As with every first Friday of the month, everyone is looking
forward to the release of non-farm payrolls out of the U.S. as dumb money
managers make trading adjustments based by this lagging indicator. Since 90% of
financial markets are comprised of dumb money investors such as mutual funds
this economic data point always moves financial markets.
I am sitting in my office monitoring our trades across all
hedge funds as I wait for the release of the NFP. Japan spooked global markets
as it collapsed two weeks ago and continued correct being down over 18% and
coming close to official bear market territory according to dumb money
standards. Smart money comprehends that the Nikkei 225 already collapsed into a
bear market given the strength of the violent sell-off in the short period of
time. Those who wanted to go long after a small correction were stopped hours
or days after they tried to go long. Abe failed as expected, Nikkei 225 down,
Japanese Yen up and Abe should be out.
The Fed picked up the torched scarring dumb money with their
new bad word of choice, tapering. The only reason U.S. equity markets and to a
smaller extend global equity markets managed to rally was due to the Fed’s
stimulus. Currently the Fed decides to waste $85 Billion of taxpayer’s money
per month for no good reason. Once the taper or even extend financial markets
will come crashing down back to reality.
A healthy equity market wants strong employment figures;
that is when you know that the rally is valid. The fear prior to the release
was that NFP data would give the Fed a reason to taper stimulus and eventually
exit it. Dumb money hoped for figures which were lukewarm and do not point to
stable economic growth so that the Fed may continue to artificially pump up
equity markets.
Flashback dumb money; the Fed should not even be in equity
markets. All the gains dumb money witnessed in their portfolios will evaporate
rather soon. This reverse and perverse approach is pathetic. NFP clocked in at
175,000, but negative revisions shaved off 12,000 jobs in March and April while
the unemployment rate rose to 7.6%. Dumb money cheered and ignored the first
crack in unemployment data which points to an even weaker economic picture than
anticipated.
Most economic reports showed that the economy is in worse
shape than dumb money hoped for and that there is an extreme disconnect between
equity markets and the real economy. Such a drastic gap is not unheard of and
the last major gap which formed was between 2007 and 2008. Eventually the gap
will close and equity markets return closer to fair value which in the case of
the 2008 meltdown saw equity markets shed roughly 50%.
The disconnect after that has been far greater and it should
not come as a shock to see a correction of 75% or which will unfold during the
rest of the decade. I am running some numbers and basically confirm our
prediction of a major market crash. Next decade we may see the S&P 500
trade at actual fair value which is below 500. The only fair value is book
value of companies and not expectations of what may happen. Next decade will
see a complete shift in evaluations of companies and this decade long hyped up
boom and bust will have a much need bust for good which will force market
participants to rethink how to evaluate public traded companies and that it
makes no sense to pay 20 times what a company is worth based on hope.
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