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Powell Q&A: It would take a ‘material reassessment’ of outlook to shift stance

Powell comments to reporters:

Powell
He emphasized ‘material’ 3-4 times.
  • Risks to the outlook have shifted more positively
  • Says he was generally referring to less uncertainty on trade
  • Consumer facing companies say consumers doing well
  • Economy has been resilient to winds blowing this year
  • Today’s business investment in GDP was weak
  • We generally hike because we see inflation moving up, we don’t see that now
  • Inflation expectations are quite central to its framework
  • If we were to have a sustained reduction in trade tensions, it would bode well but I wouldn’t expect immediate effects; it would take time
  • Significant inflation rise needed before any rate hike
  • There is a big and growing difference in rural and urban outcomes
  • GM strikes likely too ‘a couple tenths’ off growth this quarter but is likely to return
  • Policy is ‘somewhat accommodative’ in my estimation
  • Not seeing asset bubbles, monitoring
  • We think liquidity in the financial system is ample but we’re working to make it move more-freely
The dollar initially rallied but everything reversed when Powell said that it would take a significant rise in inflation before they start hiking again. That was a strong message they’ll be on the sidelines.

US vs. German yield spread breaking down from a multi-year support line!

Last two times coincided with the peak of the tech & housing bubble.

Fed policy turning uber dovish with stocks already at record valuations & late in the business cycle? Never ends well.

The 1% Gets A Scare – More To Come?

Most Americans have spent the last few years pressed up against the proverbial bakery window, watching the 1% enjoy a life of ever-increasing wealth and seemingly total indifference to the multitudes who aren’t favored by zero interest rates, big trust funds and political/corporate connections.
The one consolation for the have-nots has been that, by owning few stocks and bonds, they would suffer less when those bubble markets did what bubbles always do, which is burst.
Friday was a small but satisfying taste of that eventuality.
From Bloomberg:

World’s Richest People Lose $68.5 Billion in Stock Selloff

The fortunes of the world’s 500-richest people dropped by $73.9 billion Friday as equity markets swooned with investor worries about the pace of interest rate hikes in the U.S. Warren Buffett led the declines, shedding $3.3 billion to end the day at No. 3 on the Bloomberg Billionaire Index with $90.1 billion.

The chart shows about $100 billion of play money evaporating in the past week. Not enough to seriously inconvenience most of the people on Bloomberg’s billionaires list, but still a nice reversal of fortune versus the average person with a house, small bank account and not much more – who didn’t lose a thing.
As for whether Friday was just a blip in an ongoing “secular bull market” or a sign that fundamentals are at last gaining the upper hand on “liquidity,” that remains to be seen. Longer-term though, there can’t be much doubt that today’s stock and bond valuations are higher than they’ll be during the next downturn.
Here’s a chart from John Hussman’s latest (Measuring the Bubble) that illustrates the point.

1929 Wisdom

From John Hussman:

Galbraith reminds us that the 1929 market crash did not have observable catalysts. Rather, his description is very much in line with the view that the market crashed first, and the underlying economic strains emerged later: “the crash did not come – as some have suggested – because the market suddenly became aware that a serious depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell. There is still the possibility that the downturn in the indexes frightened the speculators, led them to unload their stocks, and so punctured a bubble that had in any case to be punctured one day. This is more plausible. “Some people who were watching the indexes may have been persuaded by this intelligence to sell, and others may have been encouraged to follow. This is not very important, for it is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.”

(more…)

10 Laws of Stock Market Bubbles

  1. Debt is cheap.
  2. Debt is plentiful.
  3. There is the egregious use of debt.
  4. A new marginal (and sizeable) buyer of an asset class appears.
  5. After a sustained advance in an asset class’s price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
  6. The distance of valuations from earnings is directly proportional to the degree of bubbliness.
  7. The newer the valuation methodology in vogue the greater the degree of bubbliness.
  8. Bad valuation methodologies drive out good valuation methodologies.
  9. When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
  10. Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed “financial weapons of mass destruction”).

NUGGETS OF WISDOM

1.) It’s not valuation that matters.  It’s risk and reward in the growth cycle of each company.   – Leigh Drogen “The Coming Tech Crash”
2.)  Most importantly for the upside of the market, no one owns stocks.
There are millions of traders flipping stock with institutions in high growth names, but there are no rational conversations about the growth opportunities.
3.)  The media latches on to Steve Jobs not distributing the cash and thank god he laughs in their faces. Why should he trust the public with that cash. The public has proven to be imbeciles.
4.) Err on side of caution, hit the gas when deemed apropos, and don’t paradiddle. – A comment to Chessnwine’s post , “You call yourself a trader, you sonofabitch”
5.) Nietzsche was right- what doesn’t kill you makes you stronger.  – Pension Pulse, “Put Yourself First
6.) “You’ve got to have the passion to do your time. If you haven’t done the time, you just can’t get there.” He goes on to argue that only by paying one’s dues through time, effort, devotion, and experience can we, “develop the rich experiences that make life meaningful.” – Top 10 Things That Determine Happiness
7.)Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity  or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories. – Robert Schiller, via Stone Street Advisors ” Driven by Stupidity
8.) No company gets to be worth twice as much in 60 days as it was before to any intelligent person, so when that happens, we take advantage of it. – Steve Wynn , via Stone Street Advisors “ Driven by Stupidity
9.) Keep in mind that you dont have to be sending orders to be working.  Avoid nurturing the belief that nonparticipation is not working.  This leads to overtrading or compulsion which is the practice of poor risk management.
10.) A series of loses first eats into your account balance, and then begins to eat into what is most important of all: your confidence.  Trade with confidence or don’t trade at all.  If you cant take the heat, stay out of the kitchen.

The greater the story, the greater the bubble

The greater fool theory explains almost every bubble

Some things have an intrinsic value. The most-obvious example is a stock with a dividend. The absolute floor for an equity is its dividend and so long as their is a profitable business behind it, the value is a multiple of that dividend.

Other things don’t have an intrinsic value. This includes virtually everything that doesn’t produce a yield. Oftentimes, prices of those things rise and fall based on future expectations of what profits or yield might be. In other cases, there is an estimation of utility. Oil, for instance, can be refined into gasoline which can be used to move things or for dozens of other uses.

Oftentimes there is a dispute about utility or a dispute about future profitability, which can lead to a dispute about prices. One way to resolve this is a model but oftentimes that’s so fraught with assumptions that it’s useless.

So how do you establish prices? Obviously, via the market.

This is when storytelling, which is another way of saying a sales job, takes over.

Cryptocurrencies are an obvious example. A Bitcoin has no yield but it has some utility. To some, that utility is replacing the US dollar as a global transparent currency. To others, it’s a way to facilitate transactions. And for others still, it’s a handy tool for criminal transactions. How you price it then, depends on how you view the future utility.

Or does it? (more…)