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On Deck: a "New Strategy" to Boost Inflation

02-21-2020

The market had a touch of sobriety early on with the Nasdaq particularly heavy, as it lost over 1.25% while the Dow and S&P were each down about a percent. The proximate cause seemed to be the realization that the coronavirus and the resulting supply disruptions are spreading.

None of this should be a shock to anyone who has spent any time thinking about it, although clearly the overwhelming majority of stock market investors have concluded that it doesn't matter because the Fed has their back and nothing can hurt them.

All Aboard the FOMO Express That said, it is not impossible that the coronavirus has induced the final exhaustion in this bubble. By that I mean that stock bulls long ago concluded that the Fed will always ride to the rescue. So when the virus and its obvious implications didn't cause stock prices to move lower, it precipitated panicked FOMO, i.e., the "fear of missing out." The only thing that bulls really fear is being left behind on the upside because, as I just stated, they know the Fed will bail them out.

What they haven't thought about is that the Fed's magic only works while the mania psychology is still in force. Once it bursts and the consequential economic weakness, combined with lower stock prices, starts to take over, then free money doesn't work so well for a while, although eventually it tends to work again at some point. All you have to do is look back at how things evolved before, during, and after the last two bubbles. Of course, this particular one is far bigger than anything we've ever seen before, but that's another issue.

The Hunch Is Back In any case. I don't want to conclude that we've reached the exhaustion stage, but as I think about it, I can see how perversely the virus precipitated panic buying and that may have exhausted itself. That's just a hypothesis of mine at this point. It certainly isn't actionable, but in prior bubbles where I've tried to take the other side, including Tokyo in 1989, there was always a moment when something became clear to indicate that the game had ended, and it had, although in the early stages of thinking that you never know if you're right.

Turning back to the action, in the afternoon the market weakened, led by the Nasdaq, which fell 2% versus a 1% decline for the S&P.

Away from stocks, green paper was not the flavor of the day today, fixed income was higher, as were the metals, with silver gaining 1% to 1.5% for gold, and the miners participating, although perhaps not as potently as one would like. I believe the spike in gold was aided by a wildly bullish inflation speech given by Lael Brainard in which she called for a "new strategy" to "address the persistent undershooting of the inflation target." I'll have more to say about that on Monday.