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Peter Atwater: Are Central Banks the New Dot-Coms?


The media follows mood and the NY Times' interest in central banks is in record territory.

Not every major market peak is a bubble, but every bubble is a major market peak.

While rare, there is something very special about bubbles and the manias associated with them. What begins as purchases made for investment purposes ultimately morphs into speculation as buyers purchase stocks, commodities, and other assets at higher and higher prices intending to resell them for a profit. Prices steepen as more and more participants are drawn into the buying frenzy with the most novice and most naïve pulled in at the very top as the media trumpets the endless opportunities ahead.

As Todd Harrison shared last January, over the past twenty years, we have seen no fewer than five major market bubble peaks: the Nikkei 225, the Nasdaq/, China, Oil, and most recently, biotech.

As an observer of the markets and a researcher in confidence-driven decision making, what is striking is just how similar the price movement for all of the bubbles is.

Click to enlarge

What starts as a walk moves to a trot which moves to a gallop and ultimately a frenzied stampede.

Bubbles have a clear crescendo as any and all investors clamor to participate.

Once the top is in, values plummet. But rather than drawing investors in, falling prices drive them away. Bubble tops are "V" shaped with mania on the way in and panic on the way out.

What has received little attention, though, is just how closely the media's coverage of market bubbles mirrors what is happening to prices in the markets.

Recently, using Chronicle, I looked at how frequent the word "Nasdaq" appeared in the New York Times.

Click to enlarge

As you can see from the chart above, New York Times' financial writers were closely paralleling the behavior of investors in the 1990's. The higher stock prices went, the more stories using "Nasdaq" appeared in the paper.

At the peak, more than 1.36% of all New York Times stories were somehow referencing "Nasdaq."

But note too, how once the peak of the Nasdaq was in, stories quickly fell off, just like the market.

Over its history, the New York Times coverage of financial markets has tied very closely to market sentiment at both high and low extremes.

Click to enlarge

Many major market tops are easily seen in the chart above. So too are a few market panics. The October 1987 market crash, for example, resulted in the words "stock market" in almost 2% of all articles that year -- a record for the Times.

The media follows mood.

Recently, though, I was struck by this chart showing instances of the phrase "central bank."

Click to enlarge

The shape of the chart mirrors the price charts of market bubbles offered above as well as the Times own use of the word "Nasdaq" approaching the market peak at the end of the 1990's. News coverage of central banks has gone from a walk to a trot to a gallop to a full-out stampede.

At 1.28% of all Times articles, "central bank" usage is not far from the 1.36% peak recorded for "Nasdaq" in 2000.

And the New York Times is hardly alone in its robust coverage of central bankers today. Recently, the Wall Street Journal began offering a daily report on global central banks called "Grand Central."

Central bank activity is believed to be so important that investors and business leaders now need to be fully briefed before they begin their day.

But what if the dramatic rise in the media's focus on (and readers' interest in) central banks is a bubble -- a climactic frenzy of interest that marks the peak in confidence?

Sovereign debt yields and the behavior of fixed income investors would certainly support this conclusion.

Not only did we see investors front run the ECB's QE unveiling this spring (like they did the Fed in 2012), but at the lows in German yields, the media was reporting that despite negative interest rates, investors were aggressively speculating that strong demand and scarce supply would push rates even lower.

Then there is the behavior that we've seen recently in equity markets. In Japan, and now China, many investors have stopped paying attention to corporate profits and underlying economic performance and are instead focusing strictly on the willingness and ability of central banks to support valuations through extreme credit and foreign currency market actions. 

To be clear, if central banks are a bubble, we could still be years away from the peak. The biotech peak identified in the chart above was from January 2014. Since then, the NASDAQ Biotechnology Index ETF (IBB) is up more than 40%. Given the price moves that occur at peaks in bubbles, the penalty for calling the top early can be ruinous.

At the same time, failing to recognize the top can be equally perilous.

Investors who bought German bunds a month ago have been eviscerated as yields have soared.

I am watching sovereign yields in Europe extremely closely, particularly as bubbles unwind from the very peak backwards.

They are a LIFO (last-in/first-out) event. As the last to the party, German sovereign debt looks like it may be the first to leave. Needless to say, if that is the case, other sovereign debt yields will soon follow bund yields higher.

But there is another element to a bursting bubble in central banks which must be considered: declining investor confidence in monetary policymakers. If higher bond yields and falling asset values are viewed as a reflection of falling confidence in central bankers, the cycle could turn vicious quickly. For central bankers, with their balance sheets at historic asset levels, the consequences could be especially severe.

I am afraid that we are already beginning to get a flavor of that in Switzerland. The fallout from the Swiss National Bank's de-pegging of the franc from the euro earlier this year has been economic, political and financial. With a decline in Swiss social mood national central bankers could easily become scapegoats.

While investors already have a long list of economic metrics to follow, keeping tabs on the media's coverage of central banks today is critical.

A sharp drop off in articles, not to mention a more hostile tone by the media toward the central bankers, would be indications that the top of the bubble is in.

What that means to stock valuations and bond yields should be clear quickly after that.
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Position in SH,DBC,TBT; creditor of JPM
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