Every day of the year another economist yaps about uncertainty.
There’s uncertainty over the US election, over Brexit, over interest rates, over the strength of the US economy, and over global trade.
Will the Bank of China devalue the yuan? Will the Bank of Japan aggressively target deflation? What will ECB president Mario Draghi do when he fails to hit his 2% inflation target?
Will Austria vote for an anti-immigration president? Will Italy’s prime minister Matteo Renzi get the constitutional reforms for Italy that he seeks? If not, will he resign as promised? What about the rise of euroskeptics in France and Italy?
A Financial Times survey says White House Battle Set to Chill US Economy.
“There is more uncertainty around US economic policy now than there has been for quite a while,” said Lewis Alexander, economist with Nomura. “You look at what Donald Trump proposes in particular and it raises all sorts of questions, the threats around trade, the threat of the costs to move jobs overseas. It raises the degree of uncertainty . . . around investment.”
Market Hates Uncertainty
I did a quick search for the phrase “the market hates uncertainty”. The results are amusing.
- On February 16, CNBC said The Market is Overreacting to Uncertainty. Pardon me for asking, but are things more certain now?
- On July 11, and in reference to Brexit, Cumberland Private Wealth Management Inc. offered this headline: “Uncertainty” – The Market Hates This Word.
- On June 27, OptionHouse stated Markets Don’t Like Surprises or Uncertainty. Supposedly, “Markets hate uncertainty even more than it hates surprises. The effects of BREXIT remain a big uncertain flag for the global economy. Global regulation in the transition is another uncertainty looming over this sector.” Darn, I missed global regulation in my opening list of things to be uncertain about.
- On June 11, 2015 Motley Fool writer TMF Deej wrote Mr. Market Hates Uncertainty, But Investors Can Profit From It.
- On September 14, 2015 CNBC interviewed Steve Massocca, at Wedbush Equity Management who offered this “sage” advice in a video appropriately titled Market Hates Uncertainty.
Protect Against Uncertainty
S&P 500 vs. Rising Uncertainty
Uncertainty Ass Backwards?
Looking at the above chart, one might wonder if the phrase “the market hates uncertainty” is ass backwards.
It’s not quite that simple either.
- Perhaps the market is reacting to the near certainty that central banks want to keep the party going.
- Perhaps people were so certain that Brexit would kill the market that it rallied after the initial shock subsided.
- Perhaps there are still more greater fools willing to be sucked into the notion that central banks have everything under control.
- Perhaps Trump will not be as bad for the economy as everyone expects.
There are a huge number of possibilities in play. All of them are uncertain.
I Am Certain of Three Things
- Uncertainty will continue.
- The more certain economists and market participants are about things, the more likely they are to be wrong.
- I don’t know, and no one else does either.
Mike “Mish” Shedlock
I don’t think it has anything to do with certainty or uncertainty like it did in the old days.
Today it’s all about market manipulation and the gamed economy.
The puppetmasters are in control. At least for the time being until Mr. Math rears his ugly head and takes it all down.
I’d rather risk my money at the Sports Bet in Vegas. It’s a lot more fun than playing the stock market and in my experience the odds are much better. But I recommend the college games. The House does not control the outcome of the game like the PTB’s control the markets.
But to each his own.
To a small extent, you are correct. There is undoubtedly some one doing something to keep equities going up. They are probably smug in their belief they can control the world forever. This will probably prove false. Somday. Buybacks compounded by HFT algos are in the middle.
Oil prices are the relevant parallel to stock prices.
From 2008 until recently, everyone believed oil prices would rise and stay high forever. The commodity cycle played a part. So did international hoarding and a speculative mania. Oil ETFs are structured to support high and rising prices in a mania environment. True commodity speculators don’t care if prices go up or down, as long as the price keeps moving. ETF speculators have a ‘go long’ mentality and hope for higher prices. Sellers want higher prices. Users don’t but they command the least power in this equation. Eventually, oversupply and conservation ruined the game and price collapsed.
