Yeah…sounds a bit Americentric and dramatic, and long too, but I always try to “call ’em like we sees ’em” around here.
Our Global Aggregate Index is up a mere 124 points for the week so far, and as we have explained the index to subscribers to our premium www.peoplenomics.com service, there is only just so much money in the world on any given week. 124 points out of just under 20,000 is friction losses or noise trading if anything.
Once you understand that, the crucial role of money supplies and manipulation begin to dig in and your ability to ‘see’ market movements in advance will evolve quickly.
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Until mid April, we have had a period of coordinated Central Bank looseness that seems to have come to a halt this month. The result of this (money becomes more dear) is rates tended to firm since mid April.
As the Fed FOMC gavels in this morning, the problem they have is economic growth is not what was predicted. The Trump Mantra about “making America Great again” sounds good and all. But with a back-stabbing bunch of conservative democrats opposing him on the Hill, there’s been no meaningful new legislation.
Ergo, the GDP growth has fallen.
The Fed – along with other central banks – has really been “pouring on the coal” in terms of making ready cash available to “the big boys.” But the problem here is that in doing so, the 10-year rates are stuck (as of the ^TNX Monday) around 2.33%. Markets are screaming “No Hike!”
Since the Fed applied the “monetary brakes” in April, the (pathetic) 2.179% lows in mid-April have edged up.
Consequently, the market now is voting to hold around present levels (though they may pull back a bit more) because we may be in Wave 1 of the final V up.
IF this is the case, then we already have a pretty good idea of where the blow-off highs will come this summer and we’ll roll them (and the new trading trend channel) out for subscribers tomorrow. But we could go up another year, or more, as in 1928-1929. (Missing is the 1929 tax cut so far, though.)
Meantime, there’s almost no point to sticking around for the Fed meeting comments tomorrow because they are not able to raise rates. One percent chance, I reckon.
This is something we’ve seen coming for some time.
I’d refer you to Peoplenomics Issue 812-B of April 1, 2017. “Are Fed Rate Hikes Over?”
It’s the updated version of pushing on a noodle.
In that article (over a month back!) I laid out a scary thought experiment which I’d like to share with you because it fits right in to the Long Wave Economic Outlook we track:
“It is axiomatic around here that the prices of bonds and the prices of stocks are roughly equal when it comes to return on investment at all times.
There are some adjustments to be understood, of course.
One reason that the Dow Jones Industrial’s dividends may tend to be slightly higher than, say, the interest paid on a 10-year bond, is because of stock price risk.
In other words, when you are trading stocks there is always the chance of a major downward stock market move. When the directional call goes wrong, total return to an investor declines. Sometimes precipitously.
Thus, to compensate for the riskier proposition of owning stock in a corporation, the dividend paid by a stock plus the trading risk (which is really a negatively signed number) should about equal whatever the bond is paying.
The Federal Reserve has a very touchy problem to deal with when facing the prospect of a potential rate increase this summer.
If the Fed makes another rate hike, consider what it will do to corporations: it will hammer them.
Corporations have been beneficiaries of the declining interest rate environment since the bond yields hit their highs in 1980. Having been in a 37-year long wave interest rate decline, the good times are about ready to hit the wall.
When the interest paid on a bond goes up, it means that corporations must find some way to make their proposition look equally enticing.
So how can they do that?
One way corporations can improve their prospects is to increase sales and/or reduce their cost of materials. So, if the bonds begin to pay 10% more than they are presently paying, then stocks must find a way to increase their sales such that dividends increase by a comparable 10%.
If they are not able to do this, however, there are other ways to skin the dividend cat: the least palatable of these is for the stock price to be slaughtered by the market and come down to a level to where the effective yields are again approximately equal after discounting for the price risk of stock trading.
There are other ways that corporations can do a better job of returning dividends to shareholders.
As my consigliere pointed out, most people are not familiar with the balance sheets of major American corporations. However, since he is both a tax attorney and certified public accountant, when he explains to me that interest costs are a huge portion of the corporate expense side of most publicly traded companies, I take him at his word.
To paraphrase his explanation, most large companies have been slowly restructuring their borrowing expenses as we have been settling in to the near-zero interest rate paradigm.
However, if the Fed raises rates again, that will put in a solid bottom in the lowering of corporate financial overhead.
Then that part of the corporate picture will reverse and stock prices will fall as interest expenses begin to bite into dividends. I think we are very close to that swing point now.”
You see that? We about nailed the change in Fed Policy!
So to me, at least, it is a foregone conclusion that the Fed will mainly talk Fed-gibberish tomorrow. The might say something like “We believe the economy is doing fine, but we are not yet raising rates until there is more…blah blah blah.
