Chronicle of a Crash Foretold

By David Stockman  |  January 22, 2020

If only one person were perfectly informed there could never be a general crisis. But the only perfectly informed person is God, and he does not play the stock market.

– Robert Skidelsky, Keynes: The Return of the Master (2009)

Exactly two decades ago, Alan Greenspan and his band of monetary central planners, panicked by the “Y2K” threat, kicked the Federal Reserve’s printing presses into overdrive.

In barely three months, the amount outstanding on the Fed’s “repo” account soared from $15 billion in early October 1999 to $120 billion by the week of January 5, 2000. Back in those days, a $105 billion liquidity injection was no small thing; it represented nearly 20% of the Fed’s entire balance sheet.

As it happened, the Y2K bogeyman was a hoax.

But the Fed’s flood of liquidity did not exactly recede from the canyons of Wall Street. Indeed, the dot-com bubble was heading for a blowoff top by late 1999; the Fed’s monetary kerosene fueled the flames to white-hot temperatures.

During the six months commencing with the Y2K repo surge after September 1999, the Nasdaq 100 Index soared by 96%. It went up an average of 1% every trading day until it reached an asymptotic high of 4,700 on March 27, 2000.

At that point, apparently every mullet, lemming, and new-age believer that could be sold a share had been rounded up and turned upside down, because, all of a sudden, the music just plain stopped.

By April 15, the index was down a heart-stopping 33%. But it’s plunge was just getting started. When the Nasdaq 100 finally reached bottom in October 2002, it was down a staggering 82%. It had come full circle, returning to the 800 level it had crossed way back in November 1996.

So… deju vu, anyone?

This time, ructions in the repo market itself in mid-September 2019 triggered another bout of monetary incontinence in the Eccles Building.

From a standing start of $18 billion on September 18, the Fed’s liquidity fire hose had bulged to $240 billion by the turn of the year.

Moreover, this time the Fed added a huge dollop of Treasury bill purchases under its “permanent open-market operations,” or “POMO,” to its “temporary” repo antics just for good measure. That added another $170 billion to the liquidity flood in barely 90 days.

It doesn’t take a financial genius or math savant to divine what’s going to happen when the Fed injects $425 billion into the bond market in a virtual heartbeat.

Presumably, the Fedheads already knew the answer.

Of course, there’s absolutely no question Wall Street knew exactly what to do: Back up the trucks and hit the “buy” key like there’s no tomorrow.

As a technical matter, these massive liquidity injections crushed the yields available to private investors who would otherwise operate in the short-term funding markets. So, real money cash investors just segued out the risk curve a few notches and bought rapidly rising “risk assets” with the funds that might have otherwise been loaned for a smaller yield against Uncle Sam’s finest collateral.

It’s just that simple.

The Fed claims to not be targeting the S&P 500 Index and other broad stock market measures.

But that’s exactly the impact of pumping cash into the canyons of Wall Street with reckless abandon.

Groupthink in the Eccles Building holds that the Fed’s policy rate must be obeyed at all hazards. If the headline unemployment rate is at a 50-year low and the stock market is at all-time highs, make no never mind – just pump until the federal funds market yields exactly 1.55%… or something breaks…

That surely can’t be far behind. That’s because Wall Street’s irrational exuberance has morphed into a classic mania. Like they did in 1999-2000, they’re just buying that which is going up.

That 4,700 level on the Nasdaq 100 visited for a brief moment during the blowoff top on March 27, 2000, hadn’t been permanently regained until early August 2016. As if history bears no lessons at all, it’s been off to the races during the 40 months since then.

North of 9,200, the NASDAQ 100 has just about doubled at a time when the U.S. economy is grinding toward recession.

The estimable Sven Henrich nailed it in a recent market commentary:

Nothing is different this time, except we’re in the midst of another historic asset bubble and this one resulting from central banks capitulation and drowning markets in liquidity. That’s it. Simple.

The Fed had its balance-sheet shrinkage program – “quantitative tightening” – firmly on autopilot just 12 months ago.

Our monetary central planners have now reverted to printing fiat credit like there’s no tomorrow, for one self-evident reason: The stock market’s 19.9% drawdown at the end of 2018 scared the living shit out of them, so they threw caution, credibility, and common sense to the winds.

Now, it’s just a matter of time until this cycle’s rendezvous with its own tragic destiny.

A Measure of Control

The 2020 election has replaced the Trade War as the primary risk for investors. That’s because, as we’ve been saying for some time now, this is the most politicized market in history.

And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market… and we’re here to help you do that.

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR