Notes From Underground: An Arthur Fonzarelli Moment for Yra

Six weeks ago I did a podcast with Anthony  Crudele and Rick Santelli about markets. I brazenly said the S&Ps would experience a 10% break before a further 3% rally. The S&Ps were at 2550 and as of this morning the 3% has been actualized long before the 10%. My respects to Rick Santelli, who was right on target with his call to purchase all equity markets for the next period of time. In true FONZI ways, I was wrong. But I have been liquidating long-held stocks into this rally and will continue to do so as I view this 23% rally since the Trump election as a great gift. If I had predicted on November 9 that the S&Ps would be 23% higher a year later, you would have had me committed.

As I noted on November 15, there are opportunities in various sectors, such as regional and community banks, which will benefit from some of the rollback of the more ONEROUS regulations. But I believe the past year’s one-size-fits-all investment strategy of passive investing will yield less returns. For the record, I have never measured my performance to any market barometers. If there is opportunity in a multitude of asset classes I expect to be able to find a profitable trade. If the stock market were to fall 20% I would expect to have a very profitable year and not view it as a success by ONLY losing 10%. This is the traditional basis of classic hedge funds which strive to profit in any financial environment. My efforts “to skate ahead of the puck” as long time reader Chicken noted the other day without getting off-sides.

This has been a difficult year for global macro traders as the liquidity efforts of global central banks has overwhelmed the ebb and flow arising from geopolitical events. Massive liquidity additions have provided the foundation for global economic growth as negative interest rates in many places has lessened the burden of interest costs and helped elevate equity values worldwide. The rise in equity valuations has also come with a dramatic rise in global debt. If the global growth story is remains optimistic interest rates will have to rise,increasing the burdens on businesses with increased debt.
When? I don’t know but the market will reflect any increased concerns but with 40 percent of sovereign debt carrying a negative yield global assets can remain elevated far longer than we can ever imagine. But the more stretched assets become the greater volatility will be. Complacency breeds comfort, which will be uprooted as a Minsky Moment arises. We just don’t know what will be the trip wire. The present landscape will provide many trades but don’t turn trades into investments.
***On Tuesday, Jerome Powell appeared before the Senate Banking Committee as he testified in regards to his nomination for FOMC Chair. Powell was very clear that he agrees with Janet Yellen in the current Fed efforts to deal with the Fed’s dual mandate: inflation and jobs. Powell said, “Time to normalize interest rates and shrink the balance sheet.” The problem for me continues to be that “normalization” is an undefined term. Is normal interest rates a real yield of 2% on short term rates? If so, then the Fed needs to get the fed funds rate to 3.5% and quickly.
Normalization is an academic term that needs to be defined in reference to markets. Governor Powell was intensely questioned by Senators Warren and Brown on his views of bank regulations. Powell held firm that current regulations are more than enough and some should be reexamined. Powell was also forthright in believing that the ONEROUS REGS should be lessened on community and regional banks. One senator (I believe it was JON TESTER of MONTANA) was able to get Powell to state that the countries smaller banks were not responsible for the global financial crisis, which caused the community bank stocks to rally.
The Senate Committee asked good questions but what was not probed was the role of foreign central banks impacting upon the Fed’s efforts. There was no discussion about the ECB and BOJ forcing the FED to stay lower for longer, even as growth “accelerated” in Europe and Japan. Powell is a lock (barring any sexual harassment issues). One issue though of importance for 2018–and this was a concern of Senator Sherrod Brown–was HAS THE FED MODELED THE FISCAL STIMULUS IN THE CURRENT TAX BILL? Powell evaded the question because he wanted to avoid all discussion of fiscal issues. But at some point the FED will have to ascertain if the tax bill is a significant variable going forward and fiscal stimulus acts much quicker then monetary policy. Increased economic stimulus with 4.1% unemployment rate OUGHT to lead to a rise in wages, which, if realized will reduce corporate profits. Higher interest rates coupled increased wages, something to be vigilante about in 2018.

***Germany remains in flux as Merkel struggles to construct a coalition. SPD leader Martin Schulz understands that Merkel has delivered him a strong negotiating position as the German political class does not wish call a new election. In a Financial Times article from Monday, “Germany’s Schulz Puts Stronger EU on Coalition Wishlist” and Schulz stressed that he would attach,”utmost importance to EU policy.” If Merkel/Schulz comes to fruition it will provide Mario Draghi with new impetus in his efforts to surreptitiously create a EUROBOND.

A German CDU/SPD coalition will be under severe scrutiny by the Bundestag opposition led by the AfD and FDP. German politics will become an important feature for 2018. But this new grand coalition will strengthen the hand of French president  Macron. Europe will be the most important center for the global financial system in the coming year. A new piece on global prairie fires coming soon.

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7 Responses to “Notes From Underground: An Arthur Fonzarelli Moment for Yra”

  1. Asherz Says:

    Yra, Your Fonzie moment that was experienced in consequence of a rational prediction brings to mind the old saw uttered by a Mr. Keynes, ” The market can remain irrational longer than you can remain solvent.” Next Tuesday will be the 21st anniversary of Mr. Greenspan’s “irrational exhuberance” comment. That was followed not that much later by the
    same individual reacting to the LTCM problem with some other disturbances in SE Asia by facilitating the dot com era. Apparently he had a bout of amnesia. Or deciding that “not on my watch” will any severe market correction take place, a policy followed by all of his successors including the newly anointed one. So staying on the sidelines and being a spectator rather than a player when the opposite of trying to catch a falling knive ( gored by a rocket?) is playing out, is exercising prudence.
    And anyone thinking we will have a 3.5% fed fund when that will add $400B to national debt service, not to mention a 320% global debt/GDP ratio, is dreaming.
    There will be plenty of opportunity for market profits even though you may miss the top by a mile. Or to repeat another ancient saying,”The bigger they are, the harder they fall” . And this is a monster that make James Glassman and Jeremy Siegel look like prophets.

  2. Joel Dee Says:

    We reside in Germany and the banking sparks are everywhere. It is like a broken power line whipping in all directions. The downsizing is to a point of becoming electronic non-personnel banks, location closures, Commerzbank being shopped, Societe’ General problems, discussions of eliminating all acct insurance protection, all of our banks sending out new rulings almost weekly and this has occurred in the last 30 days. I cannot wait for some “hoped for-feel good” in your upcoming EU economic review.

    • yra harris Says:

      Joel–thanks for the update but I think the feel good is far off for German savers who by the work of Carmen Reinhart have been the target of financial repression to bail out all of the EU and it will continue as Mario Draghi continues his efforts to create a Eurobond guaranteed by Germans—this issue will keep building and is reason why Merkel is afraid of new elections—the anti-immigrant vote has already left the CDU but the issue of financial repression will weaken the established parties even more

  3. Chicken Says:

    Normalizarion definition – Might include for instance, further rate hikes on excess reserves?

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