Stop Blaming the FED - Take a Look at What We've Allowed to Happen!

Mkts got crushed again yesterday...which was not so surprising considering that we ended Friday on the lows of the day – which always sets us up for another test lower as the mkt tries to flush out the weak links....the Dow lost 507 pts or 2.1%, the S&P gave up 50 pts or 2.08%, the Nasdaq lost 156 pts or 2.2%, and the Russell lost 32 pts or 2.1%. It was UGLY.....and will continue to be UGLY until they stop blaming the FED for the breakdown..... It is the usual suspects that are the concern, but since today and tomorrow - the FED will be holed up in an office deciding on what to do next - the mkts and almost every analyst/strategist will take the time to blame Jay Powell and the members of the FED for the breakdown in the mkts.

I have to be honest with you.....I am not in the camp that the mkt downturn over the past 8 weeks has been totally created by ‘comments' from the FED. Now I am not letting them off the hook – so fast – but I am not convinced that the most recent comments are responsible for the change in tone and sentiment.......Every time you turn on the TV or listen to a story, or read the newspaper/blog/story – the writers are quick to point out that Jay Powell (alone) is responsible for this latest disaster.....FULL STOP! (Do not forget the decade worth of stimulus that the FED provided- which caused the mkt to soar allowing street analysts to pat themselves on the back as being brilliant stock pickers??????) And the fact that we have the President publicly slamming and shaming Jay Powell on TV, on Twitter, from Air Force 1, from the oval office, from Mar-a-Lago etc...is a disgrace. And now Jimmy Cramer is screaming about how the FED is the only one that can STOP the fall -as if it is in the FED's mandate – news flash – it is NOT in their mandate and so it is not their responsibility. You may want them to be responsible but in fact they are not. It is NOT the FED's job to prop up the mkt. Mkts are driven by valuations and fundamentals – if WE allowed those valuations and fundamentals to become distorted then shame on us.

There are a number of colliding factors that are in play right now......First and foremost – Let's NOT discount the role of automation in the investing process! Passive investing and robo advising should be at the TOP of the list of factors that drove and are driving the action. When the mkt was going up – NO ONE said a thing.....passive investing, robo advising and algorithmic trading were the FUTURE. Valuations were taken to obscene levels but no one cared to call it out – Just buy an ETF and it's all good! Anonymous passive strategies and the explosion of another new ETF that was going to change the world are a daily occurrence. Leveraged ETF's – while not for the retail investor – have introduced NEW risk into the system that (again) no one paid attention to - (think of the SUB-PRIME LOANS and the creation of all those acronyms like CDS, MBS, ABS, CDO'S that no one paid attention to........). Think about the latest risk management software programs that tied into computers that have allowed for the ‘autopilot' mentality – allowing algorithms to drive the process......– taking valuations to extended levels on the way up and then taking valuations to depressed levels on the way down as the pendulum swung way too far to the right and is now swinging too far to the left........

How many of you recall the dot com disaster during 1999/2000? Many of you were in diapers or in grade school......so you can't remember the stupidity. You can't remember the action in those names. You can't remember the hysteria around anything that had DOT COM in its name. And you can't remember the pendulum and you can't remember how it ended. But for those of us who can – this SHOULD NOT BE A SURPRISE AT ALL. The Dot Com bubble collapsed under its own weight – because it was all built on a house of cards.....there was no substance at all – Mary Meeker and Henry Blodgett became symbols of the internet mania that for a while enriched so many but in the end ultimately cost those same investors a boatload of money.....They headed the group of ‘tech analysts' that helped to drive the Nasdaq up 50 % from late 1998 thru March 2000 – and when it all began to unravel they disappeared as the mkt crashed...falling 72% from March 2000 thru September 2001.

...Do not discount the ‘risk management software' that is VOID of human beings and human interaction. Do not discount the ‘techies' that do not understand the trading process, but they do understand how to build a ‘faster more efficient' algorithm. (which btw slices both ways.....) Do not discount the bubble that the computers created all during the year....they kept taking the mkt higher all while all this other ‘stuff' was happening all around us. Stuff that it discounted as not being important (at the time) or stuff that was supposed to take care of itself.....think trade, think the bullying that has taken place, think the mid-terms, think geo-politics, think GLOBAL central bank policy over the past decade, think weakening economic activity, think slowing earnings, think passive investing, think algorithmic order entry and execution, think about how we have eliminated the human being in the process and have relied on AI and automation to do the ‘thinking for us'......think about all of that before you suggest that the FED and Jay Powell alone are responsible for the blood bath that we are seeing in the equity mkts.....

