“How much worse can it get,” many of you are likely asking after Friday’s close. After all, the market is down 8% this month alone and and the NASDAQ, S&P and Dow are down -32%, -24% and -20% year-to-date, respectively.
The answer to the completely made up question I imagined you asking to yourself moments ago is this: If the Fed continues to hold course and posture the way it has, it can get much, much worse.
Putting aside the obvious - that there are record debt levels outstanding with the quickest pace of rate hikes we have seen in forever - let’s just calibrate our senses here for a moment.
As I mentioned during an hour-long interview I did yesterday, we are still not even lower than the pre-Covid highs the market had put in. Here’s the NASDAQ, for example:
And if you recall correctly, going into Covid the attitude was that we were at nosebleed valuations. In other words, no one would have been surprised if we had corrected 30% or more from there just on valuations without a catalyst.
As The Leuthold Group pointed out on Twitter Friday afternoon, the S&P’s current PE ratio is still almost double what it has been on a median basis of all bear markets dating back nearly 70 years.
A 30% drawdown from pre-Covid highs would mean the market still has close to 40-45% downside from here. A return to the median PE of 13.6x shown in the chart above would result in the same. We haven’t seen the pain of recessions past at all. Market veteran Jim Chanos made that clear today:
And while there have been scattered headlines - one here from Gasparino and one here from earlier this week - about the Fed paying closer attention, that doesn’t guarantee that the train wreck hasn’t already happened and isn’t just waiting to surface.
The point of this post is to remind you not to necessarily get comfortable buying the dip. Arguably, we haven’t even seen a “dip” yet. That’s how large this bubble was before inflation popped it. I said yesterday that the problem with bear market rallies is that everyone is always trying to pick a bottom. It is only after everyone is certain we have seen a bottom - and THEN the floor drops out - that we see sheer panic and real pain.
And again, it is all up to the Fed. I wrote this week at length about the Bank of England capitulating and going back to QE, and whether or not the Fed could do the same. That piece is here. My friend Kenny Polcari thinks that a Fed pivot simply isn’t happening.
I’d love to hear your thoughts below - but this weekend, while sipping your wine at your fall festivals and picking pumpkins with the family, just keep in the back of your mind: depending on what the Fed does, everything could still be completely fucked from here.
Have a great weekend.
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This is the most orderly unwind I have ever seen. Everyday day down 1.5%. There still hasn’t been a “panic”. It’s coming.
Let the defaults start and complete. There is bad debt weighing down the economy. Let creative destruction reign.
"How much worse could it get?"....
To be blunt, much
We've got a couple decades of bloat in the system and a weak constitution for real financial pain that may be headed our way, particularly in the states. Couple that with our predisposition influenced by recency bias and it can get much much worse and for a very long time.
The real question is "will" it, and maybe "when".
There is NFW the FED can do anything but make things worse. None of them lives in our world, total disconnect,front running trades while we argue about the latest outrage by Kylie Jenner or Trump or or whatever the influencers are doing. The have been doing their best to build a financial babble---bubble to make people think they are making money, till they set their high water mark mentally and hold on as the Hindenburg goes down, They are Mandarins per Ben Hunt and the only question is how fucked will it be/get?
"And again, it is all up to the Fed." I don't think the Fed has any control over anything - the sooner we accept that, the better off we are...
Could the Pension Funds in the USA suffer the same type of liquidity crisis their cousins in England just experienced?
Do they not have to contend with same set of issues? Possibly on a larger scale? The BOE caved why not the Fed?
One good thing thing about a bear market is that money returns to its rightful owners. For the past decade+ we have had a generation of investors thinking it was easy to make money, whether it was crypto, tech, equities or bonds. Remember when Implied Vols were at 6% several years back., correlations went out the window as everything went the same way -up!
Now we get to see who knows how to invest and make real money. We need more pain to remove all the hubris of investing invincibility.
The only difficult thing about this new path is that we may end up with a major war as the stakes are getting higher as societies are stressed to the max. That’s why fascism is rising again everywhere in the world.
We are certainly in a paradigm shift now and I don’t think the Fed knows anymore than we do. They have been totally reactive all the way, which is partially why everything is f#%d up. But we can’t blame them for everything. They are an easy scapegoat. We all collectively contributed to this. Strap yourself in for the ride!
A second level concern is that we basically have a whole generation of Corporate leaders (CEOs, CFOs, etc.) who have never done their jobs in a rising rate environment, much less to this degree. This is bound to have a negative impact on Corporate profits, growth, etc. especially during the inevitable recession.
