Robo-Machines And The Capitalization Of Monetary Folly

There won’t be much dispute among future historians about the fact that intelligent life became extinct on Wall Street during the present era. The archived newsreels will have the eerie feel of an empty bar which the revilers had long since abandoned—where what remained was only a player piano still plinking out “buy, buy, buy-the-dip” over and over.

Anyway, that was the story again today. There was not a single reason for the markets to rise except for algos and day traders playing for some more dovish braying from the Fed at the week’s monthly capitulation session.

As is evident from the S&P 500 chart below, the machines have been grinding out a recovery from the Christmas Eve blow-out low, but the index is still no higher than it was eight months ago on July 24. Meanwhile, Peak Trump on September 20 (2941) steadily fades into the rearview mirror and the resistance under 2850 continues to stiffen.

That is to say, today’s fifth failed break-out run since Peak Trump is itself a testimony to how thoroughly broken the stock market has become under the baleful regime of Keynesian central banking.

^SPX Chart

In an honest free market, of course, the S&P 500 wouldn’t be even in the vicinity of 2833 (today’s closing level), and would be heading south under the gale-force headwinds which are evident from all points on the global compass.

For instance, the Baltic Dry Index continues to weaken, thereby reinforcing the message from virtually every monthly export report since last fall. To wit, the global economy is in the midst of an accelerating dive toward recession—-and notwithstanding a full decade of massive monetary stimulus.

Indeed, South Korean exports have long been the bell weather indicator for the world economy, and the trend since the Donald’s Trade War got in full swing last summer could not be more obvious: Global economic activity is swooning; and its only a matter of months before the 1% growth estimated for Q1 in the US domestic economy rolls-over into the global drink.

South Korea Exports


As for the usual “decoupling” meme,  we have been there more than once before. In the spring of 2008, the talking heads insisted that what was underway was only a “pause which refreshes”, and that the Fed would keep the stock market levitated and the main street economy trending ever higher.

The South Korean export readings soon suggested otherwise.

South Korea Exports

The same pattern is now evident for Japan. As we demonstrated on Friday, this time it’s all about the Red Ponzi. When the last Chinese credit impulse dissipated in mid-2017 after the pre-coronation surge in the Chinese economy was safely in tow, the mini-recovery of Japanese exports also rolled over, and are now heading sharply south, as well.



So here’s the thing. No one has appointed the Fed as central banker for the world economy; and there is no plausible reading of the so-called Humphrey-Hawkins mandate that empowers the Eccles Building to further falsify Wall Street financial prices based on the impending failure of the giant credit ponzi that the red suzerains of Beijing have been running in order to perpetuate the Communist Party of China’s monopoly power.

Yet that is apparently the reason for the pusillanimous Powell Pivot, as the Fed’s latest cowardly chairman made clear in his recent 60 Minutes interview:

Patient means that we don’t feel any hurry to change our interest rate policy. What– what’s happened in the last 90 or so days is that we’ve seen increasing evidence of the global economy slowing down, although our own economy has continued to perform well………..Generally speaking,the U.S. economy is coming off a very strong year last year……We’ve seen a bit of a slowing …..But I would say the principal risks to our economy now seem to be coming from slower growth in China and Europe and also risk events such as Brexit.


If Britain becomes ungovernable, China’s $40 trillion debt mountain begins to collapse under its own weight, the old-age colony in Japan stumbles toward bankruptcy and French dirigisme sparks rebellion in the streets of Paris—why then the job of the Fed is to strangle the market’s feeble attempts at honest price discovery?

The fact is, there is not a single rational reason for the Fed to pause with the money market rate still at a rock bottom 2.4% and its balance sheet egregiously bloated at $4.0 trillion.

But that has not deterred the day traders and algos. They are clearly banking on new dovish word clouds from the Fed because over the weekend even the canard of last resort—the purportedly imminent Trump-Xi Trade Deal meme—-got taken out back and shot by the Chinese when Beijing leaked that the March, April summit is off.

Now maybe it’s June?

So leave it to the veteran croupiers of Bubblevision’s halftime show to call the scam a scam. Said one of the 25-year perma bulls: There is no remaining reason for the market to go higher—except, except…..that the Fed will make clear on Wednesday that its rate pause is permanent and its balance sheet shrinkage program (QT) will be all over and done by October.

