Notes From Underground: Same Old Song With a Different Beat

There are few questions about the one-dimensional nature of the driving force of markets around the world. Cheap money sustains equity markets as the vast amounts of central bank liquidity continues to provide support for low-cost borrowing and a lack of alternatives for investors. A subset of the cheap cost of capital has been the “hoped” for resolution to the China/U.S. trade conflict which without question has disrupted global trade. South Korea’s recent economic performance is a reflection of the impact suffered by key components of the global supply chain driven export-oriented economy.

There was an article in the Financial Times Friday titled, “South Korea Set For One of Worst Growth Periods in Half a Century.” As the story notes “with exports representing 45% of the country’s GDP and China accounting for a quarter of the country’s outbound shipments.” The South Korean economy provides a glimpse into the friction from the trade but even though it’s slowing, equity markets power higher.

The precious metals had a MISERABLE November despite the continuation of central bank action as the equity markets provided the most bang for the buck. Stock buybacks continued along with heightened interest in corporate takeovers as low cost of money spurs the drive for consolidation.

We’ve seen the rotation out of metals into equities before. I did a podcast in February 2013 with Greg Hunter of Watchdog USA in which I said GOLD was a TIRED BULL given that the stock market provided an alternative — the metal was at $1630. Did last month’s decline in gold signal that the precious metal is a tired bull? I don’t believe so as the world’s central banks are terrified of moving away from historically low interest rates (yes, that includes the negative ones). [Note: Here’s the link to the podcast.]

There is no comfort in hiding out in fixed income for the risks of BOND values declining is FAR GREATER than experiencing much more appreciation as long yields are already extremely low. Is the U.S. equity market a TIRED BULL?

This is the question that has to be answered. Is the story for 2020 to be that on a relative basis that the U.S. equity markets underperform much of the world? Every market tires after an extended period of BULL or Bear, but as Keynes so beautifully maintained, “markets can remain irrational for longer then you and I can remain solvent.” But the global rotation can provide profit opportunities by taking advantage of potential investments in other regions.

An example of such potential may lie in Europe, particularly Germany. On Friday, the FT reported that German unions and businesses were calling for a 450 billion investment boost. The German BDI, a powerful business lobby, joined with the main labor federation, DGB, to push for an infrastructure development program. There is a push for Germany to get or the SCHWARZ NULL or black zero budget rules.

Plus, bad news for Chancellor Angela Merkel over the weekend. Coalition partner, SPD, elected two leftists to lead the party, spurning well-known Finance Minister Olaf Scholz. There is no definitive answer as to how this resolves itself. Will the Merkel coalition be dissolved and new elections called? Maybe. But other outcomes certainly exist. Most importantly, the weakening of the MERKEL fiscal austerity regime will be a boost ECB President Christine Lagarde’s plans. Previous president Mario Draghi needed Merkel to promote the QE programs and whatever it takes expansive monetary stimulus to save the EURO.

Now Lagarde needs fiscal stimulus to save the EU. Promoting significant FISCAL STIMULUS will provide investment potential for European businesses, especially as ultra-low interest rates support the rational for massive spending. I have been adamant that Lagarde has a dual mandate: Create a EUROBOND and promote massive fiscal stimulus programs. Lagarde has been promoting huge government spending for developing a GREEN ENERGY REVOLUTION to diminish the carbon footprint of the entire EU.

In a speech Lagarde delivered last week in Frankfurt, the ECB president invoked the wisdom of St.Francis: “Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.” Will Lagarde’s mandate provide investment potentials? This has to be considered with the idea of the U.S. being  a tired BULL.

***On Monday night the Reserve Bank of Australia will announce its overnight interest rate decision, which is currently at  0.75%. Consensus calls for NO CHANGE. Since the Aussie dollar is at three-month lows versus the KIWI there is little reason for the RBA to cut rates. Unemployment in Australia is moderating but until the Chinese economy gives some renewed sense of slowing the RBA will hold off on further action.

***Last week Peter Boockvar had a paragraph in one of his daily missives that appropriately sums up the behavior of FED over the past decade.

“Finally, I have to include this quote from Janet Yellen from a piece written by Jeff Cox at CNBC. This comes from a former Fed member who as Governor and Chair presided over and voted for putting rates to zero, keeping them there for 7 years and embarking on multiple rounds of QE. ‘Some of the most disturbing notes came from people who said, ‘I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing.’ Savers are getting penalized.It’s true.'”

