The Fed is reaping what it sowed in 2008

The Fed is reaping what it sowed in 2008

On Wednesday, the Fed bowed to the inevitable by following what the market has already decided – by raising interest rates. But with the new Fed Funds rate of 0.5%, it remains at historically low levels. And even if the widely-expected move up to the 2% area by year’s end does materialise, rates would still remain low.

But what matters to markets is that rates are moving up, as are bond yields from ultra-low low levels. Last week I showed how corporate debt had exploded in the easy Fed money era (falling now). With yields zooming higher, much of this debt will never be re-paid. Many firms – the ‘zombies’ – have kept the doors open by rolling forward their debt load. But now this is becoming harder especially now that economic activity is in decline with price inflation rampant.

The chickens are coming home to roost and now even the hugely-subsidised EV sector is in deep trouble. One of the key commodities – lithium – is in very short supply with prices going into the stratosphere. The raw materials in a lithium-ion battery now accounts for about 80% of its cost (it was 40% in 2015).

And that is one reason why most EV shares are in steep decline. Here is a former darling of the sector – Rivian

The initial enthusiasm after its November 2021 IPO was short-lived as investors slowly realised that there was going to be major constraints in the widespread replacement of fossil fuelled vehicles. (As Bill Clinton almost said: It’s all about energy density, stupid).

And its truck was named Truck of the Year in 2021 in the US with super performance.

And that is why Ford (who owns a lot of Rivian’s shares) reported a major Q1 loss last week. Ford shares are down 45% off its January high (where it met an important Fib resistance)

And Tesla – the far-ahead EV leader – is 30% below its November ATH despite the huge adoring public that Elon Musk can still draw on. He has barely put a foot wrong in finance, but has he bitten off more than he can chew with his bid for Twitter? After all, the company is not a profit machine and he is getting less than rave reviews from his proposals for the platform. We shall see. I have a notion that the Age of Social Media peaked a while ago.

Only when money is plentiful and ultra-cheap can such doomed ventures such as EVs gain a wide acceptance while ignoring the obvious pitfalls down the road. It’s the future! Nothing can stop it! But it was part of the general euphoria towards owning shares in what I call the Great Asset Mania.

Part of that is the fantasy Net Zero ambition. The sheer costs of replacing all energy generation with ‘renewables’ in the UK alone runs into trillions (even if doable). Then there is the rest of the world! No, as the bear market progresses, such make-believe will become more apparent to more and more influencers and we shall see politicians stand for (and win) office that will campaign on repealing such harmful legislation.

For a superb layman’s review of the actual facts on climate, get a copy of: Climate at a Glance (for Teachers and Students). It should be in every school to counter the propaganda about a climate ‘crisis’ that is promoted by those on the well-paid gravy train.

I believe this fantasy world has reached its zenith with non-fungible tokens (NFTs) – that to my eyes is a a genuine fantasy. NFTs probably branched off the computer games sector where real money is exchanged for imaginary ‘assets’ as part of the games. Game players are usually obsessed individuals and many will not care when prices fall. But it works fine in bull markets (if you sell to the greater fool) but when the bear appears, watch out below.

When money becomes tight again, as it will, such fantasies will be seen by most as the impossible dreams that they really are – just like the tulips and the South Seas Company were.

During the 2008 financial crash when the Fed introduced zero interest rates and QE on a massive scale, I had an idea this tsunami of money would help create the biggest bubbles in history. I thought it unlikely it would end up in consumers’ pockets (to boost the real economy) and instead end up on Wall Street (to boost asset prices). We have seen this is the (now correcting) bond market where some EZ government bonds were issued at an insane negative rate (not many left now).

And last week I showed the high PE values on US shares (also now correcting). Tech shares in particular were trading at massive PE ratios. And now, the Fed is caught between a rock and a hard place deciding whether to ‘combat’ inflation (raising rates more) or helping the economy (by easing back on the rate increases). All of this is entirely of their own making, thanks to the experiment of QE.

Some optimistic analysts hope the Fed will create a ‘soft landing’ and not crash shares. But bubbles never burst gradually, do they?

Market reaction post-FOMC on Wednesday was pretty much as expected since many investors had loaded up on portfolio protection (including buying expensive put options) and traders did their usual thing by chasing many out of the market in a brief short squeeze. Contrarians rejoiced!

But on Thursday, after a reliable Elliott wave 2 target had been reached, shares crashed with the Dow losing 1,200 pts. Yes, a conventional contrarian would have viewed the massive buying of puts and short positions pre-FOMC as a sure signal to expect a much stronger and longer bounce in the indexes.

This is the 2-hr chart with the action around the FOMC

But the bounce could not move above the solid chart resistance around 34,000 and that was when reality dawned that the economy is facing massive headwinds and the investors who loaded up on protections were probably acting very prudently.

Short term, the market has two main options. Either the plunge will continue in a third wave to new lows, or (more likely) it will stage another bounce in a ‘c’ wave to get back close to the 34,000 area again or perhaps a touch higher.

America is getting even more divided – and that is bearish for stocks

This is usually very far from my beat, but I can’t help noting that the recent very hot abortion issue in the US – aka Roe v Wade – has reached a significant point if the US Supreme Court is about to throw it out and let individual states determine their own policy. Some states will outright ban it and some will keep to the current ‘liberal’ position. Society will become even more split down state lines.

It is yet one more aspect of the huge divides opening up in US (and thus global) society – and a key mirror of social sentiment which drives asset prices. Bull markets encourage inclusion of everyone into a greater whole. Bear markets encourage exclusion, a splitting up into smaller groups that are increasingly hostile to one another.

It is interesting to note that the Row v Wade ‘liberal’ abortion revolution about fifty years ago occurred in 1973 at a major low in US indexes just prior to the greatest rally in history that was still in force until very recently. The Dow traded then around the 700 area and reached the incredible 37,000 high in January – a gain of 5,200 pc.

(A note of caution to the bulls – there are few remaining members of the DJIA that were present in 1973.) Share selection is crucial.

So my question is this: Is today’s ‘conservative’ abortion revolution heralding the reverse move in shares?



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Energies surged last week – is there more to come?

The NatGas market has been putting on a stunning performance since last year. And VIP Traders Club members have been at the forefront of this bull while taking profits at selected times. But governments have been pulling their collective hair over the incredible price escalation that has put shivers down the spines of decision makers (including our own pathetic BoE members) as they see cost of living squeezes multiply that are bound to shake up political systems.

But a glance at the long term chart should give us pause in case we are in danger of being carried away. On Friday, the market hit a long-standing target around the round number 90 level before sharply backing off into the close down to the 80 area (a loss of 11% in six hours).

And if my wave labels are correct, we should have a complete five up from last years’ lows and now a three down should get started. This is my new roadmap.

Meanwhile, it appears crude oil remains on track to test my upper targets

Odds are good we are in a wave 3 of 5 higher according to my current roadmap. We shall see.

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