When today’s guest expert was last on this program in February, he explained how bulls & bears were locked in a “battle for control” — with the battle zone roughly defined between 3800 and 4300 on the S&P 500.
Well, that battle has now been won by the bulls. On the day of this recording, the S&P now sits just above 4400.
Where to from here?
Does the market have a clear path to new highs? Or may the bears launch a counteroffensive?
To get the best sense of exactly what the technicals are telling us right now, we’re fortunate to welcome Sven Henrich of NorthmanTrader back on the program to discuss both his latest macro and market outlooks.
Sven Henrich 0:00
We haven’t seen the lag effects and I want to emphasize this again. We’re all flying blind. Every bull by the way is flying blind on this because everybody due to the price action zooms assumes that nothing bad is going to happen as a result of that I disagree it will happen. The question is the when.
Adam Taggart 0:19
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. With today’s guest expert was last on this program in February he explained how bulls and bears were locked in a battle for control with a battle zone roughly to find between 30 840 300 on the s&p. Well, that battle is now been won by the bulls. On the day of this recording, the s&p now sits just above 4400. So where to from here? Does the market have a clear path to new highs? Or may the bears launch a counter offensive? To get the best sense of exactly what the technicals are telling us right now we’re fortunate to welcome Sven Henrich of NorthmanTrader back on the program to discuss both his latest macro and market outlooks spend. Thanks so much for joining us today, all the way from the UK.
Sven Henrich 1:14
Adam, good to see you. I’m glad to be with you.
Adam Taggart 1:17
Thanks. Always a pleasure, buddy. We have great conversations when you’re on I don’t expect this to be any different. So thanks so much for taking the time late your day for this. This should be fun. Lots of questions for you. I know you’ve prepared a lot of charts for this discussion. I know folks can’t wait to dive into the details of them. But before we do, just to start off at a high level, what’s your current assessment of the global economy and financial markets?
Sven Henrich 1:41
Well, thanks for the kind introduction there, Adam. The global macro and market structure is, in my view, kind of repeating history in many ways. And so a lot what we’re seeing right now is not surprising. However, we also are faced with new elements in this cycle, I think that we all need to be aware of because they are market impacting, as well give you an example on the macro side, we just had the Fed, obviously continuing to raise rates in about 5%. Now, yet markets seem rather sanguine about it. And I wanted to highlight that that is not unusual. This is what we’ve seen in cycles prior. In fact, markets like and when the Fed is perceived to be pausing. And typically that tends to be initially very supportive of equities was taught us, for example, in 2006 2007 period, we saw it just before the 2000. Top, so markets traditionally have a runway, especially in the context of now inflation rolling over, I think that’s something that a lot of us had hoped for, obviously, and anticipated. And frankly, it wasn’t a math, it was in the math of these extreme spikes, that we have to follow in COVID, and the supply chain issues. And so you’re always gonna get lower inflation, frankly, because that’s what the math dictated visa vie the year over year numbers. What is not clear yet is in terms of the speed in which for example, you may get a core inflation down that is looking rather sticky at the moment. And I’ll talk more about that as well. But clearly there the market has a sense of relief. And we’ve seen that before as well. Think 1982, for example, and everybody’s happening. And, you know, piling back into equities. So on the end of the labor market is still holding up, although you can maybe argue a little bit about the veracity of some of the data because we have so many adjustments going on with birth death models and so forth. So it’s a bit noisy, I have to say. But for now the economy is holding in. And you don’t have a clear breakdown, although on the macro front leading indicators continue to be dreadful. On the negative side, we have issues and obviously in small business confidence. There’s a lot of recessionary indicators out there that the market is currently ignoring we’re back into remember in early February, we were back to the the either soft landing or no landing narrative and we’re back to that price dries a lot of that sentiment. Because as price goes up, the worst is over. Everybody’s happy again. Right. And from a market perspective, what we just seen is not entirely unexpected, but it’s also stunning in the way it is unfolding. So let me give you the technicals. First off when we spoke last spoke. I wanted to give everybody a quick update in terms of how it has unfolded and why it has unfolded because I think that’s really important from our perspective as assessement first of all, when we last spoke, we talked about that battle of of control, and talked about a breakout out of a larger bullish pattern. And let me just back up briefly on this. I also mentioned last year being kind of the most controlled bear market ever, because we always saw these lower highs and the vaches, we saw these clean structures. And as I was a bit suspicious about all this, and I had highlighted at the beginning of the year that there was never really a bear market because the yearly five EMA always held a support the monthly 50 ma always held as a port and the larger trend lines support trend lines from the 2009 lows to the 2020. Bottom they always held. So bears were never able to break unconfirmed a bear market on any of these levels. The question then was okay, if you have a these falling wedges, bullish structures, can they play out? Can they take out resistance ahead. And one of the key resistance point was the monthly 20 Ma. And we’ve broken above, okay. And we’ve broken up off from the reaching here, the 4430 zone, the 4430 zone was a key level for me, because December 20, is I actually put out a chart on Twitter, which talked about its potential cup and handle pattern that pointed precisely to 4430. And we hit that last week actually exceeded it for a little bit. But on both days that it did it also reversed back below it. So that what it tells me is the market finds the structure of relevance doesn’t mean a top isn’t. But it’s certainly reflective of the technical targets. That’s why I mentioned earlier, you know, a few months ago when we spoke 4300 to 4400 Was that Battlezone control target area, and we got there now with basically a vertical move since June. Now why what happened in the interim, and this is really important. When we had the initial breakout, you know, this was in the February timeframe. Then we had this back test, which was important from a technical perspective, would the back test hold? And it initially did. And we had a bounce from there. So that was all indicative that everything was hunky dory. All right. But then the SVB banking event happened, right. And everything changed. And this is really important because it leads to where we are now. And it’s also important in terms of how this may be going on further. Remember, last time we spoke one of the one of the checkpoints I had was at the October lows. This was the infamous Yellen concerned headline, Yellen was concerned about liquidity in the treasury market. This was when the UK gilt was, you know, throwing havoc in Europe. And that was the end of the VIX at that time. Right. And it turns out now, in hindsight, we know why. Because actually, from a global monetary perspective, that’s when it all stopped in terms of balance sheets, reductions, they started balance sheets on an aggregate basis went back up. This is so important from a global liquidity perspective, because it explains everything that happened in markets thereafter. The reason I raised that is because guess what? There was a couple of days when the SVB crisis happened, and all sudden the back test looked like to fail, and s&p dropped lower for a couple of days. It broke below. And guess what the headline was that came out Yellen concerned. Okay, which was obviously in regards to the banking crisis and then started unfolding. And guess what they did? They did what they always do. They intervened
