One Year To Nowhere

[OriZ 3,157]

Great info but a little too technical for me. I've been saving like crazy since I started working thinking about retirement some day (I'm self employed). I have a large portfolio that in the past I thought I could manage but recently realized I have neither the time or desire to closely evaluate where I need to be and what I need to avoid. Yesterday met with a new professional that I liked an will enlist his help and the experts he has access to. Should have done this years ago but I feel good about making the first big step.

Any tips for evaluating and working with an advisor?

It's very hard to find a good advisor. They exist but are very far and few between. I personally don't trust most of them. Ask alot of questions and don't go just based on their returns in the last 7 years, because any monkey could have done well in those. See how they did during times like 2000-2003 and 2008-2009 because we are going to be in a similar situation in my opinion.

[X Factor 1,111]

I am waiting to see volatility come back in the markets. Usually the volume picks up after labor day when the big boys come back from Summer vacation

[OriZ 3,157]

Very very very similar to what I've been saying:

http://www.mcoscillator.com/learning_center/kb/special_market_reports/the_intersection_of_stock_market_political_races/

Right now still predicting Clinton, but if market action changes enough to warrant an update I will.

[OriZ 3,157]

Billionaire money manager Bill Gross said negative interest rates are turning assets into a liability stifling the capitalist system.

In his monthly investment outlook posted Wednesday, Mr. Gross, 72, reiterated his long-running criticism of central bankers, including Federal Reserve Chair Janet Yellen, for slashing interest rates to zero or below to help raise asset prices in the hope they will trickle down into the economy. It's a plan, Mr. Gross argued, that will fail to produce sustainable economic growth.

“Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield,” wrote Mr. Gross, who manages the Janus Global Unconstrained Bond Fund. “$11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective.”

(More: Central banks in Europe and Japan are relying on stimulus packages that include negative deposit rates to fuel inflation and revive the economy. Germany, Switzerland, France, Spain and Japan are among countries that have negative yields, according to data compiled by Bloomberg. While the U.S. hasn't used that tool, Ms. Yellen said last week that further asset purchases must remain part of the Fed's toolkit.

Mr. Gross's $1.5 billion Janus unconstrained fund gained 4.3% this year through Aug. 30, outperforming 61% of its Bloomberg peers.

http://www.investmentnews.com/article/20160831/FREE/160839984/janus-bill-gross-slams-central-bankers-again-arguing-negative-rates

[CarlosAndSveta 808]

Sort of like businesses reporting negative (credit balance) Cash on their balance sheet.

[OriZ 3,157]

Fed Vice-Chairman Admits Fed Sponsors Wealth Inequality

https://mishtalk.com/2016/09/03/fed-vice-chairman-admits-fed-sponsors-wealth-inequality/

[OriZ 3,157]

“When buying a used car, punch the buttons on the radio. If all the stations are rock and roll, there's a good chance the transmission is shot.” - Larry Lujack, “Superjock,” WLS Radio, Chicago

In 1983, after graduating from Northwestern, I spent much of my time in the old Vogelback computing center, lodged in a semi-underground building reminiscent of a bomb shelter. You’d have to carry stacks of punchcards to a mainframe operator, and then wait patiently until your output was delivered through a mail slot. There, I ran statistical studies on the financial markets, using every data series I could get my hands on, convinced that the best basis for investment decisions was evidence and historically-informed discipline. Since I lived fairly cheaply, for example, servicing my used car with parts pulled from similar cars at the junk yard (Larry Lujack was right), I was able to spend the rest of my time playing music: teaching children’s musical theatre, playing guitar and lead vocals for a great but rather loud pop-rock band called Smith/Smith, and working in the programming department of WLS Radio in Chicago, where we would track record store sales, requests, and other data to choose songs for the playlist. I credit my typing ability to Larry Lujack, who once walked by my desk as I was entering data, shaking his head in mock disappointment as I henpecked the keyboard with my index finger.

Over more than three decades since then, I’ve remained convinced that the data people look at, and the actions they take, need to be meaningfully and reliably linked to the outcomes they seek. Without data, as W. Edwards Deming once said, “you’re just another person with an opinion.” Whether we’re talking about investing, international relations, or economic policy, acting without the benefit of evidence is a shortcut that - despite its occasional near-term rewards - regularly ends in failure, and sometimes in disaster. The effectiveness of any “transmission mechanism” depends on a reliable correlation between behaviors and outcomes. Investors and policy makers have to adapt to new evidence, of course, but even if we are inclined to say “this time is different,” it should never mean discarding the lessons of history. Instead, it’s essential to discover how the new data fit in with what we already know.

With regard to the financial markets, my emphatic view is that Fed policy has not created a new, permanently high plateau as a result of its actions during the half-cycle since 2009. Rather, as I detailed in our 2016 Annual Report,

“From the standpoint of our investment discipline, the half-cycle since 2009 has been different from market cycles across history in only one significant way. By driving interest rates to zero, central banks intentionally encouraged investors to speculate long after historically dangerous ‘overvalued, overbought, overbullish’ extremes emerged. In my view, this has deferred, but has not eliminated, the disruptive unwinding of this speculative episode. By encouraging a historic expansion of public and private debt burdens, along with equity market overvaluation that rivals only the 1929 and 2000 extremes on reliable valuation measures, the brazenly experimental policies of central banks have amplified the sensitivity of the global financial markets to economic disruptions and shifts in investor risk aversion.”

Before addressing the economic impact of Fed policy, it’s useful to further examine its impact on the financial markets. Here, it’s quite obvious that zero interest rate policy has encouraged yield-seeking speculation by investors. Still, investors should be careful how they interpret this. As I’ve previously detailed in data from both the U.S. and Japanesemarkets, monetary easing in and of itself does not “support” the financial markets. Rather, easy money only reliably stimulates speculation when investors are already inclined to embrace risk (as evidenced by broad uniformity across market internals). As soon as investors become risk-averse (witness 2000-2002 and 2007-2009 for example), even aggressive and persistent Fed easing fails to prevent a market collapse.

Moreover, any economist with even a vague understanding of how securities are priced should understand that elevating the price that investors pay for financial securities doesn’t increase aggregate wealth. A financial security is nothing but a claim to some future set of cash flows. The actual "wealth" is embodied in those future cash flows and the value-added production that generates them. Every security that is issued has to be held bysomeone until that security is retired. So elevating the current price that investors pay for a given set of future cash flows simply brings forward investment returns that would have otherwise been earned later, leaving little but poorly-compensated risk on the table for the future (see QE and the Iron Laws for an illustration of this process).

