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Kass: Follow The Money

January 8, 2019

Kass: Follow The Money

The Tremor Before the Quake and the Fed’s $450 Billion Balance Sheet Reduction

“The combination of rate hikes and balance sheet reductions from the Federal Reserve in 2018 sucked up global U.S. dollar liquidity and put emerging markets under immense pressure in 2018. Emerging market equities were 20-30% lower from February through October, then the S&P played catch-up to the downside. This, combined with tariffs from the White House, has placed global manufacturing in a significant slowdown that has begun to circle back into the United States. After all, over $60T of global GDP is OUTSIDE the USA.” – Lawrence McDonald, “Fed Cave-athon Driving Stocks Higher For Now“

Why did Fed Chairman Jerome Powell’s comments on Friday get such a ringing endorsement from the equity market?

The answer is simple.

The driver to market movement is not valuations. Rather, it is the degree of the system’s liquidity condition.

Valuations generally don’t matter much when liquidity is injected and expanding price- earnings ratios don’t end bull markets.

But when markets perceive a drying up in liquidity or central bankers pivot, as in late 2018, markets suffer.

Watch the money!

The problem is not rising interest rates in 2019. Regardless of the Fed’s actions this year — and I continue to believe there will be no fed fund hikes this year — the bloated Fed balance sheet will be running off as quantitative easing (QE) is reversed.

The relationship between liquidity and capital markets volatility is inversely related. That is why in the first half of 2018 I called for a new regime of volatility, which we have gotten in spades since late September 2018. And that is why I see a continuation of heightened volatility throughout this year.

Tightened Liquidity

Last week, Dennis Gartman produced this chart of the declining monetary base:

…click on the above link to read the rest of the article…

Kass: “Don’t Blame Powell For The Mess He’s Left To Clean Up”

December 30, 2018

Kass: “Don’t Blame Powell For The Mess He’s Left To Clean Up”

Do we want to be Japan?

“I need the Fed to shut up. I don’t trust the Fed at all. I don’t trust Jay Powell at all. Jay said everything that caused a tremendous selloff. You have got to start recognizing how powerful his words are.”
— Jim “El Capitan” Cramer, CNBC, on Thursday

I am in respectful disagreement with the condemnation of Fed policy by Jim Cramer and others.

To begin with, before criticizing the Jerome Powell-led Federal Reserve, market participants would be wise to look at where the stock market has come from and how equities are still valued.

The hue and cry about the recent market downdraft and the Fed are particularly revealing in light of the fact that even after the most recent downturn the market is up 13% since 2017, 23% since 2016, 34% since 2014, and 111% since 2010.

Powell only recently has brought rates to a neutral level (in real terms, adjusted for inflation), causing investors to freak out. That says a lot about both market participants and the underlying fragility of the domestic and global economies, as they, too, have become addicted to low rates. (Europe is nearing recession even though interest rates are near zero.)

Powell should continue doing the right thing, but slowly and carefully. A garden-variety recession is fine. A move down in equities is fine. Those things are normal and part of a functioning capitalistic economy. It is amazing and unhealthy that market participants seem to forget this cleansing role.

The challenge to the Fed chairman is how exactly to do the right thing, to thread the needle. This is not his fault. But any patient addicted to drugs must be weaned off of them slowly and methodically. Cold turkey will just kill the patient.

…click on the above link to read the rest of the article…

Kass: High Anxiety In The Markets

October 31, 2018

Kass: High Anxiety In The Markets

“Brophy: I got it. I got it. I got it.

[thump]

Brophy: I ain’t got it.” – Mel Brooks, High Anxiety

Arriving at Los Angeles International Airport, Dr. Richard Thorndyke has several odd encounters (such as a flasher impersonating a police officer, and a passing bus with a full orchestra playing inside it). Dr. Thorndyke remarks:

“What a dramatic airport!”

He is taken by his driver, Brophy, to the Psycho-Neurotic Institute for the Very, Very Nervous, where he has been hired as a replacement for Dr. Ashley, who died mysteriously. Brophy has a condition of nervousness, and he takes pictures when he gets nervous. Upon his arrival, Thorndyke is greeted by the staff, Dr. Charles Montague, Dr. Philip Wentworth, and Nurse Charlotte Diesel. When he goes to his room, a large rock is thrown through the window, with a message of welcome from the violent ward.