Adam Taggart 9:14
a new financial,
Sven Henrich 9:17
hundreds of billions of dollars. First, there was the Fed, just basically piling back into the balance sheet. But more importantly, and this is this is what’s explaining all the action we’ve seen since because we haven’t seen any corrective moves since then. None. It was the change in bank reserve balances last year during this. I now call it a correction. During the correction we had a it’s a superb ly clean relationship between the level of bank reserves and what happened with the s&p You know when when you saw the June lows, now that that was the bottom basically for bank reserves, they rallied them back up, we got this massive rally in August we have that even the earlier in the year, you can go back and just compare the chart. It’s pretty amazing. Tech bottom on January 4, the same day bank reserves, balances bottomed. And they started raising them in January. And this was all related to Janet Yellen concerns liquidity and everything else. So they basically kind of intervened and put a kibosh on this whole monetary tightening piece. And when then the banking crisis happened, it just accelerated dramatically to the effect that now the net effect is half a trillion dollars added in the first six months of this year. Okay. So you forget macro, forget earnings, forget anything else. Liquidity remains just the most important driver. And I hate to tell us everyone know, how this flows kind of determines everything, you know, as long and as long as they remain in full control and wanting to intervene at any given step. When they feel uncomfortable, like they did in October, like they certainly felt uncomfortable in March, they can crank it up, and boom, here we go. But what’s happened since then, you know, a lot of the liquidity actually float into just a few stocks, right. And we got on top of the liquidity, we got a narrative obviously AI is going to solve every problem in the world is going to lead to fantastic productivity increases. And boom, you have you had a combination of liquidity flows under position, fund managers bearish positioning, on sentiment, both in funds and in retail. And now you get into the Isaac Newton reference that we made last time, which was oh, yeah, okay. So, you know, I made some money on the long side, I’m gonna just keeps going up and keeps going up, keeps going up. And all sudden, just in those last, probably three, four weeks, we’ve seen a complete flip in sentiment, what was bearish is now bullish AI, you name it, fund manager positioning, which was really low, is really high. And everybody is chasing, valuations be damned vertically up into some of the most overbought readings that we’ve seen during to like 2021 period, like it was key money printing. And ironically, if you kind of a structural bear, this is ideally what you wanted to have seen. I mean, I came in from at the beginning of the year, so that makes sense to see a rally in the first half of the year. And then if we get into the lag effects of the rate hikes into the second half of the year, then then maybe there is that potential where things can actually roll over. Okay, that was that was kind of a premise, and it’s an unproven premise, the first half kind of worked out. Now we’ll get into the second half. And really important point here. Lag effects typically, and people can argue about this and who no one knows what the position of this, let’s say 12 to 18 months. Last June, we were still below a 1% Fed funds rate. It was not until June 19 actually popped for the first time over 1%. So we’re in terms of lag effects. We’re still in his very early period here of starting to see to filter that through. But the issue is, and this is something we all have to face is, you know, this is so unclear in terms of when it actually hits. And I think the Fed actually has a problem because remember, Jay Powell wanted to be all Folker in August of last year and have this great tightening program and everything else. Well, when you have an A NASDAQ with a 79 Rsi, you don’t have any tightening, you have monetary loosening through the roof, which is interesting because the Fed claims financial conditions have tightened, they haven’t tightened. They’ve been loosening like wild is here. So having now reached some key technical levels, with now superb optimism here into the summer in the VIX, absolutely crushed. And I should I should add one one other really important component here which is that’s what I was alluding to for being different maybe two previous cycles. What we have this time is this massive gamified options complex with zero day One day option This, which has a tremendous amplifying effect, I believe in terms of the market action that we’re seeing, when you when you go into record call volumes, by far in small caps in s&p, where those type of options all sudden make up the vast majority of the entire options complex, you get exacerbated moves, especially on an intraday basis, because I see it in the price action, when it just goes vertical, you know that there’s no organic, okay, now, I think is a good time to buy something. It’s just completely vertical. And there’s no, there’s no two way price discovery. And I’ll finish on this note, by this continuing to happen. Basically, every week, you know, Fridays, for example, is a classic day except as last Friday, when we hit key resistance. But by bike had this happening week after week, after week after week, people may be forgetting what they’re actually buying, because at some point maybe valuations for period, they may not matter. But at some point they do when I see companies that are worth a trillion 2,000,000,000,002 and a half trillion $3 trillion, like Apple, almost a $3 trillion. Again, baking in valuations that would require many years of perfection to grow into. I mean, forget P E’s for moment, but I’ll just mentioned four P’s, Microsoft and Apple sitting at 3034. Four PS, that’s rich in any type of setting for for companies that are worth over two and a half trillion dollars. Wow, that’s a lot of optimism. But, you know, go back to a very basic market ratio, which is price earnings growth, PEG ratio, you know, maybe I’m old school, but you know, fairly Valley used to be 1.0, originally valued used to be 2.0, Microsoft’s at three apples at four. That’s a lot of optimism built in. So it’s going to be interesting from my perspective now. And just I’ll finish up with this. Finally, this rally has gotten so critical, so optimistic. It’s now disconnected what was disconnected in the October lows, from key moving averages, we’ve now disconnected really high on the moving averages to the upside. And that’s where you typically get into a point of rebalancing. And I think that rebalancing process that’s coming is then going to be the deciding factor. What happens next. All right,
Adam Taggart 17:50
that was a great intro. There’s so many threads I want to pull from there. Maybe just to try to summarize everything you said, this is what I heard. were, you know, tech you spend, you’re a technical analyst. So that’s the lens you primarily look through. But I know you also to be a macro analyst as well. And you bring that in. And what I heard you say is prices are now extremely disconnected from their key moving averages on the high side. Now, just as you said they were back in October on the low side. So you would expect some sort of reversion at some point, just from that alone. You talked about this a little bit less, but I think I heard you say they’re pretty disconnected from a fundamentals side right now when you’re talking about just the levels of overvaluation, that the keep key valuation ratios. Then I also heard you say, there’s been a pronounced sentiment shift, right, and bull markets climb a wall of worry. And I think that’s more or less what we saw from October to now helped by liquidity, which I want to ask you about in a minute. But now, all of a sudden, everybody’s bullish, or euphoric all of a sudden, and you’re saying, okay, that’s, that’s a classic market where a bear reversion you know, loves to come into play where all of a sudden, everybody’s now you know, expecting sunny skies ahead forever. You’re nodding as I’m saying all this, but but, um, am I correct? And those sort of three big pillars that you you see suggesting odds of a reversion being non dismissible going forward?
