It was the deep of winter… CNBC was talking about “animal spirits”, had just touted “the best January in 14 years“, was quoting Raymond James’ Jeff Saut as saying that “The market “is amazingly resilient, and is no longer overbought” and desperately doing everything it could to get retail back into stocks, and was succeeding: retail inflows into stocks were surging and seemed unstoppable… The Chicago PMI had just printed at its highest level in decades… the VIX was dropping fast… Stocks were soaring… Bonds were sliding… NYSE margin debt had just risen to the highest level since 2008… A few brief months earlier the Fed had unleashed a new, massive round of unsterilized bond buying… Bank of America was blaring about the “great rotation” for stocks, and yes – just shortly prior “global currency warfare” had broken out. Name the year?
If you said 2013, you would be right. And wrong.
Because the right answer is… 2011.
That’s right: with institutional and trader memories so short, everyone has (again) forgotten that it truly is deja vu, all over again.
Stock performance in the winter of 2011 and the winter of 2013:
Bond performance in the winter of 2011 and the winter of 2013:
NYSE margin debt – euphoria and leverage upon leverage was contagious… in January 2011 and January 2013:
Fund Flows into equities were unstoppable. Yes – that was 7 consecutive weeks of major equity inflows into stocks… back in January 2011.
CNBC: Monday 31, 2011:
Stocks End Up; Dow’s Best January in 14 Years
The Dow Jones Industrial Average rose 68.23 points, or 0.6 percent, to close at about 11891.93, after falling 1.4 percent on Friday. For the month, the Dow gained 314.42 points or 2.72 percent, its best January performance since 1997 and its first January gain in four years.
The market “is amazingly resilient,” Jeffrey Saut, chief market strategist at Raymond James, told CNBC.com. “After what happened on Friday you would have expected a second shoe to fall.”
But, Saut said, the markets had been due for a correction for sometime, and had been indicating one was on the way. After the sell-off, however, the market is no longer “overbought,” he said.
Saut remains bullish and one of his favored sectors are banks, which he had not bought for 10 years until last November. Since then, banks, as measured by the Financial Select SPDR Fund , have risen more than the S&P 500 on a relative basis.
“I think that is extraordinarily positive for the equity markets and the economy,” he said.
The great rotation was rotating… and rotating… and rotating:
Currency war had just broken out… in late 2010
“An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness.” Welcome to the new frontline. It is being played out at every 500x levered FX trade station. No prisoners are taken as those wounded are immediately shot. And the incursions have now entered stocks and bonds. Trading any assets is now retaliation against a central bank somewhere (most typically at Liberty 33 or at the Marriner Eccles building) which is engaged in open warfare against the world’s middle class. And yes, the Brazil Central Bank earlier announced that it was heading unto the breach, buying yet more dollars for 1.7094 reais at auction, and has bought as much as $1 billion USD each day for the past two weeks, putting the Japanese intervention from two weeks ago to shame.
The economy was “recovering” and yet the Fed just announced it would inject $75 billion into the market each month:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
So why is 2013 nothing but a verbatim, carbon copy of 2011?
Simple: between the Fed, the propaganda of “great rotations” and “massive” inflows into stocks, despite the endless decoupling of fundamentals with the market, all that the status quo was desperate to accomplish was to push the responsibility of keeping the market afloat away from the Fed and on the shoulders of retail investors.
What the Fed did not realize then, and does not realize now, is that the US consumer no longer has the disposable cash to push stocks any higher because while to some 1% of the economy the wealth is indeed tied to stocks, for the balance unless the economy, the jobs, the wages and all those other conventional things that determine inbound cash pick up as well, which they did not in 2011 and they certainly have not in 2013, the US consumer simply will not be able to pick up where the Fed leave off.
Which is why the Fed failed in 2011. It will fail again this time. But yes, the market is higher now than it was in 2011, why? Here’s why.
Finally, how did the market close in 2011? Flat.