[Chart courtesy of MarketWatch.com]

1. Moving the markets

In a few decades, historians will look back at the past 10 years and shake their heads in disbelieve at the insane Fed monetary policies that have kept markets artificially propped up, while “disallowing” any downside moves beyond a certain “acceptable” percentage.

Though many erroneously attribute the current market disaster to the coronavirus, that is incorrect. The virus was merely the pin that pricked the ever-growing bubbles, which would have burst anyway, but we might have pushed the can down the road a little longer.

ZH and others posted these relevant commentaries:

1. This bull market will go down in history as the one that nobody believed would last this long. A lot of people have been hurt because their retirement money disappeared…. What brought us to where we are in 2020 is too much hope, sky-high valuations.
2. Did I see it coming this far? No. Throughout the past 11 years, the market has had a lot of dips, and always the Federal Reserve came to the rescue…. Right now, the Fed is not enough, central bank action is not enough. There is a pyramid of uncertainty right now.
3. Does the Fed really want to have a put every time the market gets nervous? …Coming off all-time highs, does it make sense for The Fed to bail the markets out every single time… creating a trap?
4. The Fed has created this dependency and there’s an entire generation of money-managers who … have only seen a one-way street… of course they’re nervous.
5. The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?
6. The market is dependent on Fed largesse… and we made it that way…

At this moment, the crash fest goes on with utter abandon causing one analyst to ask:

“Is the market now like an “Oriental Rug Factory” where “Everything Must Go?”

It certainly feels that way now, as many leveraged traders are forced to unwind and sell everything, including safe-haven assets like precious metals, in order to meet margin calls.

Of course, in bear markets we can witness and sharp rebounds of great magnitude, but that does not mean a new bull market is imminent. Case in point was today, when the Fed fired a bazooka by unleashing a $1.5 trillion Rep bailout, which means up to $3 trillion in cumulative repos by the end of the month.

The effect was immediate, as the above chart shows, with the Dow regaining some 1,500 points within minutes. Unfortunately, this was merely a dead cat bounce, and the markets resumed their downward trajectory with utter abandon leaving me pondering as to whether the Fed has finally run out of ammunition.

However, I expect them to drop rates to zero, or below, and directly intervene in the markets, just like the Japanese Central Bank does, by openly buying stocks, bonds and ETFs. We will find out soon.

Yes, the thing that may have been unthinkable 3 weeks ago is upon us. The bear market has arrived with full force and may be hanging around for a while.

Being out of the market and on the sidelines never felt so right.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

With the benefit of hindsight, yesterday’s hope-based snap-back rally has now assumed the smell of a dead-cat bounce, with the major indexes getting hammered, as the Dow touched the commonly recognized bear market territory, which is a 20% drop from recent highs.

A few headlines combined to eradicate any remaining bullish sentiment:

• Core CPI jumps the highest in 12 years with services costs soaring
• The WHO finally declares the coronavirus a Pandemic
• Mnuchin says that broad economic response will have to wait

Globally, the urge to “do something” accelerated with the Bank of England delivering an emergency 0.25% interest rate cut while pledging more fiscal stimulus. Germany’s Merkel promised to do “whatever is necessary,” while at the same time the ECB President warned of an economic shock like the 2008 financial crisis.

Sure, markets are pricing in an easing of Central Banks, but the question remains how much firepower is really left, after having been in easing mode for the past 10 years.

In the meantime, the non-reported crisis in the overnight repo lending market continues unabated with the Fed having to increase the liquidity bailout to a stunning $175 billion per day, and the market still keeps collapsing (hat tip to ZH/Bloomberg for this data). Something is seriously broken, which the Financial Conditions Index clearly shows.

With the Fed summit next week, the implied rate-change for the March FOMC meeting is about 82 basis point, as Bloomberg’s chart demonstrates. That means interest rates are heading to the zero level.

And here’s something I have been commenting on over the years, namely that during times of extreme market stress, such as we are witnessing right now, the bond portion in a portfolio will not be able to “save” the equity portion.

Bloomberg’s chart shows that the weekly stock and bond combined return was the worst in 11 years (-7.80%), or more specifically since Leman went bankrupt. That supports my belief that only 100% cash on the sidelines will prevent serious portfolio damage.

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