imageIt came to me as a great revelation in a dream:  The Fed doesn’t know what is going to happen, either.

So just in case, in the Fed decision this week, they dropped from four raises being in their forward guidance down to two.  With the action going on in the rest of the world, it means they aren’t too sure yet of what’s going to happen.

In the meantime, the markets are really setting the rates – and the Fed is simply rate following. 

Remember, around here, one of the few bits of economic reality is the  10-year Treasury.  And when you look at what the 10-year has been paying, it looks to me like it may have completed a major corrective 3-wave move higher from where it was February 11th at 1.644%.

imageWhile my odd way of looking at charts will make a lot more sense to our readers, the basic idea is that we have broken the trend channel of a wave 3 rally and the way is now open for the 10-year to drop down to the 1.78% area.

While this should do remarkable things for the Dow (which should rally since when rates are falling, traditionally the stocks go the other way) this leads us to anticipate another encounter – perhaps this summer) with Ure’s Discontinuity.

That’s what happens as interest rates approach zero.  While no one knows precisely where that level is, when rates are above it, the investment community looks at things and thinks “No point of jumping into stocks because they have risk…

Usually, though, stocks begin to look better than bonds at some point in the decline, especially in the period just ahead.  That’s because the thinking of investors flips over to something like “Damn!  The market is positive for the year so at this rate I should peddle my bonds and get long stocks….”

Below the floor of the Discontinuity, though, things turn ugly.  The investor thinking turns into something like this:  “Damn, bond yields are crap so I don’t want THEM.  On the other hand, things are now SO BAD that stocks are not showing any real potential upside EITHER.  I might as well go to cash and do nothing…just get my money off the table…”

Exactly THERE is where the Second Depression begins.  People who have been buying stocks are doing so on the come:  Most companies don’t really have a lot of traditional upside left (through increased sales, new products, and reduced costs) because everything has already been optimized all to hell and gone over the past 35-years.  Long, actually:  The long term high in the 10-year dates back to 1981, does it not?

On the bond side, though, that means banks and others are sopping up bonds as fast as they can because nothing else is offering a return of any sort.  As demand for bonds goes up, their yield goes down, and their prices go up at the retail level.

Damn.  Double damn.  Discontinuity damn.

By backing away from four raise predictions this week, and dialing it back to two (and we can’t even bank of those…) what the Fed is trying to do is pretty obvious:

They are attempting to bounce along on what they HOPE will be just above the floor of the Discontinuity so that things don’t spiral into collapse.

The good news (but only such as it is) is that the stock market could light off with one last huge bubble as took place when the Fed last tinkers with the macro economic equation at these levels.  You’ll find that in your history books as the period from the Fed discount rate increase in April of 1928 until the ultimate top in September of 1929.

We may very well, at least in the way I look at things, be in that similar position today.  The Fed is attempting to arb and jawbone the market higher.  In theory that is working, but they miss an important dynamic that I’ve never seen satisfactorily explained in any economic papers.

That dynamic is consumer expectations.  Here is what is going on:  People are beginning to sit on their wallets.

Here’s a snip from one of our reader’s (from our Comments section) that explains it neatly:

“I’m coming up on my 10th anniversary working for a certain department store chain. My store is located in a rather affluent suburb of Los Angeles, but still somewhat reflective of economic trends. The last couple of years my store has definitely showed symptoms of dollar deflation as we slash prices on merchandise so deeply even the customers are remarking, “It’s like you’re giving it away” and “Maybe next time you’ll be paying me to take it!” We have lately created large areas of permanent clearance areas as we slide our way down to remake ourselves into something like Kohl’s or TJMaxx. I just hope my job survives long enough for me to pay off my daughter’s wedding!

Keep an eye on our Comments section because people are reporting various incidents of price reductions, but not in the staples – yet.  For now it seems to be confined to the upper end of the discretionary spending ladder.

Sure, housing starts are doing OK – for now.  And my expectation is that they will continue to look good until the New President comes along in January.  THAT IS WHEN RISK WILL RISE LIKE A ROCKET.