In this context, the following statement last week by Federal Reserve Vice-Chairman Stanley Fischer (Bloomberg) displayed a strikingly narrow understanding of the investment process:

“Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that and we have to make trade-offs in economics all the time, and the idea is the lower the interest rate, the better it is for investors.”

To be fair, there’s a kernel of truth in Fischer’s view that lower interest rates are “better” for investors. In recent years, low interest rates have certainly encouraged speculation, stretching reliable measures of equity market valuation to the third most offensive level in U.S. history next to 1929 and 2000. But Fischer’s statement is also incomplete. A clear understanding of how financial securities are priced suddenly turns Fed policy from something that seems quite generous to investors into something that’s actually terrifically hostile. See, the lower the interest rate, the better it is for investors, but only provided that investors wholly ignore the future.

In reality, depressed interest rates ultimately benefit only those investors actually cash outat the speculative pre-crash extremes that the Fed seems so fond of producing. From here, for example, we estimate that the prospective 12-year nominal total return on a conventional portfolio mix (60% stocks, 30% bonds, 10% cash equivalents) is likely to average just 1.5% annually. As for the S&P 500 Index itself, we presently estimate annual total returns of just 1.4% annually over that horizon, with a strong likelihood of cyclical losses on the order of 40-55% in the interim (which would be a rather run-of-the-mill outcome from present extremes). Real prospective long-term returns are already likely to be negative on both fronts after inflation. The blue line on the following chart brings the future of conventional investing up-to-date.

The foregoing chart estimates 12-year prospective S&P 500 total returns using the log ratio of nonfinancial market capitalization to corporate gross value-added. The two have a -93% correlation on that horizon in post-war data (negative, because higher valuations imply lower subsequent returns). In judging any valuation measure, one should always ask how that measure is related to actual subsequent market outcomes. For a review of the reliability of other popular valuation measures see Choose Your Weapon.

Meanwhile, as I detailed in Morton’s Fork, it’s fine to assert that the S&P 500 is “fairly valued relative to interest rates” here, provided that “fair” is defined as an expected nominal total return now averaging just 1.4% annually on the S&P 500 over the coming 12-year period. Understand that when anyone says that stock market valuations are “justified” by the low level of interest rates, that’s exactly what they mean, whether they realize it or not.

Failed transmission: evidence on the futility of activist Fed policy

As a former academic economist, I was fortunate enough to have Thomas Sargent, Joseph Stiglitz, Ronald McKinnon, Robert Hall, and John Taylor as advisors during my doctoral study at Stanford. I remember sitting across from Tom as I eagerly started to write out an economic model to address a particular issue. He looked at me with a wry smile, and just said, Yoda-like, “investment precedes consumption.” At the moment, Tom wasn't talking about economics. He was talking about restraint. It would be helpful if policy makers carried that idea in their heads. “Consumption” in this sense, is the desire to act, to form policy, to make whatever assumptions that will quickly allow us to get going and do something. “Investment” is the care and effort we take to clearly understand the problem, and especially when our actions involve risk, to establish evidence that our actions will be meaningfully related to the outcomes we seek.

Once I left that group of mentors, it became clear how few of my other colleagues in the field actually studied the economy. Rather, they studied “economies” in a very abstract sense, often with virtually no mapping between the models they studied and the real world. “Assume an economy with two islands, a turnpike, and 5 guys named Jack, one of whom is the government and nobody knows it.” Or “assume that a representative consumer has a fixed endowment and chooses how to spend it over time, based on the interest rate set by a monetary authority.” Assume, assume, assume, and if you test against real data at all, you can claim validity as long as you get a significant F-test, even if the practicalmagnitude of that effect is economically meaningless. The problem, for me, is that the models were then used to suggest real-world policies.

So here’s a question: “Is there clear evidence, across history, showing that large, activist changes in monetary policy instruments are reliably correlated to positive outcomes, of a meaningful size, in the real economy?”

The dogmatic insistence on pursuing policies based on assumptions rather than economic evidence; the failure to invest in the careful analysis of cause-and-effect relationships before consuming in the form of activist policy, is where I’ve lost all respect for monetary economists. They’ve jumped straight to consumption - pursuing recklessly experimental policies, without first establishing evidence that their tools have a reliable correlation with actual subsequent economic outcomes.

As I’ve noted before, the “counterfactual” of how the economy would have done without these interventions is readily available. Macroeconomists know that this involves comparing the projections from constrained and unconstrained vector autoregressions (VARs). Regardless of whether one uses observable data, as we do, or “shadow” monetary measures, as Wu and Xia do, the result is the same: all of this reckless intervention has boosted U.S. output by less than 1%, and lowered the unemployment rate by just over one-tenth of 1% beyond what would have been expected from conventional monetary policy (as defined by the Taylor Rule). Though Wu-Xia dutifully report this negligible impact as evidence that extraordinary monetary policy “succeeded,” themagnitude of this success is economically meaningless, and pales in comparison with the speculative extremes that have been created in the process.

The essential truth is this. Most of the variation in output, employment growth, and inflation across history can be reasonably predicted using lagged values of non-monetary variables alone. Adding information from monetary variables like the Federal Funds rate, the monetary base, and even Treasury yields, provides very little additional information. Moreover, only the “systematic” component of monetary policy - the part that can be explained by lagged non-monetary variables, has any meaningful correlation at all with subsequent economic outcomes. The remaining “activist” component does very little except to cause distortions, particularly in the financial markets. Those distortions ultimately cause economic damage when they collapse, but over a much longer horizon than the Fed seems to consider.

I've previously made this argument using methods like vector autoregression and Kalman filtering. Below, in an effort to demonstrate the case as simply as possible, in a way that readers can replicate if they like, the charts were produced by estimating rolling regressions, which ensure that the simple projections shown would have been available to a policy maker at each point in time. The first chart shows the year-ahead growth rate of real GDP, along with projected values based a) solely on non-monetary variables and b) including monetary variables and interest rates.

Non-monetary variables include current and lagged values of real GDP growth, payroll employment growth, CPI inflation, the output gap between real and potential GDP, and the ISM Purchasing Managers Index. The monetary variables include the Federal Funds rate, the ratio of the U.S. monetary base to nominal GDP, and the 10-year Treasury bond yield.

