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Intervention

Intervention

The Fed has gone into full intervention mode. Not only into full intervention mode, but accelerated intervention mode. Not just a little “mid cycle adjustment” but full bore daily interventions to the tune of dozens of billions of dollars every single day. What’s the crisis? After all we live in the age of trillion dollar market cap companies, unemployment at 50 year lows and yet the Fed is acting like the doomsday clock has melted as a result of a nuclear attack.

Think I’m in hyperbole mode here? Far from it.

Unless you think the biggest repo efforts ever by far surpassing the 2008 financial crisis actions are hyperbole:


What is the Fed not telling us?
I’m asking for a friend.

View image on Twitter

What indeed is the Fed not telling us?

Something’s off here. See it all started as a temporary fix in September when suddenly the overnight target rate jumped sky high and the Fed had to intervene to keep the wheels from coming off. Short term liquidity issues they said. Well those look to have become rather permanent:

And these liquidity injections are absolutely massive. Just yesterday the Fed injected $99.9 billion in temporary liquidity into the financial system and $7.5 billion in permanent reserves as part of its $60 billion per month in treasury bills buying program. The $99.9 billion coming from $64.90 billion in overnight repurchase agreements and $35 billion in repo operations.

All this action is surprising frankly. What stable financial system requires nearly $100B in overnight liquidity injections. The Fed did not see the need for these actions coming. They are reacting to a market that suddenly requires it. Funding issues Jay Powell called it in October. The Fed was totally caught off guard when the overnight financing rate suddenly jumped to over 5% and they’ve been reacting ever since which pretty much describes the Fed in all of 2019.

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

Measured Move

Measured Move

Having fun with the endless chop that started in early August? Markets are consolidating inside a well defined price range. 2945 on the top end and 2822 on the bottom end of the range for $SPX. That range was established on August 2 and August 5th. Since then markets have been bouncing inside that range for weeks.

Amazingly accurate how algos have rejected each side, but the upper range in particular. It’s become a running joke on my twitter feed:


 · Aug 30, 2019Replying to @NorthmanTrader

😂

How about quintuple tops?

View image on Twitter

The algos are laughing with us.
Or at us?


All joking aside markets will break out of this range either to the upside or downside and when they do the next move may be of consequence. In technical terms one can expect what is termed a measured move equaling the size of the consolidation range.

Example: 2945 – 2822 = 123 handles.

Add that to the top of the range and the upside range suggests a move toward 3068 on $SPX or 1.3% above the July highs.
The flip side is a measured move to the downside: 2822 – 123 handles = 2699 $SPX, just below the June lows or 11% off of the July highs.

What’s intriguing about either scenario is that either would result in a move landing at a key market pivot:

The downside break would bring $SPX back to its open February gap and fill the June gap in process. This could set up for a nice rally, especially if that move were to set up with the implied $VIX target in its current bull flag constellation.

The upside breakout would bring $SPX right back toward the broken wedge trend line resistance and perhaps produce another unsustained high. Why? Because it would also meet once again the broadening wedge trend line resistance:

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

Keep it Simple

Keep it Simple

Markets blow up on Friday on a series of tweets, markets jam higher on the pronouncement of dubious phone calls on Monday. The rapid back and forth has many heads spinning and makes for dramatic headlines as people are searching for explanations. To which I say: Keep it simple, especially in the age of the great confusion.

Background: In 2019 market gains have been driven by pure multiple expansion resting on 2 pillars of support in the face of deteriorating fundamentals: 1. Hope for rate cuts and Fed efficacy 2. Trade optimism. But in process little to no gains are notable since the January 2018 highs, in fact most indexes are down sizably since then.

And when markets are purely reliant on multiple expansion the risk for accidents increases when confidence gets shaken. Friday’s escalation on the trade war front again highlights this point.

And in context of global growth slowing an escalation in the trade war is akin to playing with fire as it risks being a trigger to nudge the world economy into a global recession. After all 9 economies are either in recession or on the verge of going into recession.

This morning I was speaking with Brian Sullivan and he asked me what matters most here, the China trade war, the Fed, or technicals. The short answer is they all matter as it is a battle for control, but how to delineate a complex interplay of conflicting forces into some clarity?

Let me give you my take on all 3 fronts. Before I do, for background here’s the clip from this morning:

China:

Occam’s Razor: The simplest explanation is often the best one and that’s really what’s happening on the China trade war front as far as I’m concerned.