Sven Henrich 19:22
Yeah. I mean, look, we went from a process of bearishness to capitulation where I think a lot of bears have capitulated. We see that on the banking side as well of bank analysts of flip flop, not all of them, but but some of them clearly have we saw price targets being raised all over the place that’s part of the capitulation process. And be clear, I mean, I I’m not saying you know, bears have any leg to stand on bulls on full control here. In just the fact that you’re above all these moving averages. Nothing has mattered at this point. They are in full control. And as long as the liquidity equation doesn’t change, we should probably tag on that a bit more as well. It they’re going to stay in control. In fact, I can give you some charts that are probably could scare the hell out of any remaining bear. I’ll give you one example as the Dow jumps, the Dow, the Dow Jones, you know, just kept Holding, holding its uptrend, there was this period where equal weight was horrifically lagging as these top 10 stocks basically just vertically lifted everything up. And now you can talk about maybe the ketchup trade, as tech is becoming really all the BoD. And you look at the Dow and you can make the case, or here’s a beautiful inverse head and shoulders. And guess what that’s pointing to new all time highs. Right, you can clearly make that case. If I look at the s&p on a monthly basis, you can look at the long term trend. It never broke. That’s what I was alluding to. Earlier, we have this bullish falling wedge and broke out. And now it’s above the monthly 20 Ma. That was one of my key points. But my key point then was also not only getting above it, but then also defending it as support. And as long as that holds yet bulls remaining control. And with with that, you can go back to the yearly chart, which is what I talked about yearly, five EMA holding us support last year and being defended. And maybe this is a, this is a brutal chart for bears in general, because basically says we’ve been in a bull market since 1932. I was sitting serious, I mean, if you you know, 1929 crashes, sideway, you had four years down in a row. And then World War Two aside, which obviously was just obviously a historic event. If you go back to that, in the last 75 years, there’s just been a couple events where there was two down years in a row that was in the 70s. And that was in 2000 2002. I mean, even the global financial crisis, it was just one down year. Right. And that was it. And then we had a temporary new low in the second year and they everything got rescued. And And ever since then, it’s been one year wonders and off you willing to the next few years of bull market. So that’s why I go back and spend, you know, in the context of everything. Bears had never shown that there was a bear market. And if you fall into the top red line, you know, you can make the case 5400 or 6000, whatever, whenever it tax. And that was the end of it. Right? If if nothing matters, and they they, you know, whenever they’re struggling, they intervene, which they clearly do. And that’s that’s your bull case, for sure. So, you know, right now sitting out
Adam Taggart 23:05
just just on that let me interject, because it seems like such a core part of the bull case. And we could have had this discussion before this past year is liquidity, right? I mean, the correlation between the markets and net global liquidity is super tight. I guess the question I have is, is what what do you think of as the best measure of liquidity? It’s it’s such a prime driver of asset prices. But I don’t know if there’s like a universally accepted, you know, chart for it. And we’re having this conversation. You know, the first one to mention this recently on this program is liquidity sort of driving everything here. And I kind of feel like, boy, we should all wake up in the morning, just be looking at that chart, because it’s really telling us what’s going to happen. So what do you look at to measure liquidity?
Sven Henrich 23:55
Well, I mean, as the last few months, I’ve been looking at bank reserves, because that’s for now the the absolute driver of everything. And unfortunately, we do not get the intention of it. We don’t get it in advance. We get it on Thursday nights after market close, and it tells me what happened. Right. Let me let me back up a little bit. Because this is this was presented as this great tightening cycle. And in terms of rate hikes being the fastest rate hikes we’ve seen in 40 years. It certainly seems very impressive that they finally caught up to that. And we haven’t seen the lag effects. And I want to emphasize this again, we’re all flying blind. Every bull, by the way, is flying blind on this because everybody due to the price action zooms assumes that nothing bad is going to happen as a result of that. I disagree. It will happen. The question is Is the when you know 2006 2007 It took a year and a half, but then debt to GDP was 60% and now it’s 120% going much higher. Now, let’s not kid ourselves, you know, this Fiscal Responsibility Act that just passed to extend the debt ceiling, we’re going to see a $2 trillion deficit again, we’re going over $50 trillion in debt in the next 10 years. That that’s the path we’re on. And so government spending remains extremely high, which also distorts everything, because it’s all counted towards GDP. On on some level, I mean, the spending remains there. But if you look at the monetary tightening cycle, I mean, just look at the Fed’s balance sheet, you just step back, and you go, are they actually kidding us? I mean, the the the net reduction, so far, from pre, you know, in total is less than 7%. Yeah. You know, there hasn’t been much reduction at all, in, you know, they pile in like wild, you know, they pile in $5 trillion from the, you know, 2019 or 2018. Low. And, and this isn’t a matter of a couple of years, right? I mean, they’ve just piled in like crazy. And now, they’re just ever so gently reducing, with, you know, $400 billion thrown in and in a couple of weeks when they needed to do in the banking event. They haven’t really reduced liquidity in that sense. In fact, if I view this as all through okay, has has all this excess that was thrown into the system, has that actually been taken out? And the answer is no, I see people citing em to money supply, it’s true that the year over year change is dramatically negative. But if I look at em two, as an absolute, empty money supply, still to this day is 33%, higher than it was just pre COVID. There’s still just a ton of excess and liquidity flown about, you know, and as I said, with with bank reserves, we’ve been on a NET app basis to the tune of $500 billion this year with the great tightening, the Bank of Japan is never going to stop monetary easing. That’s just, that’s just the fact. So if you’re viewing in an inflation, fight, flight, or fight through the lens of okay, are we reducing access. And that’s, you know, the evidence is simply not there. And so then you face the risks. Now, with asset prices going vertical, that the wealth effect that you tried to turn down, is actually going to result in researching inflation again, right, because if you look at total net worth household net worth, it dipped a little bit last year, in q1 and went back up, I don’t know, we’re gonna close the quarter in a couple of weeks. But because housing prices haven’t really corrected dramatically, either, either. If you look at the Zillow home value index, visa vie the MBS holdings of the Fed, they have barely reduced the barely begun to reduce the excessive what they piled in following COVID. And lo and behold, house prices remain really high. Housing Affordability is just dreadful. So that’s that’s really been no worst ever are new homebuyers. Yeah. And so before you know it, you know, you close back to record highs and household net worth. And that’s going to help somehow solve structural inflation. I mean, yeah, there’s all these year over a year of facts that are coming down. But again, is this going to solve wage inflation is going to solve houses, inflation, rental price, inflation and long term? No, I mean, in fact, this core inflation is that 5.3%? We were basically there in December of 2021. So what, what strides with progress we made? Yeah, does Powell have to show here and with a new inflation target of 2%, but now we’re in this phase, and when no one takes them seriously anymore? It was actually quite hilarious. Last week. I know fed came out with because they were in a box, right? Because if they raised rates again, they were scared of causing more banking hiccups. But they didn’t want to sound dovish. So they wanted to leave the door open for more rate hikes. And so they put out this hawkish statement on how they’re going to maybe do another one in July and maybe another one in September. And the market impact was not even 30 minutes because Mr. Powell came came out and and immediately basically put the kibosh on it and markets went off to rally to new highs to more easing financial conditions, because no one believes believes them.