You’ll notice that, with few exceptions, there’s precious little difference between the red and yellow lines. Adding monetary variables to the information set simply does not materially improve forecasts about subsequent real GDP growth over and above the information that’s already contained in purely non-monetary variables.

The next chart shows the same outcome for subsequent growth in total nonfarm payrolls.

Strikingly, the same is also true for CPI inflation. Adding information about monetary variables and interest rates does virtually nothing to improve on forecasts based on purely non-monetary variables.

Does this mean that monetary policy is completely useless in affecting subsequent economic outcomes? Not so fast. We have to make a distinction between the “systematic” component of monetary policy that’s correlated with non-monetary variables (output, employment, inflation), and the remaining “activist” component. See, it’s possible that thesystematic or rules-based component of policy is actually useful and necessary in producing economic outcomes. Since that systematic component overlaps or “spans the same space” as the non-monetary variables, we can’t rule out the possibility that it has legitimate effects. All we can say with confidence is that the activist component isn’t doing much, except to produce speculative episodes that negatively impact the economy when they collapse. But those effects emerge over a much more extended horizon.

In the chart below, the blue line shows the actual Federal Funds rate over time, while the red line shows the systematic component. The difference between these two lines is what I’m calling the “activist” component of monetary policy.

You’ll notice a few things immediately. First, in the effort to break the back of inflation, Paul Volcker probably tightened monetary policy in 1981 a few percent beyond what might have been necessary, but it was also quite a brief deviation. Likewise, it’s possible that monetary policy could have been briefly loosened following the 1981-1982 recession somewhat more than it was in practice, but it’s clear that this was also a brief deviation. In the context of the disruptive inflation of the 1970’s, I have nothing but praise for the remarkable fidelity of monetary policy during Volcker’s tenure to a systematic and rules-based discipline. Since we observe nearly zero correlation between the “activist” component of monetary policy and subsequent economic outcomes, the most likely effect of Volcker’s additionaltightness in 1982 was to help in driving the financial markets to their deepest level of undervaluation, and highest level of prospective future investment returns, in the post-war era.

Contrast that with the large and persistent activist deviations that Alan Greenspan, Ben Bernanke and Janet Yellen have pursued under their leadership at the Fed. In each case, we observe aggressive departures from the Fed Funds rate that one would have projected based on current and lagged data on output, employment, and inflation. In turn, those three large deviations helped to produce a series of three speculative bubbles in the financial markets; the first that ended with the technology collapse, the second that ended with the global financial crisis, and the third that has now brought reliable measures of valuation to one of the most offensive extremes in U.S. history. The problem is that these speculative consequences only emerge over a period of years. Indeed, the "activist" component of the Federal Funds rate has a correlation of -0.53 with the ratio of market capitalization/nominal GDP three years later. The two prior postwar valuation extremes in 2000 and 2007 were both followed by a loss of half the market value of the S&P 500 (with even deeper losses in technology and financial sectors, respectively). The disruptive consequences of this third episode are still ahead, and are now effectively baked-in-the-cake.

Let’s examine the “systematic” and “activist” components of monetary policy and their relationship to actual subsequent economic outcomes a bit further. The table below shows the correlation of each component with changes in real GDP growth, employment growth, and CPI inflation over the following year. Only the systematic component of the Federal Funds rate is meaningfully related to subsequent economic outcomes (though even that relationship isn't very strong). Those correlations are negative because when thesystematic component of the Fed Funds rate is lower, subsequent economic activity is typically stornger. But notice that the relationship between the activist component and subsequent economic outcomes is essentially zero. For inflation, the correlation actually goes slightly in the wrong direction. The same general result holds for versions of the Taylor Rule, though to varying degrees. For the monetary base (not shown), whether one uses the growth rate or the ratio to nominal GDP, there’s little correlation with subsequent economic outcomes at all, regardless of which component one examines.

Correlations between systematic and activist components of the Federal Funds rate and subsequent economic activity

Systematic

Activist

Subsequent change in real GDP growth

-0.30

+0.02

Subsequent change in employment growth

-0.42

-0.04

Subsequent change in CPI inflation

-0.32

+0.05

Remember, the systematic component is driven wholly by current and lagged values ofnon-monetary variables (output, employment, and inflation). Additional monetary policy deviations are useless. Now, one might object that monetary data can’t possibly have such a weak relationship with subsequent economic activity. After all, we know that the yield spread (e.g. between 10-year Treasury bonds and 3-month Treasury bills) is a reasonably useful indicator of subsequent economic fluctuations. In fact, that’s true, but we can also break the yield spread into two components: 1) a systematic component representing the “fitted” value based on non-monetary variables alone (output, employment, inflation), and 2) a smaller residual, which is independent of non-monetary data. Here’s the kicker. It turns out that the systematic component has a higher correlation with subsequent changes in employment growth and real GDP growth (0.55 and 0.40, respectively), than the yield spread itself (0.50 and 0.32, respectively). In contrast, the residual has no meaningful correlation at all with subsequent economic changes on either front (0.06 and -0.05, respectively).

So yes, the yield spread is a useful economic indicator, but entirely because of thesystematic component driven by non-monetary data, which acts as kind of a summary statistic for economic conditions. Again, the part that’s uncorrelated (“orthogonal”) to non-monetary data is totally useless.

The chart below shows exactly how weak the relationship is between the activist component of monetary policy and subsequent changes in economic growth. The charts for employment and CPI inflation look virtually identical. The relationship is a broad and random scatter of points.

From the foregoing data, we can conclude the following:

1. Much of the variation in U.S. output growth, employment, and inflation follows a systematic and largely mean-reverting process, and is reasonably well-predicted by previous lagged values of those same variables.
2. Adding information about monetary policy variables and interest rates does very little to improve on projections based on non-monetary data alone.
3. While we can’t rule out a contribution of monetary policy to subsequent economic outcomes, only the “systematic” or “rules-based” component of monetary policy - the portion that can be explained by prior non-monetary variables (output, employment, inflation) - is actually correlated with those outcomes.
4. There is no economically meaningful or reliable correlation between “activist” monetary policy departures and subsequent economic outcomes, except to produce speculative bubbles and collapses that impact the economy over a longer horizon than the Fed seems to consider.
5. The trajectory of the U.S. economy since the global financial crisis can be largely explained by non-monetary variables alone. Numerous methods (VAR, Kalman filtering, rolling regression) demonstrate that the extreme and activist monetary experimentation of the Federal Reserve has not materially altered that course.

