Why the Stock Market Has Boomed

And Why It Will Bomb [The Daily Reckoning] May 25, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Why the Stock Market Has Boomed - Why stocks have “melted up,” and why they’ll likely melt down in the year’s second half… - How much liquidity could drain out of the market?… - Then Dan Amoss shows you why the debt ceiling imbroglio will cause a massive liquidity drain… [External Advertisement] [Central Bank: “Final stage” beginning now]( [Click here for more...]( The end is near... Our financial system is about to be transformed in a way that would’ve been unthinkable just a few years ago. And almost nobody is prepared for the chaos that follows. According to Bank of America, this overhaul is imminent – And Dr. Nomi Prins says the final stage begins in July, with the rollout of the FedNow system. To show you everything you need to know about the FedNow system – and to help you prepare – Dr. Prins has recorded a free presentation with all the details. It’s controversial, but Nomi’s interview is a must-watch for anyone with more than $2,500 in an American bank or retirement fund. Find out what you need to do to prepare for this historic transformation… [Click Here Now]( Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, “There is a very simple reason why stocks melted up in recent weeks,” explain the gentlemen of Zero Hedge — “and a very simple reason why they’re set to stumble in the second half.” What is the very simple reason why stocks melted up in recent weeks? And what is the very simple reason why stocks are set to stumble in the second half? Answers shortly. First we look in on the site of the recent melt-up — and the site of the potential melt-down. We refer of course to Wall Street. The Dow Jones Industrial Average took a very slight stumble today, down 35 points. The S&P 500 posted a 36-point gain. Yet the Nasdaq Composite enjoyed itself a day at the races — up 213 points. The index, in fact, accounts for much of the “melt-up” just referenced. The 10-year Treasury yield stretched to 3.81% today. On May 11, it hovered at 3.39%. That represents a fantastic leap in under two weeks time. What does it portend? We do not quite know. Gold — meantime — absorbed a severe whaling today. The metal hemorrhaged $24 and change. Yet to return to the first of our central questions: What is the very simple reason why stocks melted up in recent weeks? We must first tackle this question: How could stocks “melt up” against the Federal Reserve’s ongoing rate hikes and quantitative tightening? That is, how can stocks melt up against the prevailing ice? Here is the answer: The recent bank wobbles — commencing in March — have worked a thawing effect. The ice has reverted to its liquid form. That is because the Federal Reserve blew the dust from its blowtorches… and proceeded against the ice. It sent $300 billion of ice transforming into liquid. That fresh liquidity undid a substantial portion of previous tightening… and floated the stock market to a higher level. Here is Zero Hedge, citing Goldman crackerjack Borislav Vladimiro: The $300bn increase in bank funding due to the bank stress in March. This liquidity increase has mitigated the impact of the real rate increase on risky assets (and we also said it would lead to a market melt-up at a time when everyone else turned very bearish). We hazard this “very simple reason” is a very plausible accounting. We believe it explains the recent melt-up, so-called. And so we have our satisfactory answer to question no. 1. Yet what of question no. 2 — What is the very simple reason why stocks are set to stumble in the second half? “While the "delayed liquidity" effect explains why stocks have continued to rise in recent weeks as shown by the net liquidity boost in the US,” continues Zero Hedge… “the bigger question is what happens next.” The answer is another freezing. The liquid presently flowing will return to ice in the year’s second half. Once again Zero Hedge cites the abovesaid Vladimiro: As peak liquidity — as the… risk-friendly liquidity patch we were expecting for H1-23 comes to an end — the liquidity outlook turns for a potential substantial further tightening in H2-23. How much liquidity could go to ice in the year’s second half? Again, Zero Hedge: According to Goldman calculations, which echo our own, we should see between $600bn and $1.2tn decline in liquidity by year end just in US and additional $400-500bn decline in Europe… Assuming a blended average US drain of about $900bn (in reality it will be higher), and adding the $500BN from Europe, and we are looking at about $1.5 trillion drained from global markets by year end. $1.5 trillion is plenty handsome. It represents a very substantial ice formation. Thus we are far from certain that the present gaiety can endure. We subscribe to the de-liquified, ice-choked, juiceless second-half theory. Below, Jim Rickards’ chief financial strategist — Dan Amoss — shows you why the debt ceiling imbroglio will likely lead to a severe draining of Wall Street liquidity. How, precisely? Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: [This story will probably leave you speechless.]