The Global Gamestop Moment
First, the bull thesis compliments of Barron's this morning:
"The soft landing. The Goldilocks scenario. The Powell miracle. However you want to describe it, it looks like the Federal Reserve may have managed to raise interest rates the most in decades without causing serious damage to the economy"
The only thing central banks have done - led by China, is give investors the illusion of economic tranquility while luring them into a global deleveraging event that will decide the trajectory of the global economy, instead of the other way around. Markets are now leading the economy.
Case in point China, where for the past week global investors have been front-running the impending re-opening and announcement of fiscal stimulus in Mainland China markets which is tonight in the U.S., Tuesday in China.
"Ever since Beijing pledged a ramp-up in fiscal spending on Sept. 26, the market has been waiting for specifics...the key thing to watch for in Tuesday’s meeting is if the new measures target the real economy."
Minor details.
As of last week, the Hong Kong Hang Seng has now had its largest three week rally in 50 years, up 30%. Below we see that the pandemic rally ended in January 2021 during the Gamestop debacle. And then Chinese markets imploded and led the world lower. We also see the 2023 rally was of the same total magnitude as this rally and then gave up ALL gains. Still, the false promises never end.
The wealth effect is a common side effect of monetary policy. However, central banks are now using the wealth effect to cover up the disintegration of the middle class due to excessive debt accumulation. The wealth effect primarily benefits the wealthiest households while interest rate policy primarily affects the least wealthy households. After Friday's blowout jobs report, the prospect of lower interest rates in the U.S. has dwindled:
"The trajectory of rates is less certain after Friday’s labor market report, which showed the US economy creating over 100,000 more jobs than expected last month. That suggests there is less need for more large cuts this year and raises the prospects of a reversal in many of the trades that hinged on lower rates."
As I pointed out on Twitter, the Fed's combination of pause and rate cuts also caused yields to back up in October 2008. And then the wheels came off the bus.
In summary, central banks manipulate the markets in the same way that Reddit scammers manipulated Gamestop. Pundits make up the specious narratives that attend the incipient rally. Investors chase the momentum.
What happens next, I call Shanghai Surprise. What happens when everyone realizes they've been conned.
Again.
