One of my favorite reads, Business Insider, threw me for a loop this week with an article titled, “‘Signs of excess are building’: 4 Wall Street giants explain why the stock market’s rally may have gone too far”.
Wall Street analysts are always worried about something, whether it’s the U.S.-China trade war, Iran’s saber-rattling, or the coronavirus spreading.
But, when big bank gurus are worried about “internals” – metrics surrounding the stocks that make up the market – maybe it’s time to worry.
Shah made an appearance on Fox Business Network’s Varney & Co. at the ring of the opening bell on Wednesday, and host Stuart Varney asks him about four key stocks that breaking through every headline right now…
Ongoing trouble in the repo market, where banks, big hedge funds and others borrow from each other, has forced the Federal Reserve to inject $400 billion into the fed funds market over the past four weeks.
That’s what’s fueling the stock market’s melt up.
Here’s how the problem in the fed funds market is driving stocks higher, why the Fed’s going to have to do even more, and what it means for future market moves.
The fed funds lending market is where borrowers use repurchase agreements, or repos, to borrow overnight or for terms of a few days to a few weeks. It has been in existential crisis mode for weeks now.
The bottom-line there is that big banks who usually lend their excess reserves in the fed funds market, to pick up interest overnight or on term loans, have been keeping more of their excess reserves parked at regional Federal Reserve banks. They’ve been doing this to collect IOER (risk-free “interest on excess reserves,” which the Fed’s been paying banks since the start of the financial crisis). Either that or they’ve been using their excess reserves to buy longer term Treasury bonds to earn more interest and speculate on interest rates falling.
That means there’s not enough money in the system to facilitate normal lending. As a result, the interest that borrowers must pay on repos has, at times, skyrocketed. And worse, sometimes the well’s dry.
For the last few weeks your Capital Wave Forecast has been highlighting “negative narratives” like the fake recession and fake manufacturing recession narrative, the Fed’s lost control narrative, and how global debt is going to crash markets narrative.
The purpose of highlighting and debunking negative narratives is to warn investors that they should be watching the market go higher and reading Capital Wave Forecast to understand what’s driving markets, and not listening to or reading naysaying nonsense.
There are other negative narratives out there, which we’ll continue debunking, just not today.
Today, we’re catching up with where the market’s been going and what’s immediately ahead for stocks.
The secret momentum driver elevating market indexes to all-time highs, again and again, is none-other than the “passive investing” trend. It’s going on unbeknownst to even the drivers of this momentum bus.
Investors who don’t understand how big an impact money flowing into index funds has had on the market’s performance probably have no idea what could happen if the trend stalls, or worse, reverses.
Here are the pitfalls of passive investing and how bad the fallout could be if passive investors discover the trap they’ve entered, turn active, and sell.
The almost self-perpetuating cycle of rising markets attracting passive investment capital into index products, which boosts the value of indexes as money flows into them, which attracts more sidelined money and compels investors to sell actively managed funds and buy passive index-following funds, which have been lowering their management fees since they aren’t actively managed, which attracts more investor capital into the growing universe of index funds, which keep increasing in value as sponsors and their authorized participants buy all the underlying stocks in the indexes they track when investors buy those packaged products in the open market, is, almost self-perpetuating.
But you know the saying, almost only counts in horseshoes and hand grenades.
The truth is passive investing’s virtuous positive momentum manufacturing feedback loop isn’t a guarantee.
I explained that “momentum isn’t last on that shortlist because it’s the least important big-picture item. It’s last because everything before it determines momentum…and when it’s hot, it becomes its own driver.”
And I also teased what this article’s going to reveal: “There’s another piece to the momentum picture, a big-picture momentum driver all its own, that’s been an engine of momentum, which I’ll get into right here next week.”
So, what’s the secret?
The hardly ever talked about big-picture momentum driver is the passive investing trend.