The prolonged bull market of the past decade has not only significantly increased wealth for many but has also given rise to new areas of expertise. The explosion of exchange-traded funds (ETFs) has created a boom for ETF analysts, while over-reliance on data has led to the emergence of Psychic Quants—those who predict the future by analyzing past trends.
For major financial institutions, mastering systematic, preprogrammed delta hedges has become a crucial skill in today’s market landscape. It’s likely that some of the current high-flying stocks will experience severe downturns when the next bear market arrives. But, then again, what do we know?
As we observe the stock market in November 2019, it seems to be operating in a realm of fantasy. The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq appear detached from the actual economy, continuing to rise irrespective of prevailing conditions.
Market analysts, keen to clarify this surreal scenario, offer various interpretations aimed at categorizing the current state of the stock market. Is it a bubble? A melt-up? And if it is a melt-up, how would we define its type and severity?
For instance, Brian Sozzi from Yahoo Finance argues that we are not witnessing a bubble but rather a mini market melt-up as the holidays approach. Conversely, Savita Subramanian, chief equity strategist at Bank of America, posits that we are experiencing a beta-driven melt-up as the year comes to a close.
Are you familiar with the distinction between a mini market melt-up and a beta-driven melt-up? Frankly, neither are we…
Thus, for entertainment and exploration, we embark on an analysis to classify the stock market’s status—highlighting both its type and degree. We seek to uncover exactly where we stand.
New Records
As of yesterday [Thursday], both the DJIA and S&P 500 achieved all-time highs. President Trump, an enthusiastic observer of the markets, wasted no time in celebrating these new records, tweeting:
“Stock Market up big today. A New Record. Enjoy!”
Many Americans joined in the celebration. For example, Barry McCockiner expressed his gratitude to Trump for this landmark by going to AppleBee’s with his wife’s boyfriend, where they celebrated with some beers.
However, those who took a moment to reflect on the absurdity of all-time high stock markets in the absence of a correspondingly robust economy were less pleased. Clearly, something is amiss.
Currently, the Buffett Indicator, which compares total market capitalization to gross domestic product, stands at over 145 percent. A reasonably valued market typically falls between 75 and 90 percent, and anything above 115 percent is considered significantly overvalued.
This indicator has only surpassed this level on two previous occasions: in September of last year, when it reached 146 just before a 20 percent drop in the S&P 500, and in March 2000, when it peaked at 148 before the S&P 500 collapsed by 49 percent. For comparison, it registered 110 in September 2007, ahead of a 56 percent crash in the S&P 500.
As it stands, stock prices are rising, even as the economy stagnates. The Chicago Purchasing Management Index (PMI) dipped to 43.2, its lowest level in nearly four years; any PMI reading below 50 indicates a decline in business conditions.
Moreover, Gross Domestic Product (GDP) growth has also stalled. The Atlanta Fed has cut its Q4 growth forecast to 1 percent, with year-on-year GDP growth resting at only 2 percent.
What’s going on?
Riding the Type 3 Mega Market Melt Up Train
Tracing the flow of money from the thriving stock market leads us back to central banks, including the Federal Reserve. For the third time in 20 years, the Fed has placed the investment wealth—encompassing 401(k)s and IRAs—of millions of Americans at significant risk. Unfortunately, this always seems to happen at the most inopportune moments.
Monetary policies, particularly through interest rate cuts, are being implemented to stimulate economic demand. The Fed’s relentless pursuit of a magical 3 percent GDP growth and a 2 percent inflation target is contributing to a market melt-up. Consequently, American investors are once again being set up for potential losses.
To the dismay of central bankers globally, further monetary stimulus will not generate economic growth—a lesson learned over the past two decades. Despite unprecedented monetary policies, the economy has remained sluggish, while financial markets have seen dramatic upswings followed by sharp declines.
Therefore, while additional monetary stimulus may not enhance the economy, it can certainly exacerbate stock price distortions and create asset bubbles. Given the extent of current monetary interventions, we fear bigger surprises may be on the horizon.
Indeed, we could be in for a thrilling journey: DOW 30,000? DOW 40,000? DOW 100,000?
Why not?
With Fed Chair Powell as the conductor and the third unpredictable ride in two decades underway, this melt-up may evolve into something monumental. Hence, we designate this melt-up as: Type 3 Mega.
In all honesty, the ascent to DOW 30,000—or beyond—is not a cause for celebration. It does not signify a flourishing, prosperous economy but rather, it reflects the irrational behavior and madness of the world’s central bankers.
If you are paying attention, we recommend preparing to exit at the next opportunity.
Sincerely,
MN Gordon
for Economic Prism
Return from Riding the Type 3 Mega Market Melt Up Train to Economic Prism