Equities follow the same pattern. Buybacks fill the role of hoarders. Sad to say I don’t understand the new roles that I’m sure a small number of powerful players fill today. Their goal is to prop and equity prices and see they keep rising. the BOJ and their open ETF purchases play a role. Central banks keep rates low and cash flowing to help support these people. I have no idea of the transmission mechanism and how orders are handed out. It’s probably a state secret. The news media is useful here, too, for misdirection. Nobody investigates anything anymore. Press releases serve as solid reporting.
Everyone thought oil prices would rise forever. They were incorrect. Equity prices will also fall someday. They will stay high as long as central banks keep the money flowing and the rates low, however. Politicians consider this to be a success.
This being said, when Hillary wins we may see how this magic is done. She is such a prolific and clumsy liar the truth will become obvious eventually.
Even with HFT and algos, there still must be a few real purchasers of equities. The HFT algo tools combined with low rates and unlimited cash probably work as catalysts. They combine to greatly magnify the effect of actual buyers in the market. It’s said that buyback purchasers are not price sensitive. As I mentioned above, they are the hoarders from the oil patch. The general need for wall street to sell to earn a living also assists in beating the bushes for real cash from real buyers.
So the real weak point is the supply of actual buyers in the market. Reduce their numbers and the effect of HFT, algos, and central bank direct purchases diminishes by a leveraged factor. When they return, prices recover by the same leveraged factor in reverse. In other words fewer actual buyers are needed to prop the market today and HFT algos magnify their activity so it affects the indexes by huge amounts.
Remove HFT and algos and the market will disintegrate, I presume. This concept explains why regulators are reluctant to remove obvious front runners and spoofers from the markets. They have acclimated so that indexes will fail if they are removed.
Indeed. The uncertainty is caused by Wile E. Coyote standing on the ledge, knowing there is air underneath, and not organic growth.
The negative interest rates and Mr Math are starting to call. Institutions (pension funds) and speculators will invest in bonds as long as their total returns seem promising. But the time is coming that the baby boomers will be collecting pensions on a massive scale. This cannot be funded from current interest rates. Expecting bond prices to keep realizing gains by introducing new money to buy them up is a finite strategy. One of the bounds is global carry trades as a home for money … these are dwindling. Another is the reversal in from buying to selling of baby boomer assets. How much growth will there be when Social Security has to sell their non-yield treasuries and the funding must come from current taxes? Unless you think it possible to monetize all existing credit/debt, the price of the outstanding financial instruments will be repriced. And even if you could, there would be no income-yielding instruments.
You gave me an idea.
All we need is a change in definitions and a little salesmanship.
Rather than high interest rates being the enemy of growth (the current lie) we need to reposition interest rates as a tax on wealthy borrowers so they can finance the retirement of the elderly as an indirect social program. The higher rates are applied to pensions and consumer savings accounts. In a sense, we will be replacing low quality subsidized wealth with high quality ‘socialism’. Even Bernie would be fooled by this argument. Winner Winner chicken dinner.
Very well said. Right now the market holds up because baby boomers are saving for retirement as fast as possible, and investing it. Pension funds and individuals are both willing to take the maximum risk as they have little time left, only a few more years until a huge wave of retirements. As those retirements come, and there is a wave of withdrawals from retirement funds and pensions, the selling begins, and the buying disappears.
Perhaps we’ve reached a “permanently high plateau”, and prices will remain high until values catch up. Or, perhaps there is no such thing. Are we on the verge of a deflationary crash like 1929, or on the verge of an inflationary bear market, like 1966 to 1982, with the market remaining in the nominal range 700-1000, but losing value to inflation? I’ve had a foggy crystal ball for the last few years, and waffled between inflation and deflation. The picture remains foggy, but either way I can’t see how a bear market over the next 4-5 years can be avoided.
Mish,
I may well be wrong…but here we go…
IMO, the only thing that stands between this ATH market and a precipitous fall are the CBs. I also feel that the CBs have become so involved after Lehman due to FEAR. Looks like they have developed a permanent cold feet to such an extent that they are not able to see even a 1% fall without Lehman coming up in front of their eyes.
So one thing is clear… this market WILL NOT BE ALLOWED TO FALL if the CBs can help it, meaning to say they are going to do all they can (Draghi 2012, Bullard 2014, Fed with rate hike, QE, negative interest rate, helicopter money… oh quite an arsenal to do us in) and then some. So all those betting against this market have had their heads handed over to them. This is likely to continue.
