The reason why it is so hard to tell what's ailing stocks has to do with the beginning of the bear market and what's been done -- the opposite -- to end it.
Some say the bear started all the way back in January. That's when President Trump decided to fight back against China and the stock market grew more volatile, wiping out those silly souls who had made money month after month betting that the placid bull would continue to roam.
In truth, the market had become narrower as it clawed its way back and climbed ever higher. But the confusion of its origin stems from two fatal decisions that had nothing to do with business and everything to do with Washington.
On the third of October the Fed chairman, Jerome Powell, decided, in a very odd and erratic way, to come out swinging and declare that he had to stop this runaway train of an economy with one rate hike this year and three hikes the next. Indeed, he might need to overshoot and cause the economy to grow more slowly.
This moment was the first when we realized that Powell was not who we thought he was. He impressed as a pragmatist, not a dogmatist; he spoke like a cautious, even humane, banker, but we discovered he was a theoretician relying on models that it seems as though he never used before this.
The president, of course, is clueless about any of this and mercurial as all get out, so it was natural that Powell would not know how to take him on. But to be so in Trump's face with such a rookie mistake was just too much for the president, and the war with no winners began.
The media, for the most part, hate Trump. Most hedge and mutual fund managers don't like Trump, either. So there was a lot of praise in the air for Powell. He felt no heat other than from this quarter. I saw too much weakness in the pipe, something that the models would not have predicted, just like the models didn't predict the housing-derived crash of 2007-2009 because homes had never fallen in value like that even during the Great Depression and the Fed was clueless about all the derivative pain and leverage that was out there.
We can't just blame Powell, though, because the next day Vice President Pence gave a powerful speech against China that really outed it as a Communist dictatorship out to screw the world over, not an errant trading partner.
Now there are so many Trump haters in the media and in money that this speech was not seized on as a reason to sell stocks until much after the Powell -led decline. The charts don't tell you that. But when you look closely you will realize that the domestics started rolling over first, with Exhibit A being the decline in the retail stocks. It's hard to believe because back in August Target CEO Brian Cornell said the consumer environment was the best he'd ever seen and he reiterated that in November.
But I think when the season is over we will find that there were fewer winners than we thought because of the wealth effect destruction that I think may even have mitigated the strength of the consumer as well as the pre-buying ahead of the tariffs. I bring in retail to start because it really was hit with a one-two punch of rate hikes and tariffs and is emblematic of the group that should be doing the best with a robust employment picture, not the worst as it has become.
It has been horrendous ever since then, with the worst part about it being the two moments where it looked like the year would be saved: the Nov. 15 conversation that Jerome Powell had with Robert Kaplan, president of the Dallas Fed, and the Nov. 30 G-20 meeting in Argentina.
In the Kaplan interview, Powell acknowledged that the pace of growth was slowing, but it is not "a terrible slowdown." I thought that was an important walk back of Powell's intemperate remarks. I was alone, though, in part because I was the only one even saying, let alone screaming, that they were intemperate. Jay just didn't have it right, but again, because Trump is so despised by so many in the land I live in, I was somehow perceived as doing his bidding. I was simply acting on my own data, culled from speaking privately to dozens of CEOs, that things were slowing down too quickly even if the employment numbers didn't show it.
In retrospect, the Kaplan tête-à-tête meant nothing, a total misread by me. But that wasn't the only fake-out. On Nov. 28 Powell said the fed funds rate was "just below" normal, quite different from "a long way from normal," which he said at the beginning of October. That, too, was a fake-out because it made it sound as though perhaps he realized that he should administer one more rate hike and wait. That's when I said we might be in store for a "one and wait" plan at the next Fed meeting.
We even got a not-so-strong employment number at the beginning of December that played into the "one and wait" thesis perfectly.
You see there was still time to change things, to save the darned market from what amounts to almost a daily flash crash -- more on that latter.
At the same time, on the trade front, we seemed to have one of those great historical breakthroughs that the president likes to tout after he left the G-20 meeting.
There did seem to be the usual buy of ag products and some talk about some industrial buying and the possibility of the rekindling of M&A as the Chinese said they would allow the Qualcomm (QCOM - Get Report) -NXP Semiconductors (NXPI - Get Report) deal to go through. I still wonder if anyone at that table from our side knew that deal was done and paid for. Would things be different if they had been informed? Sorry to be so cynical, but probably.
But, ever since then, we have had to deal with one fake-out after another from Trump's disparate team. First -- simultaneously, it turns out, with the G-20 meeting -- the Canadian government chose to arrest the CFO of Huawei Technologies in Canada, something the markets didn't find out about until days later. No matter, it was a brutal, chilling reversal of any good will from the talks. Again, a more organized, disciplined White House would have known about this. But they didn't.
Since then, we've got Treasury Secretary Steve Mnuchin and Larry Kudlow, director of the National Economic Council, talking about how things will work out and Trump trade adviser Peter Navarro talking about how he doesn't want them to work out, and Navarro appeals much more to Trump's angry base, which only knows the rapacious side of China because it's been busy wiping out their jobs in the name of free trade.
