Prescient Clancy? Markets Teeter, Prices Drop

imageJust for grins, we re-watched the Tom Clancy thriller “Shadow Recruit” last night because underlying that movie was a very possible scenario that might fit unfortunately well in times like these.

Although the whole plot is more completely revealed (spoiler alert) over on the Wikipedia site here, the main idea was that a major player could collapse the US into a Greater Depression by simply timing a major selling event (of Treasuries) within minutes of a major terrorism attack.

And, given how the 10-year has been doing lately, down to just 1.78 yesterday at the close as measured by the ^TNX, it begins to look like our posted intermediate term outlook could come sooner than later.

Remember, the old low (1.63) set in June 2012 could fall, and taking out that really means the Fed will have to do something – even if it’s wrong.  And I have every confidence…..

Meantime, the price of oil was up a bit, Asia was down more than one percent, but Europe down only marginally, which means they are waiting for key economic data from the US before deciding how to collapse the Euro.

Forbes is wondering what the Swiss know, and we’re not sure why Forbes can’t see lifeboat building when they see it.

Not that they’d planned that, of course.  But just like a test pilot doesn’t intentionally rip the wings off an airplane, the world has never test-flown a purely made-up notional currency backed by nothing but a multilingual chorus of me-too’s.

With classic understatement,econo- princess Chris LeGarde of the IMF suggested “strong headwinds” are facing the global recovery.  The what?  And she said the Swiss negative rate move was a surprised, but sounds like she wouldn’t recognize incipient deflation if it pistol-whipped her.

Ure’s Discontinuity Revisited

In the interest of keeping the Fed and the IMF on the right track, here’s the ultra-short version of where we are in  the Global Economy for those who missed it, including Ms LeGarde:

Say you have a stock with one dollar of earnings.  When prevailing rates are 5%, we see that is about a $20 stock.  When the prevailing rate drops to 1%, then that same dollar of earnings is suddenly supporting a $100 stock price.  And, by the time rates drop to a quarter of one percent…then what happens?

Stock price zooms up to what?  $400-bucks.

With long-term rates dropping since 1981 (chart here for non-believers) we can expect the market to keep zooming ahead as rates fall until the bottom quite literally falls out.  Then you get the second Mother of All Crashes and the stupid will not understand why nonlinear periods occur in markets.

They’ll be off looking for scapegoats (short sellers and hedgers) when the real problem is the numbers when rates drop past the public recognition point.  Which is why another QE may be needed…to pump up prices of commodities, which in turn supports rates which in turn lowers stock values which in turn buys another 2-years.

Simple, huh?  If only William of Ockham had managed a fund.


Say, did I mention the Baltic Dry index is down to 741 this morning?  Not a particularly encouraging sign, is it?

So the whole problem is rate-based.  If you want to save the world you raise rates instead of further lower.

Reason?  The closer you get to the edge of the cliff, the more likely someone will panic, or try to pull off a Clancy-like terrorism followed by panic because the closer you are to the inflection point, the less powder and bonds it would talk.

That’s because even without the Clancy plot, if rates keep failing, the worse it’s going to get until ultimately at the inflection point (where prices collapse in a heap) there is no exogenous force required  – shit just falls.

The problem (and one we might get into for Peoplenomics subscribers tomorrow because we have an answer – though it may not be perfect) is that only market performance over time will resolve whether we are on the final upside of the discontinuity, or, whether we are already past the crescendo and this bobsled isn’t already heading for the first turn.

Stay tuned for more on this exciting match-up, coming soon to markets near you.

But not till next week – we still have options to get through today and the Consumer Price Index which hints at what?

CPI and Inflation

And what?

BANG!  Serious Deflation

Just out is the Cost of Living report.  Ugly…but this is what happens when deflation comes-a-calling…

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today.

Over the last 12 months, the all items index increased 0.8 percent before seasonal adjustment. The gasoline index continued to fall sharply, declining 9.4 percent and leading to the decrease in the seasonally adjusted all items index. The fuel oil index also fell sharply, and the energy index posted its largest one-month decline since December 2008, although the indexes for natural gas and for electricity both increased.

The food index, in contrast, rose 0.3 percent, its largest increase since September. The index for all items less food and energy was unchanged in December, following a 0.2 percent increase in October and a 0.1 percent rise in November. This was only the second time since 2010 that it did not increase.

The shelter index continued to rise, and the index for medical care posted its largest increase since August 2013. However, these increases were offset by declines in a broad array of indexes including apparel, airline fares, used cars and trucks, household furnishings and operations, and new vehicles.

The all items index increased 0.8 percent over the last 12 months. This is notably lower than the 1.3 percent change for the 12 months ending November. The energy index has declined 10.6 percent over the span. In contrast, the 3.4 percent increase in the food index is its largest 12-month increase since February 2012.

The index for all items less food and energy has increased 1.6 percent over the last 12 months, its smallest 12-month change since the 12 months ending February 2014

The Dow futures are only down 50.  Wait till we hit next week and out of options choppiness.  Then we should get a better sense of things.  But remember S&P 1,740 this spring is still very much alive in our playbook.

Cleaning Out the Nest

Raids in Europe overnight have netted a dozen, or more, who were suspected of supporting the outrage in France last week.

John Kerry laid a wreath in France today, playing (sorry for the bad pun) catchup.  (Think about it.)

Meantime, the Belgium authorities have busted up some would-be cop killers.

Oh Canada

Target is leaving.

1 thought on “Prescient Clancy? Markets Teeter, Prices Drop”

  1. I’m not really surprised about Target – and I wonder how it hangs on in several places around the US – Mostly, I think, the retailers get to big for their britches – and the constant attempt to grow (get bigger/expand) stretches out their resources which are on risky grounds because they only create servile wages jobs – Penney is a good example of not leaving well enough alone – the local store has little ‘help’ from the clerks and the inventory doesn’t maintain the quality that Penney’s was once noted for – lack of customer service is what really hurts in many communities.

    There is a large Target distribution center here – and the nearest Target is over 50 miles away.

    I suppose ‘Mericans are getting used to having to figure out/help themselves when shopping – the clerks are simply cashiers that can scan barcodes. Self-service.

    Deflating the stock market doesn’t bother me – deflating the currency does. MOST citizens, me thinks, are more concerned with the cost of food and energy as well as the cost of housing – inflating the amount of dollars only inflates the cost of living – deflating the value of the dollars that we have.

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