The problem is that they need to sound confident on the one hand (so people will keep investing in the future) but on the other there’s a screaming reality from the bond market: When this much money has been sloshed into the system, rates don’t rise.
We pointed out last Saturday for subscribers that the M1 rate on a most-recent three months basis was up around 13.3% (yikes!) but in the sliding 13-week window had dropped to 8% and change. Means money creation is slowing. Market rally should cool.
Still, this doesn’t mean the market can’t go up.
In fact, we see the talk today of a possible summit between Donald Trump and Kid Korea as being just the kind of headline that could power stocks higher regardless of Fed policy – to a degree and for a while.
But our expectations today are simple: With our Aggregate Index up 124 points for the week, we should see a modest decline until the Fed mumbo-jumbo (which is sure to include something for everyone) comes out tomorrow.
After that? Well, that’s why Thursday and Friday are so interesting because we will get a series of job reports starting tomorrow.
For what it’s worth, I’m back on the long side of things expecting stocks to go up. We’re on a semi parabolic path, more muted than the 1928 analog, but less so when you correct out the differences due to the six day-a-week trading in the historical period.
Even if you don’t “Play the Market” it’s still worth following all this because it’s more like a “Snap-Circuits” kit. Economics doesn’t easily fit into idiot-level SMS chatter as we screamed about in this morning’s Coping section.
But it does impact jobs, contributions to Social Security and a pile of other geared relationships which, again, require thought and connecting more than SMSBS or serial tweets.
The Big War: Turning of the Screw Dept.
Read-worthy headline: “FBI translator married ISIS terrorist she was supposed to investigate.”
Oh, yeah: Skip Europe this summer. State Department has issued an extremely rare blanket travel warning:
Recent, widely-reported incidents in France, Russia, Sweden, and the United Kingdom demonstrate that the Islamic State of Iraq and ash-Sham (ISIS or Da’esh), al-Qa’ida, and their affiliates have the ability to plan and execute terrorist attacks in Europe. While local governments continue counterterrorism operations, the Department nevertheless remains concerned about the potential for future terrorist attacks. U.S. citizens should always be alert to the possibility that terrorist sympathizers or self-radicalized extremists may conduct attacks with little or no warning.
Extremists continue to focus on tourist locations, transportation hubs, markets/shopping malls, and local government facilities as viable targets. In addition, hotels, clubs, restaurants, places of worship, parks, high-profile events, educational institutions, airports, and other soft targets remain priority locations for possible attacks. U.S. citizens should exercise additional vigilance in these and similar locations, in particular during the upcoming summer travel season when large crowds may be common.
Terrorists persist in employing a variety of tactics, including firearms, explosives, using vehicles as ramming devices, and sharp-edged weapons that are difficult to detect prior to an attack.
The facts seem to argue my case that there’s a war on, it is transnational in scope and anyone who doesn’t see it is a retard.
But we have no shortage of those, so let’s move on to…
Trump Bash du Jour
Here’s the Reality: the Founders loved FREE SPEECH. But that doesn’t give anyone the RIGHT TO INTERUPT OR DISRUPT Or ATTEMPT TO SILENCE anyone else’s.
The radicals in America think – since they are the sole arbiters of what’s wholesome and allowable – that THEY AND ONLY THEY should have disruptive speech rights.
NO ONE has them. To deliberately go to the oppositions event to hijack a peaceably assembled group is no more allowable when it’s anti-Trumpers or BLM.
Not that anyone under 40 will understand this, since in the dumbed-down country once called America, this is no longer driven home in civics classes. Only civics that matter are Hondas.
It’s all teaching free-for all and get whatever plumbing changes you feel like this week and we’ll find some way to stick the taxpayers for it.
Yeah think of it as NBSC – new bullshit civics.
Dear Santa Monica Cowboys
I couldn’t help but notice that a lousy 3.0 earthquake in Santa Monica is BIG NEWS.
Flyover country reality: There have been 12 earthquakes in the past week in “fracking country” up in Oklahoma. Two of those were 3.0 and larger. See anything in the press? Hell no. Not even in OKC for the most part.
Left Coast? Hysteria! Monetization opportunity: Everyone run from street! The quakes are coming! The Quakes are coming!
My God. I can see it now: “Quake injury reported and Santa Monica as supermodel reports “Quake broke my fingernail!”
Jeez…cowboy the f*** up.
(Or cowgirl…I mean this is California…sheesh Hmmm, lest we be sued by the rads I suppose we could throw in arriba vaquero and arriba vaquera…and for our undervetted new arrivals aistajmae qawak. Did I leave anyone out? Oh yeah: kovboy aroyf, which might get a laugh at our favorite deli (Jerry’s) out on Ventura, or not.)
Coffee and a blintz?