These conclusions aren’t simply a critique but an indictment of Federal Reserve policies. The Fed has insisted on slamming its foot on the gas pedal, refusing to recognize that the transmission is shot. So instead, the fuel is instead just spilling around us all, waiting for the inevitable match to strike. We can clearly establish that activist monetary policy - deviations from measured and statistically-defined responses to output, employment and inflation - have had no economically meaningful effect, other than producing a repeated spectacle of Fed-induced, speculative yield-seeking bubbles. The American public has repeatedly paid the consequences of the Federal Reserve’s insular dogma when those bubbles have inevitably collapsed, but those consequences are typically spread over a longer horizon than the Fed appears to consider.

As a side note, the idea that investment precedes consumption would be useful for policy makers to remember from an economic standpoint as well. In this misguided idea that low interest rates are "good" for investors, in the rush to equate overvaluation with wealth, policy makers ignore that the fundamental driver of economic growth, productivity and living standards is productive investment. The central focus of policy in recent cycles has been to encourage debt-financed consumption, rather than creating incentives to channel savings toward real, productive investment (productive infrastructure, workforce training, early-stage capital investment, R&D, education). Since the late-1990's, the growth of real U.S. gross domestic investment has collapsed to one-fifth of the rate it enjoyed in preceding post-war decades. Growth in real gross domestic investment has been zeroover the past decade. Not surprisingly, weak U.S. productivity growth has followed. Wealth is not produced by speculative malinvestment, debt-financed consumption, or market overvaluation. Financial securities actually net out to zero in the calculation of a nation’s wealth because every security is an asset to the holder and a liability to the issuer. Instead, the true wealth of a nation is embodied in its capacity to produce, as measured by the stock of real investment (productive capital, stored resources, infrastructure, knowledge) it has accumulated as a result of prior saving.

From dogma to coercion: Jackson Hole becomes the Manhattan Project

If there was one key theme of last week’s economic symposium at Jackson Hole, Wyoming, it certainly wasn’t to examine the weak links between monetary policy tools and economic outcomes. It also wasn’t to examine the extent to which existing policy has distorted financial markets, bringing reliable equity valuation measures to historically obscene levels, and encouraging the highest ratio of corporate debt to corporate gross value-added in history (much of it of the “covenant lite” variety providing little recourse in the event of bankruptcy).

No, the focus was on pushing harder on the string; on the technical details of how policy makers might provide, in the exact words of Carnegie Mellon’s Marvin Goodfriend, “the case for unencumbering interest rate policy so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis.”

Fed Chair Janet Yellen, while not encouraging further easing in the near term, offered speculators the carrot that “future policymakers may wish to explore the possibility of purchasing a broader range of assets.” What she didn’t mention is that those future policymakers would have to include Congress, as Sections 13 and 14 of the Federal Reserve Act explicitly prohibit such purchases, except in the emergency context of discounting bills of less than 30-day maturity. Of course, Ben Bernanke stretched the concept of “discounting” to include shuttling distressed mortgage securities into a series of off-balance-sheet shell companies called Maiden Lane, but Congress has since revised those sections of the Act to read like a children’s book.

The academics at Jackson Hole also discussed the possibility of raising the inflation “target” of the Federal Reserve from 2% to 4%, an idea which is much like saying “we can’t hit the broad side of a barn from 50 feet, so let’s try from 100.” This ties in with the concept of “helicopter money,” which is really just a fiscal stimulus package financed by creating currency. Christopher Sims, as one of a minority of economists who recognizes that monetary policy is never fully independent of fiscal policy, discussed this idea, correctly but chillingly, by noting that helicopter money essentially operates by destroying fiscal credibility:

“Fiscal expansion can replace ineffective monetary policy at the zero bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”

Understand that nothing in these discussions was focused on the question of whether policy instruments were actually reliably and materially correlated with sizeable economic outcomes. No, the transmission mechanisms were taken care of by making assumptions.

One session addressed “pass through” from Fed policy to market interest rates; essentially, how buttery the Fed’s low-interest hot potatoes are in affecting other markets as monetary policy tightens the screws. Presently, the Fed pays 0.50% to banks via “interest on excess reserves” (IOER) on their surplus cash, but it pays just 0.25% to money market funds and the like via “reverse repurchases” (RRPs) of their surplus cash. Of course, interest rates are determined at the margin, and there’s no incentive for banks to offer interest rates above the 0.25% rate that non-bank cash holders are stuck with. Somarket interest rates have tracked the lower RRP rate. Indeed, given that the Fed would have reduce its balance sheet by about $1.5 trillion to generate 0.25% market interest rates the old-fashioned way, without paying that interest itself (see Blowing Bubbles: QE and the Iron Laws), the RRP rate is currently the only thing that pulls market interest rates away from zero. The extra interest the Fed pays on idle bank reserves is essentially a multi-billion dollar giveaway of public funds to the banking system. Predictably, banks tend to quickly lower deposit rates after a Fed cut, and raise them much more slowly after a hike.

At Jackson Hole, these responses of market rates aren't attributed to bank behavior at all. Instead, we're asked to assume something called “depositor attention deficit” where some depositors are just, well, “slow.” In that world, the RRP rate is actually seen as a threat that pulls “fast” depositors into money market funds, and leaves banks with the remaining “slow depositors,” reducing the responsiveness of bank deposit rates after a Fed hike. Proof (this from a paper by Duffie and Krishnamurthy), looked like this:

Another paper argued for keeping the Federal Reserve’s balance sheet permanently high, even after interest rates are well above zero (a feat that would involve paying banks billions of dollars of interest on reserves, potentially at rates well above the interest rates that the Fed is presently bargaining for as it replaces bonds as they mature). The idea, as Harvard’s Greenwood, Hansen, and Stein proposed, is to totally dominate the market for short-term assets so that the Fed can “crowd out” the ability of the private sector to borrow money at short-term rates. This, in their view, would improve financial stability.

This is nothing but an argument for more Fed intervention in order to solve a problem that was created by Fed intervention. As I warned as the bubble was emerging, and before its collapse, the global financial crisis was a predictable response of Fed-induced yield-seeking speculation, brought about by inappropriately low interest rates, and enabled by banks and Wall Street financial institutions who had an incentive to create more “product,” regardless of credit quality, in order to satisfy the yield-seeking demand of speculators. Sound familiar? The Fed has done precisely the same thing in recent years, but writ much larger, to extend to all classes of assets.