As Boockvar maintained, the Fed hung savers out to dry and Jay Powell and Co. seem intent on doing it again if needed.

The bottom line is why would you lengthen DURATION RISK with the guardians of the nation’s money supply being question. I am staying invested as short as possible and putting on steepeners. The 2/5 curve in the U.S. is trading at 2 basis points. Duration risk is a fool’s errand. If US rates were to go back to zero or lower there will be far greater opportunities in the global macro realm.

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9 Responses to “Notes From Underground: Same Old Song With a Different Beat”

  1. yraharris Says:

    from yra: rrency Wars are Real—Yra Harris
    By Greg Hunter On February 13, 2013 In Market Analysis 45 Comments
    2 jpgBy Greg Hunter’s USAWatchdog.com

    Legendary trader Yra Harris says, “The currency wars are real, and the game is on.” Harris says the global currency war is what helped Volkswagen gain market share in the last few years. So, what is Japan doing? It is cutting the value of its currency so Toyota will gain market share. The currency war is also what’s been driving gold higher. Harris says, “Is gold in a bull market? Absolutely. Is gold a tired bull for the moment? Absolutely. . . . I think you’d be crazy to sell because there are so many variables of uncertainty.” Harris goes on to predict, “What do I think is the most explosive event for gold? It is the day Draghi (President of the ECB) can no longer jawbone quantitative easing. He actually has to step up to the plate.” Harris is counting on the Fed to continue to pump out dollars. He says, “I can go to sleep at night and know one thing–the Fed will not allow deflation.” The reason is simple, according to Harris, “We live on debt in this society. Debt based societies cannot absorb a deflationary spiral.” Join Greg Hunter as he goes One-on-One with analyst and trader Yra Harris.

    click on watch dog for viewing the full 20 minute interview

  2. Don H Says:

    /GC Is still range bound, as mentioned in a previous post.
    /ES Above 3138 target new ATH which occurred this a.m. Buyers still need to defend above 3138 to hold this range > higher; IF 38 fails, then anticipate a deeper pullback.
    My .02

  3. Richard Papp Says:

    Yes, gold still range bound in the lower end of a downward slanting channel. A second LBMA fix of 1440 would break the lower end.

  4. Michael Temple Says:

    Yra
    Well said….If US interest rates veer towards zero, there will be better macro trading ideas.

    Foremost among them will be the PMs, which pack far more beta than RED EDs.

    Before today’s Trump inspired stock sell off and corresponding PM rally, the very few pure play silver miners were making new 52 week highs.

    Today, new highs have been further extended with PAAS and CDE leading, and with AG (First Majestic) close behind.

    And, I find it very telling that Kirkland May have timed the absolute bottom of this 3 month pullback in buying out Detour Gold while a Chinese miner just paid $1BN to buy out a smallish Canadian miner.

    Meanwhile, here is a crazy notion to consider.

    Trump may have chosen to unleash trade wars with France, Brazil, Argentina and now again with China to cause stock chaos.

    A drop of 10% puts S&P back to 2800. No big deal.
    Yet, Jerome will surely cut and/or do real QE.

    Stocks then stabilize. Then, when it behooves Trump most in 2020, he can cut a deal with China. Combined with QE Infinity, stocks roar into 2H 2020, just in time to get him across the Nov finish line and a second term.

    Either way, the PMs look deliciously cheap as we head into a chaotic 2020.

    Mike

    • yraharris Says:

      Mike–thanks for the insights.You and I have discussed the perspective of Trump as nihilist with no care for the stock markets if he perceives those he disdains can be hurt in the short term—my warning is when narcissist turns nihilist–yesterday’s comments about Brazil and Argentine could not have been more flawed—I will blog about them either today or tomorrow.

      • Michael Temple Says:

        Yra
        Yes, Trump’s comments about Arg/Brazil was “cuckoo for coco puffs” but it doesn’t mean he is stupid.

        He needs to create enemies and boogie men to stand in opposition to his “greatness” and how he is fighting to Make America Great.

        If he actually slaps the additional Chinese tariffs on Dec 15th, no telling what could happen next in markets.

        Hey, Jerome….Start cranking those printing presses

        Mike

      • yraharris Says:

        Mike–never said the word stupid

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