Market Crash 2018
As of early October 2017 (S&P500 at 2550 as I write) we can look back at 2017 and see shades of 2007 in several macroeconomic as well as fundamental and technical market indicators. But there is a difference (I’d hate to say “this time it’s different”, but….). 2017 has seen six surprise Fed intrusions (grouped into four points in time) this year wherein a key Fed leader (mostly Bill Dudley, the NY Fed Prez) threatened to keep the punch bowl spiked – or at least slow the pace of taking the punch bowl away. Each time this happened we saw an incremental enlargement of what has become the largest property and stock market bubble in history –eclipsing the biggest previous bubbles seen in 1929, 2000, 2007. That these threats to spike the punch bowl happened against a formal/public position of tightening is quite amazing. Indeed 2017 saw the Fed raise the Fed funds rate and begin reducing its balance sheet – a net tightening of policy. We saw nothing like that from the Fed in 2007. On the contrary, the Fed maintained a 5.25% Fed Funds rate from July 2006 to July 2007 i.e., it did nothing. It would not begin taking an action until until August 2007 –and that was cutting rates not raising. By October 2007 the Fed had cut the rate to 4.75%, and would cut further by December to 4.25% (when the recession began –but don’t worry the BEA would not call it a recession until nearly 11 months later and global stock markets had been nearly cut in half). Point being: 2017 has seen repeated attempts by the Fed to keep the punch bowl spiked -if in an off balance sheet sort of way- by not using formal FOMC actions.
I will say this about 2017 though, every time the Fed did a surprise policy threat of new yumminess, the mini Greedometer value was dropping near 60. Apparently the Fed has something similar to the Greedometers because at each of the 4 groupings of Fed surprise intrusions this year the U.S. stock market was within 1 week and 1% of initiating an opening drop in a protracted market crash. Clearly the Fed was seeing an imminent threat and took an action. Why else threaten more yumminess if everything’s great?
All Greedometer® sequences have been stopped (at different levels of maturity) by new and increasingly desperate central bank actions -and threats of actions. However, when a sequence has been stopped, a new one loads with less risk-on holiday time than was seen before the launch of the latest sequence. This is key! The time between Greedometer sequences has obeyed an exponential decay function as follows (from 1999 to now). This clearly shows that monetary policy is reaching the end of its efficacy.
Isn’t it interesting that the velocity of M2 money in the U.S. has slowed during the same timeframe to new all time lows? Monetary policy becomes less effective as velocity of money slows. So central banks have needed to take more desperate and more frequent actions as those actions become less effective.
Back to where we are now.
- The Fed is painted into a corner wherein it will lose credibility if it has to do a Japan-like policy reversal and lower interest rates after raising them. Former Dallas Fed Prez Fisher says the “Fed is out of ammo”.
- The ECB is all-in in terms of its negative interest rates and QE program. It is doubtful the Bundesbank would permit the ECB to do a Japan-like QE program that buys equity ETFs — that would be wildly inflationary and introduce severe risk to Europe’s bourses when the ECB would have to sell their equity holdings.
- The BOJ is very likely out of policy bullets. It is already buying all the new JGBs bring printed plus gobbling up most of Japan’s equity ETF universe. How does it sell those equity ETFs without crashing the market? How does it do more?
- The PBoC already has a pseudo QE program and the lowest interest rates and bank reserve ratios ever. How do they appreciably add to this?
The Greedometers show that central banks have been keeping bubbles from imploding (or imploding worse) for the past 18+ years. Central banks can only keep doing this as long as their tools remain viable, and as long as their institutions remain credible. As of October 2017 monetary policy ammunition is all but used up –and is becoming less effective. So global central banks are all trying to back away from their QE programs as gracefully as possible. All that’s left is a global helicopter money drop –and that was threatened in January by the Fed’s Brainard. Imagine the wave of global food & fuel inflation if a coordinated helicopter money drop were to occur. The bottom 60% of income earners in the U.S. would get crushed. The same in every other western country. The bottom 90% would get crushed in India and China. Tell me that would end well.
So 2018 may finally see a Greedometer sequence not stopped by central banks –because they can’t. A U.S. stock market crash would burn itself out of natural causes. This has not been seen since 1929-1930.