I’ll emphasize once again that the global financial crisis did not end because the Fed expanded its balance sheet. The crisis ended precisely when, in the second week of March 2009, the Financial Accounting Standards Board (FASB) responded to Congressional pressure, and changed rule FAS157 to remove the requirement for banks and other financial institutions to mark their assets to market value. With the stroke of a pen, that change eliminated the specter of widespread defaults, by making balance sheets opaque. Of course, if we should have learned anything from Charles Ponzi, Bernie Madoff, Enron, and a thousand other examples, it’s that opaque balance sheets may be great fun in the short-term, but ultimately become weapons of mass destruction.

Think carefully about what the economists at Jackson Hole were really saying: “If you’ve worked hard, and saved, and want to provide for your future without joining in on the late-stage of a speculative bubble, then our job is to figure out how to punish you into abandoning those plans and consuming or speculating now. We’re really smart and well-intentioned people, and can’t imagine that repeated episodes of yield-seeking speculation and collapse could possibly be our doing, so the only solutions to be found must be those that expand the size, scope, and aggressiveness of our interventions. If zero interest rates aren’t enough, perhaps we can eliminate the lower bound entirely. If negative interest rates aren’t enough, then we need to wipe out your purchasing power by raising the inflation targets we already can’t hit. Sorry, it’s a trade-off. We can’t prove the benefits of that trade-off in actual data unless we’re super-careless about what we call evidence and only take credit for improvements, but let’s assume a tradeoff. QED.”

This delight in the technical details of pulling off something new, without evidence of human good, is how intelligent people lose their soul. It seems to me that monetary economists have fallen into that abyss. As the physicist J. Robert Oppenheimer wrote:

“When you see something that is technically sweet, you go ahead and do it and you argue about what to do about it only after you have had your technical success. That is the way it was with the atomic bomb.”

http://www.hussmanfunds.com/wmc/wmc160905.htm

Edited September 4, 2016 by OriZ

[OriZ 3,157]

https://northmantrader.com/2016/09/07/time-to-get-real-part-i/

[OriZ 3,157]

Interesting day today, looks like we're going to test the pre-brexit highs as support now on the S&P500, they are not much lower from today's close. If they hold the market could continue higher through election day but if they don't we could end up seeing 2,000 and if we see 2,000 that would mean around 10% decline from the top which I said would turn the elections back into a tossup. Below 2,000 favors Trump. Current levels still favor Clinton. All based on this:

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=8262915

[Voice of Reason 10,298]

Well, then, I predict it won't go below 2000. Hillary will win.

[OriZ 3,157]

To summarize key realities: Earnings have been declining and productivity is decreasing. Pension funding gaps are widening forcing companies to raise debt, and funds to increase risk asset allocations. Low yields are causing artificial capital flows into risk assets resulting in a crowding into a shrinking selection of asset classes elevating valuations via 100% multiple expansion. Recession risk in historical terms is rising and supported by data while consumers are increasing debt loads via credit cards and auto loans while libor rates are rising. Real wage growth remains absent as consumers are struggling with rising rents and medical costs. Manufacturing, industrial production and private investments are on the downturn.

If this all sounds structurally bearish it is, because none of these facts will magically change overnight. Yes, growth may bounce here and there for this reason or another, but the structural reality is do deeply ingrained that it presents a circular mathematical problem that cannot be solved on the current path.

Rather, on the current path, the world is experiencing the largest artificial asset allocation in modern history, one that is driven by a misguided interest rate regime that has lost its efficacy and is producing more harm than good. Yet the fear of withdrawal pain is keeping central bankers from doing the inevitable: Quit. The response is predictable:

What are the implications for markets? The data shows that current GAAP earning levels are commensurate with a price equilibrium much lower than current prices. Yet in 2016 the combined action of global central bankers has proven yet again that they can still cause price squeezes higher independent of earnings, growth or the economy at large.

But investors may want to pay attention to one additional reality: Increasingly they are partaking in a marketplace where many participants are purchasing equities either because they literally have to, or are part of an illustrious group of players that face absolutely no personal consequences for overpaying. Think central bankers, buybacks, index funds, pension funds. Many are just chasing yield. And as we saw again on September 9, 2016, the bid can disappear in an instant, yet people were happy to bid up stocks for weeks on end only to see 8 weeks of price range being taken out in 2 days.

Consider: 50% of the market cap of the entire S&P is concentrated in just 50 stocks. $2.3 trillion in market cap is now held by 5 companies alone:

$AAPL $583B, $GOOGL $545B, $MSFT $449B, $FB $376B, $AMZN $371B. Too big to fail? Thin leadership with everyone owning all the same stocks?

What really is the depth of this market were it ever to get really tested?

https://northmantrader.com/2016/09/10/time-to-get-real-part-ii/

[OriZ 3,157]

Deja Vu

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=7929304

[OriZ 3,157]

Time warp.

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=7946749

http://www.businessinsider.com/a-new-housing-bubble-2016-5

[OriZ 3,157]

A MUST read. Definitely agree with what he is saying here, goes hand in hand with my work. I have to add one thing, and that is that even assuming that instead of reaching the previous secular lows, at 0.33 like he did, but instead we'll assume that even 25 years from now such low valuations will not be reach, only those similar to what has been reached over the last decade and a half, lets put for example 0.6.

(1.04)^25 * (0.6/1.30) = 1.230. Basically, that means even assuming 4% annual GDP growth over the next 25 years(which will not happen), AND, ratio of nonfinancial market capitalization to nominal GDP that will not fall below 0.6 even though historically it has been half that on average every 20 years or so at least once, we can assume that the S&P500 will be no higher than 2,620, a mere 23% gain from current levels. And that is the optimistic case, if I am totally off and wrong and we get no collapse scenario over the coming few years. Well enough of that, here's Hussman...

A quick update on near-term market action. Last week’s market retreat was a very minor example of the “unpleasant skew” I’ve discussed in recent months. Under present market conditions, the single most probable outcome in a given week remains a small advance, but with a smaller probability of a steep loss that can wipe out weeks or months of gains in one fell swoop. So the mode is positive, but the mean return is quite negative (seeImpermanence and Full Cycle Thinking for a chart of what this distribution looks like). Again, last week was a very minor example. Prospective 10-12 year returns increased by only a few basis points.

