Elliott Wave: Fed Follows Market Yet Again

By Steve Hochberg and Pete Kendall

Back in December, we wrote an article titled "Interest Rates Win Again as Fed Follows Market."
In the piece, we noted that while most experts believe that central banks set interest rates, it's actually the other way around—the market leads, and the Fed follows.
We pointed out that the December rate hike followed increases in the six-month and three-month U.S. Treasury bill yields set by the market.
What happened with this week's Fed announcement? Well, you guessed it—the Fed simply followed the market yet again.

The chart above is an updated version of the one we showed in our last article. The red line is the U.S. Federal Funds rate, the yellow line is the rate on the 3-month U.S. T-bill and the green line is the rate on the 6-month U.S. T-bill. The latter two rates are freely-traded in the auction arena, while the former rate is set by the Fed.
Now observe the grey ellipses. Throughout 2017-2018, the rates on 3-and-6-month U.S. T-bills were rising steadily, pushing above the Fed Fund's rate. During the period shown on the graph, the Fed raised its interest rate six times, each time to keep up with the rising T-bill rates. The interest-rate market is the dog wagging the central-bank tail.
Now note what T-bill rates have been doing since November of last year; they've stopped rising. Rates have moved net-sideways, which was the market's way of signaling that the Fed would not raise the Fed Funds rate this week.
Too many investors and pundits obsess over whether the Fed will raise or lower the Fed Funds rate and what it all supposedly means. First, if you want to know what the Fed will or will not do, simply look at T-bills, as shown on the chart. Second, whatever their action, it doesn't matter because the Fed's interest-rate policy cannot force people to borrow.
See Chapter 3 of The Socionomic Theory of Finance for more evidence.

License to Thrill No More

By Murray Gunn

The luxury British car maker Aston Martin has learned a hard lesson; namely, diamonds may be forever, but the market for $400,000 cars is not. A February 28 Guardian article confirms that since going public on the London Stock Exchange last October, Aston Martin's shares have plummeted 40% amidst billions of dollars in losses. To be fair, some of the loss can be attributed to the company's IPO costs, but we believe that where there's smoke, there's fire. The IPO, in and of itself, is a splendid signal that the credit cycle, and the positive social mood which fueled a massive expansion of credit and rising stock values, is undergoing a bearish shift. A fall in Aston Martin's fortunes equally represents a fall out of favor of one of the most recognizable bull market icons -- Bond, James Bond.
Since Ian Fleming wrote the caddish secret agent into being in 1952 amidst the postwar bull market, Bond's popularity has risen and fallen with the Dow. (See chapter 10 of Socionomic Studies of Society and Culture here.) And since Bond drove onto the big screen in 1964's "Goldfinger" in his epochal Silver Birch DB5, the character has been synonymous with the luxury car brand.
In 2005, during the great stock market boom and one year before the 2006 blockbuster hit "Casino Royale," Aston Martin experienced its best year on record and turned a profit for the first time in its 90-year history. Optimism was so high that a June 26, 2007 Motortrend piece affirmed that the company's new owners, who just bought it for $1 billion, planned to "recover a good chunk of their investment through an initial public offering in the London Stock Exchanges within five years." Those plans were soon derailed by the 2007 stock market peak and ensuing global financial crisis. Aston's IPO hopes went up in smoke, as a December 1, 2008 Telegraph article revealed, the car maker's drastic cut of "one-third of its workforce amidst the extraordinary market condition we all now face."
Flash ahead to 2018, the 2007-9 Great Recession firmly in the rearview amidst a record-shattering bull market, and Aston Martin decides to "remake the Classic James Bond DB5" at a sky-high price of $3.5 million (Put it on "M's" tab!). Coincidentally, the car maker announced take two of its plans for an IPO. In an August 29 report titled "Live and Let Die," I published the following long-term chart of the Dow Jones Industrial Average which showed five instances when Aston Martin's insolvency or deep financial stress coincided with troughs in the global economy and wrote:

"Now, with Aston Martin"s popularity and confidence so elevated that it is going public, the probability that the IPO coincides with a peak in the global economy is high. Expect financial markets to be shaken, as well as stirred, in the months ahead."

Aston Martin Lagonda's first day of trading as a public company was on October 3, 2018 the exact day of the top in the Dow. Fittingly, global James Bond Day was October 5. The Dow then declined by 19% into December, while Aston's stock plunged 40%, no doubt making investors feel like Goldfinger did when Bond took away his gold.

The 25th installment of the James Bond franchise, "Bond 25," is slated to hit theaters in 2020. Meanwhile, Aston Martin hinted of a partnership with "aerospace experts to develop a new model with takeoff and landing capabilities." (September 20 USA Today). I can envision no better symbol of soaring optimism than a flying Aston in the next Bond film. But should the villain of a bear climb into the passenger side of the market as it is whisking through the clouds, investors are going to wish for a Q-worthy ejector button to cast it out.
Discover how the popularity of James Bond films has fluctuated with the Dow Jones Industrial Average in this free chapter from Socionomic Studies of Society and Culture. Read the chapter now.