Adam Taggart 30:13
But let me interject there, if I can, because I two things one will pick up later, because I know you and I can really get going on this. But your point about the Fed, it will right now this rising liquidity is it is going to cause the wealth disparity to research. And it’s really helping those who own financial assets right now, which is you and I know is 10% of the populace. Right, so unfair on that. And a couple of years ago, the populace was getting some help. I mean, it’s helped that created this inflation, but they were getting checks, they were getting stimulus. Now that’s gone, right. And cost of living has gone through the roof will probably continue to as long as this liquidity surge continues. So you’re you’re helping the wealthy out even more, and you’re hurting, the less wealthy the bottom 90% disproportionately, so it’s actually going to make that wealth inequality even worse than it was before. You’re not as I’m saying this, we can talk about that in a moment, cuz I’m sure we can, or near the end, because I’m sure we can read about that for a while. But on on the Fed thing here where you’re saying the market doesn’t leave the Fed that the market hasn’t been calling the Feds bluff all year, right, that keeps saying I’m going to keep hiking market says Now we think you’re going to cut earlier. And interestingly, the markets had to change its forecasts of the Fed pivot. But that hasn’t really impacted. asset prices. In fact, as we’ve been talking about, they’ve now recovered, they won the battle, and they’re off to the races right now. So how many people say is playing for legacy here? You know, I hear a lot of people say, Look, don’t underestimate pals conviction to do whatever he’s got to do to get inflation under control eventually, even if that means sacrificing market prices and whatnot. And you’ve been saying Core inflation, which is the Feds preferred measure has been sticky. And whether we believe the data or not, the jobs market still looks pretty robust. So that should give Powell a green light to just keep on taking the sledgehammer out and continuing to, you know, hit the economy with more rate hikes and maybe more aggressive Qt at some point. I’m just curious, what’s your forecast there? Do you think Powell is going to have to ramp it up? And is he going to eventually say markets, I don’t care, you know, what you want? I’m gonna have to be the adult in the room and really do whatever it takes to bring this down? Or do you feel Powell is more of a paper tiger here?
Sven Henrich 32:47
Well, I I would like to think that he would actually put the hammer on and but he’s revealed themselves to not stick to anything. Time and time again, I’ll give you one specific example in this press conference, which was, I mean, I don’t know how you can take it seriously. He was asked specifically about rate cuts, right. And his response was not for couple of years. On the same day that he put out, the Fed put out a dot plot that shows rate cuts in the next year. Okay, who am I taking seriously here? If he really wanted to follow through on this, I think he would have had the wherewithal would have had the wherewithal to be a lot more direct and more forceful. The fact that the market completely ignored him is a bit concerning, because you would want the Fed to have credibility problem is you literally have 50 speeches each month, where there are collimating, all kinds of things when given example, this this whole June rate hike. I mean, the market had priced in a June rate hike, outcome fed speaker after fed, fed fed speaker, raising the expectations for a Fed rate hike. And all sudden they all flip flopped, and it took it back down to zero. So what where’s the sign that they actually following through with it? Keep in mind, they’re the ones flushing through the liquidity, right? I mean, with bank reserves and everything else that we’ve seen yesterday taken down and fed balance sheet by the way, q t is designed not to upset things whereas QE is designed to stimulate thanks. So they haven’t they haven’t really shown this and they themselves showing rate cuts in next year, is not helping the cause if they really wanted to be hawkish, I’m sure we’re gonna get Now if that’s not the reaction that they wanted to have an opportunity to rectify this this week, because even Powell is speaking twice. He is giving testimony. So if that’s not the React Shouldn’t he wanted last week? Then got tougher, maybe. Let’s see if he talks tougher because there’s there’s your answer, right. The other thing we all have to consider I hate to get into the political calendar here, but there is a US presidential election coming next year. And Powell is not the ultimate boss here. It’s yeller. Remember Yellen, Yellen, concerned about this vix dies, Donna Yellen come learn about something else. The VIX dies. She’s already announced a treasury buyback program to launch next year. Government buying treasuries before you know it. And that’s specifically designed to improve liquidity.
Adam Taggart 35:49
So okay, inside, just want to make sure we have this right. So right now she’s having to refill the TGA, which technically should be draining liquidity. But I guess from what you’re saying, You’re not that worried, you don’t see it changing the net flows. But tell me if that’s wrong. But then she’s going to shift next year. And she’s going to do a treasury buyback, which will then obviously add to liquidity.
