Failure Is Not An Option

Failure Is Not An Option

Authored by Sven Henrich via,

Following all time highs last week markets actually also got to within an inch of a complete breakdown. Again. And again they were saved in the nick of time with the predictable Fed cave on tapering to unfold this week during Jackson Hole and looking to make new highs again this week. 10 weeks in a row. 10 months in a row. If markets seem to have a programmed consistency about them it is because they do. The rally has gotten too persistent and steep that failure is not an option. Indeed markets MUST make new highs every week or risk the break of the trend.

Failure is not an option.

I’ve stated consistently that the S&P 500 has devolved into a Fed balance sheet tracker and as long as the liquidity equation remains in control over the market distortion equation the ghost of 2013 will see this market levitate non stop with perhaps the occasional dip into the 100MA. Unlike 2013 of course valuations are significant higher and no dips below the 50MA are allowed so far.

The media and market participants still like to chase the narrative of the day to explain market moves while really nothing else matters besides the Fed.

Let me shine light on that facade. No narratives matter and I can prove it.

For one we already know the one constant since November. The Fed balance sheet makes new highs and the S&P 500 soon follows. Steady as she goes, 10 months in a row:

All dips in markets appear to have coincided with a slowing or pausing in the Fed’s balance sheet. Indeed new highs were made last Monday during the same week the Fed again expanded its balance sheet by another $85B in just one week. (Wednesday to Wednesday).

And last week’s dip induced lows not only came precisely on yet another tag of the supporting trend line and, forgoing all pretense of this being a market that tries to assess impacts of news flows, economics or anything else, but rather lows now come on a rather obvious pre set date, the 19th of each month:

They don’t even try to hide it any longer. $SPX

— Sven Henrich (@NorthmanTrader) August 20, 2021

One can blame OPEX machinations as much as one wants, but go back in history and you won’t find such a constant dynamic, especially considering that OPEX weeks historically are more bullish than other weeks.

No, a market supposedly driven by millions of individual investor decisions that yet does the same thing month after month is not a market. It’s a running program, that doesn’t discount anything. It just runs on its trajectory.

And for that reason nothing has mattered so far.

Not the slowing growth and disappointing economic reports:

Not the inflation data points that keep surprising to the upside:

Nor the carnage that is taking place in China the world’s 2nd largest economy:

Nor the complete collapse in internals as seen in the Nasdaq for example:

Nor the historic unprecedented disconnect of valuations from the size of the economy sitting at over 200%:

No, nothing has mattered. Not the divergences, not the slowing of growth or economic disappointments, not an equity bear market in the 2nd largest economy of the world, not vast pressures in inflation of costs, on the consumer, not valuations. Nothing. Like clockwork markets make new highs every month tracking the Fed’s balance sheet and for show are now making a bottom on the same day each month following ever shallower pullbacks:

Why are the dips getting smaller? Because they have to be for the trend line keeps rising steeply and a sustained break would be a technical disaster for this market. And last week’s dip again precisely saved at the trend.

You know I joke about with my laughing Powell’s but there is a sinister point behind it all:


— Sven Henrich (@NorthmanTrader) August 21, 2021

The point being the Fed actively managing this market and being terrified of seeing the trend break.

Consider: Last Friday during OPEX markets simply couldn’t afford a drop or the trend would’ve broken on a weekly basis.  Futures were down in pre-market. Frankly a lot was at stake. For not only was $ES at its key trend line all our volatility structure charts were at the verge of a massive break out:

The same volatility structure on all the key indices all ready to break out inviting a major break in markets. Yet all saved on Friday. Each and everyone of them. The proximate trigger? This:

BREAKING: Markets rallying after Fed caves on taper talk following a 2% dip in markets.

— Sven Henrich (@NorthmanTrader) August 20, 2021

No really, Dallas Fed president Kaplan offered the cave narrative and futures immediately turned positive:

Dallas Fed President Kaplan says he may adjust his call for taper to start soon if delta variant slows down demand. (Via DJ wires.)@VCignarella points out he was the first to say we should be tapering. Any backtracking is huge.$SPX futures bounced on this.

— Kriti Gupta (@KritiGuptaNews) August 20, 2021

Why was this relevant? Because the same Kaplan that folded his conviction like a leaf on last week’s dip is the same Kaplan that has been warning of consequences of too much printing, a housing bubble, financial excesses and risk of these imbalances being counter to the Fed’s goals, hence the Fed must taper immediately. No, really:

Kaplan hinted at a delay in taper &  markets reacted immediately. And by hinting at a delay in taper Kaplan rendered all his previous warnings as meaningless for if he meant them he wouldn’t cave on a 2% drop in markets.

Be clear, the taper song and dance by the Fed is strategic in design and execution. How do we know that? Because they keep telling the market:

Kaplan Says Fed Will Avoid 2013 Taper Tantrum This Time Around

Fed officials will seek to avoid a tantrum as they keep ‘taper talk’ going at key summit

It is an open admission that the Fed is managing markets as to avoid a sell off. Sell offs are “tantrums”. And let’s face it the Fed’s entire taper talk strategy was specifically designed to not upset markets by first letting non voting members such as Kaplan plant the seed, to then bring on others on board without letting the big guys Powell, Williams or Clarida commit to a taper hence giving markets the opportunity to not take the talk seriously and then, when there is the slightest trouble in markets, let someone like Kaplan pull the switch causing a relief rally.

You may hate it but this active management strategy keeps working even though some of the Fed are now also openly admitting that QE is not doing anything to help jobs or the economy:

“The purchases of Treasuries and agency mortgage-backed securities are no longer the right remedy in an environment of severe shortages of essential materials and workers”

*If this is true, which I believe it is, then the Fed shouldn’t taper, it should stop immediately.

