The inexorable equity rally off the 2009 crisis doldrums spawned a market meme about how the “powers that be” have effectively made it “illegal” for stocks to fall.
Depending on your penchant for conspiracy theories, you can place that meme on a continuum where one extreme is labeled “pure levity” and the other is labeled “working assumption.”
It’s important to distinguish an assertion about markets being micromanaged on a daily or hourly basis from the overt and systematic suppression of volatility and the deliberate creation of a global hunt for yield.
The latter (deliberate suppression of volatility across assets and an engineered hunt for yield) is part and parcel of the ultra-accommodative policy response that characterizes the post-crisis environment. Far from a “conspiracy”, it’s stated policy as communicated to the public after each and every central bank meeting and as clearly delineated on those central banks’ official websites.
The former (the idea that central banks or some arms-length intermediaries operating on their behalf are actively managing every tick) is largely a fairy tale. I used to listen with more than a little incredulity as a couple of traders I knew spent most of their day trying to explain every move in U.S. equity futs by reference to their suspicion that Haruhiko Kuroda was moonlighting as an FX trader, pushing around USDJPY whenever U.S. stocks looked like they might want to move lower. And I am not exaggerating - they actually believed that and although I no longer talk to them, I imagine they still do. “THIS is all USDJPY!,” they’d digitally-shriek at regular intervals from the cash open to the closing bell, using a Trump-ish combination of all-caps and unnecessary punctuation.
But over the past month, it’s become apparent that some folks are starting to buy into (figuratively and literally in this case) the notion that stocks shouldn’t be allowed to fall - that somehow two-way price action is something that is not only not desirable, but is in fact a state of affairs that might be an affront to decorum so egregious as to warrant forceful admonitions akin to something you might expect to see in China.
Back in 2015, when China’s leverage-fueled, equity market miracle turned into a nightmare thanks to a dramatic unwind in a half-dozen or so backdoor margin lending channels, the Politburo embarked on a comically absurd plunge protection push that at one point devolved into actually arresting people on charges that, when stripped of the attempts to ascribe illegality, amounted to this: “they sold some stocks.”
And while I don’t think we’re quite there yet, Steve Mnuchin’s efforts to weaponize the stock market for political leverage a couple of days ago raise serious questions. Here’s what he told Politico on a podcast released Thursday:
There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done. To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains.
And here are some excerpts from the post I penned documenting those comments:
First of all, that’s probably true. The original “Trump bump” and its short-lived sequel (which both included notable rotations within equities, a run up in yields, and a dollar rally) were at least partially attributable to optimism on tax reform.
But the problem with Mnuchin’s comment is that he’s effectively piggybacking off Trump’s tweets about the stock market. All Trump has left in terms of things he can point to for evidence of “success” are record stock prices and his tweets have made working class people i) care about daily moves in equities, and ii) believe that the rally is attributable to him.
So what Steve is doing is telling those same working class people that if tax reform doesn’t get done and stocks crash, they have Congress to blame. That move is a rather transparent attempt to blackmail lawmakers. Now, they’re in a position where if their constituents’ 401ks take a hit on tax reform failure, they’ll be blamed. Of course those would be the same constituents who, for the most part, will not benefit from the administration’s tax plan.
And the ultimate middle finger to the middle class here is that the people who benefit the most from higher prices for financial assets like stocks are the people in whose hands those assets are concentrated – people like Steve Mnuchin. Those would be the same people who also benefit from the tax plan.
Meanwhile, Trump continues to tweet about record highs for the market. That would be the very same market that, just 13 months ago, he (correctly) called “false.” Allow me to excerpt a few passages from another post I wrote this week (at a certain point, paraphrasing oneself just to avoid recycling material is an exercise in intellectual dishonesty):
What you’re seeing from Trump on the market is important. It’s become a key pillar of this administration’s propaganda campaign. Lacking identifiable legislative achievements, the stock market is becoming more and more important as a distraction for a base that’s become disillusioned by the President’s failure to actually implement any of his campaign promises.
As you’ll also recall, he’s now floated a trial balloon about the national debt and stock prices. To anyone who knows anything at all about how this works, it was comically absurd. He told Sean Hannity that because the stock market is rising, the national debt is falling. Again, that’s completely laughable to most of us. But not to his base.
Obviously, that raises questions about how he’s going to respond when the market finally does fall and people who don’t know any better start tweeting about how that must mean the national debt is rising. The administration’s knee-jerk reaction will be to assign blame to Congress and somehow, they’ll manage to make at least some people believe it.
But it’s not just Trump. I read a post this week in which one of the most prominent pundits in the mainstream financial news media suggested that perennial bearishness from folks who have previously made good calls but who have been left behind by the current rally are akin to “heroin”-addicted “Gollums.”
Say what you will about the likes of Albert Edwards and Bob Janjuah, but I’m not sure it’s accurate to paint them with the Tolkien brush or otherwise suggest that they can’t be trusted because they are a gang of desperate goblins who think of media appearances like trips to the opium den.
Besides, at some point this has to end. Have a look at this chart from Goldman (up to date through Friday):
That raises questions about who it is that’s really acting irresponsible. Is it the people warning that this is almost certain to turn around soon if history is any guide at all, or is it the people who claim that “this time is different”? Hint: you never want to be the guy that says “this time is different.”
This attitude is becoming pervasive. The stock market has ceased to function as a mechanism for price discovery and has instead become something akin to a sacred cow that everyone from the President all the way down to mainstream pundits feels compelled to worship everyday.
This feels different than the dot-com bubble. This is less like a mania and more like a national religion. Anyone who doesn’t subscribe to it isn’t just an “idiot,” they’re a heretic and a ghoul. Suggesting this will end badly isn’t “sour grapes” from someone who missed the rally, but rather sacrilege emanating from drug-addicted devils.
For my part, I’m just fine with watching this from the sidelines. Call me old fashioned. Or just call me a witch.
Catch more Heisenberg over at Heisenberg Report.