Sven Henrich 36:08
So Yellen to me is obviously a key operative in the big macro monetary liquidity construct. And now that the Treasury account got so low, and they’re refilling it, the view is, and that’s been my view as well, that’s actually going to impact bank reserves negatively. And a lot of the inflows that we’ve seen gonna reverse and they’re gonna pressure equities, right. So and we have to watch this week to week. So what happened the first two weeks of June, that didn’t barely reduce bank reserves at all. In fact, the first week bank reserves went back up last week, they went down by about 25 billion. And maybe that’s a reflect, because the first two weeks, they actually use the reverse repo facility, which tells me that they specifically wanted to avoid a negative impact on bank reserves. If dumb old me can see the relationship. So can they’re right. And the question is, how far can they rely on the reserve repo facility, then the numbers are staggering in terms of what they have to do to refill the TGA account? We’re talking 2 trillion trillion and a half dollars, I did mention a $2 trillion deficit coming this year. Right. So there’s, there’s a ton of funding requirement. And if this actually does translate into a significant reduction in bank reserves, and you can argue this, this refill of bank reserves going north, starting in January was largely, I shouldn’t say largely, but largely impacted by the drainage of the TGA account. And if we now do see them, not being able to refill all this via visa vie reverse repo, but they have to retrain bank reserves, then you can find yourself in a situation where all this what we’ve seen here in terms of the market rally was the grand illusion, because it was liquidity filled. And because price was so aggressive, and persistent, that it resulted in a complete flip and sentiment, then it would have been your classic bear market rally bull trap. And you can argue that maybe the options complex was one day zero day options, just amplified at all. Yep. Okay. And that’s the process of discovery we have and I found it actually, in this context. Curious, Yellen was asked about the TGA account the other day, and she was oddly specific, which she said something which I was surprised why she even said it because it wasn’t really necessary to say it but she said she they’re going to add to the refill the TGA account in June and in July, and then maybe not in August. So she gave a rather specific roadmap for that, which to the extent that that means that bank reserves are going to drop if they are then you have a window for market weakness even into July which is not typical, right. Typically in July’s is fairly positive. And then things flip flop again in August. So hard to say. I mean, you know, we’re trying to trade technicals we’re trying to trade the signals, but we are, whether we like it or not. We are beholden to the liquidity equation. So this this is a big issue as it pertains to markets, right. From my perspective, let’s be absolutely clear, this market rally that we’ve seen liquidity fueled or not, is all multiple expansion, massive, multiple expansion. I mean, Apple making new highs, great. But it’s doing that on, you know, slowing revenue and earnings growth. And that’s, that’s what you have in this year. Right. And if you bullish, you say, well, this, the worst of the decline is over. Okay. That’s, that’s the bold argument to make, knowing that we haven’t hit the full lag effects at all yet that that wall is still coming. Right. We haven’t seen the full effect of tightening and lending standards. This is this is this is the hard part this year. Obviously, the hard part, I called it flying blind earlier, because none of us know when and where and how hard it’s going to hit. You know, philosophically I can say, well, we’ve tripled debt since 2009. And now we got the highest rates we’ve had since 2006. And you tell him, he has no impact whatsoever. That doesn’t inherently make sense to me. But then when I look at, again, the liquidity in terms of into in the balance sheets and mortgage backed security holdings, and so forth, that haven’t really been reversed in any major way, I get why we got risk full on again. So the animal spirits, they haven’t been, they haven’t been extinguished at all. I mean, that’s typically what you would see in a bear market, people puking out their positions and capitulating and everybody hates stocks forever and ever. Amen. But that’s not what happened here.
Adam Taggart 41:52
Right? We didn’t get anywhere close to that. I don’t think so.
Sven Henrich 41:55
There was no panic. There wasn’t there was no fear at all. This is what let’s go back to my lower highs and VIX. It was lower vix than in 2021 was ridiculous.
Adam Taggart 42:05
Yeah, what did you call it? You called it like the most controlled market decline or whatever?
Sven Henrich 42:10
Most controlled bear market ever, but it wasn’t even.
Adam Taggart 42:13
But it wasn’t a bear market. That’s why Yeah, by your definition, so I was trying not to use that word. Exactly. So yeah, we never we never saw the panic.
Sven Henrich 42:21
So because they intervene very subtly, by changing liquidity.
Adam Taggart 42:25
So So let me ask this. So, you know, the economy is not nearly growing by as much as the markets have this year, right? Which is why I believe you said it’s all multiple expansion, right? That’s the liquidity, just just pricing, making things get priced ever more richly, thinking about the economy for a second. And I just want to dial into the lag effect, because you’ve mentioned it a number of times here. So I sort of think about, imagine a building with it with a side elevator on it, right? And the Fed is standing on the roof of the building, and it’s looking at the side elevator rise. And let’s say the economy is the side elevator. And it says, You know what, it’s rising too fast. Right? So I’m going to I’m going to do a rate hike, which is the equivalent of releasing an anvil off the side of the building to land on top of the elevator and slow it down a bit. Right. And Powell decided, you know, what, the, that element is rising, rising so fast, I’m gonna throw more candles I’m just I’m, that’s what last year was just chucking a bunch of anvils of different sizes over the side. Now they’re in their progression of falling, right? That’s the lag effect. We don’t know how many have actually hit that elevator yet. Our guesstimate would be probably not that many so far, if the true lag is 12 to 16 months, or whatever you said. Right. So in theory, that rising elevator is going to get hit by more important more of these anvils, even if the Fed stays positive from here on out. Right. And so a big open question, this is sort of why I think you said we’re flying blind, is we don’t know what the net impact, or the net effect of the impact of all those animals are going to be as they hit over the coming quarters here. That could really slow we could stop the elevator, right. And that’s the problem with the lag effect is, is if the Fed is over tightened, that elevator may stop, and it’s going to keep getting hit by notes over time can make can make a pretty bad situation worse, we just don’t know. And maybe I’m just guessing here, maybe that’s why Powell is pausing now, but keeping the door open for more rate hikes is he’s he’s maybe got more confidence that the market does that that lag effect is going to make a difference. Who knows. But the other element we have here, so that’s the economy, right? And in theory, the market should be based off of what the economy is doing, right? If it generates X amount of earnings, well, then the markets should react to that you’re shaking your head because what really matters there is the amount of liquidity, right so we have this weird world where the economy could really stumble, yet markets might not if this net liquidity just keeps rising and I will say there’s a ton of heirs who were scratching their head coming into this year and I’ll be honest, I was one of them. We could see The okay monetary stimulus is over. fiscal stimulus is declining in terms of just what Congress has been able to get past at least. And we have these rate hikes. And we have Qt and we have the banks tightening lending standards, following the banking crisis and all these things in the TGA having to be revised all these things that you think would be net liquidity contractors, but they haven’t been. So as a nervous bearer, you gotta be thinking, Oh, my God, well, when times are good, I mean, or, or, you know, what are these guys going to do in the future? For more liquidity? If this was the bad liquidity? Oh, my gosh, that not so bad liquidity is going to be like, Tony is for everybody.