— Sven Henrich (@NorthmanTrader) August 18, 2021

Applying the wrong policies under false pretenses to prevent a market sell off is now the state of affairs we’re in.

There are 2 types of people right now: Those that recognize that this is largest everything bubble brought about by historic central bank intervention who think this is problematic and bubble deniers such as Cathie Wood who want to deny the existence of any asset bubble, many wanting to declare that central bank liquidity and rate adjusted the valuations are justified, consequences be damned.

I disagree vehemently on that front although I can’t deny the obvious: As long as central banks expand their balance sheets aggressively there are no corrections of size. That really has been the script since 2009:

The only sizable corrections have come in periods when central banks either paused or withdrew liquidity, the one exception being the Covid crisis when not even an expanding Fed balance sheet from 2019 into 2020 along with 3 rate cuts in 2019 could prevent a 35% crash in markets.

No, what was the long denied by central banks is now fully recognized by financial institutions such as of BofA. Cause and effect:

And this is the result.
I rest my case.

— Sven Henrich (@NorthmanTrader) August 20, 2021

The question we are all continue to be faced with is this: Is there a limit to how far and how long central bank intervention can disconnect asset prices from the economy in favor of the owner class or is there no limit? If there is no limit then this train will go on forever, wealth inequality will keep expanding and the concepts of free market price discovery and creative destruction are no longer relevant to markets and the economy.
If there is a limit, then any loss of control would be be devastating for a larger reversion to the mean would bring about a historic unraveling.

My general criticism has been one of expanding wealth inequality, but now this expanding wealth inequality has taken on a new dimension with the emergence of inflation and central bankers with their policies of excess are waging an outright war on the poor and downtrodden while presenting themselves to be their saviors:

I go further: Central banks willfully ignore the data that goes counter to their persistent easy money policies.
The result is ever expanding wealth inequality with the bottom 50% not only getting left behind but also paying the brunt of price distortions in their cost of living.

— Sven Henrich (@NorthmanTrader) August 18, 2021

How long before the people will no longer put up with this? How long before the distortions and reduced affordability in living standards will cause a massive drop in spending and risk a political breaking point? All drops in confidence and spending are now blamed on the Delta variant. How about the end of stimulus checks? The increased costs of living? The collapse in the savings rate? How about the Fed actually employing the wrong policies for the economy.

That’s not a rhetorical question, it’s an outright admission by the Fed’s Rosengren:

“Our big issue right now is not that people aren’t willing to purchase goods and services. The problem is that it’s difficult to be able to find the labour and find the materials to actually produce the goods and services,” he said. “So in that environment we’re having more of an impact on temporary surges of prices and less of an impact on trying to get back to full employment and a more sustainable inflation rate.”

Rosengren, who will be a voting member of the policy-setting Federal Open Market Committee next year, said the rising pricing and debt loads fuelled in part by the asset purchases could eventually jeopardise the recovery.

“I do worry that undue leverage and price appreciation that could potentially be reversed down the road could undermine the ability to reach our full employment mandate over time.”

Now that the Fed via Rosengren has openly admitted of employing the wrong policies will Powell and team relent and finally hint at a taper this week?

Don’t hold your breath:

How to say you’re not going to taper without saying you’re not going to taper.

— Sven Henrich (@NorthmanTrader) August 21, 2021

For we know it’s Game Over and taper is actually meaningless to begin with as the distortions keep building, while the Fed ponders and tinkers on the self admitted wrong policy path with excesses in housing and excesses and imbalances in financial markets. All this printing has consequences. These are not my words, these are the words of Kaplan who caved at the slightest sign of trouble in financial markets.

My assertion: They know, they are terrified of a massive sell off, of a break in the trend, hence they want to avoid a “taper tantrum” as Kaplan said which means the same financial imbalances and excesses that ” threaten the Fed’s goals” are to be exacerbated to prevent a tantrum. Do these people actually ever listen to themselves? There is no consistent logic or intellectual integrity to anything they say.

But there is one point of clarity: The flip on taper within days of a taper related sell off again highlights the fear of seeing the trend break.. That’s the problem with managing excess. You got to keep the excess going and make it worse and worse for fear of the reversion and that’s the position the Fed is now in.

So markets are now in a position where new highs MUST me made each week or the trend is at risk of breaking and with it the risk of a volatility break out.

And while an initial trend break may even get bought the first time around and could even make new highs down the road still, the technical consequence would be devastating for do not forget this massive ugly pattern suggests dire consequences for this everything bubble:

The $VIX spike in Feb/March 2020 may have been child’s play for what could become of this pattern. See the upper trend line.

But be clear: The only thing that again matters this week is the Fed and the headlines that come out to Jackson Hole.

My premise remains that Powell will not actually taper before his term is up or secured. He may talk about it, he may even offer a schedule at some point but he will keep kicking the can for as long as possible and Yellen needs someone to keep financing massive Federal deficits and she has a willing executioner hence the love fest:


— Sven Henrich (@NorthmanTrader) August 21, 2021

Bottomline: New highs may once again be on the agenda this week and into month end because they are necessary to keep the trend going. It is this mission critical now that the trend is so tight:

Failure is not an option but failure is inevitable for this trend is so steep it is unsustainable. The questions remains the when, but when it happens I expect the unwind to be furious as the energy keeps building and the patterns are tightening with ever more new highs each week. For now the program remains in control. Watch for changes.

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Tyler Durden
Mon, 08/23/2021 – 12:45

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