[Ed. Note: um, one thing: “There is no inflation”? Try this: U.S. food prices rising 367% faster than inflation]
from Northman Trader:
When the Fed embarked on its mission to rescue the economy in 2009 it did so on the following premise: Save the banks by re-inflating the housing and stock markets via easy money and, as a result, companies would hire and the eventual scarcity of labor would produce wage growth with the end result that the resulting inflation would permit for a tightening cycle to normalize rates.
The problem: After 7 years and trillions of dollars in debt and balance sheet expansion there is no inflation nor is there any wage growth. And the reason for this is a structural one that central banks have been refusing to acknowledge and admit: The massive underlying shift in technology that is radically changing the global labor market. Not for the better, but for the worse.
And this shift has enormous implications for investors, the economy, society at large and the stock market. And these implications have the potential to signal Game Over for this bull market.
Before we get into this let’s briefly address the recent history in the stock market:
For years investing was easy. You just threw money at a market that never stopped going up. And when it occasionally fell, it was because the Federal Reserve had just ended a QE program. But not to worry, the next one was just around the corner. And sure enough every Federal Reserve press release or press conference produced an orgasmic buying feast every time the word “accommodative” was mentioned. Easy money, we have your back, the Bernanke put. You know the gig. Then we had the taper tantrum when Ben Bernanke merely mentioned the possibility of QE ending. Oh, but not to worry, we will stay at ZIRP. Free money for a long time to come and don’t worry we will let you know way in advance when we will raise rates. And even better: QE will be everywhere. In Japan, in Europe. And if things were to get really bad (i.e. the Ebola scare) we will bring QE4 back (Bullard, October 2014). But not to worry any issues are just transitory. Inflation is just around the corner don’t you know?
And for years the narrative worked. Markets went on to make ever new highs, even in 2015 after QE3 ended, spurred on by an unprecedented move of global QE and dozens of interest rate cuts. The ECB launched QE and the DAX even got to over 12K, the Nasdaq went over 5,000 and new highs and the news media and bloggers were giddily writing articles how it was different this time. But there was something odd about these new highs. Most stocks were not participating, in fact, most stocks started correcting while markets made new highs despite this negative divergence. It was a rally of the few, the big cap stocks, while the majority was left behind and we could see it in the charts:
But then something happened. Something symbolic at first. A young woman threw glitter at Mario Draghi in April and the DAX lost 12K and never saw it again. Then there was anxiety about Greece. The math didn’t work, but as we expected they found a way to kick the can. Then China numbers didn’t add up and its growth story began to implode.
In July we outlined the Big Bad Bear Case and pointed toward this structurally weakening $NYSE price chart:
Since then the August flash crash has reconnected price with the moving averages highlighted in the chart:
Price discovery took place in the course of only a couple of days and was stopped by circuit breakers during that flash crash day in August.
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