May 3, 2023


A debt ceiling looms. Three banks are gone now. What to do? 

We’re going to Greece.  No sense waiting for the next banker’s shoe to drop.  We’ll be back May 24 to see who’s still standing.  If we find Ithaca off Cephalonia, we might stay.

Photo 10026012 / Achilles © Sonica83 |

Speaking of mythology, it’s hard to sort fact from fiction in the stock market.  Are we off to news highs or bound to plumb the depths?

I don’t know.  Yesterday, our measure of Demand, a ten-point quantitative meter of buying and selling, had dropped to 4.9. You need at least 5.0 to sustain gains. And Supply, which we measure as short volume, the percentage of trading on borrowed stock, rose above 50%.

Too much Supply, not enough Demand, prices fall. 

And spending drives our economy. Consumption is 70% of Gross Domestic Product. If people can consume, things are fine. If not, they aren’t.

Last November, Federal Reserve chair Jay Powell blamed consumers for inflation.  If we’d stop spending, if more of us got fired, inflation would calm down and the Fed would stop rattling the cage.

He didn’t phrase it that way but he could have.  Mr. Powell speaks again today.

Meanwhile, three big banks have gone the way of Hector outside the Trojan walls, felled not by Achilles but by the Fed. 

Oh, they’d disagree.  Poor management did in these financial institutions, we’re told.

And I’m sure they made mistakes. But the economy didn’t decide to give money away for free anymore than the economy decided, no, let’s stop doing that and jack the cost to 5%.

The Fed did that.

On a related note having nothing to do with Greece, the Odyssey, Homer or battle, at least yet, the Commerce Dept yesterday released data called the JOLTs survey on job openings and labor turnover.

Subtract firings and departures from hiring and you’re darned near zero.  Job openings plunged by 1.6 million.  Job growth has stopped, we can conclude.

Consumption drives the economy. Jobs drive consumption.

What drives stocks?  Money-flows (nope, not earnings).  You might’ve seen that so-called Active Exchange Traded Funds have boomed the past two years, raking in scores of billions of dollars. One from JP Morgan (JEPI) purports to pay big dividends and has exploded to $25 billion of assets.

We’re led to believe they’re stock-picking ETFs.  They are, in the sense that instead of using a model to calculate the “basket” of stocks the ETF tracks, humans are doing it.

It’s sort of the opposite of artificial intelligence in the sense that it’s actual intelligence.

But it’s a search for collateral, which is getting scarce.  ETFs track a set of underlying stocks. Could be the S&P 500, or it might be ideas JP Morgan fund managers think up.

It’s collateral for creating ETF shares.

JP Morgan’s Equity Premium Income Fund (JEPI) depends on large cap value stocks.  There are only 490 large caps, maybe 250 of those value stocks.  Those 490 are over 85% of market capitalization (throw in 300 midcaps and it’s 92% of market cap, the Russell 1000 is 95% of market cap).

Everybody owns them.

The largest equity investment category is Passive Large Cap blend. How JEPI generates 12% yields on the same stuff everyone else owns is head-scratching.

The Investment Company Institute says there are nearly 2,900 ETFs trading in US markets now, about 2,100 of them focused on equities, the rest in bonds, commodities hybrid combinations.

ICI says assets of ETFs rose by $150 billion in March.  Data for April aren’t out yet.

Here’s where I’m going.  Money flows to ETFs, driving stocks up. It’s not jobs or consumption. Even earnings are down about 4% year-over-year in the S&P 500, according to Factset, and likely will be down two quarters running.

Stocks rise as ETFs buy the same stocks everybody else owns.  It makes the market a mythological barometer for risk.

The Achilles heel – pun intended – of ETFs is that they expand and contract.  They issue shares in trade for stocks.  And when money leaves the market, they give stocks back in trade for ETF shares.  Demand falls, Supply increases.

The market can carom.

I’m not saying Agamemnon and the Achaeans are drumming at the walls of the market’s city of Troy.  I’m saying you can’t look at the stock market and figure that out.  There’s a Trojan horse in our midst. 

The Federal Reserve?  The cost of credit?  Failing banks? ETFs?

I don’t know.  It’s sitting there silent and large. But the evidence of its presence is widespread.  So, hang onto your hats, or your helmets. Grip your sword.

As for us, we’re girding up our loins and boarding a boat.  See you on the far side of the Ionian Sea.

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