Oh and check this out:
April may be even worse for U.S. stocks as demand dries up
Thomas H. Kee Jr.
Are you wondering why the U.S. stock market has suddenly become so volatile?
I will offer a simple explanation that will define the real long-term risks for investors.
Volatility has not suddenly spiked because of a potential trade war, regulatory problems with Facebook FB, +4.42% Trump taking aim at Amazon AMZN, +1.11%or any other recent issue in the news. Volatility and risk are clear and present because demand has dried up.
There’s no place to hide; all asset classes are in a bubble.Demand for global assets has come from two sources for the past six years. One is natural demand, based on population growth, natural inflation levels and natural economic cycles. My longer-term macroeconomic work, The Investment Rate, defines this, and the observation extends out to the year 2060. In other words, we know what natural demand levels will look like far into the future.
The second source of demand has come from central banks. Namely, the Federal Reserve and European Central Bank have been pumping money into the global economy with the intention of bolstering asset prices. As recently as August, the Combined Central Bank Effort (CCBE) had been infusing $60 billion a month.
This has been happening ever since the Fed began targeting assets in 2012. Literally, policy makers told us what they were going to buy, when they were going to buy and how much they were going to buy, in advance, every month, for the past six years.
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The asset-purchase programs were not only unprecedented because the CCBE was actually trying to push asset prices higher, or because of the sheer size, but also because they told us what they were going to do in advance. In normal conditions none of those factors exist.
Think about it. Traders attempt to get an idea of how many buyers or sellers there may be for a given stock at a given time. So this insight is something every institutional investor wants, and for the past six years, the buyer at the other end of the table, the CCBE, has been an open book.
Knowing who the buyer is, what they are going to buy and how much they are going to buy is something we all wish we knew.
The death of stimulus Today the reverse is now happening. The Fed, for example, is scheduled to remove $420 billion from its balance sheet this year. The buyer at the other end of the table is not buying anymore. In fact, the CCBE, which was infusing about $60 billion a month as recently as last year, will be in deficit starting in April. They provided liquidity in an unprecedented manner, and now they are removing it, and with that, demand has collapsed.
Currently, the CCBE is neutral. That means they are not adding new demand or removing demand monthly. In April there will be a deficit. When the Fed reduces its bond-buying program by an additional $30 billion a month, the CCBE will officially become a negative influence.
However, the CCBE is not currently a negative influence, so why the volatility?
Without the positive influence, the demand for assets reverts to natural demand levels, which is defined by The Investment Rate, and that tells us that the economy is actually in the third major longer-term down cycle in U.S history, akin to the Great Depression and Stagflation, the only other two times there have been long-term declines in natural demand levels. That started, officially, in December 2007.
During this entire stimulus phase, natural demand levels have been declining, but the CCBE distorted that otherwise natural and unyielding influence. Like death and taxes, natural demand levels cannot be changed; they are rooted in the investment patterns that our ingrained societal norms have influenced, and the rate of change in the amount of new money available to be invested into the U.S. economy on a natural basis has been declining all the way through this, and it will continue to decline for years.
The reason volatility has skyrocketed, even though the CCBE is neutral, is because natural demand is far lower, and the demand side of the equation has reverted to natural demand.
Looking ahead, when the Fed removes an additional $30 billion in April, it will get even worse.
There’s no place to hide; all asset classes are in a bubble. The recent bull market was the most expensive in history, and repricing is coming. The only way to manage this is either to be in cash or in proactive trading strategies.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily. |