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

CONfidence

CONfidence

Markets are subject to a giant con game. The game of CONfidence. Confidence must be maintained under all circumstances or we’re heading into a global recession first and then a US recession to follow.

Consider the macro context here: Nine major economiesare either in recession or on the verge of it. This includes Germany, UK, Italy, Mexico, Brazil, Argentina, Singapore, South Korea, Russia. Everything else is slowing down hard. Yields are plummeting for a reason and once again the world is looking to central banks to bail everyone out and for stimulus programs to be launched to rescue a global economy that hasn’t been able to do without in 10 years. US consumers are holding the US economy up is the consensus as they keep spending for now, but already we saw a dip in confidence. Why? Trade tensions, political tensions, and yes, concerns that the longest business cycle may come to an end. Add scary stock market headlines and before you know it the consumer is holding back.

And hence confidence must be maintained under all circumstances. This has been the game for 10 years and hence any market drops that would add pressure to confidence must be averted. You really think it’s an accident we see intervention always at the point of serious trouble?

Retail sales dropped hard in December as markets plummeted. It’s no coincidence. Hence any prolonged malaise must averted.

As Mohamed El-Erian pointed out so clearly this week:

“We may end up in a situation where people read these alarmist headlines, they get concerned, they stop spending. As they stop spending, companies stop investing. And then we get a major slowdown:” ⁦

Alarmist headlines? How about headlines that point out reality? But the larger point is clear: Lose the consumer and a recession is unfolding perhaps more quickly than anyone can imagine. After all nobody on the planet called for a 1.5% US 10 year yield in 2019 or a German 10 year bund at -0.72%.

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

End Game

End Game

Well, here we are. All roads have led to here. The combustion case outlined in April, the technical target zone outlined in January of 2018. Trade wars, 20% correction in between, Fed capitulation in response, slowing growth data, inverted yield curves, political volatility, deficit and debt expansion, buybacks. All the big themes that have dominated the landscape in recent memory, they all have led us to here: Record market highs and high complacency into a historic Fed meeting where once again a new easing cycle begins.

Like flies drawn to a light investors have ignored everything that may be construed as negative as the market’s primary price discovery mechanism, central banks, are once again embarking on a global easing cycle from the lowest bound tightening cycle ever. By far. Many central banks such as the BOJ and ECB have never normalized, the Fed barely raising rates before capitulating once again to macro and market reality:

What’s the end game here? I have to ask given the larger backdrop:

Central banks 2009-2018:
We will print $20 trillion & cut rates to nothing & that will reach our inflation goals.

Central banks 2019: Ok, none of that worked so let’s print more & cut rates again. Trust us we know what we’re doing.

What has all this produced? For one the slowest recovery on record, but also the longest expansion. But this expansion has come at a very steep price as artificial low rates have led to massive record debt expansion, $250 trillion in global debt:

The world is sitting on over $13 trillion in negative yielding debt, corporate debt ballooned to all time highs is keeping zombie companies afloat, the desperate search for yield is forcing pension funds into riskier assets, 100 year bonds, BBB rated credit is the largest component of debt markets, everything is distorted and the desperate search for yield has produced another market bubble.

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

Battle for Control

Battle for Control

Markets are engaged in a clear battle for control: An active Fed eager to extend the business cycle using asset price inflation as its primary means to generate further debt financed growth on the one hand and deteriorating fundamentals and technicals gnawing at an artificial market construct on the other.

Let’s call a spade a spade: Markets would not be anywhere near new highs were it not for a Fed flip flopping and racing from dovish media event to dovish media event. I’ve been very vocal in my criticisms of their efforts and sense they are playing a dangerous game here. Hence I don’t want to belabor the point here today. But as a follow up: Friday’s desperate efforts on the side of the Fed to backtrack market expectations for a 50bp rate cut at the coming July meeting, which they themselves caused on Thursday with multiple Fed speakers, has revealed again the Fed’s singular role it has to devolved into: The market’s primary price discovery mechanism. As markets dropped below $SPX 3,000 this week dovish Fed speakers caused a renewed rally above 3,000 and as soon as they tried to walk it back with a conspicuous WSJ Journal article on Friday markets again soon rolled over.

That’s the circus atmosphere they have created and appear to be supportive of. The Fed is very aware of its role in all of this and it’s shameful. Like Alan Greenspan or not, but at least he was a cryptic speaker that left markets guessing and played his cards close to the vest. But over the years the Fed has devolved itself into this clown show we have now, a day to day manager of markets. And markets have learned to react to every single pronouncement and utterance.