Given that Japan has been able to do it for almost three decades and the others for nearly a decade by now the CBs (and others) assume that they can do it ALL THE TIME. It has to be said that the CBs have showed that it can be done long enough to make it look like they can do it forever. Will they be able to do it forever… who knows? It sure looks like that.
The only problem in this pretty picture that I see is that the expected growth (that the CBs thought will arise from their interventions) has not materialised and thus they are unable to move into hands-off mode. The growth is also NEVER GOING TO COME unless we get changes that will break and rebuild the existing financial system. At this juncture the changes look like they will not happen any time soon.
Why do I think so? What else can you say when we have a system that allows the Central Banks to get away with an economic crime of this magnitude, which vies with the physical crime of Hitler. Destroying savers, retirees, prudent folks, risk-averse folks, capital, savings, investments and growth all in the guise of doing it for us. GIVE ME A BREAK. If people cannot wake up to the crimes of the CBs after a decade when can we expect them to wake up. Probably NEVER. Also those who are awake are unable to do anything about it. Probably we need to get a bunch of well-meaning and capable individuals (with interest being more than self-aggrandizement) who can take on these CBs. We need an Economic War of Independence. Unlikely to happen anytime soon. So in all probability we will grinding it out like this for a long time. Anyway changes of the magnitude that is needed generally happens slowly and then all of a sudden.
Probably the only way to play this (always knowing that the CBs are on your side even when everything is falling apart) is BTFD till the CBs back is broken or people revolt…which could take, who knows, another decade or two or may not happen at all. I feel till we have negative interest rates in the US (by when it should be VERY NEGATIVE interest rate in Europe and UK) the market can grind higher because at that point things change and even carry trade will start losing money.
Will people wake up before that… looks like they may not (Japan’s Abe becoming more powerful is the case in point)… so BTFD.
While the frustration may be understandable, references to Japan’s last three decades and “can the CBs do it forever?” refrains are ridiculous. Is it really necessary to point out the profound differences between today’s world, and the one in which Japan kept the balls in the air for so long? Are you really blind to how the CBs are already losing control?
The only thing that have any control of are markets, and even that ability is now at the breaking point.
There is ZERO chance that the current, last-gasp charade can continue much longer. A year or two, perhaps, but five or 10? Fuggetaboutit.
@Tinky,
I accept it is a different world (from when Japan started). But then I am surprised that they have managed to do it for a decade nearly now. You may well be right but I would not bet the house on 1 or 2 years. I for one am not really sure how long the charade can go on and to what extent these guys will go (banning cash, helicopter money, QEn, negative interest rate, ban on hoarding cash etc.). But these guys have pulled this train quite a distance…
“Anyway changes of the magnitude that is needed generally happens slowly and then all of a sudden.”
Sudden, is at the 180 degree phase of a cycle, when it is pointing straight down.
When i was growing up, there’s the Six Million Dollar Man (Six million just sounds nice, and an absurb amount of money then).
Rich people are millionaires
Poor people have nothing.
Fast foward now
Rich people are billionaires
The poor people still have nothing
Waiting for the world’s first Trillionaire
Would a revolution happen before this? My bet is unlikely
The poor will still remain poor, you just need to feed them into stupor. Having a full stomach makes zero incentive for picking up arms
Subconscious emotional changes happen inside individuals, and then are projected onto something around them to rationalize their existence. Uncertainty is the projection du jour.
Are you sure?
absolutely. In an external causal model, positive events would feed back to create a perpetual bull market. We know that markets pull back and sometimes take years before finding a bottom. We know that markets have been observed to do the opposite of what is expected after news is released. Given the measurable contradictions to the external-causal model, the driving force must be internal, which is emotion and mood.
Mish
Remember the market always climbs a wall of uncertainty. Also, TINA,
there is no alternative.
Gary
Supposedly a “wall of fear”
But who is afraid with VIX at 12
Maybe I should look at that as well
It is amazing to me that your point #3 demonstrates a complete lack of knowledge of Martin Armstrong’s blog.
