This guest commentary was written by "Fed Up" author Danielle DiMartino Booth. Make sure to watch her recent conversation with Hedgeye CEO Keith McCullough.
What has the power to turn a right of way into a rite of passage?
Might it be that the mighty hand of time plays a role? Any buffed historian worth their weight in tapas will tell you the most glorious bull run of all time is grounded not in pageantry, but rather pragmatism and perseverance. Nestled on northern Spain’s Basque seashore bordering France, the heat of summer brings with it the promise that Pamplona will once again host its famed San Fermin Festival, so named for its patron saint.
History has it that Middle Age cattle herders and butchers would venture out into the night to guide bulls from their barges to bovine barricades. And while legend suggests the tradition dates back to the 13th century, from whence the mid-night marches morphed into the festivities that today are called the Running of the Bulls, its true beginning remains an unknown. The locals claim October 1776 marked the transformation to today’s annual adrenaline-rushed race through the cobblestone streets. But who establishes anything in unpredictable October? And 1776? In any event, the festival has since been moved to reliable July and aside from a few deaths (15 in all since 1924, when record keeping began) the running continues to run smoothly.
The same can be said of the modern-day bull run the world both celebrates and derides, trading day in and trading day out – it runs like silk on steroids. But unlike the practical birth of its Pamplonan predecessor, there was an overabundance of pomp associated with the grave circumstances that marked the advent of the current stock market run born in March 2009 from the beneficence of commandeered central bankers.
'Bulls Will Be Fried to a Crisp And Lose It All'
Being as it is, the second-longest artificially-turbo-charged bull market in modern market history, the rally has garnered more than its fair share of detractors. These wall-of-worry scalers suffer from a post-traumatic-stress-disorder that only the twin architects Greenspan and Bernanke could conceive. They simply refuse to be thrice burned. And who with a straight face can blame them? And yet these stalwart prudes have nevertheless been engulfed in the flames of shame of the roaring rally that’s left them behind. In some cases, once again.
Have these unrequited bears lost money in the process? It is said, even insisted, that is the case. But all they’ve really done is lost face, not money. The bears have sat bitterly idle while their full-bull counterparts have racked up massive paper gains. As sure as salt finds an open wound, some of their professional peers will even be nimble enough to monetize their handsome profits and go off, as it were, into the wild blue yonder, or at least the Hamptons, which is a lot closer.
But history also dictates that most of today’s bulls will be fried to a crisp and lose it all. Such is the nature of the beast. Why else would he be called bestial?
In the meantime, the bulls have become belligerent, boastful and bloodthirsty. Naysayers in their pathway are as good as ripe for the picking to the bone as so many hyenas on the hunt would be innately inclined. If only there was some assurance that comeuppance was forthcoming!
Yes, stock market valuations are richer than at any other time since 2000 (in the case of you-name-the-bond and commercial real estate, well, no precedent exists). But let’s focus here. Yes, the yield curve is flattening. Yes, share buybacks have peaked and rolled over. Yes, unchecked leverage lurks in the shadows. Yes, the critically compromised Federal Reserve is threatening to unleash balance sheet Beelzebub. Yes, it is even the case that the real economy has peaked for the current cycle, in both the United States and China, for those inclined to see through bubblevision’s delusional depictions.
No, as much as you’d like to believe, absent war, oil prices will not stage some robust rebound that rescues the junk market. And finally, yes, you are not imagining that the political and geopolitical backdrop have never been as tenuous as they are today, to be polite in shared company. At least in our lifetimes. And so justice commeth?
Afraid to be the bearer of good news, but NO, stocks are NOT poised to crash, at least not imminently.
The confluence of factors converging to bring stocks down are precisely what will keep them levitating for longer than any logical person could surmise. And God help the poor soul who endeavors to maintain a bet against stocks without withstanding magnificent losses. You may as well be shuffling razor blades blindfolded in the dark.
For all of you who’ve grown accustomed to analytics at this juncture, hit that ‘x’ at the top right of your screen. Stop reading now. This one comes from anecdotes, history’s brutal lessons and the gut.
Lesson number one is melt-ups have little to do with reason and everything to do with emotion. Where to start on measuring today’s mania?