Sven Henrich 45:39
Well, first of all, I would, you know, again, $2 trillion deficit, I would say simply say, That’s stimulative.
Adam Taggart 45:46
That is stimulative. It is,
Sven Henrich 45:48
I mean, look at construction spending. I’ll give you that’s another argument for both. If you think as tightening going on, no, it’s gone vertical. A lot of that has to do with finances, the packages that were
Adam Taggart 46:02
the inflation Reduction Act, all that infrastructure spending, yeah.
Sven Henrich 46:05
Right. massive infrastructure spending. And so that’s stimulative. So don’t don’t anyone tell me there’s not stimulus running through the economy that’s stimulative. Okay, deficit spending is stimulative. I mean, typically, you get the big deficits, when there’s actually a recession, and they need to stimulate. I mean, if you’re running a $2 trillion deficit, during a non recession period, what are you going to spend when the actual next recession comes? And by the way, let’s just be clear, we’re all working with fantasy numbers, right? This, this this deal, debt ceiling deal that just got passed on, based on CBO projections, I’m sorry, you know, just don’t ever intellectually insult us all. Because all these forecasts all of them are based on no recession ever, you know, just always stem, you know, continues to positive GDP growth. And, you know, I look at net interest expenditures on debt is already outdated in the in the first year, you know, you just got to realize that, you know, the real math effects of what’s happening with higher rates for longer will have a dramatic impact on on the sustainability of the debt construct, because all this debt is rolling, oh, we will have to refinance only the 2 trillion, they’re gonna have a new deficits this year, it’s all the rolling over debt that came from cheap rates, that’s that this year, next, you’re going to be have to refinance. I mean, interest in debt is going to be over a trillion dollars this year, it’s gonna go by unless the cut rates, right,
Adam Taggart 47:46
which, which is constructive. But that’s, that’s not liquidity. No,
Sven Henrich 47:51
it is. And this is the thing with also the labor market, you know, that everybody is having a positive view on at the moment, that’s what always happens. You know, the labor market is the last goal. And that’s why I’m, you know, I’m, I’m not too keen on the data points. So we’re getting with all these seasonal adjustments, because I can’t see what’s real and what’s not. I mean, on the one hand, I see, you know, ever more layoff announcements. On the other hand, I see a 3.4% unemployment rate also, although it just ticked up to 3.7%. But, you know, the fact is, labor markets still tight, you got a lot of people, you know, the, unfortunately, people are passing away and so there’s, there’s wealth transfer going on. So there’s, there’s still a whole wall of monetary stimulus coming in the next few years, I keep going back to this this whole notion of what how are you going to beat structural inflation? You know, yes, the the event inflation part is over. But the structural part, the traditional solution was a recession. It was it was not, you know, the next bubble forming off we off we go, which is kind of where we are, if I look at, you know, the valuation expanse, I mean, when I say people are piling and piling in, I mean, Microsoft, which is a great company, and obviously, the now one of the key AI plays out there. But when I see a market cap expanding by half a trillion dollars in less than two months, that’s not only a lot of revenue that ultimately has to come in, but that’s just enormous amount of earnings to have to justify that. So, you know, and with the VIX, again completely collapsed, the three year lows, this is no fear in the market at this point at all.
Adam Taggart 49:55
There’s so many things I want to keep wanting to ask you about and I’m trying to be as silent as possible. Well let you talk because you’re doing such a great job, but but again, interrupt you on the Vex. So is the VIX. Even a useful measure metric at this point?
Sven Henrich 50:10
I think this is a really fair question that I have to acknowledge. I think it may be broken. I mean, a lot of people are considering it broken. And for good reason. The impact, as I mentioned early on the options complex, it’s it’s so dramatic and how it’s colored. I mean, recently, I’ve seen cases where it doesn’t matter what the VIX does goes up, the market goes up, it goes down, the market goes up. It just it’s just the you would think that at some point, when you see the most obvious program on the planet, which is a vix crush Fridays, you know, if too many people see it, it becomes itself a useless indicator and ultimately even becomes a trap. I mean, we seen this before with the VIX. There was a few years ago, there was an ETF product blew up in everybody’s face, ultimately, it seems to me, you know, the, with the valuation and the technical disconnects becoming so vast that this incredible low volatility that we see is ultimately conducive for another Big Rip higher that no one sees coming at the moment. And then maybe no one’s positioned for it. I mentioned call call record call volumes. I mean, this is hardly any demand for puts at all. And they’re really cheap, that the boat is very much loaded one way. But you also have to be cognizant, beating the VIX below 20. And now into the 13th arranged you know, this, this is the time periods when you when you have confirmed new bull markets, remember in 2017, and just dropped to 1011? or what have you. But I would,
Adam Taggart 52:05
I went short the fangs for a little while during that period. And boy, that was just terrible.