Pensions are bust, need yield…no alternative. Buy bonds at historic lows? Bank deposits?? Neg real rates after ‘inflation’ guarantees loss. Buy gold?? Maybe a little. Where to put the rest… Bitcoin??
Full disclosure: have no retirement, no pension, little savings, the herd (speak to one of our professional advisors today!) says buy mutual funds. Hell even Dave Ramsey (no offense to DR, he’s awesome) says don’t try to time the market, just buy some every month….sigh
Negative interest rates push those monies into more risky investments, some of that is into stocks.
The markets look ahead some months, they see Clinton as easily being elected as the next President, the markets are okay with that.
Saw on Bloomberg TV last night, that Bullard is again playing the rate hike is still live, routine that the FED wants people to fall for, while they never hike the rate.
Years down the road wikileaks will leak e-mails on Operation Lucy / Charlie Brown
Every 2 weeks millions of dollars are pumped into the stock market through 401(k) mutual funds. That money has to go somewhere since the rules say the mutual funds can’t hold cash. They also can’t take a short position because that would be “bad” for the market. So the majority of new money going into stocks is long and (by law) stupid.
As much as I hate the Social Security system, at least George Bush’s idea of “letting” workers put their FICA into some private (stock driven) fund was DOA. The last thing we need is more people losing their life savings in the Wall St casino.
Yes, for now that is true. Once baby boomers begin to retire, that cash flow will reverse. Every month millions of dollars will be pumped out of 401k mutual funds.
Welcome to the world of bank centrally planned stock prices. The Japanese bank centrally plans stock prices by buying stocks directly. The domestic bank centrally plans stock prices by metering credit to its proxies.
The stock market no longer primarily reflects the wisdom of millions of investors, but rather the opinions of a had full of bankers. Bank control of stock prices is imperfect, but stocks have not reflected free market pricing for quite some time.
Mish, you might find this interesting. I was looking at Mark Hanson’s real estate blog and he had a Treasury Department press release (July 27th) on the dept expanding its crackdown on all cash real estate transactions. Don’t see ANY way that will help that sector of the casino keep the illusion going.
…
WASHINGTON—The Financial Crimes Enforcement Network (FinCEN) today announced Geographic Targeting Orders (GTO) that will temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. FinCEN remains concerned that all-cash purchases (i.e., those without bank financing) may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. To better understand this vulnerability, FinCEN issued similar GTOs earlier this year covering transactions in Manhattan and Miami-Dade County, Florida. The GTOs announced today will expand upon the valuable information received from the initial GTOs.
https://www.fincen.gov/news_room/nr/html/20160727.html
One thing is certain,,,,the dollar will be devalued. Stawks will adjust accordingly. So will houses, commodities and Big Macs.
How?
Currency is set on the open market.
And other countries (currencies) well ahead of the US in the race to the bottom.
If the value of a currency were the perception of what you could ultimately obtain with it in comparison to holding anything else, including other currencies, well a dollar devaluation would appear with the end of American ‘can do’ and the arrival of ‘slush’. Not saying it will be one way or the other mind you…
Investors are on autopilot. Zero interest rate policies (ZIRP) and QE will remain in vogue at the central banks so there are no alternatives to grow one’s portfolio except the markets and property investments. Perhaps both asset classes are in bubble status but who is to say that these bull markets won’t continue for a much longer period.
We’ll see how US asset valuations survive a bad recession (we are due … if not already in one).
Until then I wouldn’t bet against central banks keeping the spinning plates in the air.
“Madness is the result not of uncertainty but of certainty.”
Friedrich Nietzsche
“The trouble with the world is that the stupid are so confident while the intelligent are full of doubt.”
Bertrand Russell
“..live in the question.”
Rainer Maria Rilke
Non GAAP vs GAAP earnings widening….Mrkt up.
Pulling future est earnings and applying it to current quarter ….Mrkt up.
,buyback….Mrkt up
Cut staff…. Mrkt up
GDP bad…..must be bottom Mrkt up
One big kink here….. Growth down !!! And slowing!!!! See Lacy Hunt
Liquidity loves inflation – Doug Noland.
There are share buybacks and conversion of equity to debt.
