Morning Note: The Greenhouse Effect

Listening to a couple of expert interviews yesterday evening I found myself pondering the punditry’s forever need to identify the ultimate catalyst that’ll instigate the next great change in stock market trend. 

These days, Fed-skeptics like myself who’ve navigated a bear market or two are wondering what’ll it be that’ll shock the stock market into shape? What event will shake loose the bulls’ resolve and finally have them seeing the real economy for what it is; an utter mess that has virtually zero chance of creating the conditions that will remotely justify today’s level of stock prices in the foreseeable future?

I suddenly get all philosophical and I ask myself: “Myself, does nature produce a catalyst that explains every change of season? Does something external, and unexpected, occur every summer that sets atmospheric conditions in motion sufficient to cause a shift to cooler temperatures? And should such a catalyst never occur would we then experience perpetual summer?

Myself says “Of course not: While we do experience the occasional lengthy summer — at times to the point where we wonder if winter’s ever going to come — inevitably, winter comes.” 

If, say, this coming October sees a big storm out of the blue, followed by a frigid cold spell taking us into November, with winter conditions prevailing through next February, we will not be pointing to the prior October and saying that if it wasn’t for that damn thunderstorm we would’ve enjoyed warm temps and blue sky right through to Christmas and beyond.

But markets are different, right? They’re not nature, right? I mean, a bull market can indeed last forever if no catalyst ever shows up to usher in an unwelcome bear, right? 

Well, if we go there we go where no market has gone before. We in essence go to a place where business cycles no longer exist. Hmm…

As it stands, central bankers, treasury officials, Presidents and Prime Ministers the world over would actually have us believing that perpetual sunshine is in fact doable, that policy can indeed overcome natural economic forces. 

Japan’s Shinzo Abe, for one, vows to “defend the Japanese economy at any cost.” To, in essence, keep economic winter from ever coming. So, indeed, citizens of Japan, no need for you to bundle up, no need to shelter yourselves from some impending cold that’ll never come. Venture out, take risks, dive deep, swim across those lakes, summer’s here to stay! 

Oh Boy! And what if he’s wrong (he is, by the way) and Japan’s unsuspecting citizenry actually believe in such magic? Will they then venture far into the woods only to discover when it’s too late that the mother of all winters was creeping up behind them the whole time? Why wouldn’t they?

Well, you know where I’m going with this: To believe that we’ve just experienced the shortest stock market winter in history amid, whether it turns out to be short or long, the worst economic winter in almost a century is to put far too much faith in mere mortal policymakers’ ability to circumvent natural economic forces. However, and make no mistake, there are indeed analysts far smarter than yours truly who are predicting that very thing.

All I can say is that if they indeed have it right this time, market life going forward will be akin to existing within an artificial climate-controlled greenhouse where stuff grows year in and year out. Sheltered within a structure strong enough to withstand whatever mother nature might conjure up, season in and season out…

Back to the catalyst theory of markets: While there’ll no doubt appear to be a catalyst should stocks be brought to their knees, frankly, one’s not required. The market is indeed capable of crumbling under its own weight. Although, again, be that as it may, the human need to finger an event will for sure have pundits pointing to something that got it all started.

Today, for example, has to have traders on pins and needles. Should the President announce that Hong Kong loses its special trade privileges, if, worse yet for short-term bulls, he says that China’s gone too far this time and we’re canning the trade agreement, sanctioning certain officials and completely banning Huawei from all U.S. markets, well, today may very well provide the perceived catalyst that sends the market on its journey to those March lows, maybe. If, on the other hand, he goes soft on China and keeps all existing agreements in force, well, then, yet another strong short-covering rally should come as no surprise.

Something in between, which is likely, given the Administration’s sensitivity to markets, is a distinct possibility. 

Either way, the market’s presently living in what amounts to a makeshift greenhouse composed (by policymakers) of a material that virtually has to decompose over time; ultimately subjecting stocks to real-world forces that they in all likelihood can’t hold up against all by themselves. 

How long that material can last is anybody’s guess. Whether or not a strong enough wind blows by to accelerate its demise  — and receive the blame for the next leg down — in the meantime remains to be seen…

Call me old fashioned, but — present summer temperatures notwithstanding — we’re going to keep client portfolios clothed with an extra layer for the time being…

Have a great weekend!


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