During the movie, Thorndyke suffers from a neural disorder called “High Anxiety”, a mix of acrophobia and vertigo, and tries to overcome the infliction.

We Live In Mel Brook’s Crazy World Now

With an intraday move of almost 4% – the S&P futures fell by a remarkable 100 points from the day’s high to the day’s low. A large sell program at around 3:30 p.m. abruptly moved the market down by fifty handles in one of the largest sell programs I have ever seen hit the floor. (The day’s swing in the Dow Jones Industrial Average exceeded 900 points!)

The Spyders peaked at over $270 at around 10:10 a.m. and bottomed at under $260 (with 30 minutes left in the trading session). Spyders closed the day at $263.86.

Talk about High Anxiety!

As I write this morning’s missive the market volatility has continued. When I started writing this column, S&P futures were +18 and Nasdaq futures were +38 . They are now essentially flat, on no new news.

…click on the above link to read the rest of the article…

Kass: Tops Are Processes & We May Be In That Process

July 31, 2018

Kass: Tops Are Processes & We May Be In That Process

The Yield Curve Will Likely Invert by November, 2018

  • Economic growth is less synchronized than the consensus believes
  • On a trending and rate of change basis the economic data is slowing down
  • The Fed’s continued pivot to tighter money will likely lead to curve inversion – which will likely stoke fears of recession

“China, Europe and the Emerging Market Economic Data All Signal Slowdown: It’s in the early innings of such a slowdown based on any realtime analysis of the economic data. The rate of change slowdown (on a trending basis) is as clear as day. A rising US Dollar and weakening emerging market economic growth sows the seeds of a possible US dollar funding crisis.” – Kass Diary, Investors are Not Being Compensated For Risk

At economic peaks everything on the surface looks Rosy (except to some observors like myself and Rosie (David Rosenberg)!) – until it doesn’t.

Towards that end, here is what I wrote yesterday about US and overseas economic growth in my two part opener:

“Global Growth Is Less Synchronized as the trajectory of worldwide growth is becoming more ambiguous. I have featured the erosion in soft and hard high frequency data in the US, Europe, China and elsewhere extensively in my Diary – so I wont clutter this missive with too many charts. But needless to say (and seen by these charts and here), with economic surprises moderating from a year ago and in the case of Europe falling to two year lows – we are likely at ‘Peak Global Growth’ now. (The data is even worse in South Korea, Taiwan, Indonesia and Thailand).

…click on the above link to read the rest of the article…

Kass – Risk Happens Fast

June 20, 2018

Risk Happens Fast

  • Risk happens fast – Trump trade policy whacks futures this morning
  • We remain in a trading sardine market – not an eating sardine market
  • Hastily crafted policy that conflates politics is dangerous in a flat and networked world
  • The return of an untethered Orange Swan is market unfriendly … brace yourselves
  • The Supreme Tweeter will likely “Make Uncertainty and Volatility Great Again” (#MUVGA)

The First Half of 2018

The first half of 2018 has been a tale of two markets. Maybe three markets.

January brought a market fervor – in which global equities rose dramatically, likely in response to the expected stimulative contribution and impact of the Administration’s reduction in statutory tax rates.

As interest rates began to climb in January, bullish investor sentiment crested and the risk parity trade went array.

Stocks fell violently in February and the new regime of volatility commenced – in a market revealed as increasingly illiquid.

The S&P Index fell from nearly 2900 and successfully tested the 2550 level twice. Several meek rallies commenced but the S&P had 2-3 more successful tests at about 2600 and stocks recently closed in on 2800 (S&P Index).

1Q-2018 corporate revenues and profits didn’t disappoint but the complexion of the market had clearly changed – and valuations (the S&P Index’s price earnings ratio expanded by almost 3 points in 2017) began to contract. Wall Street, which outperformed Main Street in 2017 – reversed roles in the first six months of 2018.

While the stock market reeled with volatility since January 1, the FAANG stocks generally stood tall throughout the year as the market narrowed and investor interest focused on the 5-10 anointed stocks.

The first half of 2018 was also characterized by a series of questionable and controversial presidential policies (the most recent being trade/tariff decisions) at the same time the Federal Reserve was pivoting on monetary policy. By overtly playing to his base, having little sense of economic history, Trump has contributed to even greater volatility in a market without memory from day to day.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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