Every time I was hoping for some breakthrough here we got the opposite because, I think again, Trump just loves his angry base so much that he doesn't even know how to finesse the Chinese. It's all bluster and anger, nothing clever about it. At this point we should forget about breakthroughs altogether.
Now fast forward to this past week. On Wednesday Powell crushed us, indicating that instead of three hikes, two were needed. Once he said anything was needed beyond waiting, he pretty much insured the sell-off that began in October would really usher in a bear market. The Justice Department the next day indicted some Chinese nationals for cyberterrorism and that's all we needed to put the final stake into Chinese-U.S. relations.
So now, where are we?
We are in a terrible spot for certain, where the Fed is our sworn enemy, and I think we need to see three weak months before Powell can even admit that things aren't as strong as he thought and that he will need to delay the hikes, something he most likely will screw up because he doesn't seem to know the power of his words and he doesn't' realize that data dependency means no more models.
The president? Post-Mattis, I am more worried about a military incident then I am about a trade deal not getting done.
In this atmosphere I think we are right to feel totally betrayed by our leaders for not realizing what they have done to the possibilities of much slower growth in 2019.
Notice, I didn't say "what they did to the stock market." That's got its own series of issues that I will address in a moment.
But neither Powell nor Trump had to handle themselves in this way. Trump's Chinese negotiations haven't been done in a way that makes a lot of sense. It's pretty clear that the world is fed up with China and now is the time to wrangle a coalition of the willing to combat China. We know, as departing Defense Secretary James Mattis made clear in his resignation note, that's not going to be the case. Plus, if Trump had shut up about Powell maybe Powell wouldn't have been as obtuse as he has been.
But I can tell you this: The idea that this economy is going to stay this strong is just fanciful. I am not forecasting a recession. I do think that, as my friend Matt Horween informs, Powell wants to see growth to go sub 2% to slow the economy. That's going to shrink the E in the P/E, and we will pay less for the E because the multiple is going to shrink due to the tremendous uncertainty.
Meanwhile, as the rates go higher, the community banks will be stuck paying higher CD rates and lending for the same amount because the long end stays stubbornly low, courtesy of foreign money that earns nothing. Strong dollar, high yields -- if you are overseas, what's not to like? Even the Chinese don't want to sell them.
Of course, the Fed could have offloaded its whole hoard of longer-term bonds and the Treasury could issue paper cheaply, too. But we don't have any policy makers with even the most remote understanding of trading, so what does it matter? They are both foolish about how markets work and, in many ways, have devolved into what Lenin would say are "useful idiots" for short sellers.
Now, if you want to know who is really tone-deaf about the markets, it's the Securities and Exchange Commission, which doesn't seem to care at all about why we keep having so many mini-crashes. High-horses out there, I am not dismissing the mini-rip-ups we have had. I decried them, too. But honest brokers of discussion know that it is easier to knock down stocks, which is why the SEC created the uptick rule to make it harder to raid stocks.
But because there is so much money made by brokers and by exchanges and by money companies creating ETFs of every variety, you can't have a short-sell uptick rule anymore. It would put most of these double and triple ETFs and the proprietary hard-to-trade ETFs out of business, and with low commissions they are really the great savior of Wall Street. So you are tilting at windmills if you try to bring the rule back because, again, the agency is either captured or obtuse, or both.
Companies do themselves no favors, either, by insisting that they no longer split their stocks. Retail investors want to be in so many of these high dollar-amount stocks but they can't buy enough shares. The ETF people have kept their stocks at prices that can be easily used against the big dollar-amount stocks, and now that liquidity seems to be draining away and the index money is coming out both because of fear and because the CD rates have gotten so competitive, so many stocks, particularly tech and health care stocks, are like defenseless lambs.
Mind you, though, none of this would even matter if the Fed had been sensitive to the weakening economy -- something it could have done simply by talking to the same people I talk to. Just like in 2007 they don't seem to know who to talk to. Earlier this fall I disparaged them for not doing their homework, and the blowback on that one didn't take long. What I don't get, though, is why the onus is on me and not them? They got it wrong before the Great Recession and they threw us into it.
Now they are doing the same. With or without Trump.
So now we have to see if we can catch some oversold bounce so we can lighten up, particularly on the stocks with no dividend protection that seem at the mercy of the ETFs and the great tech unwind.
I am conscious that there are many people out there who think the Fed is doing the right thing and that the president is screwing everything up. I beg to differ. He doesn't want us to fund China's super power status anymore. He's going too fast, not giving companies a chance to get out in time. But at least he's been upfront about it.
Powell hasn't been upfront at all. He dropped hints that he was going to be more reasoned after his rash blast at the beginning of October, and then by insisting on even forecasting hikes, he wrecked this market but good.
Go ahead, disagree with me, like so many did back in 2007. I wish you the best of luck. Keep telling yourself Jay's doing the right thing. Keep railing against Trump.
I am watching the world slow, demand dry up and the P/Es shrink. And those who disagree with me don't even have an answer for any of these -- but I'm sure they will foment some to make themselves feel better as the bear market deepens through no fault of the companies themselves.
(Editor's Pick. Originally published Dec. 24.)