Henrich: "A Tragedy Is Unfolding In The Stock Market That Should Worry Both Bulls & Bears"

In the U.S. stock market, it’s all going to end badly. Even some ardent bulls will freely admit to it. The question is how, when and where.

Frankly, a tragedy is unfolding, and discerning eyes can see it. Since the December lows, the stock market has taken the scripted route higher, salivating at the prospect of dovish central bankers once again levitating asset prices higher. It’s a Pavlovian response learned over the past 10 years. Record corporate buybacks keep flushing through the market, and cheap-money days are here again as yields have dropped markedly since their peak last fall.

But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.

Fact is, central banks are hopelessly trapped:

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10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels?
 Anyone? pic.twitter.com/aFw5dltGTg
— Sven Henrich (@NorthmanTrader) April 10, 2019

The capitulation is as complete as it is global, and 10 years after the financial crisis, there is not a single central bank on the planet that has an exit plan. As this week’s Federal Reserve minutes again highlighted: No interest-rate increases in 2019 while the tech sector is making a new all-time high. What an absurdity — a slowing economy ignored by the market as cheap money dominates.

So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating.

Yet, in their desperation, central banks may have set a combustion process in motion that they can’t stop, one that may bring about even more ghastly consequences than the market troubles they sought to avert in the first place.

It’s a blow-off topping scenario driven by several factors: All-in dovish central banks, a renewed desperate hunt for yield, FOMO, a U.S.-China trade deal, record buybacks, trillion-dollar deficits ($1.1 trillion for 2019, to be exact, and rising) and a White House administration preoccupied with managing stock market levels with the expressed goal to keep prices elevated for the 2020 U.S. election.

Trump’s dangerous game

The latter point is not lost on Wall Street. This is from Morgan Stanley’s chief global strategist of investment management: Trump’s dangerous obsession with the markets.

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“Mr. Trump’s willingness to bend policy to please the markets is now clear — and it’s risky. In recent years, the stock markets have grown larger than the economy, and they are now big enough to take the economy down with them when they deflate.”