Trump and Yellen Make for a Volatile Pair
The VIX made a “monster move” from single digits to the 15-16 range range in response to the White House’s “fire and fury,” “locked and loaded” talk while warning Kim Jong Un and Venezuela that the US military is ready to rumble anytime, any place. VIX option volume was higher on Thursday than any day in history with 2.6 million contracts traded.
The Trump rally, as John Hussman wrote on August 7, has pushed the market to “the median price/revenue ratio of S&P 500 component stocks reached the highest level in history, advancing far beyond the levels reached at both the 2000 and 2007 market peaks.”
Hussman reminded his subscribers of something he wrote in 2000.
“Investors have turned the market into a carnival, where everybody ‘knows’ that the new rides are the good rides, and the old rides just don’t work. Where the carnival barkers seem to hand out free money for just showing up. Unfortunately, this business is not that kind - it has always been true that in every pyramid, in every easy-money sure-thing, the first ones to get out are the only ones to get out...
"Over time, price/revenue ratios come back into line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.”
Of course this is all the doing of the Federal Reserve’s money creation, but not to worry, Fed Chair Janet Yellen said a couple months ago another financial crisis occurring in our lifetimes is unlikely.
Hussman doesn’t believe Ms. Yellen is any brighter than her predecessors. He writes, “One thing should be clear: policy makers have not become “smarter.” What they have become, with each bubble-crash cycle, is more reckless and arrogant in their willingness to extend speculative financial conditions by encouraging yield-seeking, compressing prospective future investment returns, amplifying the destructive consequences that inevitably result, and ironically, using those same consequences to justify fresh intervention.”
Hussman wrote on July 31, of “Hot Potatoes and Dutch Tulips.” The Fed creation of zero interest base money reserves which created “pressure to chase stocks, junk debt, anything to get rid of these yield-free hot potatoes. That didn’t stimulate more real, productive investment; it just created more investors who were frustrated with zero returns, because someone had to hold that base money, and in aggregate, all of them had to hold over $4 trillion of the stuff at every moment in time.”
The Fed’s actions created the latest bubble as investors seek to get rid of zero-yielding money as fast as they can to chase any sort of yield or potential for asset appreciation.
“This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all, just like many of us did when we learned about the Dutch Tulip mania,” Hussman writes.
Mike “Mish” Shedlock makes the point continued Fed rate increases are not fait accompli. “For the first time in a long time, CME Fedwatch shows the odds of a rate cut in December rose considerably above zero. Considerable means 2.6%. Yes, that’s a long shot, but cut odds were zero on Thursday, zero a week ago, and zero a month ago. Moreover, rate hike odds which a week ago were over 53.2% are now down to 35.9%.”
Politico reports,” President Donald Trump is increasingly unlikely to nominate Federal Reserve Chair Janet Yellen next year for a second term, four people close to the process said.”
These sources say, “National Economic Council Director Gary Cohn is now the leading candidate to succeed Yellen.”
However, Trump said in April, “I do like a low-interest rate policy, I must be honest with you.”
With the White House creating volatility while at the same time preferring low rates, Yellen will do what it takes to keep her job. More money, low rates, more bubbles, and then, that crisis Yellen doesn’t think we’ll ever have.