Straight Talk #2
First off a big thank you to everyone watching last week’s debut of our webinars. We didn’t know what to expect, but we felt the issues we highlighted deserved a deeper look, not only in last week’s episode but in future discussions as well.
From the overwhelming positive feedback we received we sense you agree, and hence we decided to bring you another episode this week.
So thank you again for your interest and engagement, we are glad you find this format useful. We’ll see how it develops and we may also bring in special guests in future episodes. From my perch I couldn’t be more pleased and honored to have these important discussions with Guy Adami and Dan Nathan, two market pros who I greatly respect. Please keep the feedback coming and let us know your thoughts. We are seeing your comments and they help us greatly in guiding the episodes.
In last week’s episode we raised the alarm bells about the sustainability of the rally, structural concerns, and valuation issues and promptly saw these issues come to the forefront as market declined this week.
This week saw the valuation concerns also raised by multiple well known billionaires who expressed concerns that markets had too far disconnected from economic reality. Tepper, Druckenmiller, Cuban, all well known industry names highlighting similar concerns and suggesting markets may be far overvalued and the disconnect between tech and the broader market ended up becoming headline news in financial media as well.
It is then perhaps with some irony that suddenly (after our recording yesterday and literally 1 minute after market close on a Friday no less) the Fed sheepishly came out with a warning that asset prices are at risk to significant declines.
First outlining that the Fed’s action is directly responsible for improving investor risk sentiment which as clear as an admission one would get from the Fed that their actions are driving asset prices:
“Since late March, however, investor risk sentiment has improved, and risky asset prices have partially retraced earlier declines . Some of this improvement is likely due to strong and rapid fiscal and monetary policy responses as well as the measures taken by the Federal Reserve and Treasury”.
But then admitting that asset prices are elevated and subject to steep price decline risk:
“Asset prices remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse, or financial system strains reemerge. The improvement in asset markets since their troughs reflects expectations for a rebound in economic activity as well as the extraordinary policy actions taken. Uncertainty remains high and markets remain volatile relative to historical norms, suggesting the possibility of further price declines should developments prove more adverse than expected . Price declines could be especially pronounced in areas where valuations have remained high.”
Well, talk about covering your butt. My sense fwiw: The Fed knows the collateral damage of their intervention actions has resulted in market valuations incompatible with the economic risk profile that keeps revealing itself. Valuations are too high and they know it. And hence they don’t want to be seen not having been on the record highlighting it, even if it is on a Friday evening after market close. So bulled up investors, take note. The captain just got the lifeboat ready for himself. Why are you still partying on the deck above?
Economic data released this week has continued to show disastrous declines exceeding expectations. The Atlanta Fed yesterday dropped its Q2 GDP expectations to -42.8%. Jobless claims again exceeded expectations. Industrial Production has collapsed in never before seen ways.
So yes, asset valuations, especially in tech remain sky high, and hence the China issue Guy raises is an important one, especially considering we are in a politically charged election year.
And just in the week following us raising all these valuation concerns we saw a rejection of the April highs this week. This rejection was no accident, it was technically well founded and we are discussing it in this week’s episode and the prospect of an intermediate market top and prospect of new lows still to come.
We are also covering the escalating tensions between the US and China, the challenges of reopening the economy, $AAPL, $GOOGL, $FB, the tech sector, the lagging broader market, some causes for optimism, but also concern about the dreadful impact this crisis is having on vast segments of the population, the health of the US consumer, and the reality of what the economy will look like in a post criss environment.
And frankly the reality that is emerging should concern everybody:
By the time this is all over the poor will be poorer, the middle class smaller, the country horrifically in debt, unemployment much higher than before and the top 1% will be largely fine.
Do not underestimate the long term impacts of this ever increasing divide.
— Sven Henrich (@NorthmanTrader) May 15, 2020
Please join us for the latest episode of Straight Talk:
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Note to subscribers of Market Videos: The next edition will come out next weekend, for now note the technical framework discussed continues to apply including the general targets discussed.