The questions, of course, could be asked: Why did you ever try narcotics? Why did you continue using it long enough to become an addict? You become a narcotics addict because you do not have strong motivations in the other direction. Junk wins by default. I tried it as a matter of curiosity. I drifted along taking shots when I could score. I ended up hooked. Most addicts I have talked to report a similar experience. They did not start using drugs for any reason they can remember. They just drifted along until they got hooked. If you have never been addicted, you can have no clear idea what it means to need junk with the addict’s special need. You don’t decide to be an addict. One morning you wake up sick and you’re an addict.
– William S. Burroughs, Junky: The Definitive Text of “Junk” (2003)
The Dow Jones Industrial Average opened 2019 down 268.85 points. It was off as many as 398.87 points before noon.
But, now, at a quarter past one in New York, it’s up 47.61 points. And, surely, we’re headed for at least a couple hundred more points to the upside before the closing bell rings.
Because that’s how it works now, as economic malaise, fiscal ruin, and “normalization” merge with Trade War for the Mother of All Yield Shocks…
Wall Street is apparently so fragile, overextended, and riven with extreme valuations that it’ll absolutely collapse under the Federal Reserve’s plan to take its benchmark interest rate to 3.25% sometime late in 2019.
That’s what that deafening Bubblevision chorus was all about in the run-up to the mid-December 2018 meeting of the Federal Open Market Committee.
The Donald led recriminations after the FOMC held course and bumped up the federal funds target range another 25 basis points.
But his Treasury Secretary, Steve Mnuchin of Goldman Sachs, walked that back, quoting the Tweeter-in-Chief as follows in his own thread:
I totally disagree with Fed policy. I think the increasing of interest rates and the shrinking of the Fed portfolio is an absolute terrible thing to do at this time, especially in light of my major trade negotiations which are ongoing, but I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.
Everyone from The Wall Street Journal to CNBC to the “low interest man” in the White House implicitly presumes financial markets can’t handle a money market rate of barely 1.0% after inflation.
Let’s emphasize the “Wall Street” as opposed to “Main Street” interest here.
After all, no household even remotely borrows money at the current federal funds rate. Auto loans currently average 5.0%, personal consumer loans 10.0%, and credit card debt 15.0%.
When it comes to revolving credit lines and working capital loans for businesses, 12-month LIBOR-based rates exceed 4.0%, with risk margin. And the prime rate stands above 5.0%.
In other words, Bubblevision – and the Donald – are crying for Wall Street, not Main Street.
“Pause” to them is a fix for an addict. That’s what their damaged psychologies demand.
Here’s the reality that obviously afflicts Main Street and haunts Wall Street like a Dickensian ghost…
The 2008-09 financial crisis never really ended. It was only warehoused by the Fed amid a long run of free money. To wit, from late 2008 until just a few months ago, the cost of carry on Wall Street was virtually zero.
This elongated rate bottom made for nothing less than the devil’s financial workshop. It signaled that any asset with a yield or any prospect of even mediocre appreciation could be optioned or carried at virtually no cost and little funding risk.
That’s what happens when the world’s most important central bank has the money market pinned to the financial floorboards.
Also, this: Heedless, relentless, and – in the end – mindless speculation that drives drastic inflation of the price of virtually every asset class.
It’s way too late to prevent the thundering crash lurking just around the bend. “ZIRP,” “Operation Twist,” “QE,” and all that absurd ilk have done their damage.
The true danger, in fact, is not another 25, 50, or 75 basis points of cost in the money market. The danger is that financial asset prices have long been detached from reality.
And that “reality” is a debt-ridden economy ill equipped to generate any real, sustainable growth.
A Model for “Normalization”
Desperate times call for… “common sense” measures.
These are desperate times… how else to explain 300-, 600-, and 900-point swings for the Down Jones Industrial Average on what seems like a daily intraday basis?
This is not “normal.”
Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.
We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.
I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”
All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…