There are only three possible outcomes in view presently, and none of them is particularly encouraging.

1.  Hillary Clinton wins the election:  Under this scenario, the importation of masses of more workers continues as illegals are made “legal” by the complicit (bribed and cajoled) Congress which has forgotten the basics.

Under this scenario, we have to ask “How would the Depression have worked out if Hoover hadn’t won in 1928?  What is a Roosevelt New Dealer (and master inflationist) has come along, instead?

Then, instead of a global blow-up in stocks and bonds (which not of the PowersThatBe really want) we would likely be able to kick the can down the road for another 2-5 years but then pension obligations blow up the world.  

CNBC has that covered in Study Finds Public Pension Promises Exceed Ability to Pay  which is worth reading.

The main thing here is the ultra-long-term view of pensions and Social Security and inflation and levels of taxation are still out there, and still unresolved.  It’s just we are distracted by a closer-in mess.

2.  Donald Trump (with a running mate like Dr. Ben Carson) win.

In this scenario, the Rest of World blows up, and while things look “iffy” in the short-term for investors, in the longer run, problems begin to dissipate after a few years.

The problem of the Second Depression, unfortunately does not.  Because as we slam borders closed, and as we raise tariffs or simply impose fees on imports, prices will go up.  And what is the result of that likely to be?  Oddly:  Some inflation under Trump during the period of adjustment.

Then there’s the matter of “payback’s a bitch.”  What if something happened to the master investor?  (In other words, a Kennedy type event.)  Would whoever his running mate is be able to hold to the economic policies that Trump espouses and see them to the implementation phase?

Answer:  It would be iffy at best.  So if anything happen to Trump – and regardless of his running mater, the outlook would be for a Depression with someone left in charge who lacks the communication skills to “talk down the country from the ledge.”  That’s a tall order, and none of the debaters seem likely to get this right.

3.  The GOP – being totally controlled at the top by self-interested greedsters who can’t em brace change unless there’s a buck in it for them, goes to a brokered convention and appoints as the standard-bearer someone who skipped the debates. 

I’m not the only one who expects a kind of WW III if this happens – read over here about how this insider stuff works.

In which case, the silent middle will be disgusted with the failure of the GOP to “walk the talk” and we [return] to Option 1 as the actual outcome and Hillary wins.

So our bottom line: 

1.  Slow time in the newsroom but since the Fed decision, the market seems likely to close up 250 for the week.

2.  Next week, we may see a decline because of the post quadruple witching let-down.

3.  It is still too early to take our New All-Time Highs to the bank.  That will not be assured until we get there are (as several astute readers have noted) get a few weeks of solidly higher closes above that level.

In Other News

Note really much worth noting except maybe American IS fighter: I made a bad decision because that really is a win for the home team.  Imagine:  Someone coming to their senses…

There is a new $10 bill in the works according to Hamilton Creator Says Fans Will Be Happy With New $10 Bill.

The fact that it’s not a new $20 or $50 speaks volumes about deflation to some of us.

O Cuba

To the LA Times “Obama’s Cuba visit to augur a ‘new beginning’ between nations.”

The real deal here is money (but then isn’t it always?)  Cuba rebukes Obama’s call for change but will nix dollar tax.

This will be an instant “add policy change and stir” that will bring some economic stimulus to southern US ports and will open another economic valve…

The Art of the {BAD} Deal

Fortunately, there’s a kind of unwritten rule of being a journo that you don’t get down to using colloquial phraseology in reporting like “Ungrateful prinks.’

Otherwise, we’d be tempted to apply it to Turkey and remind the cast of clowns running the EU (into the ground) that they are stupid beyond belief: Europe offers deal to Turkey to take back migrants.

They should be saying “Take ‘em back, or else…”

Europe loved the economic push from the import of lots of people (who just want to take over Europe again in a kind of Islamist’s version of reconquista),  Now they want to undo the deal?

Europe was dump for letting them in, in the first place.  Now they want Turkey to solve the problem for them?  ViseGrips time.  I need to pinch myself, bad…