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

The Most Dangerous Game

The Most Dangerous Game

How can I not talk about the Fed? How can I not talk about the daily jawboning? It is all around us. Every. Single. Day.

And it keeps working.

I feel like I’m being reduced to a loon conspiracy theorist documenting the very reality of it.  But I’m not. From my perch I’m doing a public service doing it, because the background motivation for why it is being done reveals a deeper and disturbing truth: They are scared, they are worried and they are desperate to keep the balls in the air.

In my view it’s disingenuous to not acknowledge the real impact central banks have on markets and assess the risk implications.

Yesterday the Fed went full circus. It was stunning to watch and I suspect they made a couple of mistakes by revealing things they shouldn’t have.

Not a surprise Bullard wants to see cuts, but it was Clarida and Williams who dropped the bombs. Wait for bad data? Nah, just cut preemptively. A full abandonment of the ‘data dependency’ charade. To ‘influence markets’. Stated straight up for all to see. They are no longer even pretending.

And a stunning admission from Williams: “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”

It pays to act when you have limited ammunition. A clear acknowledgement of what I’ve been outlining: The Fed, by not being being able to normalize in this cycle, is scrapping at the bottom.

So they want to intervene before things turn bad and hope this will prevent a recession. How? By blowing the asset bubble even higher.

And it worked again yesterday. Stocks flew higher, especially in after hours.

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

The Rise of Insanity

The Rise of Insanity

Everybody is trampling all over themselves to raise bullish targets. $SPX 3,300, $SPX 3,350, $SPX 3500, do I hear Dow 31,500? Yes I am. The big driver of course the Fed and central banks cutting rates again to save the global economy.

And amid all the hype and excitement you see headlines like this:

Bullish U.S. Stock Buyers Are Positioning for a Giant Windfall

  • Equity options strategy could deliver a 13-fold return…
  • …If the S&P 500 gains another 11% by the end of this year

The free money excitement is great.

But I have a question:

I also have an answer and it’s an unpleasant one. Because by bailing out markets and economies at every sign of trouble over the past 10 years central banks have given politicians license to do nothing. And nothing is what you get as political discourse fragments and majority solutions are impossible to come by.

But not only are majority solution impossible to get nobody even wants to even talk about them. Why? Because they involve pain. Voters don’t want to hear pain. Hence all you hear is free money. Tax cuts in 2016. Now we hear free college, health care and debt forgiveness for 2020 and who knows maybe more tax cuts.

Nobody wants to campaign on pain. I get it. But does anyone really think solving the structural problems that are behind slowing growth after 10 years of monetary stimulus are easily solvable?

Heck, they may not be solvable at all, hence it’s easier to create a political climate of hate, division, distraction and outrage.

Everybody talks about the outrage of the day, it’s a hyped up atmosphere by design. Because the architects of the conversation know the truth, and that is: As long as people are distracted by outrage, fear, anger and emotion they will not think about how the system is actually utterly screwed.

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

Distortion

Distortion

This week we entered the Sell Zone as I called it last weekend. Overnight today $ES hit nearly 3004 and is currently 23 handles lower on the news that the latest NFP report beat while unemployment ticked slightly higher. Whether the sell is now in full swing or more highs are still to come is an open question, after all it’s like arguing with drunks at the bar, you never know what they’ll do next and how far they take the binge. But note what we’re witnessing here is historic but not unprecedented.

The most deceitful time in a cycle is the end of a cycle. Unemployment is low & stock markets keep making new highs despite underlying signals showing reasons for concern which are largely ignored by investors, namely bond yields sinking, yield curves inverting, growth slowing, participation waning, internals weakening. And when that happens new highs may prove to be a great selling opportunity.

I submit we may be seeing all these things now, but perhaps even in a more deceiving manner than ever before.

Why? Because of central banks are desperately trying to extend the business cycle and are thereby distorting markets.

Let’s take note of some facts:

Stock indexes are not making new highs because of revenue and earnings growth. Quite the opposite, earnings growth is negative. The global growth picture is regressive. PMIs have overtly dropped into contraction territory, even in the US key indicators are showing negative growth, durable goods, construction spending, you name it and even employment growth is slowing which is typically what happens at the end of a cycle.

These data trends are reflective of the warning signs coming from the bond market. The German 10 year is -0.4%, The US 10 year has dropped to 1.95%, a full 40% collapse since the November highs (not a single economist had predicted that, they were all above 2.5%-3.5%) and we have inverted yield curves with $13 trillion in global negative yielding debt floating about.