( It’s about one small biotech company located in Baltimore, MD that’s just made a [shocking breakthrough…]( A breakthrough which could mean the beginning of the end of one of the biggest diseases in America. And no, we’re not talking about cancer, heart disease, or anything else you might expect. We're talking about [arthritis.]( Arthritis impacts an estimated 56 million Americans, or about 24% of the adult population. But thanks to this company’s new breakthrough, that could soon come to an end. Take a look at this patent they just filed and see for yourself: [click here for more...]( This company and their patent could be the biggest medical breakthrough of your lifetime. And it could create untold billions of dollars in new wealth over time, all while improving the lives of tens of millions of Americans. But you only have until tonight at midnight to act on this urgent opportunity — otherwise you’ll miss out. [Click here right away for the full story.]( [Act Fast – Controversial Video Will Be Pulled Offline Thursday Night]( Due to the confidential nature of this new video, we will be pulling it offline on Thursday night. And because what you’ll discover in this video could give you the chance to change your life forever, I suggest you set aside a moment and watch it right away. You only have until Thursday night to take action, or you could get left behind forever.… [Click Here Now For Access]( The Daily Reckoning Presents: Why the debt ceiling circus will drain liquidity from Wall Street… ****************************** The Looming Liquidity Crisis By Dan Amoss [Dan Amoss] DAN AMOSS I’m Jim Rickards’ chief financial strategist — and that brings a lot of responsibility. After all, Jim is one of the world’s most prominent financial minds. And I really need to be on my game in order to keep up with him. It’s hard, but rewarding work. Without that intro out of the way, let’s address why we’re facing a looming liquidity crisis… Almost every Wall Street strategist will tell you that stocks are a sure buy as soon as the debt ceiling fight is resolved. “It’ll be back to business as usual,” they’ll say. “Earnings will start to grow again. And corporate balance sheets are healthy!” In other words, good times will soon be here again! Well, all I can say is, not so fast. Good times wouldn’t necessarily be here again… Sure, corporations have tons of cash. But that only tells a portion of the story. You can’t consider the corporate sector’s overall cash levels without reference to its total debt. Averages are dangerously misleading. As the old saying goes, “You can drown in a pool that is, on average, a foot deep.” When analyzing stocks, it’s vital to think about the entire pool, which is far deeper than a foot in many places. You can’t just consider averages. Again, the overall cash level is meaningless. You have likely heard about stock buybacks, where companies buy back their own stock to reduce the available supply, which tends to raise the stock price. The Roosevelt administration actually made stock buybacks illegal in the mid-1930s, on the belief that they were a form of market manipulation. 60 years later, during the Clinton administration, under heavy lobbying efforts from Wall Street that had been going on for years, the ban on stock buybacks was lifted. But the buyback effect really took off after the Great Financial Crisis and the ultra-low interest rate environment the Fed created. Here’s what I mean… A significant portion of the last decade’s stock market gains were produced by corporations buying back their own stock. It was all enabled by the artificially low interest rates resulting from massive market intervention by the Fed. Not to get too technical, but stock buybacks are only lucrative in a low-rate environment, falsely created or not. If you want to call it financial manipulation, I won’t tell you you’re wrong. But that’s the way markets have operated since the Great Financial Crisis. Now, in fairness, I need to say that stock buybacks aren’t necessarily bad. For financially sound companies with plenty of cash on hand, stock buybacks might even be good business decisions. I don’t want to paint with too broad a brush here. Again, stock buybacks aren’t necessarily bad. But they can be abused. Consider Apple… Apple is buying back stock. But Apple’s free cash flow has already been shrinking for a few quarters. And it’s going to fall sharply in a recession. In other words, the Apple buyback scheme doesn’t mean it has plenty of cash on hand. It doesn’t indicate strong cash flow. Quite the opposite. Here’s what’s going on, as far as I can tell: [Warning: Will “Bidenflation” Destroy Your Retirement?]( [Click here for more...]