In recent months, the compression of volatility has encouraged speculative put option writing by pension funds (see here for example), coupled with increased market exposure by volatility-targeting strategies that buy as volatility falls and sell as volatility rises. Last week, JP Morgan’s quantitative derivatives analyst Marko Kolanovic observed “Given thelow levels of volatility, leverage in systematic strategies such as Volatility Targeting and Risk Parity is now near all-time highs. The same is true for CTA funds who run near-record levels of equity exposure.” This setup is reminiscent of the “portfolio insurance” schemes that were popular before the 1987 crash, and rely on the same mechanism of risk-control - the necessity of executing sales as prices fall - that contributed to that collapse.

I continue to expect market risk to become decidedly more hostile in the event that various widely-followed moving-average thresholds are violated, as those breakdowns are likely to provoke concerted efforts by trend-following market participants to exit, at price levelsnowhere near the levels where value-conscious investors would be interested in buying. For reference, the 100-day average of the S&P 500 is about 2120. The 200-day average is about 2057. For now, keep “unpleasant skew” in mind, to avoid becoming too complacent in the event of further marginal advances. I see the most preferable safety nets as those that don’t rely on the execution of stop-loss orders.

Looking out on a longer-term horizon, the following chart shows the ratio of nonfinancial market capitalization to nominal GDP, where we can reasonably proxy pre-war data back to the mid-1920’s. Our preferred measure is actually corporate gross-value added, including estimated foreign revenues (see The New Era is an Old Story), but the longer historical perspective we get from nominal GDP is also valuable. The chart shows this ratio on a log scale. To understand why, see the mathematical note at the end of this comment. The recent speculative episode has brought this ratio beyond every extreme in history with the exception of the 1929 and 2000 market peaks.

As I’ve often emphasized, one of the most important questions to ask about any indicator is: how strongly is this measure related to actual subsequent market returns? Investors could save themselves a great deal of confusion by asking that question. Hardly a week goes by that we don’t receive a note asking, for example, that “so-and-so says that earnings are going to strengthen in the second half - doesn’t that make stocks a buy?” Well, it might, if year-over-year earnings growth had any correlation at all with year-over-year market returns (it doesn’t), or if there was evidence that earnings tend to strengthen in an environment where unit labor costs are rising faster than the GDP deflator (they don’t). That’s not to say that we can be certain that earnings or stock prices won’t bounce, but we can already conclude that so-and-so hasn’t convincingly made their case. When investors ignore the correlation between indicators and outcomes, they make themselves the victims of anyone with an opinion.

The chart below shows the same data as above - the ratio of nonfinancial market capitalization to nominal GDP - but uses an inverted log scale. The red line is the actual subsequent total return of the S&P 500 over the following 12-year horizon. We use that horizon because that's the point where the autocorrelation profile of valuations hits zero (see Valuations Not Only Mean-Revert, They Mean-Invert). The chart offers some sense of why Warren Buffett, in a 2001 Fortune interview, called this ratio “probably the best single measure of where valuations stand at any given moment.” Again, we prefer corporate gross value-added, but at that point, we’re quibbling over a 91% correlation and a 93% correlation with subsequent 12-year market returns. Buffett hasn’t mentioned this measure in quite some time, but that’s certainly not because it has been any less valuable in recent market cycles. As I’ve frequently observed, it’s fine to assert that stocks are “fairly valued” relative to interest rates here, but only provided that “fair” is defined as an expected nominal total return for the S&P 500 averaging about 1.5% annually over the coming 12-year period.

It’s not a theory, it’s just arithmetic

Understand that valuation levels similar to the present have never been observed without the stock market losing half of its value, or more, over the completion of the market cycle. We’ve periodically heard analysts talking about stocks being in a “secular” bull market that presumably has years and years to go. These analysts evidently have no sense of what drives such secular market phases.

The period from 1949 to about 1965 represented a secular bull market, comprising a series of complete bull-bear market cycles, characterized by progressively richer valuations at the peak of each cyclical bull market. Likewise, the period from 1982 to 2000 represented another long secular bull market, again characterized by progressively richer valuations at each cyclical bull market peak.

By contrast, the periods from 1929 to 1949, and again from 1965 to 1982 both represented secular bear markets, comprising a series of complete bull-bear market cycles, but with a somewhat less progressive profile. Still, the overall period was characterized by a move from extremely rich valuations at the beginning of the secular bear market to extremely depressed valuations (and extremely high expected future returns) nearly two decades later. I'm not at all convinced that these secular periods are reliably periodic, but suffice it to say that secular movements between durable extremes of overvaluation and undervaluation can span a whole series of cyclical bull-bear cycles.

From the chart above, it should be clear that the defining feature of a secular bear market low (and the beginning of a long secular bull market) is deep undervaluation. Indeed, the 1949 and 1982 market troughs each brought the ratio of market capitalization to nominal GDP below 0.33. By contrast, the defining feature of a secular bull market peak (and the beginning of a long secular bear market) is extreme overvaluation. Indeed, the 1929 and 2000 market peaks each brought the ratio of market capitalization to nominal GDP to levels similar to what we observe today (the 2015 peak slightly exceeded 1.30).

Let’s do some quick arithmetic. Suppose that real GDP growth accelerates to 2% and inflation picks up to 2%, producing 4% annual nominal GDP growth for the next 25 years. Now allow for the possibility that the stock market hits a secular bear market low similar to 1949 and 1982, not two or three years from now, but fully 25 years from now. On those assumptions, what would happen to the S&P 500 Index over the coming 25 years?

The answer is simple. The ratio of the future S&P 500 Index to the current S&P 500 Index would be:

(1.04)^25 * (0.33/1.30) = 0.677. Put differently, the S&P 500 Index would be 32.3% lower, 25 years from today, than it is at present. Even including the income from a growing stream of dividends, we estimate that in the event of a secular low 25 years from today, the average annual total return of the S&P 500 between now and then would come to less than 3% annually. It’s not a theory, it’s just arithmetic.

Are we suggesting that investors should avoid stocks until the next secular low? Certainly not. Regardless of where valuations head in the long-term, we expect to observe regular and substantial investment opportunities in stocks over coming market cycles, with the most favorable opportunities emerging at points where a material retreat in valuations is joined by an early improvement in market action. Are we suggesting that the long-term tradeoff between expected return and risk is unfavorable at current valuations, and that near-term and intermediate-term market outcomes could become steeply negative in response to a moderate further deterioration in market action? Absolutely - a century of market evidence offers little to support any other expectation.