This is my third ‘rodeo’ and this one reminds me, so far, of 2001-2002: a slow grind downward. My mantra for this year has been ‘be patient.’ Not that I haven’t tried to squeeze a few points of alpha here and there... I remember as kid of 11 they sheer pessimism of 1973-1975. Nothing seemed to going right in the country. And apart from the brief excitement of the bicentennial it wasn’t long before we plunged back into some really gloomy economic and political times: the Carter/oil embargo/hostage years. I remind myself the malaise can last longer than I think. Much of what I survey has the potential to extend the uncertainty for a while longer. Be Patient. I signed up for a U of Chicago on-line course on the psychology of finance. I hope it helps me navigate the next 2-5 years.
Listen for the following bullshit:
We have a "liquidity crisis". Bullshit. There is so much liquidity no one know what shit is worth anymore. Which means we have a stupidity crisis.
This is a "Black Swan." Bullshit. Nassim Taleb coined the term for genuinely unknowable events. He used the term "White swan" for events we know will happen at some point, but we can't know how big or bad. His example? A global pandemic like the Spanish Flu. COVID was a WHITE swan, not a BLACK swan, and those who were not prepared have no one to blame but themselves.
Related: "No one could have predicted this crisis." BULLSHIT! If you are old enough to remember the dot-com bubble, its bursting, and then the things that ran up to 2007-2008, you recall LOTS of people reacting to the bailouts by saying: "You're gonna break the bond market!!!"
So, BREAKING NEWS!!! They broke the bond market!!!
But no one could see this coming, right?
As A teenager in the 70's, I remember P/e's of 8,9. They told me 14 was the normal average. I couldn't believe it could go that HIGH Now flip the numbers and try to imagine 14..No one can imagine it could go that low. Recency bias or normalcy bias ??? Great job, Chris, any chance of getting Fleckenstein on soon ? Ward (of the state)
Ben Bernanke’s Fed made the biggest mistake in the history of Capitalism when they artificially drop interest rates to zero and invented QE. In simple terms, they nationalize pain, they made the Government own all the private parties mistakes, debt was transferred from private hands to Government, they remove the moral hazard, they rewarded the irresponsible risk takers at the expense of the future generations and the prudent investors. Now we face the choice again of taking responsibility and let the speculators fail, or save them at the expense of the health of the society. I think it is time to fix the system and take a Darwinian approach. Survival of the fittest. Let the non profitable business fail, as they should. I would accept minimal Fed intervention to avoid complete collapse of the markets, but no bailouts at the expense of the rest of us.
Imagine the ramp in inflation if the Fed pivots now.
Imagine the suffering of the majority with no real savings. They are likely spitefully laughing at the shmucks losing in the stock market.
The Fed will bail out/in cracks great and small while rates keep rising. That’s what the UK did already.
The heads of numerous crypto platforms don't all resign at the same time if good news / price appreciation is on the horizon.
It’s not just the Fed, it’s energy/ESG and the global supply chain. Everything is hanging on by the thread single thread that ties them all together.
There is a narrative that younger investors do not ‘get’ the situation and the effects of inflation and interest rates. I believe that younger investors are the most informed from their internet acumen and the availability of historical economic data. I hope we are headed down so that real opportunity opens up for patience investors. There will be plenty of older investors that take a lick’n because of their own bias. I am investing in the S&P as soon as it hit 3400. Even if it is in its way to 3000.
Powell knows this much: Recessions hurt some. Inflation hurts all.
How dare you! You’ve stolen my dreams and my childhood with your empty words. Have a great weekend 😆
This article will shift your paradigm on the reason for the myriad of political and economic crises that have occurred in the US in the last couple years. I had no idea that repo rates were 10% in 2020-21 with the Covid crisis being the excuse for the Fed to pump 9 trillion into the market.
Just remember that the deer is not crossing the street but rather the street is crossing the forest.
Agree with Thomas P. Real capitulation means panic selling and naked terror. We haven't seen that. However, even the slightest good news can give a temporary reprieve as we saw briefly with the attempted (failed) recovery after BOE stepped in.
I like Hartnetts advice which is start buying for serious around 3,300. Just nibble for now. Sadly, many of the bulls on CNBC were egging people on to buy around 3,750 and you don't hear much from them now. The retail side is still in BTDip mode it seems.
One big down day of 5%-8% and then we are done ?
It’s funny, it started to feel like capitulation was beginning just before the BOE stepped in on Wednesday, but now I feel like the market got hope that the Fed will blink. So there’s probably a ways to go before we get that feeling again. At the bottom, nobody thinks about buying the dip
If you're looking for the bottom, look up. When people are jumping out of tall buildings, the bottom is close.