First, thank you to all the readers and friends who posted condolences and sent private notes on the passing of my dear brother Ralph. If you want to see his creativity, search for Dwight Ralphy on YouTube. They have provided me a laugh and reminder of how forward Ralph was as this work was created in the ’80s and ’90s.
For the past couple of days I have been reviewing market action and news stories that purportedly raised the volatility levels of equity, bond and currency markets. In my February 5 post I mentioned that the synchronized key reversals of the three major U.S. indices–Dow, Nasdaq and S&Ps–provided a backdrop that we have not experienced in many, many years. In June and August 2017, the Nasdaq 100 futures put in a weekly key reversal. An outside key reversal is when a market makes all-time highs and closes below the previous week’s low. This technical indicator has been a mainstay of the week of high quality technicians and last year’s failure of this long trusted indicator drove market seers crazy.
But this synchronized event of the week ending February 2 has provided a SHORT-TERM signal that has borne great profit opportunities. I stress that this BLOG is not a primary source for technical analysis but when high probability chart patterns form, I will make note of the significance.
While I was in contemplative mode, there are some issues that raised my consciousness:
1. The Powell FED is a different institution as all the FED voices last week kept to the theme of downplaying market volatility. Even New York Fed President William Dudley, the traditional guardian of Wall Street, referred to last week’s sizable correction as “small potatoes.” It seems to me that the Jerome Powell FED leans toward allowing markets to work rather than the central bank being quick to suggest that the cavalry is on the way. To paraphrase Frank Borman, capitalism without losses and bankruptcy is like Christianity without hell. It appears that Chairman Powell believes uncertainty in the stock market is healthy (let’s hope). But if this becomes the rule of the Powell Fed the market volatility across asset classes will become much more volatile.
2. The Trump budget was passed which blew away all the sequestrations and caps on government spending. My long-time readers are aware that I was a gigantic supporter of the Bowles-Simpson budget process that was sent to the wilderness when President Obama failed to support the findings of his own commission. I am not a DEFENSE SPENDER and the Bowles-Simpson group had offered up a 10% cut in defense in order to get spending under control. In my opinion defense spending is the “mother’s milk” of Congressional money programs as all budget discipline is washed away under the guise of national defense.
Once the sequestration on defense allotments was lifted the budget process became an auction as every bidder for increased spending was rewarded. The TRUMP budget is a blow to fiscal responsibility in a time of exploding deficits. The deficit is expected to top a TRILLION dollars this year and that is in the time of a healthy economy. No wonder the DOLLAR and BONDS remain on the defensive. Trump is aping NIXON’s strategy, “We are all Keynesians now.” There are many making light of the recent surge in bond yields but it seems that foreign investors and the proverbial “bond vigilantes” are seeking higher yields because of all the uncertainty regarding the U.S. budget situation. How high can bond yields rise? Don’t know. But as risk/term premiums increase I believe my early prediction on the ten year of 3.4% is certainly feasible.
3. There was an Associated Press article published last week titled, “Trump Threatens ‘Tax’ on Countries That Exploit US Trade.” The story cites the idea of a “reciprocal tax” on countries that the White House determines abuse their trade relationships with the U.S. The paper quoted Trump: “We cannot continue to let people come into our country and rob us blind, and charge us tremendous tariffs and taxes, and we charge them nothing. We cannot allow it to happen.” The article goes further to note that trade with China, Japan, South Korea and other countries are all benefiting from asymmetric relationships. Upon the release of this story the YEN had a strong week as it rallied against the EURO and the dollar.
This is something to be watch, especially with the appointment of BOJ Governor Kuroda and a very aggressive group of doves on the board. When is monetary policy considered an act of currency intervention? More to follow as we catch up to global financial events. The Trump reciprocal tax makes me bullish the YEN but the reappointment of Kuroda and his excessive policies of QQE leads me to be cautious. The GOLD/YEN cross also bears close watching.
Tags: BOJ, Bowles-Simpson, Euro, Fed, J. Powell, Japanese yen, Kuroda, U.S. bonds, U.S. budget
February 20, 2018 at 4:19 am |
Happy lunar new year. In what counts most, haha, the year of the dog and weekend’s fortune stick burning at Hong Kong Che Kung Temple foretell this year to become more volatile and risky. Bear in mind that the year of the rooster, just passed in the last 12 months through January, is the best in the cycle, and that the year-after-next “rat” is cyclically the weakest. Good luck as that’s even better than good skill.
February 20, 2018 at 4:43 am |
Yesterday I saw Goldman´s projections for the deficit: https://www.zerohedge.com/sites/default/files/inline-images/goldman%20us%20fiscal%20%201.jpg?itok=RCD2kxb1
Wow, what are the USA going to do, if the economic cycle turns down?