Sven Henrich 52:13
No, I mean, there’s the old phrase, you know, markets can remain irrational a lot longer than you can remain. solvent is the phrase and I think the emphasis is on irrational. So if you think that markets are forward looking, well, you know, they weren’t so forward looking in January 2022, when everybody was proclaiming 5200 5400, whatever on the on the key. Now it’s liquidity and unfortunately, we’re all subject to it. And we’ll also then subject to shifting narratives as priced and moves in a different direction at some point. My view has been for 23 We just gotta be respectful of all possibilities. But we got to be also mindful of shifting risk reward. Okay, I mean, I was bullish October lows of two bullish or January bullish in March when SVB thing happened now I’m having a really rough time to be honest with you justifying any new Long’s we you know, texts been going vertical now for weeks. That’s to me is kind of a not a good I mean, weekly. RSI completely outside the weekly Bollinger band back to the March highs from last year as Super Extended. I can’t justify new Long’s on tech here. To me that’s kind of an initial corrective type situation on what we have been doing is looking at small caps and the Dow Jones as long place because that was kind of the ketchup trade because some indicators were clearly oversold, even though we did not have a single, larger correction in May, we got oversold indicators, because the larger market was correcting while the indices chopped in may remember that chart period that we had for about six weeks or something like that. The battle for control. That was that was definitely a battle for control. And now that I was broken to the upside, text got me more of a bot. But they’ve they’ve been opportunities with the down I mentioned this potential inverse hasn’t confirmed but play. You know, this is one of those things you want to see validations small caps I have to say it actually does a lot of financials and small caps. And maybe worth looking at a larger chart of the bank’s BK x because as I mentioned, the October interventions actually came at an opportune time on Tech because that was the point where it looked like everything was going to break trend. And guess what in March, banks were looking to break trend. then that’s when the intervention came. And if you look at that chart, though, you know, there is a bounce, but it’s really tepid. And I think this is maybe want to accentuate the potential bear case here, because this all sounds like, bears don’t have a prayer. And yes, if I go the 2006 2007 example, we’re going to hit new highs before anything bad happens, right? If the lag effects take that long, but if we look at the banking index, it’s barely bounced. And the reason rally here in June barely bounced, I mean, if you think you can have a sustained bull market without the banks participating, you know, you’re you’re a lot braver than than I am. So I’m not sure that this is a positive sign. And the second thing I want to highlight here, is REITs. themselves in 2022. If you look at the n dx visa vie the TN next note on this chart, here, I have t and x inverted. So you see the, the relationship clearly outlined. So if you’re on the chart C and T and X going up, going up, it actually means going down and vice versa. Meaning that if you have higher rates, it impacted tech negatively. That’s what happened all of last year. And it was in then in the fall timeframe, when when a 10 year actually peaked. That’s when he found a bottom and markets in general. And since then, you know, we’ve had a big reversion in yields, and that was supportive of the tech rally that was supportive of the overall market rally. Because from that perspective, you can argue that was the peak and tightening, right, again, higher yields matter. And yet something really weird happened this year. And that is it’s another one of those relationships, that got totally blown out of the water, because yields actually have been rising. And and Tech has completely an utterly ignored that. And I have a hard time reconciling this from a fundamental perspective, because tech does not like high yields in general. Tech has been living of low rates since the 2009. Lows. Yeah, rates go up doesn’t like it. That’s why we had a hiccup in 2018. Right? Because they were actually raising rates. Yep. Now rates have blown far beyond that. And if you look at the T and X weekly chart, that’s a little north cast on this a while back. It is actually confounding that chart, because it’s looking like a gigantic bull flag. And I have a tough time reconciling that with everything I said before, you know about maybe the Fed not following through what have you. Because if that’s a bull flag, and it’s so clean, it’s a clean as a chart was last year with the s&p going down. And maybe it’s related to the refilling of the TGA account. I can’t say but this chart says higher yields. I’m not sure you can sustain a rally indefinitely with higher yields coming. So I think this is a really important chart for everyone to watch. Yes, it’s been ignored. And maybe the liquidity that we referenced earlier, has allowed everyone to ignore that. But the tenure is back at 3.8%. Last year on a 10. Year was a 3.8% No one was happy about that. The one year is massively over 5%. And all sudden you’re looking at a reality where earnings yield is drops to the point where from an investor perspective, you get the same
Adam Taggart 59:12
yields. Why would you take the equity risk? Yeah, exactly.
Sven Henrich 59:15
Do I want to take the equity risk with valuations sky high markets having massively recovered in the VIX at 13. I wonder and then you get into the issue of Okay, last year we had this the worst bond equity performance ever the 6040. And now you have kind of a mismatch here going on. And you looking at the end of the quarter and you have to wonder okay, what what is the task by pension funds? Remember a lot of this is not is not a choice to have standards to meet balancing standards to meet. And now I wonder, and I’m speculating here but I’m wondering if we’re going to see some rebound financing as a result of this relationship all of a sudden,
Adam Taggart 1:00:03
and if anything selling of equities buying bonds
Sven Henrich 1:00:06
Hmm Why Why take the risk at this point in the cycle just in front of lag effects I, you know, after a big massive massive rally Now having said all this, I go back to what I said earlier, as long as the monthly 20 Ema on the s&p holds bulls are in control. Bears have to drop below the monthly 20 Ma and they have to drop below the quarterly five EMA you do not have a bear market at all. And on any retrace. And this is also important from a technical perspective now that we’ve ripped this high vertically and gotten this overbought, there is a typical, probably very frustrating for the bears event. That means if you get an initial pullback, 5%, something like that. And you reconnect with some of these inmates that are currently disconnected, you’re going to be oversold really fast. So my buying, you know, an overpowering liquidity reduction in bank reserves, which made them happen. I can’t say that they won’t. But barring that, I would suspect that the first corrective dip will get bought not only because of technicals, but also anyone that’s missed a rally will want to get on board, right. And so let’s say you get a move back to the 50 ma on the s&p or the NASDAQ which this would be sizable reversions. All sudden, because we’re that far disconnected. Right? But I’ll just throw this out as a hypothetical. If you get that you will likely see a bounce from there, see a rally? And then what happens next is going to be for me to key decisive point. Will that result in new highs for visa vie, what we’re seeing now? Or is this going to roll over for a lower high. And then we see actually, the lag effects taken over. And I go back to a chart I mentioned I think at the tail end of our last discussion a few months ago, which was the s&p seasonality chart. And for all the things that we just discussed. It is hilarious in a way because it’s still playing. That’s short, had a march low. And the June peak, guess what we had a march low end of June peak calls to a little dip into the end of June and then more highs in July. And that chart basically says game over for bears this year, and maybe get some another correction in September, October, but they’re just gonna keep at it. So for all the complexities out there, they’re also in a standard working through the market that may well extend us still into next year. Especially if if liquidity keeps flowing. So I would say this has generally been a very maneuverable environment over the last year and a half. But now we’re getting back to a point where credulity is kind of being stretched again, because of the belief that suddenly nothing bad’s gonna ever happen again, because nothing bad has happened. And and that’s the challenge here. You know, technically I can’t buy convincingly here now. I can make a technical case for buying pullbacks. But I can also still make the case for major rollover to come. The question is, is the when. And that’s that’s the unknowable. At this point. I will just say generally speaking, nothing has been cleansed. The monetary excess still in the system. Valuations are still sky high. In fact, they got just brutally more expensive. I mean, you’re looking at almost 20 pe again on the s&p looking at the leaders of the AI club, obviously been through the roof on on that basis. So, you know, I would say as long as the labor markets holding in, I think bulls will want to continue pressing on dips. But once you see the labor market rolling over, remember the historical script. Structural bottoms happen, not when the Fed pauses rates but when they’re panic cutting, because then something will have broken
Adam Taggart 1:04:45
Alright, so spend listening to everything you’ve said here. It sounds to me like you are pretty solid bear, fundamentally, but you’re a technical analyst and you’re looking at the TA and you We’re looking at the the effect of policy decisions. And you’re saying, Man, I mean, they can keep this thing going for a lot longer than the bears can imagine here. So I gotta presume that this is a, a more challenging time for investors. You know, you’ve you’ve had a long season career, is this true is this, we entered again yet another kind of on the metrics of easy and hard the hard part of making investing decisions at this point.
