Morning Market Thoughts
Good morning. If this were Rainman, Charlie Babbitt would be saying, “Three Days to Yellen. Three Days to Yellen.” On Friday, The Chair speaks at Jackson Hole, Wyoming. (I previously said Jackson Hole was in Montana. Having actually ridden through Jackson Hole on a motorcycle back in 1990, I’m embarrassed that I didn’t remember what state it was in. It’s in Wyoming. Montana is in Montana).Anyway, The Chair speaks on Friday. I just read an article on CNBC.com wherein Steve Liesman cites a CNBC Fed Survey finding that 60 percent of Wall Streeters who were polled say that the central bank has no plan to make policy. Rather, they make policy based on the latest economic number (my view), or by their own professed measures, which tend to change a lot.
This is more important than you might think because of the consequence of such a consensus about the Fed’s lack of policy framework. Because of an absence of policy, the market simply prices in non-existent interest rates into infinity. That’s the great news for bulls because they realize that an infinite supply of free money will ultimately find its way into the market. Advantage bulls! But the risk is that an asset bubble will be created,…just like the ones that Greenspan and Bernanke blew up.
Ultimately, they pop.
But I think we can navigate our way through this risky market because I’ve finally discovered the “tell” for the next bubble popping. Think about the history of the Fed vs. the economy over the past 10 years or so. It’s not a perfect relationship, but it works for our analysis. Alan Greenspan was Fed Chairman from 1987 to 2006. He had a big hand in creating the bubble in stocks back in the lat 90’s, and presided over the recovery from 2003-2006. He then had the prescience to retire before the popping of the real estate bubble that he created to get us out of the last bubble. He effectively handed the problem to Bernanke. Greenspan then retired, and wrote a book, entitled “The Age of Turbulence”, ironically published by Penguin Books, about how well he managed the Fed. (Bill Fleckenstein subsequently wrote a book entitled “Greenspan’s Bubbles” which revealed the many untruths told by Greenspan, mostly in the way of revealing certain documents, quotes, and actions taken by the Fed, and revealing the accurate dates that decisions were made, thus proving that Mr. Greenspan had actually “cut and pasted” certain dates to make it seem that he predicted various things that he actually missed by a mile. He edited the time line to make it fit his actions. But I digress).
Ben Bernanke then ran the Fed until 2013, and had to navigate through the popping of the asset bubble created by Greenspan. He took a similar approach as Greenspan — dropping rates to a point where money was free. He completely missed the bubble. The internet is rife with time-stamped bullish and confident quotes of Mr. Bernanke before and during the implosion of housing (and consequently, stocks). After housing hit bottom,the next bubble immediately started — the one that we are currently enjoying. Because investors were (rightfully) spooked by real estate…and millions of would-be investors had their credit decimated by the popping of the real estate bubble…the bubble once again occurred in the stock market.
Upon retiring, Bernanke, following the footsteps of Mr. Greenspan, wrote a book. This one was entitled “The Courage to Act.” Like “The Age of Turbulence” it was a homage to himself. Mr. Bernanke is now an expert, and spends his time at the Brookings Institute and advising foreign nations on monetary policy.
That brings us to present day, and the consolidation of the market for the past 18 months or so. You see, bubbles can last for a long, long time. Are we in a bubble now? Only time will tell. It sure seems like we are. But to be honest, the charts don’t bear that out. Rather, we are in a long consolidation with an upward bias. [There is a nasty “megaphone pattern” which I have discussed many times. But absent that yellow flag, we’re just in a high basing pattern that just might lead to a resumption of the bull market].
So, this brings us to present day, where we need to do our best to figure out how long the bubble is going to last. Will it last for a couple of weeks, months, years, or decades?
Here’s the payoff: I don’t know! Nobody knows…including The Chair.
I don’t think anything will come of the Jackson Hole speech on Friday. I think it will be more of the same — kind of a muddled view of things that reveals that the Fed has no real policy guiding it. And that will be good for the markets.
It is to our advantage, as stock investors, to have an infinite supply of money that ultimately finds its way into stocks. That’s actually a good thing, though it will ultimately lead to a bad thing. But for now, we need to do our best to look at the market through a bullish lens because that’s how we stay on the right side of the market. Nobody likes a perma-bull who is always pouring water on a good party. This is probably why Peter Schiff isn’t invited to many parties. So we want to remain positive and bullish. And we can remain confidently positive and bullish, with clear eyes and a calm heart, because we will be able to predict when the current bull market will end.
Here’s the “tell”: When Janet Yellen announces her retirement, start moving your stops up and increase your cash allocation. When a book deal is reported, where The Chair is being paid a 7 figure advance to write a memoir about her escapades running the Fed, go to cash and remain vigilant. Start focusing on learning to short stocks (you can find a great course on our website. I know, because I taught it). By the time the book comes out, your shorts will be paying off handsomely.
There! That’s our blueprint for navigating through the current market environment, which is admittedly a bit confusing.
So embrace the free money. It just might be a part of your life…for the remainder of your life. Ignore the dire predictions of the naysayers like Bill Gross and Peter Schiff. They’ll ultimately be right…but you won’t make any money by listening to them now. Just think of them as the masons who are building the “Wall of Worry.” Stay long, focus on charts that have a simple combination:
1. Price > 50-day moving average
2. 50-day moving average > 200-day moving average
3. Both moving averages are trending higher.
Stick with that simple combination and you’ll be making money while others are fretting about things that may not happen for several years. But watch the financial news!
When you see a headline that Janet Yellen is retiring and that James Bullard or William Dudley is being considered as the new Chairman, start worrying.
And you thought this stuff was tough. I just gave you the keys to the kingdom! Enjoy.
–Dan
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