Save Fintech? Ban Short Selling. It's Not That Simple

By Murray Gunn and Brian Whitmer

The pinhole puncture in the global "Fintech" bubble keeps growing, despite drastic attempts to seal it shut. The most recent and radical attempt occurred on February 18, when BaFin, Germany's financial regulator, issued a temporary short-selling ban in Wirecard after its shares plunged 40% in less than three weeks. Wrote one news source, "Germany bans speculative attacks on Wirecard stock", as if those shorting the market were wielding pitch forks and lobbing actual threats against the stock's upside.
Incredibly, vilifying short sellers is as old as the market itself. The first short-selling ban occurred in 1610, after the Dutch East India Company crashed. Notorious short-seller Isaac Le Maire was barred from the market, leaving Amsterdam a pariah. In the 1790s, Napoleon Bonaparte charged short sellers with treason during the financial chaos of the French Revolution.
And, most infamous is Jesse L. Livermore, the brilliant trader who shorted the U.S. stock market in September 1929, earning $100 million ($1.7 billion in today's money) in the ensuing crash. Livermore was publicly skewered in newspapers as the "Great Bear of Wall Street."
Still, history shows that the draconian move of banning short selling is hardly effective. Amidst the Livermore debacle, the newly minted U.S. Securities & Exchange Commission made plans to reinstate a century-old short-selling ban, which didn't go into effect until 1934 -- after the U.S. stock market had already lost 89% in value.
In 2008, the SEC, acting in concert with the UK Financial Services Authority, prohibited short selling in 799 financial companies to stem the bleeding from the subprime mortgage meltdown. SEC Chairman Christopher Cox gave this assurance of the ban's efficacy: "The emergency order... will restore equilibrium to markets."  Yet, instead, the global financial sector entered an accelerated and prolonged period of chaos and value destruction.
Now, we have BaFin's attempt to save Fintech by banning short selling in one of the sector's most iconic companies. BaFin noted the importance of Wirecard to the German market and economy, and heartened: "There was risk of further downward spiral without restrictions on shorting the stock," echoing Christopher Cox's confidence in 2008. The strategy won't work, because short selling isn't causing the market's decline; an ongoing negative social mood trend in Europe is. As the most sensitive meter of social mood, Fintech stocks warned of this shift long before there was a sustained downturn. (See other signs of a negative shift in social mood across Europe here.
The first signs began to emerge last fall. In September 2018, we observed how the financial technology sector had become another benefactor of society's blooming optimism. But that optimism had then reached a dangerous extreme, as evidenced in the soaring valuations and growth forecasts across the industry. Soon after, Wirecard replaced Commerzbank, a 149-year old institution, on the DAX 30 index. We warned, "The Global fintech Thematic Index [is]on course for a jaw-dropping setback. … In fact so many mania symptoms plague the sector that the sell-off could be catastrophic."

Depicted below is the sudden reversal in Wirecard and the Global fintech Thematic Index that followed, in which the latter's shares dropped 57%.

Jesse L. Livermore, the trader blamed for the 1929 U.S. stock market crash, was known to have said: "All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope."
When there's hope, and prices are rising, short selling is deemed a necessary part of a balanced system that encourages free will speculation. When that hope turns to fear, short selling is then vilified as the cause of market crashes. We believe many of the components of that shift are well underway in Europe now.
Radical politics. Secessionist movements. Crumbling economies. Follow this link to discover more signs of a shift toward negative social mood across Europe.

Perception of Powell Put in Place – QE4 Looms

By Murray Gunn

For better or worse, the markets perceive that Fed chairman Powell has showed his hand.
The recent Federal Open Markets Committee (FOMC) minutes of the January meeting revealed almost unanimous agreement to announce a plan soon for ending the Fed's policy of balance sheet reduction. This is the first step in an inevitable march towards the fourth round of quantitative easing (QE4).
If any more evidence were needed pointing to the fact that Fed policy is led by the markets, this surely is the icing on the cake. Stock markets tumble in the fourth quarter and, in January, not only does the Fed signal a reversal in its interest rate path, but the FOMC members have a collective buttock clench over its policy of reducing the trillions of dollars of new money created after the financial crisis of 2008. Music to conventional analysts' ears. The "Powell Put" is in place. From this moment on, whenever stock markets fall, the buy-the-dippers will be full of confidence thinking that the Fed will come to the rescue.
And therein lies the problem.
You see, it's all about causality. Or more succinctly, the perception of causality. Most market participants think that the stock market rally since December has been caused by the reversal in Fed policy. Not so. It was the decline in stock markets during the fourth quarter that caused the Fed's U-turn. FOMC members are human. They have emotions. They herd, just like the rest of us.
The Socionomic Theory of Finance noted QE's impotence with respect to moving market prices. Chapter 2 (read an excerpt here) shows that stocks did not respond commensurately to the Fed's quantitative easing program. And forget about commodities. In July 2008, just two months before the onset of QE, commodity prices started their biggest bear market since 1932. As the author Robert Prechter noted, "Anyone applying exogenous-cause thinking to these data would have to conclude that QE worsened the collapse in commodity prices."
Nevertheless, the fairytale of central bank policy dictating how financial markets and the economy perform persists. This will last until that ephemeral thing called confidence ceases to exist. In the next downturn, or the next, when QE4 is seen to make no difference whatsoever, at that point the market's perception of the omnipotent Fed will falter. When it does, when markets come to the realization that the Fed is not the "secret sauce" that keeps stock markets going up, the fallout will be cataclysmic.
For more on monetary policy and market prices, read an excerpt of chapter 2 of The Socionomic Theory of Finance here.