This Market Rally Won’t End Well

[Money Trends with Andy Krieger]( Welcome to Money Trends! If this is your first time reading one of our issues, learn more about us [here](. And if you have any questions or comments, shoot us a note anytime [here]( or at feedback@andykriegertrading.com. This Market Rally Won’t End Well By Andy Krieger, Editor, Money Trends At its meeting last week, the Federal Reserve promised to keep rates at zero until the end of 2022. It will buy at least $80 billion in bonds and $40 billion in mortgage-backed securities every month until then, according to the New York Fed. The alleged goal of these measures is to promote full employment and price stability. But Jerome Powell, the chairman of the Fed, was quite downbeat in his talk. He confirmed that, best-case, the Fed’s forecasts for growth this year will be minus-6.5%. During his question-and-answer session, Powell noted that the piercing of the asset bubble would be bad for unemployment. He also noted he’d like investors to analyze risks in the markets more thoroughly. I found these comments astonishing. I’ll show you why in today’s issue, along with what it means for traders. To start, let’s talk about some points from the Fed’s meeting that bordered on the weird… Retail Investors Are Driving This Rally The Fed knows the current valuations in the stock markets are a true bubble. They’re completely out of touch with the reality of the economy and its long-term prospects. But Powell still wants to maintain the bubble. Seriously? The Fed’s goal of maximum employment will be even harder to achieve if the equity markets break down to sensible levels, so the Fed chairman will try to sustain crazy prices. That’s disturbing, to say the least. The Fed’s new mandate – now that Treasury Secretary Steven Mnuchin has effectively commandeered the institution – seems to be boosting asset values through wild policies… and maintaining those values at unreasonable levels. It’s true that another stock market meltdown would damage consumer confidence further. It’d also create a negative wealth effect. But at what cost? Long-term price stability is a clear, legal requirement of the Fed – even though Powell seems to have abandoned that. Put simply, he seems ready to unleash another $4.5 trillion of funny money on the market in order to kick the problem down the road. But more astonishing is what the markets did against this backdrop of madness. The day of the Fed’s meeting, the Nasdaq broke to all-time highs. It climbed as high as 52% from the lows of March 23, before giving back some gains the next day. The S&P 500 and the Dow Jones came within shouting distance of all-time highs, too. Keep in mind, institutional players aren’t the ones driving this train. Rather, the retail investors have been pushing these markets. Their latest plays have been to load up on “junk,” taking flyers on things like Hertz, which filed for bankruptcy in May. Most hedge funds have been watching the rally from the sidelines, with minimal exposure. They are puzzled by the market’s buoyancy, and they are reluctant buyers of drastically overvalued assets. So far, the retail guys have gotten this one right. I’m afraid, however, that this story won’t end very happily for a lot of the retail players. Here’s why… What Recovery? The economy is still very weak. That’s despite more than $5 trillion of stimulus in one form or another. This stimulus is already 144% of all tax receipts for 2019, and it has some very dangerous long-term ramifications. Unemployment figures are catastrophic, at 13.3%. We haven’t seen levels like these since the Great Depression. Moreover, the people who can least afford to be unemployed are in many cases the ones who have lost their jobs. This will not be good for our society. Large numbers of restaurants will never re-open, the travel and leisure sectors have been crushed, schools and universities are reeling, and the list goes on and on. In a normal world, the market would’ve behaved very differently under these circumstances. So the question is… Can the Fed really pull off a miracle and create a V-shaped recovery in the economy, to match the V-shaped recovery in stocks and other risky assets? No Easy Way Out The only way that can happen is if the Fed completely loses its mind and unleashes trillions and trillions more in emergency spending packages. That would decimate our long-term funding prospects at the same time. In fact, the Fed is already nervous about funding the current deficits over time, so the situation is really dangerous. So where do we go from here? The short answer is there are still too many risks lurking in the shadows. Even if we drop down to 10% unemployment by the end of 2020, the economy will still be soft, and it will take years to recover. Of course, this information is relevant as a backdrop to the trading, but not necessarily immediately. As we saw over the past few weeks, a disastrous economic performance doesn’t automatically equate to a disastrous performance in the stock market – or to a risk-off mentality in currencies. As noted, the Fed’s job is to promote full employment and price stability. Its targeted inflation rate is 2%. There is no chance that the Fed can reach these objectives before the end of 2022. Still, the trend towards improvement should be clear… although I don’t believe it’s enough to justify the recent pricing in the markets. How to Handle an Irrational Market As I wrote [last week]( the Fed has enormous power and vast tools, but they are not limitless. Do I still believe that the [recent “bull market” is based on foolish assumptions]( Absolutely. The prospect of zero rates for two more years won’t do enough to maintain the current bubble. I expect there will be more stimulus coming from both the Fed and the Treasury. However, the impact on the markets may be more muted than officials like. But do I intend to hold onto my market views with a rigid attitude and inflexibility? Of course not. Am I suffering from FOMO? No! I know we’re going to have a vicious correction at some point, so I will remain patient. Over the years, I’ve been confused by the markets many times when they behave irrationally. At those times, I just sit back and reflect on the themes driving the markets, and I try to get myself realigned with the market action. I know that to make money with my trading, I need to be in sync with the markets, so I am going through a re-think now. Am I likely to jump on the bull train now and start advocating structural risk-on bets? No. But I am not averse to periodic short-term, risk-on trades – even when the market has reached what I consider nearly insane valuation levels. Those trades would be largely based on technicals. In any event, markets can remain irrational for a long time. So we need to be flexible and focus on some short-term trading opportunities as they arise. But always remember: You must take into account how much you risk on any one trade. We don’t like to risk more than 1% of our assets on any one idea, and we try to put on trades that have at least some diversification. This approach has worked for me since 1984. I am confident that it will continue to work well over time. Regards, Andy Krieger Editor, Money Trends [Money Trends with Andy Krieger]( Andy Krieger Trading 55 NE 5th Avenue, Delray Beach, FL 33483 [www.andykriegertrading.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. 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