Look! Those trade frictions began when Trump moved into 1600 Pennsylvania Avenue (the WH) in January 2017 and only increased in January 2018 when he took on all of our trading partners. Yet the mkt went higher. And slowing global growth? Well, that has been a topic for at least 3 qtrs now....so that's 9 months – Yet the mkt went higher. Geopolitical tensions? Yet the mkt went higher. Talk of interest rate normalization has been going on for 2 yrs now –Yet the mkt went higher. Trade disputes and concerns? Yet the mkt went higher. BREXIT and other EU concerns? Yet the mkt went higher. Exploding oil production – Yet the mkt went higher. Stronger dollar? Yet the mkt went higher. But no one seemed to care.......street analysts/strategists etc.....kept telling us ‘Don't worry, be happy'! The computers say it's all fine.

Yesterday a GS analysts said - "The market path in 2019 will depend on investor perception of the longevity of the current economic expansion"

Really? Is that the best that GS can do? Of course that is what drives mkts.....it is everyone's perception of what they think is fair and what is value. Look – there are people that are taking advantage of this sale....they are the buyers....vs. the people who are panicking – they are the sellers....and in this case – the sellers are robots.....algorithms that operate on strictly mathematical equations that have no sense, no feel – while on the other side – there are people who have disengaged the robots and are using their brains to find value.....and while not standing in the way of a moving train – they are finding value as the robots continue to destroy value. It's a conundrum really...one side says it's a disaster while the other side says its an opportunity. It's called ACTIVE investing, it's called using your head for something other than a hat rack, it's called hard work.....

. So parts of the mkts and sectors of the mkt are approaching BEAR mkt territory.....(defined as a 20% drop) Home builders – XHB are down 31%, Energy – XLE is down 22%, and Retailer – XRT are down 23% (they are there) while Industrials XLI - are down 18%, Tech – XLK are down 18%, Financials – XLF are down 17%, Consumer Discretionary – XLY are down 16%, Communication – XLC are down 18%, and Transports are down 19%....and the list goes on.....and so it is UGLY...but this is not happening because the FED said that he is raising rates on Wednesday......it is because of ALL the other stuff coupled with what the FUTURE FED and OTHER central bank policy will look like. Remember – on Friday – the ECB (European Central Bank) told us that they too will end their bond buying stimulus program that has been in place for nearly a decade now as well. So this is NOT ALL about the FED at all – they play a role for sure – but stop blaming them for the blood bath taking place now.

Asian mkts took a beating again last night – following on what happened here in the US. Chinese President XI Jingping – speaking at the 40th anniversary of China's ‘reform and opening up' struck an - in your face tone - as he remains a bit defiant saying that:

"The past 40 yrs eloquently prove that the path, theory, system and culture of Socialism with Chinese Characteristics are completely correct and that the CPC Theory line and policy that have since taken shape are completely correct" and that "No one is in a position to dictate reform to us" – slamming Donny without actually using his name......but appearing to back himself into a corner as he didn't leave himself any ‘wiggle room' to strike a deal with the U.S. You would think that Asian investors would view that as a positive – yet the mkts sold off. Japan – 1.8%, Hong Kong -1.05%, China -1% and ASX -1.2%.

European mkts – which were also all lower have now begun to swing higher.....Most are near flat or attempting to go positive as the morning turns to afternoon. Again the usual suspects are taking center stage....FED meeting, political uncertainty, growth prospects and ECB policy all contributing to the angst. I love when they describe the outlook as ‘dark' and ‘gloomy'....does that do anything to help investors feel good at all? Hardly....but it is what it is......FTSE -0.46%, CAC 40 +0.02% (win), DAX +0.39% (win), EUROSTOXX – 0.02%, SPAIN – 0.29% AND ITALY + 0.16% (win).

US futures are UP 10 pts....with the Dow futures pointing to a triple digit gain of 150+ pts......In yesterday's note I said that we should not be surprised to see the mkt test the March/April lows of 2,555 (while I would prefer it did not) – which was the next level of support – in fact the S&P it not only tested that level – it went so far to test the February low of 2,530 – which was a 69 pt move lower from Friday's close at 2,599. As of last night – the S&P is still up 12% from when Trump took office.....and while the past 2 months have been ugly and uncomfortable – it is hardly a complete disaster if you are a long term investor –

Listen to the tone today.....listen to what some expect to hear from the FED tomorrow. It's not about the 25 bps rate increase tomorrow – It is like earnings....that is history, it is about what the future guidance will be...and THAT is what will drive the mkts in the very short term. So If he becomes more dovish – going so far as to say that all further increases are OFF the table then it will be clear that the FED is not immune to what is going on – but do not mistake that to mean that the FED's purpose is to drive the mkt higher....it is their mandate to pay attn to the fundamentals of the global and US economy and then design policy around that. Either way – you can be sure that we are in for more volatility as the mkt thrashes around trying to find stability.....Can we hope that the lows of yesterday (and February) will be that stability?