Thursday, October 12, 2017

The Rate of Growth of Central Bank Balance Sheets Is Rapidly Decelerating

From The Macro Tourist, October 5: 

Think back six months. Do you remember all the warnings from the legendary hedge fund managers about the impending stock market doom? Paul Tudor Jones, Scott Minerd, Larry Fink, Seth Klarman, the list is long but distinguished. At the time I penned It’s too easy to write bearish pieces. Even in late summer, gurus like Gundlach were bragging about the 400% he would make on his S&P 500 put purchases - Billionaire Bears. Given the atmosphere, I knew posts about the coming collapse would be greeted with tons of words of encouragement. Yet if I wrote something about the stock market continuing higher, crickets… Or worse yet, remarks about my cluelessness regarding the problems in the global financial system. I didn’t think stocks were going higher because everything was roses, no in fact just the opposite. Stocks were being pushed higher because everything was so FUBAR’d. Central Bank balance sheet expansion was pushing risk assets higher, and for the longest time, everyone wanted to fade it.

Fast forward to today. Even the most ardent bears have given up and embraced the idea Central Bank buying will push stocks higher. Investors that were previously doom and gloomers are now speaking of blow off-tops. I can hear the capitulation in their voices. No more brave predictions of the coming collapse. Instead, meeker forecasts of a high volume runaway euphoria. There are no bears left. None. Not a soul.

The bears have been replaced by gloating bulls that are openly bragging about how high the S&P 500 futures will gap up Sunday night. They are mocking the bears with taunts of how much money will they lose fighting the rally. They joke about buying the dip, which increasingly is becoming more and more nothing more than a couple of downticks.

I might not know much, but I know the Market Gods do not take kindly to that sort of behaviour. What was that quote from Bernard Baruch? “The main purpose of the stock market is to make fools of as many men as possible.”

Ask yourself what would embarrass most investors right now? Would it be a continuing rally? Not a chance. Given the white flag waving by the bears, and the over-enthusiasm of the bulls, there is little doubt in my mind that a stock market decline is what would hurt most. That wasn’t the case six months ago. Heck, it wasn’t even the case two months ago. But that’s where we are today.
I could try to dig up some sentiment numbers, but the reality is I don’t need to. The mood is plainly obvious. Investors are as bullish as they have ever been since the Great Financial Crisis. Sure, you might argue that it was much more frothy in 1999. But who cares? Do you really want to be buying based on the greater fool theory? Ask Chuck Prince how that turned out.

It’s hard standing alone and fighting the crowd. If it was easy, everyone would do it.
I have written about the new reality of how markets are now full of A Series of Rolling Mini-Bubbles, but a sharp Seeking Alpha writer by the name of Ian Bezek has done a better job than me of identifying the latest madness. In his post, An ETF Levitates: This is Not Normal, Ian points out that the IWC nano-cap ETF has been up 26 of the past 28 days.
This is the new reality. A series of rolling mini-bubbles. But you want to know the hardest part? Just when it looks best, is the time to fade it.

I can already hear you saying to yourself, that’s a big leap. Selling it because it looks good? Well, in case you don’t believe me about the series of rolling mini-bubbles (remember, the keyword is mini), how about this for a reason?

Almost everyone has now embraced the idea that Central Banks will push asset prices to the moon. It’s like they just realized that with the balance sheet expansion of the ECB, BoJ and the SNB (Swiss National Bank), the monetary stimulus has been higher than any time except for the initial days of the crisis.
One thing before I continue. For these Central Bank balance sheet charts, I have frozen the currency adjustments in time. If I let them float, then the balance sheet size will move around as the US dollar rises or falls. Since we are interested in how much the Central Banks are expanding or shrinking their balance sheets, this would lead to a distorted monthly change.

Let’s zoom in and have a look at this a little bit more closely.