The cash the Fed supplies at near zero interest (elsewhere negative) goes into the fastest appreciating things. If stocks start crashing and gold has a melt up, expect $3k/oz gold
ZIRP has fueled the market since 2008, clearly. We never had interest rates this low for this long, and the punch bowl is still full. Only two things can end the party: One, interest rate hikes. If the Fed raised rates by 100 basis points tmrw, the markets would sink like a stone. Two, companies flat-out start losing money. No matter how cheap the money is, if companies keep losing money, they will stop being invested in. Even Central banks can’t keep companies profitable.
Record highs in the market always attract the losers at the end game. PE ratios @ 25, corporatipns buying back stock to make the bottom line look better. Ect.
Equities are always in a crude equilibrium with bonds. Bond yields are roughly the inverse of equity P/E’s. The CB’s can manipulate yields on bonds. Thus CB’s can manipulate equity prices. While CB’s have reached the limit on interest rates by whacking into the zero lower bound they still have room to move in the dimension of duration. One variant of CB helicopter money is for CB’s to replace finite duration finite yielding bonds with zero coupon (rate =zero) bonds of infinite duration in the ultimate QE end game. This is pure helicopter money as these bonds need never be repaid. They can be left on the CB’s balance sheet or other balance sheets forever. So much for the question of negative equity for CB’s. The Swiss CB is already at 50 years and near zero coupon. So the CB of the world are truly almost infinitely powerful in their ability to control asset prices. But they cannot control unemployment nor can they simultaneously control inflation. Unemployment is worsening by substitution of crappy low wage jobs for good manufacturing jobs. Inflation is controlled for now by debt deflationary forces like commodity price declines just as occurred in the first Great Depression. Watch bond durations expand to infinity as the next leg in the current CB insanity unfolds.
Here’s your answer Mish. Uncertainty drives up the prices of bonds which drives up the prices of equities.
Except, I’ll add, when there is a global run on banks.
Two quotes come to mind.
She who speaks does not know, and she who knows does not speak.
If I told you how to invest I’d have to kill you.
Trying to predict the market based on subjective analysis is an exercise in futility. The market is gonna do what the market is gonna do. The best thing you can do is just FOLLOW THE TREND. Which for the moment is UP. So stay LONG until it reverses.
Well said. Follow the trend.
Agree completely. Do the following: (If you can’t, get out of the market)
. Let profits run
. Cut losses short
. Manage risk with stops and market direction change
. Trade in both up and down markets
. Understand Expectancy
. Take advantage of mass psychology (trends)
One thing is certain: market will continue to go up.
Why? All the shorts have been damaged.
For those who need to listen to “Experts”, here are a few past predictions:
1. “Thus, most likely, we can brace ourselves for new lows on US and Global equities for the next 12 to 18 months.” Nouriel Roubini – March 12, 2009.
2. “We could see a real bear market rally lure investors back in, just to crush their hopes this summer”. John Mauldin – March 14, 2009.
3. “I believe the markets are now overshooting to the upside and that the US stock market has likely peaked for the year. Higher interest rates, rising marginal taxes, lower US dollar.”
Doug Kass – Aug 26, 2009.
4. “Stocks peaked in September and are back in a bear market. The S&P 500 will probably fall substantially below 676.53, the 12 year low reached on March 9th, he said. His projection implies a drop of more than 34% from last week’s close of 1025.” Bob Prechter – Oct 1, 2009.
5. “The US market will drop below fair value, which is a 22% decline (from the S&P level of 1098 on October 19).” Jeremy Grantham – Oct 19, 2009.
6. “I think we very well could go back and test that 666 on the S&P, maybe go a bit lower than that. And this decline may very well spill over into next year.” Gary Shilling – Oct 23, 2009.
7. “The six-month rally in risk assets – while continuously supported by the Fed and Treasury policymakers – is likely at a pinnacle. Out, out brief candle.” Bill Gross – Oct 27, 2009.
That’s just a sampling. I wonder if these guru’s all changed their tune when the market gained 80% – 140% after their predictions?
Answer this question – Why try to predict the market when you can just follow the trend? The answer is: They get paid to predict and there are $ millions to be made in the predictions game.