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

It IS Different This Time

It IS Different This Time

They’re right. It IS different this time. It’s worse. Much, much worse. What is? Everything. In terms of preparedness for the next recession that is. Debt is higher than ever, be it corporate debt, government debt, central banks balance sheets, available ammunition to deal with a new recession, wealth inequality, the social divisions and political extremes, and now trillion dollar deficits, everything points to a much more fragile system. Oh yes on paper low rates keep it all afloat, but the context is as ugly as it gets.

Here we are, the great collapse unfolding in front of us. With yesterday’s Fed meeting we witnessed a confirmed breakdown in central bank narratives over last the year, an utter capitulation to market realities that are forcing central banks to commence the new easing cycle. No, this is not a temporary little rate cut event they are promising, it’s a new cycle. The Fed yesterday offered a 3 rate cut outlook, precisely what markets had been pricing in. The Fed bowing before market demands. Give us drugs. Yes, whatever you want, you got it.

The response: An overnight collapse in yields to now below 2% on the 10 year, the lowest reading since the US election in 2016.

It was all bullshit:

The glorious growth stories everybody told, the tax cuts that were supposed to bring greatness, all nonsense. Instead we’re now stuck with trillion dollar deficits, collapsing yields, and a renewed TINA effect as money doesn’t know where to go but stocks, chasing whatever they need to chase.

Or, if you don’t want to chase, you can lend money and pay people to borrow from you. It’s all the rage:

Over $12 trillion of negative yielding debt floating about there. Quite the recovery.

But be clear the bond market is screaming recession is coming, none of this is fundamental based:

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

Pain Is Inevitable; But Suffering Is Optional

Pain Is Inevitable; But Suffering Is Optional

How to avoid becoming collateral damage in the coming crash.

Sometimes you really do find enlightenment at the top of the mountain.

I spent this week hiking in Montana’s Bitterroot mountain range, as a participant in the pilot run of a new personal-growth-through-adventure-travel startup.

In our group was a famous professional cyclist, who had been a superstar on the Tour de France for many years.

He has a fascinating life story, both on and off the bike. His tales of the super-human efforts required to prevail at the most elite level of this punishing sport are mind-blowing.

The relentless and gruelling training covering thousands and thousands of kilometers. The near-starvation state cyclists exist in to maximize their power-to-weight ratio. Endless travel. Horrific crash injuries. Sponsor pressures. The money and politics driving the sport. Overbearing regulators. Cut-throat teammates. And of course, the pervasive doping.

When we asked him how he managed to persevere at the top of such a demanding sport for so long, despite the huge toll it took on his health and his marriage, he thought for a moment then said: “I suppose I’m just really good at suffering”.

It’s clear that, in addition to some truly amazing experiences, his cycling days have left him with a legacy of damage that he’s still working through.

As he shared this with us, one participant wisely advised him to remember: Pain is inevitable. Suffering is optional.

Yes, he’ll still need to deal with the aftereffects of his racing years. But it’s up to him how much power he wants to give them over his happiness and life path from here.

From Mountains To Markets

I’m struck by how relevant the above advice is to investors right now.

It’s becoming increasingly clear that the end of the ten-year bull market has arrived.

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

Event Risk

Event Risk

In rare moments markets face major event risk, in even rarer moments the event risk is well advertised in advance and the risk implies massive potential moves in either direction.
Markets are faced with such a moment right now: The outcome of the China negotiations.

Ever since Donald Trump tweeted out new tariff threats last Sunday markets have experienced their most serious rout in 2019 with $VIX exploding higher right in front of the advertised decision day tomorrow.

In process markets have broken their 2019 up trends (see also Shattered) and indices such as $SPX have rejected new all time highs. The decision outcome tomorrow is likely binary, Trump either follows through on the threat or he won’t. If he follows through China may retaliate and the trade talks long serving as a rallying cry for markets under the banner of “trade optimism” may very well escalate into serious tensions that could either delay any trade resolution for months or even cause them to fall apart with potential very significant consequences.

Of course the tariff threat may just be bluster and/or effective depending on your point of view, in which case we may see a massive rally, even to new highs. Even today we see a quick lift in markets off of Trump’s most recent comments that a trade deal is still possible and he has thought of an alternative and has received a “beautiful letter”. It’s literally a ping pong game, but it’s also a technical one.

