The S&P 500 hit the milestone of 2,000 yesterday before backing off. Today, it closed at 2,000 sharp, as if by coincidence. It’s up nearly 200% since March 2009. It hasn’t seen even a run-of-the-mill nothing-to-worry-about correction of 10% in almost three years, though these corrections occur about every 12 months in normal times. “Buy the dips” rules, with dips getting ever smaller and shorter as traders are motivated by the only remaining fear, the fear of being left out.
With all this enthusiasm for stocks, you’d think there’d be some volume, some serious buying, to back it up. But yesterday, the day when the S&P 500 snuggled up to 2000, it was the lightest non-holiday volume day since, gosh – someone did the math – October 2006.
This condition of mysteriously drying up volume has piqued the curiosity of Cali Money Man, a portfolio manager at a big bank and WOLF STREET contributor, who has been on the job through the last three crashes:
I asked a Street technician about the low volume advance and the pattern in recent years for the market to rise on low volume and fall on high volume. The first rule I learned about this biz in 1978 was VID: volume indicates direction. But no longer. High volume has become a “contrarian indicator,” the street technician explained. It’s a “sign of stress or a crisis.”
It’s the New Normal, one of many anomalies. But we have remarkably little interest in analysis to learn why this is so. Something has changed, but we don’t yet see what or how.
Low volume has another name: lack of liquidity. When a few buyers emerge, stocks rise because there aren’t many sellers. That’s what lack of liquidity does on the way up. But when investors click the sell-button one too many times, there might be a shortage of buyers. Selling into an illiquid market is something even the Fed is fretting about.
And it’s not like the world is swimming in peace dividends, or anything. Wars, civil wars, and potential wars are brewing around the world. China’s economy, which is desperately dependent on housing and infrastructure construction, is facing local mini-rebellions, as the prices of unsold homes get whacked by 25% or more, thus wiping out the investment of those hapless souls who’d bought a few days or weeks earlier. The sector is taking down steelmakers and other industries. The Eurozone seems to be reentering a recession. The second quarter in Germany was terrible, Italy’s entire “recovery” was a sham, and other Eurozone countries are teetering as well.
In the US, construction and sales of new homes, a big contributor to GDP, are getting bogged down in prices that have moved out of reach. Automakers have to resort to heavy discounting to bring down their inventories and move the iron, and it’s cutting into transaction prices and revenues. Big tech companies, the high-growth darlings of yesteryear, are laying off tens of thousands of people….
Economists would have plenty to talk about, but no one wants to hear it. The fundamentals – whatever they may be – no longer matter. The Fed has surgically removed them from the markets, and thus from consideration. What everyone wants to hear is the reassurance that stocks will continue to soar, regardless. And without interruption.
And these economists, who are integral part of the Wall Street hype machine, have to supply these reassurances. It’s part of their job. So the Wall Street Journal breathlessly reported that Torsten Slok, chief international economist at Deutsche Bank, sent a note to clients on Monday with the subject line: “Buy Equities.”
“I believe the stock market will continue to go up until we get a recession,” he wrote.
There is no recession in his sights. In fact, there will never be another recession. Even basic business cycles, as old as the oldest profession, have been successfully expunged from the economy. While there may be “some wobbles” in the markets as the Fed tapers QE out of existence and approaches the end of ZIRP, these wobbles won’t amount to much. Instead, he reassured these clients: “I expect equities to continue to rise steadily over the coming years.”
The operative word being “steadily.” Stocks aren’t considered risky anymore. Henceforth, they’ll go up “steadily.”
Other economists are also touting stocks. Cali Money Man observed that David Rosenberg, Chief Economist at Gluskin Sheff, and Ethan Harris, co-head of Global Economics Research at BofA Merrill Lynch, among others, start their reports these days with summaries of market action, and they rationalize their analyses by referencing the soaring prices of stocks and other risk assets.
But there’s a reason, Cali Money Man explains: “It’s always good business to tell the audience what it wants to hear. And when fundamentals disconnect from markets, what else is there to do?”
These fundamentals haven’t exactly been on fire: Beyond the hype, the US economy, as measured by real final sales, jobs, and other indicators, continues to grow at about 2%, all predictions year after year of escape velocity to the contrary. EPS as measured by GAAP is growing at a slightly slower rate. Real wages are stagnating. The Fed’s estimate of long-term US growth is coming down, while much of the world appears to be slowing. So Cali Money Man concludes:
Amazing how much excitement Rosenberg and his fellow cheerleaders build around this! But he nails it. He knows things are great. He looks to the stock market for confirmation, which makes him still more bullish – so he encourages people to buy. It’s a self-licking ice cream cone, a perpetual motion machine.
It must be the finest moment for the Fed: even economists are now fixated on rising asset prices as the only thing that matters, rather than the economy or other fundamentals. And if the economy stumbles, as it is doing in a number of European countries, or if America’s Housing Bubble 2 comes unglued entirely, or if Big Tech layoffs begin spreading to other sectors, it wouldn’t matter. Because we now know one thing for sure: stocks will always go up. Economists have said so.
But for those of us who still cling stubbornly to the notion that there is no such thing as a perpetual motion machine, not even in finance, and not even under QE and ZIRP, there will eventually be a major re-alignment. But when? As soon as investors come to fear the next Fed-talk, that’s when. Read…. Money Manager’s Warning: ‘The Bull Move Has Lasted So Long Nobody Can See Its End’
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