Sven Henrich 1:05:29
It took, you know, speaking about, you know how far this can go. I mean, this is the way I’ve, you know, there have been times when I’ve been fighting the tape brutally, when markets are indeed irrational and fun, learned a few tricks along the way as well. You got to be so respectful of the strength and and we went from conviction long, to cautious now trying to position for fade, but always every week, we’re finding a long entry, because of the persistence and in the tape, and we’re looking where where we can where we can justify that at least, right? I mean, I’m, again, from a technical perspective, new long sear conviction, who longs to me does not make sense, it may may well make sense in two weeks, you know, if we get a nice pullback or something like that, or next month, it’s always a balancing act between net long and net short for us. And the risk reward from my perspective, visa vie October has clearly shifted at this point. But you, you got to be respectful of the strength. And I said 2006 2007, you know, they passed rate hikes and markets went off to make new highs and I can even use 1999 2000 as an reference example, why did we have that blow off top in the NASDAQ in 2000? I’ll tell you why. Because the Greenspan back then added a bunch of liquidity. Why? Because there was a bunch of fear about y2k. It was not until that liquidity got pulled out that the NASDAQ completely collapsed on itself. So I hate to say this from cycle to cycle, the Fed folks have their fingers in the liquidity pot, and they are massively impacting how markets flow whether we like it or not. And and so you can argue with the market, or you got to be respectful of the powers that be that are involved in it. I mean, you mentioned me being bearish on on the macro. I can, I can certainly say that I see massive recession risk. But I, even historically, I can say this can take a while to play out. But as we saw, and I’ll give you one other reference, a lot of what we’re seeing this year is kind of reminiscent in a way of what we saw in 2008. Right SVB same weekend as Bear Stearns, what did we see in Bear Stearns, massive intervention, and we had a massive rally and everybody was happy again, back then Bear Stearns, though that rally petered out in mid May. And then it was lights out this time, and it hasn’t petered out and made continued into June. Right. And back then we were below the key moving averages. Now we’re far above. So you can make the case it’s it’s not the same. But I’m just saying in terms of script where people think, okay, now things are much better, because nothing bad has happened and they save the day. Well, that has happened before this, this is the most uncomfortable thing for me right now is the flying blind aspect that we talked about in terms of the impacts. Now, if you’re not concerned about, you know, you’re not concerned about flying blind, you just pilot, right, because nothing, nothing bad’s going to happen. But that’s what happened in 2008. Right, because the the the economic impact was felt, and it will be felt here as well. And now the Fed basically said, Well, you know, we’re not again, they’re gonna say we’re not going to cut this year. And in a way, that’s bad news, because that means the lag effects will ultimately be more powerful. But you you would want to see that inflation fight having been one. But the reason the inflation fight hasn’t been one in my view is that by having induced that much liquidity and wealth, again, they are actually delaying their own victory, which forces them to be higher for longer in the most debt laden economy ever in any our lifetimes. So you, you, you are vertically risk that something does break out of the blue and the equation changes. So to be completely complacent as this market is right now, greed indicators through the roof, everybody bullish now, having seen that sentiment shift in all these people that were skeptical piling in, Ma, who’s going to save the day when this thing goes down, because you don’t have a lot of these previous shorts to cover, right. There are still shorts out them, you know, commercial speculators definitely are. And they actually been adding to positions in the last few months, which is interesting, because that’s also what they did in 2007. They looked perfectly wrong, but they were ultimately proven terrifically, right, in a bad way. So that this, this is a complex journey, that no, I would not be blase about it. But you got to be cognizant of the risk.
Adam Taggart 1:11:05
In this. This is where I was going saying this is this is now on the hard side of the investing scale, where it’s difficult to navigate what’s going on here. Alright, so two questions for you. First, is we’ve got regular people who watch this channel, and they are just trying to navigate what’s going on, hopefully not become collateral damage to anything bad. And to try to at least make some money with a relatively acceptable risk return ratio. If things go well. What would sort of be some of your parting advice to those folks? You know, I heard you say like, alright, don’t go super long into tech right now. Maybe buy on a pullback, wait for a pullback to buy if there’s a pullback if you’re bearish don’t pile in immediately, because that’s likely to get bought in the near term. What other bits of counsel would you give them?
Sven Henrich 1:11:55
Well, you know, first of all, one of one of the things that was missing by the way in May,
Adam Taggart 1:12:02
our interview with spend will continue over in part two, which will be released on this channel tomorrow, as soon as we’re finished editing it. To be notified when it comes out. Subscribe to this channel, if you haven’t already by clicking on the subscribe button below, as well as that little bell icon right next to it, and be sure to hit the like button too, while you’re down there. Finally, if the challenges spent as detailed in this interview, have you feeling a little vulnerable about the prospects for your wealth? Then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth, keeping in mind the trends and risks and opportunities that spends mentioned here. Just go to wealthion.com and we’ll help set one up for you. Okay, I’ll see you next over in part two of our interview was Finn Henrik
Transcribed by https://otter.ai
Sven Henrich is founder and the lead market strategist for NorthmanTrader and a highly respected technical analyst and commentator about markets & the macro economic environment and is a frequent contributor to CNBC, CNN Business and to MarketWatch.