Tonight I am posting the latest episode from the Financial Repression Authority (click on the blue link to listen). I do these for no remuneration as I think the information flowing out of this group creates great conversation and can generate some very profitable investment opportunities. Yes, it’s 34 minutes long but it is more LEARNATIVE than the network news. So pour a stiff whisky and listen while doing other reading. I share this with, you readers because I am honored to be a part of this great dialectical process. One of the key points in tonight’s post is the development of a narrative in which to analyze the world of Trump. It is not a partisan narrative but one I am developing as I attempt to discern the unfolding global dialogue being put forward by Team Trump.
Posts Tagged ‘S&P’
WARNING: Put on your life lines, foul weather gear and be ready for the boom to come flying about (thanks Whitewave). There are violent winds blowing in the financial seas as equity markets are giving warning that something is amiss. The 200-day moving averages for the DAX, CAC, Nikkei and SPOOS succumbed to selling pressure in synchronized fashion. The Dow Transportation Index looks atrocious, especially when viewed in terms of the steep drop in energy prices. Lower fuel costs are historically a boon to trains, planes and automobiles and most especially trucks. Lower fuel costs lead to increased profits for freight haulers (h/t American Limey and Professor Waspi).
Before we review Friday’s action, I would like to present a quote from Tolstoy sent from a long-time reader and is representative of the 2+2=5 basis of Notes From Underground. While I have respect for the theoretical basis in the continued search for knowledge, I try to write NOTES with a deeper understanding of the fundamentals that drive markets on a short- and long-term time scale.
As Harry Nilsson sang in “Everybody ‘s Talkin'”: Everybody ‘s talking at me, I don’t hear a word they’re saying, only the echoes of my mind.” This is true of the words from St. Louis Fed President James Bullard as he had the audacity to opine in the middle of Friday’s S&P and equity rout that: 1. “The Fed doesn’t react directly to equity markets”; and 2. “More sanguine than market on global outlook, China.” (source: Bloomberg). This is the very same James Bullard who is credited with halting the significant break in the SPOOS on October 15 when he mentioned that “the Fed should be open to continue its QE on the back of low inflation expectations.”
First, as the clouds of sadness begin to lift I want to thank all of those who took time to send a note to the blog and to me in emails for the condolences on the passing of my mentor and friend. In a tribute to one of the great traders, the markets provided volatility reminiscent of a 21 gun salute, or maybe just 21% vol levels and a VIX to go with it.
Tonight I’m paying homage to Rudyard Kipling’s great poem, “If.” It’s a reminder of what the fourth quarter holds for global investors, and particularly traders with a much quicker reaction:
If you can keep your head when all about youAre losing theirs and blaming it on you,If you can trust yourself when all men doubt you,But make allowance for their doubting too;If you can wait and not be tired by waiting,Or being lied about,don’t deal in lies,Or being hated,don’t give way to hating,And yet don’t look too good,nor talk too wise
During the last month markets have adopted the approach of “Don’t Worry Be Happy.” No event increases risk awareness as central banks being perceived as the guardian angel of all global investors, so every possible geopolitical event is merely a fresh buying opportunity. This week brings the ECB rate decision and consensus seems to be that President Draghi has secured a vote in favor of cutting interest rates from 0.25% to 0.15%, a drop of 10 basis points, or, as the talking heads and pundits of pabulum will with great fanfare scream, the ECB has cuts interest rates by 40 PERCENT. Ah, the beauty of small numbers in a zero interest rate environment. I DOUBT THE ECB WILL GO NEGATIVE AT THIS TIME. Why? Negative interest rates by a large central bank will be an experiment that the ECB will not wish to embark on, especially as U.S. money market funds have returned to providing short-term financing for European entities. Going negative may result in money market funds shying away from the uncertainty of negative deposit rates paid by the central bank.
As the talk turns to concern about inflation in the U.S. and possibly the U.K., we must ask ourselves a question that will be our focus for at least the next six months.
The U.S. unemployment data released on Friday was extremely positive on two measures: Nonfarm payrolls increased by 288,000 and the unemployment rate dropped from 6.7 to 6.3 percent. The soft side of the numbers was that the average hours worked remained flat and the all-important average hourly earnings also stayed flat, undermining the robustness of the headline figure. The U.S. dollar and U.S. bond markets initially performed as expected as the DOLLAR strengthened and bond yields rose in response to positive news. However, by day’s end the DOLLAR was LOWER and the yields on the long end of the CURVE had also dropped while the SPOOS and DOW failed to hold gains on what was a very strong employment picture. The reason given by analysts was that the Ukraine situation was becoming more volatile and caused investors to be cautious over the weekend.
In an effort to state how badly the markets are ignoring risk, we at Notes From Underground warned about being short volatility. As we head into the Passover and Easter holidays there is much on the table that financials fail to appreciate. A global market focused on the pantheon of central bankers it is the my task to remind of the major issues facing the world’s POLITICAL ECONOMY.
- The BOJ and the Abe government have gone to great lengths to create a recovery in Japan and with it a modicum of inflation. At this point economic growth in Japan is stalling. With the initiation of the sales tax increase of 3 percent April 1, Japan’s central bank has a great deal at stake. If growth stalls the BOJ will be hard-pressed for even more radical efforts to jump-start the economy through increased bond purchases both of a domestic and foreign nature. The YEN will be under pressure causing stress throughout the global financial system.
- What will happen in China as it tries to stem any debt crisis from too much credit being advanced through the Chinese shadow banking system?
- The problems in the Eurasian land mass as President Putin attempts to undermine the sanction regime of the G7 nations
- The potential for a banking crisis in the European system as the mass of debt becomes a larger burden in a low inflation environment. Compounding the problem is that European banks own a vast amount of sovereign debt of Greece, Spain, Italy, Ireland and Spain,resulting in an adverse feedback loop of monstrous proportions; and
- The Federal Reserve has adopted a position of primary concern for a high unemployment/low wage environment and is pretending that a zero interest rate policy can provide the solution. The FED is putting its credibility on the line in pursuing a jobs-at-all-cost position for if the self-imposed jobs threshold can be easily forsaken, why should investors believe that the inflation threshold will be followed? Keep an eye on the 2/10 yield curve for any signs of the market’s concern with regards to the credibility of the Yellen Fed. For now, the SPOOS and NASDAQ are the default mechanism for all investors for when in doubt, buy equities. As Jefferies’ David Zeros said on CNBC Monday afternoon, SPOOS ARE FOR LOVERS AND GOLD IS FOR HATERS, which may well be … for now. But being short volatility is for the clinically insane. Just hope I have a ticket on the volatility train since “YOU DON’T NEED NO BAGGAGE, JUST GET ON BOARD.”
Also in the spirit of the holidays:
If the U.S. Treasury had done only TARP … it would’ve been enough
If the Fed had only provided QE1 … it would’ve been enough
If the Fed had only done QE2 … it would’ve been enough
If the Fed had only done Operation Twist … it would’ve been enough
If the Fed had only done QE Infinity … it would’ve been enough
If Mario Draghi had pledged no taboos … it would’ve been enough
If Mario Draghi had pledged to do whatever it takes … it would’ve been enough
If the BOJ had only doubled the money supply … it would’ve been enough
If the BOJ had only bought massive amounts of JGBs … it would’ve been enough
If the Japanese were only buying foreign bonds … it would’ve been enough
If all the world’s central banks had lowered interest rates to zero … it would’ve been enough
AND NOW FOR THE BITTER HERBS!
Wishing all of our readers a happy and healthy Passover and Easter.