2017 Template

I mentioned several weeks ago about the similarities that I see between 2017 and 2021. Another similarity is the behavior of bond yields.  After a big bond selloff post 2016 election, the bond market rallied from March 2017 to September 2017, going from 2.62% 10 yr yields down to 2.03%.  After a big bond selloff post Georgia runoff election in January 2021, 10 yr yields got up to 1.75% in March.  It has been rallying ever since, with 10 yr yields now down below 1.20%.  Both of these bond rallies occurred as the SPX kept making new all time highs, staying above the 50 day moving average, with infrequent, brief, and shallow corrections throughout. 

2021 SPX chart

2017 SPX chart

 

The big difference between 2017 and 2021 is that the Fed was actually hiking rates and tightening monetary policy in 2017, which would eventually lead to a market top in 2018.  This time, the Fed has stayed super dovish and only hinted at a possible taper.

The Fed has now backed itself into a corner, nurturing the biggest bubble in financial history with any kind of rate hikes probably causing a 2008 style collapse in the stock market.  

We've gone beyond the moral hazard of the 2008 and 2009 bailouts.  Almost everyone who is investing now believes that Fed will come to rescue whenever there is a correction in the stock market and the Fed is basically a meme now cranking the printer going brrrr.  

Tapering QE is now like rate hikes back in the old days.  Rate hikes are now a long term theoretical construct which were possible in a pre-bubble environment with decent organic growth, but are untenable in a zombified overindebted corporate financial system that relies on super low interest rates and an implicit Fed backstop during stock market corrections.  Rate hikes in this era would collapse the house of cards that has been built and violently pop the biggest bubble ever, so they are out of the question.   

The bond market is beginning to sniff out the distinct possibility that the Fed is basically at the same spot that BOJ was in the early 2000s, and the ECB was in the early 2010s.  5 year yields are now trading under 65 bps.  Once this bubble pops, whether it be 2022 or 2023, that will effectively kill any chances of raising rates during the boom portion of this cycle even as inflation stays high for an extended period of time.  At that point, you are probably looking at the 5 year being back at their 2020 levels of 0.25%, and 10 year yields going back towards 0.50%.  At that point, there will probably be serious discussions about negative interest rates in order to see if the positives of the wealth effect from higher bond prices and lower corporate bond yields would be worth it to cross the Rubicon and accelerate the de-dollarization of the financial system.  

Financial history shows that when the masses start investing heavily in stocks as they are now, with the highest valuations in the history of the US stock market, bad things will happen.  Its not a matter of if, but when.  My bet is that the shit hits the fan in the second half of the 2022, as the midterm elections get closer, with a high probability that the Republicans will win either the House or Senate, if not both.  Once the realization of gridlock and no more fiscal stimulus till 2025 hits, it will make the fiscal cliff of late 2012 look like child's play.  No more fiscal stimulus would be one of the worst pieces of news that the market could get.  After all, there is no organic growth, it is all fueled by fiscal and monetary largesse.  Even with QE, unless the Fed jumps the shark and goes full BOJ and starts buying equity ETFs, the stock market will be in big trouble. 

But let's not get carried away and think too far ahead.  The bubble will get bigger before its all over, so its still better to look for longs than shorts.  Price action and the charts tell you that its still a BTFD market, as the dips are rare, and when they come, they don't last for long before V bottoming and going back to all time highs.