Randall Forsyth

Randall Forsyth at Barron’s Magazine says it had little to do with those ‘financial weapons of mass destruction’ (exchange traded funds and notes), derivative securities, created to bet against volatility (VIX). In his opinion it is all about monetary policy.

“We are witnessing the beginning of the end of the radical monetary policies that brought interest rates down to zero—and in some cases, below zero—and flooded the global financial system with excess liquidity. That has resulted in the inflation of asset values and the subduing of market volatility. That, in turn, enriched investors and speculators. Until it didn’t.”

There is but one problem with this revelation

It’s Wrong!

It is not new news, nor is it particularly a revelation. Pundits like Forsyth have actually been making this case for the past five years, since before the beginning of the tapering of Quantitative Easing (QE) by the Fed in in December of 2013. The actual purchases were halted in October of 2014. In December of 2015 the first quarter point increase off the 0-.25% low in the Fed Funds rate was implemented. Subsequently the rate was increased to 1.50%. At every step in this process we were warned that this time it was the beginning of the end (Kort Session #18, “Fed Bolt from Hell, Part II –March 23,2017). During this four-year stretch of end-of-the-world monetary events the S&P 500 managed to run from 1845 to a new all-time-high of 2872 … not bad for the ‘end times’.

Media/Pundit Malpractice Never Ends–Birinyi gets’ it right

I’ve been writing about this for the past five years, but in the above link to Session #18, dated March of 2013, I put up a link to a Barron’s article by Laszlo Birinyi, money manager and founder of Birinyi Associates. “A Good Chance S&P Hits 1600,” published in 2013 the piece takes a look back to 1994 (S&P 500-465) and 1996 (S&P 500-669), all similar issues to those facing us today … potentially higher interest rates and a fairly constant negative spin coming out of the media and punditry. As most usually is the case these episodes ended badly for them (the media and pundits) and anyone who paid attention to them (S&P 500 – 1550 by March of 2000). I might point out that in Birinyi’s pre-investment career he was that of a history major at the University of North Carolina, and knowing history for him and all of us is a real leg up in the stock market. Knowing this history might have kept you in the market four years ago.

History would tell you that this secular bull market will end badly

J.P. Morgan as Bubble-Blowing Bull

It is baked in the cake. They always end badly. Just knowing this simple fact should give you tremendous confidence and an advantage in dealing with investments. Markets always run from low levels in bad economic times when FEAR keeps people away from stocks, to good times when GREED brings them back.  They run in grand cycles. Most importantly, if you plot those cycles on a chart they continue to begin and end at ever increasing levels on the index (historically, in the long-run, stocks increase in value).

Secular bull markets end when so-called investors feel ten-feet-tall-and-invincible and see no end in sight for the good times — euphoria. My read is that we are nowhere near that level yet and the market action of the last week has taken that pot even further off the boil. In my view there is nothing on the horizon that would change that outlook, including Forsyth’s end of a radically easy monetary policy.

If you have been paying attention that change has been in place since 2014. The Fed Funds rate is up from near zero (economic life support post the 2008 financial crisis) to 1.5%, which is still well below a historical average of 4.8%. I might also point out that the yield on the ten-year US Treasury note peaked in January of 2014 at 3%. Since, it has been much lower but never above that level. That peak came with the Fed’s decision to taper QE. So, QE’s gone, Fed Funds are up 1.25% and the Fed is beginning to sell its bond portfolio, unwinding Quantitative Easing, and the 10-year yield is still below 3%. Earth to Forsyth, “please explain.”

“Irrationality Isn’t Always Associated With ‘Exuberance’ And ‘Euphoria'”  **

I am quoting the title of this week’s post from one of my favorite reads, “Fear & Greed Trader,” a valued source. The speed and violence of the decline, quickly dousing any speculative flames and muting sentiment, quickly turned the tone of sentiment to irrational pessimism in some quarters. When, in fact, the facts on the ground really have not changed that much.

“From the view at 30,000 feet, the recent volatility and pullback is all part of the regular ebb and flow that occurs in the stock market. Yes, we just witnessed a pullback greater than 5%, and it was the first such decline from a closing high for the S&P 500 since before the election last November. Fear showed up and the pullback morphed into a dip into correction territory for the major indices. Problem for bullish investors, it all happened in a week.

The period from when President Trump was elected through Friday, February 2nd, is one that any investor alive today is unlikely to experience again in their lifetimes. 448 days without a 3% decline.” (F&G Trader)

This is the stuff that rattles courage of the of the uninitiated, stimulates irrational thinking and behavior and bolsters the fortunes of the media that delights in the fact that they have a negative story to flog.

My take is that this market crack was to be expected, normal and not the end of the world.

What’s yours?

**Link to “Fear & Greed Trader” post

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