Wolf
Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
Stock market participants and the players
around them cling to every word proffered by the Fed that might
reveal its secret plans because everyone knows that the words from
the Fed and the money it prints and the interest rates it sets have
been the fuel for the stupendous rally that started over five years
ago. Wall Street wrings the last drop of hype and hope out of these
words and spins them and doctors them to rationalize ever higher
stock prices.
But recently, there has been one word that has
moved up on the central-bank public worry list. As so often, it did
so in a coordinated manner, and within days, it cropped up at the
Fed, the Bundesbank, the Bank of England, the ECB….
“Complacency.”
It’s a condition of super-low volatility
where the markets have become a one-way ticket to heaven, when market
participants think that asset prices can only go up, that stocks will
always rise, that a 4% decline is a correction, that even the worst
junk bonds won’t ever default, that inflation doesn’t exist –
and no one demands being paid for the risks they’re taking on
because there are no more risks. Just look at the VIX volatility
index, or fear index as it’s called: it has descended into a state
of somnolence.
Central bankers are now worried that this
creature of their making – this happy state of complacency amidst
gorgeous and plump asset bubbles – might cause the next crisis.
They’re worried that no one will be prepared for when it all turns
around.
Alas,
beneath the surface, stocks have already turned around.
Volatility is already tearing into stocks, and
those holding them outright, rather than safely out of view in some
confidence-inspiring fund, have watched “wealth” and dreams go up
in smoke. But they know their formerly red-hot darlings will soon
reach new highs, and that’s when they’ll sell them to a greater
fool, and so they’re hanging on by the skins of their teeth, and
others are buying because complacency still rules the day.
LinkedIn skidded 40.6% from its 52-week high,
Twitter 57.5% in five months. It’s not just a few fallen angels.
The Russell 2000, which tracks the 2000 smallest stocks in the
Russell 3000, is down 9.1% from its 52-week high. The FDN Internet
Index 16.1% in three months, the NBI Nasdaq Biotech index 16.5%, the
Social Media Index SOCL 24.4%. Stock after stock has taken a brutal
licking, papered over by the Dow and the S&P 500 whose
components, the largest companies in the US, have largely held up so
far. But beneath them, the Fed’s illusory “wealth effect” has
begun to reverse.
And just as these stocks were coming off their
peaks in March, the one thing that wasn’t supposed to happen,
happened: margin debt, after having spiked for months, declined.
Margin debt – newly created money that is
plowed into stocks – is the great accelerator on the way up. It
inflates values and increases leverage, and when it spikes, it
performs miracles. But it has a terrifying habit: after going into a
majestic spike, it reverses abruptly right around the time stocks
crash.
Over
the last 15 years, margin debt had three spikes and reversals:
The first spike peaked in March 2000 at a
record of $278.5 billion, or 2.66% of GDP. By the time it reversed in
April, the stale air was hissing out of stocks with epic speed.
The second spike peaked in July 2007 at $381.4
billion, or 2.60% of GDP. In November, stocks began to swoon. No one
will ever forget what happened next.
The
third spike – the most phenomenal yet – peaked in February 2014
at $465.7 billion, beating the prior record by 22%. It reached 2.73%
of GDP, the highest ratio ever! In March, the spike reversed. And in
April, it declined
again.
And it’s forming an increasingly
terrifying chart:
Margin debt is down 6.1% from its February
peak. $28.6 billion was drained from the stock market in two months,
rather than added, as it might have been the case during the spike –
a difference of $57 billion. And the dough that was yanked out isn’t
piled up on the sidelines either, waiting to be plowed back into
stocks. It was used to pay off debt. It simply evaporated.
During those months, the former red-hot
darlings have been eviscerated, and thousands of stocks have skidded
in sympathy. It’s brutal out there. But hey, the VIX is asleep,
volatility isn’t visible from the top, complacency rules, and to
heck with the last two times this scenario played out and blew down
the whole flimsy construct.
The
equation might not have gone so horribly awry if each class of
graduates had seen their incomes skyrocket in line with their student
debt. But that’s a crummy joke in America these days. Read…. This
Chart Is The Fate of Housing In America As Student Loans Bankrupt A
Whole Generation
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