So, we have been writing about a melt-up in asset prices for some time triggered by central bank monetary policy that is doing whatever it takes to keep investors investing and households spend.
When the Federal Reserve, the world’s central bank by default, purchases 120B USD of assets every month, better known as quantitative easing QE, and keeps doing it, maintains base rates near zero, and suppresses the 10-year yield, the writing on the wall reads melt-up.
“a melt-up in asset prices triggered by central bank monetary policy that is doing whatever it takes to keep investors investing and households spend”
Emergency monetary policy, also known as monetary accommodation, the mechanics of it being near-zero or zero interest rate policy, treasury yield targeting, and QE infinity all reads melt-up where investors should BTFD.
QE tapering is hot air.
So, when the mainstream talking heads, charlatan analysts, and manipulative billionaire investors get on the stage and rant about a meltdown in stocks, just BTFD when the indicators flash green.
The takeaway of this piece is that when the DXY, US T10 yields, crude oil prices, what we coined the indicators flash risk on sentiment continue. In other words, risk assets, which include stocks tend to head higher with the indicators flashing green.
“QE tapering is hot air”
As we write this piece the DXY is at 94, the U.S. 10 Year Treasury Note yields 1.6%, and crude oil is bidding at 84 USD a barrel. So, a snapshot of the indicators on October 18 suggests little or no fear in the market. In short, capital flows to risk-on assets are likely to continue, given no black swan event. But if we see a spike in any of the three assets above or all of the above assets then that would suggest that risk-off sentiment is playing out.
For example, a financial meltdown head for the hill scenario would show up on the dashboard indicators with the DXY spiraling over 110, US T 10Y over 3%, and crude 140 USD per barrel. Moreover, investors can reconcile the diagnostics of the indicators with the VIX, known as the fear gauge. Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility. On the other hand, abnormally high volatility is anything above 20. When you see the VIX above 30, that indicates unsettled markets.
The VIX is at 17 is indicating no panic or meltdown in the market.
“when the investment bank’s buy-side desk gets on the stage recommending investors to zig, it often works out better to zag, bearing in mind, it is a zero-sum game. But this time, the investment bank could be bang on the money” – Win Investing
If the market were an engine, our diagnostic tools, the indicators, suggest a melt-up in risk assets has legs
Traders and investors long in the tooth know that the central banks manipulate everything, particularly the indicators. But if central banks lost their ability to manipulate financial markets, that would first show up in the indicators. Notice how the gold price is so manipulated to the downside, despite stagflation, which is a message that reads the Dons still have absolute control. Moreover, while the central banks manipulate gold prices downwards, they continue to snap up the shiny yellow metal at a record pace.
Central banks from Serbia to Thailand have been adding to their gold reserves. Indeed, global central bank gold reserves increased by a net 28.4 tons in August, according to data compiled by the World Gold Council.
The melt-up in risk assets is now even being touted by Goldman Sachs who is expecting a market melt-up in the next few weeks
That makes us a bit nervous because when the investment bank’s buy-side desk gets on the stage recommending investors to zig, it often works out better to zag, bearing in mind, it is a zero-sum game. But this time, the investment bank could be bang on the money.
A piece in Zero Hedge entitled “Why Goldman Expects A Huge Market Melt-up In The Coming Weeks,” makes timely reading.
“Tactical Flow-of-funds: October 2H” report by flow trader Scott Rubner who writes that he is “on FOMO Watch” and lays out the argument for a major market breakout in the coming weeks.
“This is the biggest flow dynamic to know for November, and this kicks off aggressively following back earnings,” writes zero hedge.
“The $160B of repurchases in the last two months of the year is ~$3.80B per day, every day” – Goldman report
Here are the key points from the investment bank research which supports the melt-up view
“GS buyback desk forecasts $887B worth of buyback executions for 2021. This would be the second-highest year on record (after 2018).
“The $160B of repurchases in the last two months of the year is ~$3.80B per day, every day. This is significantly front-loaded into November (and should pace above >$4B),” according to the Goldman report.
But it is not just the second-highest stock buyback on record that supports the melt-up view we are also seeing the best-ever global capital inflows into stocks.
“There have been +$774.50B global equity inflows YTD, the best year on record by a mile, in the 190 trading days ending on October 6th. This will be roughly $1 Trillion worth of inflows for 2021,” writes the report.
Our fifty cents worth is that we agree with the investment bank that a melt-up is real. We have no reason to doubt the tactical capital flow research data.
Central banks could be about to blow their old brand of fiat currency and usher in a new brand of fiat.
Even Joe public, who does not follow the Fed and may not understand the mechanics of emergency monetary policy, gets it.
He realizes that the stack of dollars under the mattress may not be worth much in a few years. So, he reckons it is better off buying a new fridge, washing machine now rather than wait a few more years and pay double. Fear of shortages, empty shelves are weighing on consumer psychology as people begin herding goods.
We believe we could even see a min consumer boom as people exchange depreciating cash for goods.
So, we are not surprised to see that investors are dumping cash and stock buybacks, and global capital inflows into stocks are near record highs. A debased currency has no store of value.