Money Manager’s Warning: ‘The Bull Move Has Lasted So Long Nobody Can See Its End’

“Here’s when US equity and bond markets will change direction,” Cali Money Man grumbled a few days ago. He is a wealth manager and has been on the job at brokerage firms and large banks through three phenomenal crashes. Unlike others, he hasn’t forgotten the craziness that led up to them.

“When investors come to fear the next Fed-talk, that’s when markets will change direction,” he said. “Now they bid up risk in advance on confidence – and afterwards on reassurance – that ZIRP will continue. But eventually they’ll focus on the start and pace of tightening. Fed-speak will assume an aura of bad news.”

And on Wednesday, there was some Fed-speak. As the minutes from the Fed’s July 29-30 policy-setting meeting were published, investors hit the sell button, just a smidgen, then changed their minds, but not much. The Dow and S&P 500 ended the day up, the Nasdaq slipped. The reaction seemed uncertain, jittery, frazzled, but finally unconcerned.

All eyes have been on the Fed for years. By now nothing else matters. And the minutes had a nasty message buried inside: the Fed was seriously debating if it should raise interest rates sooner.

Many participants noted that if convergence toward the objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.

“Many participants.” No longer just a couple of hawks! And QE is practically history. It confirmed Fed Chair Janet Yellen’s quickly brushed-off warning in July to Congress; and it confirmed what other Fed governors have said recently: rate hikes might come sooner and be quicker than anticipated.

Alas, it took the market only about 30 minutes to decide that the FOMC minutes were backward looking and hence irrelevant. What mattered now was what would be said at the big shindig in Jackson Hole. When Yellen speaks on Friday, the pundits will vivisect her oracular pronouncements and read in between the lines to ignore what they don’t like and put in bold italics any hint that ZIRP would last forever, that in fact, the Fed couldn’t ever raise interest rates.

That’s what powers the market. Fundamentals have been obviated by the Fed.

“I was on a conference call with a group of portfolio managers,” Cali Money Man said today. “Their mood was resigned capitulation to the trend, going fully invested in order to survive. Low-risk assets pay nothing. They’re negative to clients after fees. And even worse after inflation. Yet these ‘low risk’ assets, such as high-grade bonds, face almost certain losses.”

Almost certain losses: that’s how low-risk assets are being defined today. The Fed’s new world is dripping with ironies.

ZIRP and QE, in effect since December 2008, have succeeded in creating a world where fundamentals have been surgically separated from valuations, where “low risk” assets produce almost certain losses, and where everyone has to pile into high-risk bets just to overcome fees and inflation, with a good chance of losing a big part of the investment down the road.

And these “principal-agent dynamics,” as Cali Money Man calls them, boil down to one hyper-ironic strategy: take on risk to survive. That strategy, when multiplied by a million times around the world, drives markets even higher.

“The bull move has lasted so long – despite weak macro fundamentals, despite its mysterious origins – that nobody can see its end,” he said. “We’re like observers on June 24, 1812, watching Napoleon’s Grand Army march off to Russia, with its victory certain.”

And so, one after the other, portfolio managers who have been bearish based on how they saw the fundamentals and other factors capitulate; they can no longer believe their former views. “This is the essence of a one-sided market,” Cali Money Man said. “Oddly, the third one of our generation.”

But one-sided markets invariably tip over. It’s just a question of when. And how violently. Cali Money Man added pensively: “I wonder how many of us will be at our desks four years from now.”

But not everyone is bullish on US securities. The report by the US Treasury – released on Friday when everyone was on vacation or getting ready to head out of town, and when no one was supposed to pay attention – was a zinger: US net capital outflows soared to $153.5 billion, the largest ever recorded. Read…. Foreigners Dump Record Amount of US Securities, But Who the Heck Is Still Buying?

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  9 comments for “Money Manager’s Warning: ‘The Bull Move Has Lasted So Long Nobody Can See Its End’

  1. tom kauser says:

    The talk of rate rises in the morning smells like victory! Both sides? QE was about creating inflation take that away and you have a Fed reducing the money supply and creating a situation were a recession from lack of money growth is both solution and needed short term problem? CANT RAISE RATES is so infantile! The Fed can and will raise rates! However the amount and rate of change is what is going to lead the debate and not about the FED running out of money or loosing control? The beginning of 2014 when everyone was this is it ” the Fed will have to push up rates this year” and 30 year caught a bid? Everyone is just as stupid calling tops in markets as they are calling bottoms in rates! Bonds have been great against investment pros welding pitchforks and now the future BTFD when rates start rising

  2. william says:

    “I wonder how many of us will be at our desks four years from now.” This is going to be epic, like nothing ever before seen. With all those of us at or near retirement age, the “markets” collapsing and Social Security ready to melt down with all of the retirement savings saying “good bye”, safely tucked into the pockets of the 1% …

  3. contrarian says:

    Past bubbles where strikingly easy to see because they were primarily concentrated in sectors like technology in 2000 or housing in 2006, whereas the present bubble is diffused across all sectors leading participants to believe that perpetual rising asset prices are the new normal. Reminds me of Blaise Pascal, who said, “We run carelessly to the precipice after we have put up a façade to prevent ourselves from seeing it.”

  4. Adam says:

    I’ll explain my “crisis” very simply: Interest rates. My big plan, having worked in Japan (and so a super small social security check) was dependent on getting an income from my savings. Then slam bam interest rates dived down to zirp-dom. Psychologically I hate spending my savings for daily life so while staying in my cheap Honolulu condo (I live in Japan) I live on brown rice and half a can of something or an egg on top of it. (Not into dog food, yet.) Today’s Honolulu Star-Advertiser says that one in five Hawaiians depend on the food bank. And these people are WORKING.

  5. HD says:

    “Many participants noted that if convergence toward the objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

    This newspeak is starting to irritate me no end. No wonder people haven’t a clue about the true state of all things economic. In the DDR – former communist East Germany – they did something similar, using cryptic descriptions to hide unpleasant facts. For instance, there was a subtle but distinct difference between “friendly” and “brotherly” relations with other communist states. “Friendly” meant there were frictions, whereas “brotherly” was a genuine thumbs up.

    But I’ll admit economic Esperanto comes in quite handy when your aim is to dissimulate the dire state of the global economic system.

  6. Orlando says:

    The irony is that the talk is sounding similar to 2006-7. However, that was a time when aggressive interest hikes had ‘slowed’ the economy significantly and led to major crises as the financialization risks took on a life of their own once principals were exposed as bogus. This time, there HASN’T EVEN been an interest rate hike. Either we have two or more years, where rate hike take place, for the risks to fully weigh down the economy or else, this is going to be a blow up with no PREVIOUS historical precedent.

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