As the chill winds of New York’s seventh month of winter weather flow through the canyons of Wall Street, market volatility has subsided. Programmed, as they are, to jump at every Presidential tweet, it was only a matter of time before the markets’ pavlovian response faded away. 

While the market narrative changes from time to time depending on the catalyst of the day we remain on course for an overall bearish view on equities and asset prices in general because the underlying growth of money continues to decline. At this time there is no sign that this declining trend in the global growth rate of the global monetary aggregates is turning. Nor is there any sign that the trend decline in velocity has reversed.

Looked at individually we can say that the decline in US and Chinese monetary data is policy induced while in Europe and japan it is declining despite continued QE programs. While Eurozone and Yen QE programs have been cut back the consequent fall in money growth shows how dependent their economies are to financial pumping to generate any growth at all. It highlights our principle criticism of QE in general that it is for emergency only. Excessive application is self-defeating and leaves no painless exit for central Banks. Continue reading “Next phase of volatility is approaching”

The countertrend rally underway could last three to five days but the price action has the characteristics of pre-crash conditions. We recommend increasing short positions and hedges into the rally.

TR

The sharp drop in equity markets has further to go. The threat of a trade war will not dissipate overnight. Indeed escalation is more likely.

The appointment of John Bolton as National Security advisor puts the final confirmation that the US is gearing up for war. This does not mean there will be a war but it does mean that North Korea will abandon its nuclear program or else it will be destroyed with an unquantifiable amount of collateral damage.

TR

The decline in stock markets has found some support but it is not the end of the decline. We expect support to break fairly soon and that markets will decline into early April. The February lows are a rough target for now.

Bonds are weakening in advance of the Fed statement and forward guidance. We think that guidance will be towards tighter monetary policy as the Fed is convinced the economy is on a stable and strong footing. Inflation is above target so there is no reason for the Fed to hang back. A rate hike this week is well discounted so its the future guidance that matters.

TR

 

It looks increasingly possible that the Democrats will get a majority in the House in November’s mid-term elections. This is an important point for markets. True, a victory for the Democrats is in no way a certainty. Their recent victory in Pennsylvania’s special election depended on a candidate who was unusual in that he was pro-life, pro-guns and anti-Pelosi; in other words, not typical. Looking ahead, similar candidates would probably lose in most party primaries, where ideological purity tends to be placed ahead of wider bipartisan appeal.

However, the main driver for a Democratic victory will be the economy. We remain convinced that the economic cycle is turning, and that the coming downturn will deepen as interest rates rise. Note, in particular, that corporate debt has expanded enormously in recent years to finance share buybacks and M&A deals. This is classic end-of-cycle activity, and it makes the whole economy much more vulnerable to interest rate increases. As we have described in earlier notes, a credit shock is likely as the Fed tightens policy.

…but not yet. For the moment, stock markets are relatively untroubled. Yes, there’s volatility—but “buy the dip” psychology is still pervasive, and we have not reached the panic stage yet. It will come.

In the meantime, bond markets are likely to fall a little more ahead of this week’s Fed meeting and the next hike. We would take the 3% level on the 10-year note as a buying opportunity. It is not far away. This should coincide with gold basing out for a decent rally with a rough target of US$1,550.

Malcolm Tulloch

The writer is director of the firm Tulloch Research. The company provides bespoke advice to clients on macro-opportunities in financial markets.

“Intuition is a product of accumulated experience”

Tobias Truman

US monetary policy is set on a tightening course. Any variability is just a question of manipulating expectations around the speed of interest rate increases. Inflation is above target on a quarterly basis; unemployment is low and continues to decline. Under Powell @federalreserve, the Fed is moving away from targeting an ever-higher stock market—recognizing the risk inherent in such a policy. Reflecting this, his erstwhile private equity partners are selling whatever assets they can.

