The market continues to yo-yo this week, with early gains getting erased by the closing bell, only to see overnight action bring prices right back up. It's been a week where the wheels are spinning, with large intra-day moves, but the market isn't moving anywhere.
It was two years ago in 2016, right around this time, when the market was falling, and the growth story was over. The top was in. Bearish sentiment reached a rare extreme.
— UPBOptionMil (@UPBOptionMil) February 11, 2016
And then, the market reversed and went on a frenzied near 2 year run. With nary a red monthly candle to be found. Until this month.
A bullish extreme was hit just a few weeks ago.
and two years later almost 180 degree flip pic.twitter.com/i5KYSuGjDQ
— UPBOptionMil (@UPBOptionMil) January 8, 2018
Granted, there is still time for this market to turn it around for the month and avoid the dreaded red candle.. Judging by the overnight buying frenzy last night, it almost seemed like we were going to reverse all of February's losses and then some before today's open. But alas, just DOW +200 is all the market could muster in the overnight session. However a pullback to sober up market participants isn't always a bad thing.
Despite the recent pull back, it is clear that equities still have that loving feeling. Equities remain the answer to those seeking a return on capital. Those who were taught when they were young to save their money via a savings account are the fools. Those throwing their money into risky assets are the smartest people around. And that is just how the FED wants it. After operation twist Ben Bernanke was quick to point out, when asked what he would say to those relying on their hard earned savings in retirement, that the savers will be rewarded down the road, because the economy as a whole will be far better off.
He was right about one thing, the economy is far better off... but you can't say the same about those who decided not to put their hard earned life savings into the stock market after seeing it crash twice in an eight year span. As the economy has turned around, those savers still find little yield in their savings account. The rich are off buying their 8th summer home, or buying art for obscene prices, while the middle class and below have not received the same reward from inflating asset prices.
I see the majority of the commentary concerning the rising interest rate environment as being bullish for asset prices. And yet interest rates have been trending lower for almost 40 years! Most particpants in this market have never seen interest rates trending higher. EVER!
On the flip side debt is on a 40+ year BENDER. Debt has been going UP while interest rates have been going DOWN. That makes perfect sense. If the cost of debt were to rise, it would be the other way around. That is why the FED has kept rates low for so long, to get corporations to borrow. And guess what?????
Corporate Debt levels have NEVER been Higher. #FEDWinning
and amid a world of cheap money, borrow and spend works. Borrow and buy. Borrow and buy back stock. Borrow and hand out dividends. and Borrow the corporations have. Record corporate debt. Governments are borrowing too.
It's a happy world awash in cheap debt and soaring asset prices.
Mortgage rates have remained at historic lows for almost 10 years.
There has never been a better time to borrow to buy a house. But what happens if mortgage rates rise? What happens when corporations borrowing costs RISE? Can these historic low rates remain historically low forever?
It's been near 40 years of declining costs of capital which has led to 40+ years of debt inflation. And yet overall inflation, has remained subdued. It's a veritable nirvana. Which is why, when inflation readings started to heat up recently the market took notice. Bonds started to sell off. And asset prices fell.
If inflation remains low and interest rates remain abnormally low, asset prices around the globe will continue on their happy way to higher and higher prices. Corporate and Sovereign debt will continue to soar, Housing prices will continue on their merry way. And perhaps that is what lies ahead.
However I think anyone saying higher interest rates is a good thing for the economy, the stock market, and asset prices is just plain wrong. Ask them where they were in 1965 when interest rates were in an uptrend.
I think higher interest rates will crush asset prices, will squash those corporations who over-ate at the debt table. We will see countless corporations go belly up amid un-serviceable debt. Housing prices will fall, and we will be back in the 2008 scenario of underwater homeowners.
Low interest rates forever.... perhaps that is the road that lies ahead, because if we are indeed at the start of a road to higher interest rates, the recent market pull back is just the pre-game warm-up of the asset price adjustment game that lies ahead.