If it was kosher to passively invest in a pre-Trumpian world, it’s downright patriotic to do so today. Bet against a future led by someone with no axes to grind, no special interests to whom to kowtow and a businessman at that? You call yourself an American? Buy the index! Long-term investing index always pays in the end.
As for the feckless Fed, futures are betting less than even odds of a rate hike after we see June 14th come and go. So rates are not at zero. But conditions are anything but tight and the market is telling us they’re as bad as they’ll get for the current cycle, within a quarter-of-a-percentage-point, that is.
Lest we forget the other inevitable that’s priced into the markets, DC is poised to stand and deliver. While that may or may not be the case, Congress-folks cannot recuse themselves from the lens of laudable lawmaking until a year from now when they hit the campaign trail for the midterm elections.
And if nothing of note is passed? Oh you naïve nabobs, what’s at play is our playing along, nodding our heads in agreement that the smoke-in-mirrors routine amounts to anything more than a token tax repatriation that funds share buybacks (oh, the novelty of it all!)
But surely there’s that outlier of outliers to fall back on, that of the sadistic seed of demonic dictatorial despots? While abundant in their presence, you may note that absent the nefariousness of a nuclear nature, the markets could give a damn. Don’t expect that to change any time soon.
Not to get technical, but the technicals are poised to be the cherry on the bulls’ sundae.
Bets are piling up that certain stocks are poised to fall. Those savvy souls placing their money where their mouth is include none other than the Big Short’s Steve Eisman, who almost lost it all, but lived to make it big betting against toxic subprime mortgages back in the day.
In the here and now, at least in his most recent CNBC interview, Eisman talked up his decidedly two-way book, one in which he’s long Amazon and short Simon Properties. Smart guy. Malls bad. E-commerce good. The only problem is, he won’t be alone in being long for long.
Crowded trades that are banking on a stock’s decline, especially when they begin to multiply as the macroeconomic backdrop deteriorates, oftentimes have a way of backfiring in splendid fashion. They’re called short covering rallies and can be a hairy to maneuver, to say nothing of escape, unscathed. As sound as the logic may be, extrapolating the idiosyncratic to the whole has made many an idiot investor.
How to put the mechanics succinctly? The slightest hint of not-awful news on a stock, or even the space it’s in, can trigger a mad dash to exit a negative bet. One investor covering their potential loss by buying a stock back necessarily propels that given stock upwards, which works in a vacuum. Except that shorting is akin to a plague in how quickly the contagion can spread. More often than not, others are forced to follow suit to contain their damage.
Recall that owning a stock, or being ‘long’ has finite downside. The flip side is that betting a stock will decline carries the potential for infinite theoretical losses, a truth to which many bloodied veterans who’ve lived to tell can attest.
More than any one factor, though, the one that is the least satisfying, the most vexing, for bears to bear, is that of gravity, or better said, the lack thereof. Though a challenge to quantify, upward trending markets are inclined to keep pushing into the stratosphere in search of weightlessness. Like a tantrum-pitching toddler whose headache has long since settled in, this tendency’s impetus to infuriate bears knows no bounds.
It will all come down to a race against time, a test of reality’s resolve to refute recession.
But that’s the very nature of mindless melt-ups. They are what make bubbles unfathomable. The siren song of foregone fortunes is the very elixir that lures little investors into the lurch, lengthening the rally’s legs for one last leg-up.
If there is one saving grace, it is the gracelessness with which the bulls have begun to comport themselves, though comportment might be a bit generous in this application. Perhaps it’s better said that nasty is as nasty does. Reading the schadenfreude-fueled vicious barbs being spewed at the ‘loser-bears’ leaves one with some sense of the delayed justice to come.
To think these forked-tongue keyboard abusers embrace their mothers at holidays with the same claws that scratch out the multitude of inappropriate rants in public spaces. One is tempted to ask if someone can please get these bullish haters a puppy already. For the here and now, like it or not, the odds are the bullish cabal will keep running the Street, continuing to disappoint violently-disposed voyeurs by staying one step out of reach of those honed-sharp horns.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Danielle DiMartino Booth. DiMartino Booth spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas under Dallas Federal Reserve President Richard W. Fisher. Her brand new book “Fed Up” explains why the current Federal Reserve system is due for a serious revamp. DiMartino Booth currently runs Money Strong, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.