( If you’re like most Americans, you’ve worked hard for decades to build your financial legacy. And now, as a result of Biden’s disastrous money printing policies, that’s all at risk. According to one top retirement expert, “Bidenflation” threatens to destroy your retirement and make your hard-earned savings worthless. That’s why you must take action right away to protect yourself… [Click Here To Learn How]( Apple’s corporate finance strategists are selling high-cost debt to invest in low-yielding stock buybacks. Do you see the problem? They’re selling high-cost debt to invest in low-yielding stock buybacks. That’s not a winning combination. Guess what? Apple would be better off investing its cash in Treasury bills! Or, they could pay it out as a dividend to reflect the company’s limited growth potential. My point in discussing Apple is that if even mighty Apple’s balance sheet is weakening… what does that say about companies in lower-quality, more competitive businesses? It says they’re likely to suffer lower stock prices as creditors take their pound of flesh from shareholders to refinance debts. This brings up another question, taking us into the weeds against our will: Why is the junk bond market holding up so well in the face of a high-rate policy from the Fed? In case you don’t know, “junk bonds” are exceptionally high-risk bonds. They offer extremely high yields to attract investors — but that’s because they’re extremely risky. So why are junk bonds holding up so well in today’s environment? Here’s my best answer: It’s just temporary. They’re ticking time bombs. Give it about three to six months before junk bonds reach the panic stage. But let’s get back to things that supposedly “matter”... The market’s narrative is intensely focused on the debt ceiling fight in Washington, D.C right now. Once that’s resolved, the bulls say we will get a “relief rally.” But relief from what, may I ask? This market has been complacent for most of the year, even in the wake of bank funding stresses. Sure, a few sentiment surveys conclude investors are bearish. But action, not words, reflect a bullish mindset. We have seen no material fund outflows from stocks. In fact, net fund flows into stocks have been flat over the past year. And getting down to brass tacks, the S&P 500 Index may rally on headlines of a debt ceiling deal. It probably will. But any such rally is unlikely to last. Why do I say that? The answer comes down to liquidity… Markets are entirely dependent on liquidity. When liquidity is freely available, the stock market tends to outperform. But when liquidity is scarce, the stock market tends to underperform. Here’s where things get interesting… In the coming months, even with a debt ceiling agreement, the Treasury will be forced to sell enormous amounts of bonds to finance its operations. Tax receipts alone can’t finance them. Where will the money come from to purchase the bonds? That’s the supreme question. Basically, we’ll be witnessing a vast wave of U.S. Treasury bill auctions. These will drain tremendous amounts of liquidity from Wall Street. For a stock market reliant upon generous amounts of liquidity, that is a poor sign. So what can you expect next? Around the same time as Janet Yellen is sopping up hundreds of billions of Wall Street liquidity via Treasury bill auctions, the jobs data will weaken as the lagged effect of the 2022 rate hikes kicks in. Jay Powell will be slow to react to job market weakness. He may actually welcome a softer jobs market to a certain extent. Weaker demand for labor will help the Fed achieve its 2% inflation target, at least as the Fed sees it. In conclusion, the combination of heavy Treasury bill auctions, a Powell Fed that wants a weaker job market, and tightening credit conditions is a nasty cocktail. The liquidity just isn’t going to be there, in my opinion. Batten down the hatches, it looks like rough times are coming. Regards, Dan Amoss for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Ed. note: [This story will probably leave you speechless.]( It’s about one small biotech company located in Baltimore, MD that’s just made a [shocking breakthrough…]( A breakthrough which could mean the beginning of the end of one of the biggest diseases in America. And no, we’re not talking about cancer, heart disease, or anything else you might expect. We're talking about [arthritis.]( Arthritis impacts an estimated 56 million Americans, or about 24% of the adult population. But thanks to this company’s new breakthrough, that could soon come to an end. Take a look at this patent they just filed and see for yourself: [click here for more...]( This company and their patent could be the biggest medical breakthrough of your lifetime. And it could create untold billions of dollars in new wealth over time, all while improving the lives of tens of millions of Americans. But you only have until tonight at midnight to act on this urgent opportunity — otherwise you’ll miss out. [Click here right away for the full story.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. --------------------------------------------------------------- [Dan Amoss] Previously the investment adviser to one of the top small-cap mutual funds in the country, [Dan Amoss]( is a senior investment analyst and CFA at Agora Financial. Dan tracks aggressive accounting and other red flags that markets miss as he exposes frauds and promotions that suck in unsuspecting investors. His bottom-up investing style focuses on management strategy, return on capital and the truth (and lies) buried in financial statements. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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