Elaborate fallacies

The danger of the current iteration of “this time it’s different,” I think, is in how elaborate and far-reaching the underlying fallacies have become. By equating the delay of consequences with the absence of consequences, investors have now set up the most extreme episode of equity market speculation in U.S. history next to the 1929 and 2000 market peaks, and the broadest episode of general financial market speculation outside of the 11-month period from November 1928 to September 1929 (as measured by the estimated prospective 12-year total return on a conventional portfolio mix of 60% stocks, 30% bonds and 10% Treasury bills).

It’s not just that investors have oversimplified a complex interaction, which they are certainly doing here in assuming that “easy money makes risky assets go up.” This simplification fails to explain, for example, how the U.S. stock market could lose more than half of its value on two separate occasions since 2000, during periods when the Federal Reserve was persistently and aggressively easing. It also overlooks that the Japanese stock market shed more than 60% of its value on two separate occasions since 2000, despite short-term interest rates that were regularly pegged at zero and never breached even 1%.

The historically supported, but more complex statement recognizes that the relationship between monetary policy and the financial markets is not reliably mechanical but wholly psychological. Easy money operates by creating safe but low-interest liquidity thatsomeone in the economy must hold at every moment in time until it is retired. Investors often treat that liquidity an inferior and uncomfortable “hot potato,” but only if they don’t see safety as desirable. So the accurate statement is that “easy money can encourage speculation, but only does so reliably when investors are already inclined to speculate.” As I’ve often noted, we infer the preference of investors toward speculation or risk-aversion by the uniformity or divergence of market internals across a broad range of individual securities, industries, sectors, and security-types.

The fallacies underlying today’s “this time is different” mantra go even further, assuming not only that central bank behavior has permanently changed, but that we can also abandon everything we’ve learned from centuries of economic dynamics, human behavior, and even basic arithmetic.

Having repeatedly borrowed enough short-lived bursts of consumption from the future to keep U.S. real GDP growth barely above 1% over the past year (and indeed, over the pastdecade), monetary authorities have convinced investors of a cause-effect relationship between activist monetary policy and economic outcomes that is entirely absent in actual data (see Failed Transmission - Evidence on the Futility of Activist Fed Policy). Worse, central bankers have convinced investors that the progressive overpricing of financial securities can substitute for actual growth. Unfortunately, with every increase in price, what was “prospective future return” a moment earlier is suddenly converted into “realized past return,” leaving nothing but lower expected returns and greater risk on the table for investors who continue to hold those securities. The essence of a Ponzi scheme is to reward investors who leave early, out of the capital of investors who arrive later, thereby ensuring losses for anyone who stays. What else is current central bank policy but a massive greater-fool Ponzi scheme?

The recent speculative episode has even convinced investors that human nature itself has changed. Centuries of financial market behavior can easily verify that periodic cycles of greed and fear are an inherent part of market dynamics. Instead, investors have abandoned that lesson, believing that central banks have discovered the ability to do “whatever it takes” to keep markets higher (without realizing that the effectiveness of easy money is entirely dependent on the absence of risk-aversion among investors).

The thing that allows this is imagination. In every market cycle, imagination is what gives greed and fear their impetus. In a financial or economic crisis, imagination is what leads investors to question whether the economic system itself can survive. In a bubble, imagination is what leads investors to invent endless reasons why the carnival can continue indefinitely. For example, despite the fact that Japan’s real GDP has grown at just one-half of 1% annually over the past two decades, while the Nikkei stock index has taken an extraordinarily volatile trip to nowhere over that period, imagination leads investors to ask why the Federal Reserve won’t suddenly begin buying stocks, as the Bank of Japan and the Swiss National Bank have done. Well, one answer is that Sections 14 and 15 of the Federal Reserve Act prohibit it. Another is that even if the Fed could emulate the Bank of Japan, the Nikkei Index is still below where it was in 2000, 2007 and 2014 (not to mention 1986), so it’s not at all clear that such purchases exert any sustained effect on stock prices. In addition, one needs to examine the situation of each government to understand why certain central banks, and not others, have purchased equities in the first place.

As a fairly insular economy, Japan’s encouragement of overlapping and often centrally-planned relationships between government, business and the banking system has been the dominant economic model for decades, which has allowed more tolerance for the actions of the Bank of Japan. That said, buying corporate securities is actually quite a hostile act toward the public, compared with buying government debt. The reason is that when government bonds are issued for the purpose of public expenditure, or ideally, productive investment, central bank purchases of those bonds are a form of public finance. By contrast, when a central bank purchases corporate securities, and if they subsequently lose value, the creation of base money acts as a public subsidy to private investors who would otherwise have borne that loss. Since central bank purchases of stock are the last resort of a central bank that has already pushed other forms of speculation to the limit, the likelihood of loss is quite high. Those losses involve a large opportunity cost to the public, as well as a transfer of public wealth to private individuals. From a contrarian perspective, I suspect that the worst time for a central bank to buy stocks is when the public itself is too bullish to oppose it.

Meanwhile in Switzerland, the desire to peg the Swiss franc to the value of the euro can only be achieved by following Mario Draghi down the primrose path of asset purchases, and the already bloated balance sheet of the Swiss National Bank leaves stocks among the few assets available to buy. My expectation is that this too, will turn out in hindsight to have imposed a huge opportunity cost on the Swiss public.

With regard to the basics of yield arithmetic, investors have equated raw yield with total return, in a way that leaves them with no meaningful prospect for investment returns over the coming 10-12 years, and the likelihood of deep interim losses over the completion of the current market cycle. Understand that the “current yield” of a stock or a bond (the annual dividend or interest payment divided by the current price) is quite a misleading indicator of likely total return. Consider, for example, a 30-year bond with a coupon yield (annual interest payment/face value) of 3%. By the time the price advances enough to bring the current yield (annual interest payment/current price) down to 1.58%, the yield-to-maturity on that bond has already hit zero; investors in that bond will then earn nothing for 30 years. Moreover, an increase in the yield-to-maturity from zero to just 1% will generate a -20% capital loss. Indeed, German 30-year bonds, which hit a record low yield-to-maturity of 0.34% at the end of July (think about that), have already lost about -8% as yields have increased by just a few tenths of 1%.