Without going into the political or strategic or the myriad of possibilities (including a kick the can scenario) but let’s just look at the potential sizes of the bullish and bearish outcomes.

The bullish: Tensions get reduced and/or a trade deal actually comes to fruition or an “alternative” kick the can scenario brings hope again.

Result: Massive relief rally that can actually produce new highs.

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

The Fed Is the Bubble

The Fed Is the Bubble

Occam’s Razor: The simplest explanation is often the best explanation. In this case: The Fed panicked in December and by caving to markets reignited the bubble in a major way and now they are losing control as they are trapped and twisted in their own narratives. No rate hikes until 2020 but markets are printing new all time highs less than 4 months following Powell’s famous balance sheet flexibility cave on January 4th, just a couple weeks after President Trump told him “to stop the 50Bs” on twitter.

And markets have done nothing but gone up since then:

View image on Twitter

View image on Twitter

2019

But this appears to be only act one of the drama. Now a mere weeks after a constant drum roll by Kudlow and Trump demanding the Fed to cut rates by 50bp the Fed may actually do just that according to Nomura.

Such a move would surely end whatever may be left of the Fed’s “independence” credibility which one can critically question already following the December cave. Loss of credibility being ironically one of the key risk factors Deutsche sees as a threat to the expansion:

DEUTSCHE: “There are 5 different ways this expansion could end”

1) A sudden blowup in credit markets

2) The US consumer gets tired

3) The US trade war intensifies, in particular with Europe

4) Fed credibility is severely damaged

5) China gets a current account deficit pic.twitter.com/059hmNSU60

Whether they will cut rates at this meeting or not is speculative, but fact is global growth is slowing still and markets are pricing in a rate cut:

The Fed has already made itself the market’s play thing and hence can’t ill afford to disappoint markets this year and consequently the Fed faces a perhaps impossible choice this week:

Cut rates here by 50bp could only exacerbate the bubble and set markets onto their combustion path following a total credibility loss.

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

Get Real

Get Real

The final phase of a bull cycle is the most deceiving. It is the time when things are at their best, optimism runs wild, equities can do no wrong and any warning signs are dismissed as equity price action valiantly defies the reality that is to come.

It is also a time when complacency makes a comeback as big rallies emerge following initial larger corrections. 2018 was a year of big corrections. 10% in February, 20% in Q4. Now a 25% rally. Not signs of a stable bull market. It is precisely the aggressive counter rallies near the end of cycles that can be the most awe-inspiring and reason defying, yet they can also be the most dangerous while being the best opportunities to sell at the same time.

Let’s get real: The liquidity machine can hide reality only for so long and that is: Things keep slowing down. Cycles don’t turn on a dime, they take time and that is what we are seeing unfold and the signs are plentiful. From Japanese industrial production going negative the past 3 months to home sales in the Hamptons slowing to the slowest level in 7 years.  I’m using these couple rather random examples to illustrate a point: The slowdown is as broad as it global:

Oh yes, even Friday’s Q1 GDP report reeked of deceit and the headline is hiding theslowdown in plain sight:

“The economy isn’t doing nearly as well as that 3.2% annual growth rate for gross domestic product reported Friday by the Commerce Department.

The heart of the real economy — private-sector consumption and investment — slowed sharply in the first quarter to a 1.3% annual rate, the slowest growth in nearly six years.

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

Combustion

Combustion

This is all going to end badly, even some ardent bulls will freely admit this, the question is the how, when and the where. Frankly it’s a tragedy that’s unfolding and discerning eyes can see it. Since the December lows markets have taken the scripted route higher salivating at the prospect of dovish central bankers once again levitating asset prices higher. A Pavlovian response learned over the past 10 years. Record buybacks keep flushing through markets and cheap money days are here again as yields have dropped markedly since their peak last fall.

But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation.

Fact is central banks are hopelessly trapped:

10 years after the financial crisis is there any conceivable scenario under which central banks will ever normalize balance sheets to pre-crisis levels?
Anyone?

View image on Twitter

Implications:
1. The Fed stopping here is an admission of failure
2. Full normalization would crash global equities
3. Central banks are trapped & are forced to remain accommodative
4. Central bank policy is still in crisis mode
5. It’s all a propped up shell game

The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. As today’s Fed minutes again highlighted: No rate hikes in 2019 while the tech sector is making a new all time human history high this week. What an absurdity. A slowing economy ignored by markets as cheap money once again dominates everything.

So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the ECB under Mario Draghi:

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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