Just like that. We have reached the point where the denizens of the casino think the stock market is so detached from the real world that it is now possible to capitalize nothing more than the blatant folly of the central banks.

As of the March meeting, the Fed will have kept the real cost of carry trades at zero or under for nearly the entire decade from the March 2009 bottom; and by the now loudly telegraphed end of QT with its balance sheet at about $3.6 trillion it will have monetized more than $3 trillion of debt since the turn of the century when its balance sheet stood at a mere $500 billion after 86 years in business.

In a word, the end is surely near when the revenant of the casino can find no reason left to buy the dip except that the Keynesian central bankers may attempt to perpetuate their absolute folly a tad longer.

And when it comes to Keynesian central banker folly, the leading edge is surely represented by the BOJ, which has now expanded its balance sheet to nearly 100% of GDP, and pushed the  benchmark 10-year interest rate on this nation’s massive public debt (240% of GDP) to negative 0.035%.

Of course, that is absurd on its face, but consider this.  With Japan’s industrial production rolling-over yet again, it now stands 8% below its level 28 years ago in the spring of 1991.

That’s right. After all that fabulous money printing and financial repression, Japan’s industrial economy has gone sidways for three decades!

As they say on late night TV, however, there’s more. If the clueless central bankers in the Eccles Building weren’t enough, it is now evident that the Donald has appointed himself factory-manager-in-chief  of an economy that is most definitely not “booming”.

@realDonaldTrump: Just spoke to Mary Barra, CEO of General Motors about the Lordstown Ohioplant. I am not happy that it is closed when everything else in our Country is BOOMING. I asked her to sell it or do something quickly. She blamed the UAW Union — I don’t care, I just want it open! Democrat UAW Local 1112 President David Green ought to get his act together and produce. G.M. letour Country down, but other much better car companies are coming into the U.S. in droves. I want action on Lordstown fast. Stop complaining and get the job done! 3.8% Unemployment


Then again, you also have this juxtaposition. Lyft is apparently going public at a valuation of $21-23 billion based on revenue of only $2.16 billion, and a net lost which expanded to $911 million last year from $688 million in 2017.

In turn, that is supposed to pave the way for Uber, which looses far more on far more revenue, to go pubic next at a value as high as $120 billion.

So the question recurs. How is are these magnificent dreams of growth compatible with the picture below?

That is to say, there is yet another great rush back into negative yielding debt—and that’s most definitely not a sign of a booming global economy.


Perhaps the robo-machines are still in business for one reason alone. In their folly, the Trumpite/GOP and the Fed have conspired to cause the C-suites of corporate America to devour their own cash flows and balance sheets to fund one last hurrah in the casino before the player piano is finally left alone to plink out its ghostly tune.

When the inexorable crash arrives, of course, the Eccles Building will again be on the record as not seeing it coming. In his 60 Minutes interview, Powell left nothing to the imagination:


PELLEY: We have seen big swings in the stock markets in the United States. And I wonder, do you think the markets today are overvalued?

POWELL: We don’t comment on the valuation of the stock market particularly. And we do though, we monitor financial conditions carefully. Our interest rate policy works through financial conditions. So we look at a very broad range of financial conditions. That includes interest rates, the level of the dollar, the availability of credit and also the stock market. So we look at a range of things. And I think we feel that conditions are generally healthy today.

PELLEY: Generally healthy? One of your predecessors back in the ’90s famously said that the market in those days was irrationally exuberant. You don’t see that today?

POWELL: We don’t see much evidence of that today. There, as always, in our very highly developed and large capital markets, there are places you can point which are, let’s say hotter than others. But, generally speaking, credit spreads, which is the compensation you get above risk-free rates for taking credit risk, are at relatively normal levels. By some measures the stock market valuation is closer to its sort of normal levels over long periods of time. There are pockets though. There are things, for example, the leverage lending corporates. We’ve seen high growth in leverage lending to non-financial corporates. And that’s something we’re watching carefully…….What we’re seeing now is some companies borrowing fairly large amounts of debt. And the sense of it is that if there were a downturn, having highly leveraged companies would be an amplifier, could be an amplifier, to a downturn. I don’t think it’s the kind of thing that we saw in the financial crisis, where you had, you know, the subprime mortgage crisis. It doesn’t seem to be like that, generally. But at the same time, it could be an amplifier to a downturn.