Monetary policy in Europe and Japan remains in emergency mode—reflecting the structurally weak condition of their economies. In Europe, this means primarily Italy—and in Japan, it means the Yen. The Yen will shoot higher if monetary policy tightens, precipitating another deflationary shock. But that’s not all: The real structural change for both Europe and Japan will come when they join the developing global arms race. Continue reading “Geopolitics growing threat to risk assets”

Stock market action over the past week did not play out as we expected. This would have been a continuation of the corrective pattern that would refresh markets for a longer-term push higher. Instead, the leading index, the Nasdaq, confirmed that the mania for technology stocks is still intact. Without the pause and consolidation that would provide the basis for another leg higher, the markets are likely to reach exhaustion high in the near future. This will end the cyclical bull that began in March 2009.

This market top has been in the making for some time led by markets in Europe and Asia. The significant difference is in the technology sector where the US is dominant with no real competition. Thus, the recovery in markets from the February correction has been minor in Europe and Japan while the Nasdaq reached new highs. This is against a monetary background where the US is tightening and the ECB and BoJ remain in crisis mode. Continue reading “The End of the Bull Market Is In Sight”

The dollar index may consolidate further this week, but a low has been formed that should lead to a multi-week rally. Bonds are still in a bear market.  Last week’s rally is probably over. The US 10-year should test the 3% level that we think is a soft limit for the move.  US equities should resume their downtrend, with the objective of breaking the February lows. Gold hit our buy target last week. It may base a while, but a large rally should follow.

To recap, our fundamental indicators show the economic cycle that began in 2009 approaching a peak. Economic tops are rarely abrupt—unless there is a catalyst, and this one has at least been dulled by the tax cuts. Dollar liquidity has been tightening for some time and the growth rate of Austrian money supply has been falling in a similar fashion to 2007. Unlike 2007, the financial system appears relatively robust. But this does not mean that financial markets will hold up. In fact, all asset classes will remain vulnerable. Continue reading “Markets to remain under pressure this week”

Summary View: We are long the US dollar in DM and EM, short equities, long bonds and waiting for a low in commodities.

The notable difference in Powell’s testimony from his predecessors of the past few decades was the absence of jargon. Our take on the testimony is that monetary policy is on track for the three hikes that forward guidance has assumed. The economic outlook is at the outer edges of capacity limits and inflationary pressures are building. The balance of risk is for somewhat tighter policy than what is discounted, and so a fourth hike is possible.

The bond market acted as though it broadly agreed with this interpretation by falling slightly. Our view is that while this is a reasonable picture of the economy today, we expect disappointing economic data in the second half of the year. Some early signs are showing up in our indicators. The most important of these is money growth; that has been slowing for some time, and is now barely at the growth rate of nominal GDP. Continue reading “Interpreting Jay Powell.”

We continue to anticipate a stronger dollar, higher bond yields and a weaker stock market over the coming few weeks. Crude, precious and base metals will consolidate further during this time period.

Our central case remains that monetary expectations will remain focused on the Fed’s promise to adjust rates higher as economic expectations remain constructive. Global economic data continues to reinforce these expectations. Whether they will be fulfilled is another issue. The ECB and the BoJ are ahead of the Fed in disappointing market expectations of tightening. This is one factor in supporting a dollar recovery against the Euro and emerging market currencies. To give this forecast some perspective we expect the dollar index to rise to around 95 from the current 89-90 level and not to fall below 87. Some kind of base appears to be forming with a top formation reflected in the Euro. Continue reading “On track but slowly!”

Another Great Depression ahead

We do not just live in a world of facts but also in a world of perceptions. Perceptions are sometimes aligned with reality but frequently, reality is misinterpreted partly due to cognitive deficits but mainly as an almost inevitable consequence of information shortfalls or even inadequate theoretical grounding. This gap between perception and reality grows, sometimes exponentially, because of positive feedback loops that are a classic symptom of bubbles.

Are we in an asset price bubble now? This is the key question of our era because if we are, it is one of the biggest in history and will have dramatic if not catastrophic consequences. Since the beginning of the modern nation state in the early 17^th Century, there were at least four significant depressions following asset price implosions.

Continue reading “The situation today: Two Meta Scenarios”