Investors seem to forget that the lower the yield and the longer the maturity of a financial asset, the greater its vulnerability to capital losses in response to even minor changes in yields or risk premiums. This is particularly true for equities. The language of a market top is “well, even if it goes down, it will eventually come back up.” To some extent, that’s true. Over the 16 years since the 2000 market peak, the S&P 500 has posted an average total return of 4% annually, though it’s taken the third most extreme equity market bubble in U.S. history to do it. Unfortunately, a century of market history suggests that all of that return is likely to be wiped away over the completion of the current market cycle; an outcome that would only be run-of-the-mill given current valuations. By that point, investors may be quite right that they didn’t lose anything by purchasing stocks at the 2000 highs. I doubt that it will be much solace.

The belief in “TINA” - the notion that “there is no alternative” but to own stocks - ignores that stocks are already so overvalued that the S&P 500 is likely to underperform even the 1.6% yield on Treasury bonds over the coming decade. Frankly, we expect even the average return on Treasury bills to be higher over that horizon. So, yes, I very much believe that safe, low-interest cash is a presently a better investment option, both in terms of prospective return and potential risk, than equities, corporate bonds, junk debt, or even long-term Treasury bonds.

My view is that investors should presently make room in their portfolios for safe, low-duration assets, hedged equities, and alternative strategies that have a modest or even negative correlation with conventional securities. I expect that there will be substantial opportunities to alter that mix over the completion of the current market cycle. The time to focus on higher beta and longer duration assets is when those assets are priced at levels that offer potential compensation for their prospective risk. Currently, investors in conventional assets face a combination of weak expected returns and spectacular downside potential. I expect that this will soon enough be as obvious as it was in 2002 and 2009, when investors looked back on their insistence that “This time is different” and replaced that thought with “What the hell were we thinking?”

In the interim, as value investor Howard Marks observed in The Most Important Thing, “Since many of the best investors stick most strongly to their approach - and since no approach will work all the time - the best investors can have some of the greatest periods of underperformance. Specifically, in crazy times, disciplined investors willingly accept the risk of not taking enough risk to keep up... Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion.”

A mathematical note on valuations and subsequent market returns

I’ve introduced a lot of analytical methods and indicators over the years, and various graphics demonstrating the relationship between reliable valuation measures and subsequent market returns have come to be known as the “Hussman valuation chart.” Since we continually do research and learn from those efforts, we’ve identified increasingly accurate measures over time. For example, while Shiller’s cyclically adjusted P/E (CAPE) is preferable to say, price/forward earnings, the CAPE becomes much more reliable when one corrects for variations in the embedded profit margin (see Two Point Three Sigmas Above the Norm). Some observers seem keen to characterize learning from research as some sort of nefarious “evolution,” or to dismiss a century of evidence on valuations as “data mining” or “curve fitting,” so it’s important to understand how strongly the relationships between valuations, growth rates, and investment returns are rooted in identities and basic arithmetic.

As a side note, I also use logarithms quite a bit. If you’re serious about investing, learning how to work with logs is time well-spent, because returns tend to be linear in log valuations (see, for example, The Coming Fed-Induced Pension Bust).

Let's review this arithmetic (see Rarefied Air: Valuations and Subsequent Market Returns for details and data). Below, P is price, F is some reasonably reliable fundamental, V is the valuation ratio P/F, and g is the nominal growth rate of that fundamental over the following T years. We can then write the future capital gain in the form of an arithmetic identity:

P_future / P_today = (F_future/F_today) * (V_future / V_today)

P_future / P_today = (1+g)^T x (V_future / V_today)

Or in log terms:

log(P_future/P_today) = T x log(1+g) + log(V_future) - log(V_today)

All this says is that your future investment return is driven by: the holding period T, the growth rate of fundamentals g over that horizon, and the change in valuations over the holding period. Because departures of valuations and nominal growth from their historical norms tend to mean-revert over time, one can obtain reliable estimates of prospective 10-12 year market returns by using historical norms for g and V_future.

But we can actually go further. The estimates turn out to be accurate even in periods where g and V_future depart from their historical norms. The reason is that variations in g over a 10-year period tend to systematically offset variations in terminal valuations log(V_future), largely because of how investors respond to inflation. Put simply, market valuations tend to be negatively correlated with the growth rate of nominal GDP over thepreceding decade.

It’s a systematic relationship. Meanwhile, average dividend income over a given holding period has a high inverse correlation with starting valuations.

The consequence is that annual nominal total returns in the S&P 500 over a 10-12 year horizon have a robust and inverse correlation with the log of starting valuations, particularly as measured by market capitalization/GDP or market capitalization/corporate gross value-added. That’s not data mining or curve-fitting. It’s not a theory, it’s just arithmetic.

http://www.hussmanfunds.com/wmc/wmc160912.htm

[OriZ 3,157]

Interesting day today, looks like we're going to test the pre-brexit highs as support now on the S&P500, they are not much lower from today's close. If they hold the market could continue higher through election day but if they don't we could end up seeing 2,000 and if we see 2,000 that would mean around 10% decline from the top which I said would turn the elections back into a tossup. Below 2,000 favors Trump. Current levels still favor Clinton. All based on this:

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=8262915

Another interesting day today. Market opened lower to test the pre-brexit highs(While the cash index didn't go low enough to quite "touch" the line in the chart, the overnight futures were a little lower and did a full test before bouncing) and then finished 1.5% higher. Second thing that happened is that as I've explained in the past here, here, here and here, once the bands start to narrow a sharp move usually follows. We saw a very tight range within the bollinger bands for several weeks with price barely moving(the bands are in dark green), and finally, a break beneath them and a 2.5% sharp down day. However another thing I have said in those 4 links and showed live examples of is that if price breaks out of the bands too violently, and not gradually, we tend to see it snap right back to the "scene of the crime" i.e. the price point where it exited. I'm showing this in today's chart using a little horizontal line and a little circle, that is where price exited yesterday, around 2150. So between knowing we're supposed to at the very least get back there, as well as being at pre brexit highs support, today morning was definitely a good opportunity for a nice swing long, and that is exactly what happened. Now, that doesn't mean support will hold forever but for now the market has a chance to continue higher and Clinton is safe. However as I have said before going beneath the pre-brexit highs may take us down to ~2,000 and there or under life will start getting really difficult for her.