In contrast: Germany aims for another year of a balanced budget (“black zero”) and the projection is that Debt/GDP will be So in terms of fiscal and monetary policy we could see the US and Europe diverge significantly in the years to come…
February 20, 2018 at 4:46 am |
(Somehow the software mixed up my post.)
In contrast: Germany aims for another year of a balanced budget (“black zero”) and the projection is that Debt/GDP will be < 60% by 2020.
Significant news for the ECB: Luis de Guindos (Spain) will be the next Vice President. Since there´s a balance between northern and southern Europe the chances increase that indeed Jens Weidmann could become the successor to Mario Draghi.
So in terms of fiscal and monetary policy we could see the US and Europe diverge significantly in the years to come…
February 20, 2018 at 6:28 am |
GreenAB–you stole my thunder on Guindos paving the way for Weidmann.There is much positioning going on and if I read one more bit of nonsense from Couere I am going to stick pins in my Draghi voodoo doll.Weidmann has softened his words of late and if Merkel wants to salvage any thing that remains of her dignity she will push for Weidmann
February 20, 2018 at 6:30 am |
Yra,
Do you have any thoughts on the upcoming Italian elections??
February 20, 2018 at 10:36 am |
Trader1–yes I do and being that polls are not available unless you are wealthy enough to do private polls –so we are dependent on the hedge funds and other groups driving the narrative but at this juncture it seems that Berlusconi and a combination of the right will craft together a coalition that will send shivers up the spines of Brussels eurocrats–more to follow but this is a polling blackout period so narrative will be important
February 20, 2018 at 6:31 am |
Green AB–read this Goldman piece yesterday morning and wondered whether Gary Cohn will be asked about it–certainly not a piece supportive of the recent tax “reform” and budget presented from the great minds advising the oval office
February 20, 2018 at 7:59 am |
Welcome back, Yra.
1. Frank Borman has become as irrelevant as Coin Harvey. Eisenhower’s Judaeo-Christian nation has left the belief in Hell far behind. There is no longer a majority in any age group that still believes in damnation.
https://www.britannica.com/event/Pledge-of-Allegiance-to-the-Flag-of-the-United-States-of-America
http://www.pewforum.org/religious-landscape-study/belief-in-hell/
2. People no longer believe that anyone can “control” the markets. Governor Powell has simply caught up with the times. So has Trump. He understands that Social Security, Medicare and defense spending are the Holy Trinity of American electoral majorities.
Any President foolish enough to stray from absolute fidelity to that fiscal Triad condemns his party to the minority.
3. For Republicans to overcome the gerrymandering of Congressional apportionment, they need to add a fourth item to the catechism: “tax cuts”.
https://www.census.gov/rdo/data/voting_age_population_by_citizenship_and_race_cvap.html
4. Simpson was another in a long line of guys who thought they were smart because they were tall (Galbraith was another; I leave it to you and the other traders to tell me where the Jolly Green Giant fits). He never once discussed how the present industrial revolution of AI would affect his calculations; everything was always about the dependency ratio. Given what we know about the future for “jobs”, we should, if anything, be praying that the dependency ratio declines further.
So, “the debt” will continue to grow; yet the country will not “go bankrupt” because the rate of increase in the supply of us old people is already peaking. The machines – and the excise taxes – will pay for it all – just as they did for the generation that attended the Centennial Exhibition in Philadelphia and marveled at the Corliss.
https://en.wikipedia.org/wiki/Corliss_steam_engine
February 20, 2018 at 12:10 pm |
Stefan–as usual you stretch my knowledge and that is indeed a very good thing–there are still central bankers who believe they control markets–see Draghi and Kuroda
February 20, 2018 at 12:48 pm
Fat thumb. When I wrote “people”, I meant the majority of those who follow the markets and actually have money that they speculate with. My Rees-Mogg premise is that the informed electorate – the people with skin in the game – almost always have better judgment that the elites who have appointed themselves to know better.
February 20, 2018 at 11:38 am |
Obviously I have a lot to learn b/c I always thought the MIC IS in large part, the swamp. Also, I didn’t notice sequestration cause MIC equities to dip, except perhaps very briefly if at all.
February 20, 2018 at 2:55 pm |
Further extraneous history:
Today is the anniversary of the final connection into Chicago. The first Michigan Southern train pulled into LaSalle Street on this day in 1852. You could now take a train to New York in two days – a trip that had taken two weeks when you went by canal and turnpike.
Within little more than a decade, the Depot had been built.
https://chicagology.com/prefire/prefire034/