August 29, 2019
Why?
As we've discussed, stocks set the tone for global sentiment in this environment (across financial markets, policymaking and economics). Global policymakers are well aware of this (from the Washington to Tokyo, from the Fed to the BOJ).
With that in mind, we've talked in recent days about "plunge protection" that has appeared in stocks, since Trump and Mnuchin had an emergency call with the heads of the big banks. And the Bank of Japan (already of an outright buyer of global stocks), has also likely been a contributor to the cause (following a one-on-one meeting with Trump at the G7 meetings last weekend).
So, as of Friday, the world was looking particularly chaotic, with Trump's verbal assault on the Fed, and an escalation of trade sanctions exchanged between the U.S. and China.
Four business days later, and there have been few (if any) improvements to the situation. Moreover, for the doom and gloom crowd, we've had a deepening of the yield curve inversion this week. Still, stocks wouldn't/didn’t crack.
As I've learned over 20+ years of macro trading, what can't go down, will go up. Stocks couldn't go down. And now we have a surge up today. That quickly influences the risk-mood.
Believe it or not, we've now fully recovered the losses in stocks that were triggered by Trump's tweet on Friday.
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And now we're approaching a big technical level in stocks.
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You can see the sharp decline that started August 1st, from the all-time highs, triggered by another Trump tweet (the announcement of tariffs on another $300 billion in Chinese imports). If we get above this key 2940 area in stocks (the yellow line in the chart above), we could see record highs again, soon.
Clearly, Trump has had little trouble manipulating both sides of the stock market. That (manipulation), along with global central banks back in aggressive easing mode, has been a greenlight to own gold. With that, gold traded near six-year highs again today. But we end the day with a sharp reversal. For technicians, gold put in a bearish technical reversal signal today (an outside day). With stocks and yields moving higher, gold may be in for a small retracement (which would be a buying opportunity). |
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August 28, 2019 It was reported today, that Trump said on a call with midwest farmers, that he could quickly claim victory on a China deal and be a hero and easily win the election.
This is what I've suspected to see him do since he forced the Fed's hand on a rate cut in July. But he hasn't done it, yet. And as time passes, he is losing leverage. He continued by saying, it would be the wrong deal (to concede). He said staying the course, is doing it "the right way," but it will take a little time. We continue to watch how it unfolds. In the meantime, the behavior of U.S. stocks sets the tone for global financial markets and global sentiment. And for the moment, hanging around 5% from the highs, the market is relatively stable. Remember, that appears thanks to an emergency call Mnuchin and Trump had with the heads for the country's big banks on August 14th – the worst day for stocks since 2019.Let's take a look a the chart to see how stocks have behaved since that call. |
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We had a huge bounce, for the days following the call. And stocks have continued to bounce back sharply when testing back below the 2850 level on the S&P futures. When is the last time Mnuchin made an emergency call to the big banks? Christmas Eve of last year. When stocks opened the day after Christmas, the bottom was in.
So, what kind of messaging are we hearing from the banks that are represented on these calls? JP Morgan (the biggest bank in the country) has been putting out bullish stock market notes. On August 19th, JP Morgan said they "don't think the current pullback will extend for longer than the May one did" (which was a 7.6% decline over 23 day — 13 days to fully recover the losses), and they said they think "stocks will make new all-time highs into the first half of 2020." Yesterday, they said the time to buy stocks is approaching and still think the market will advance into year-end. At this point, stocks have fallen 6.8% and have been in drawdown for 23 days.
August 27, 2019 Yesterday, we talked about the two key spots to watch, as we step through the week: the Chinese yuan and the yield curve.
Today, both continued to disrupt any sense of calm that might have developed following the weekend's G7 meetings. The Chinese walked the yuan lower, again, overnight. The yuan is 4.2% weaker relative to the dollar, since the beginning of this month! |
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As you can see in the chart, the yuan is the weakest since 2008 (the orange line going up represents a weaker yuan, stronger U.S. dollar). At this pace, by year-end we would see a return to the value of the peg (8.27 yuan/dollar). The peg held from 1997-2005.
The yield curve Remember, we've had an inversion of the 3-month treasury to 10-year treasury since May. But the markets didn't go haywire until the 2-year/10-year spread briefly went negative on August 14th. Yesterday was the first day, it spent considerable time "inverted." And today, it plunged as low as negative five basis points. Bottom line, the "recession signal" that sends fear is now clearly flashing. Still, unlike past yield curve inversions, we have global central banks that have pinned down the long-end of the curve (i.e. distortion). People in this business don't like to say "this time is different." But that makes, this time different. What the yield curve is doing, however, is exposing the Fed for bad policy — for aggressively moving short term rates UP, while the world is still dealing with post-crisis deflationary forces (which is why the central banks are still involved in the long-end of the curve).
August 26, 2019 As we entered the weekend, it appeared that global tensions and uncertainty had reached a boiling point.
But by Monday afternoon, things are looking relatively calm. What happened? The news of the day, attributed to the calmer tone, was some ambiguous commentary on China trade negotiations. But it probably had as much to do with the call out to the banks that the President and Treasury Secretary made about 10 days ago (to “assure normal market operations”). And with a meeting that Trump had with Abe over the weekend, the leader of Japan and the commander of biggest and boldest QE program left in existence (within which, is a mandate to outright buy stocks). With that, both the U.S. banks and the Bank of Japan were likely the stewards of global financial market stability overnight (i.e. the plunge protection team). Of course, U.S. stocks remain an important barometer of global economic sentiment. And, on that note, we start the week with what seems to be a healthier head-space than we ended last week (with stocks about 5% off of all-time highs, despite some very ugly risks). But two spots will be key to watch, for signals on whether the mood might be calming: 1) The Chinese yuan traded to another 11-year low overnight. The weaker the PBOC sets the yuan, the more aggressive retaliation signal they send to Trump. And 2) The U.S. yield curve (10-year/2-year) inverted just briefly a couple of weeks ago (fueling recession talk). Today, it was inverted much of the trading day.
August 23, 2019 China escalated the trade war this morning, just before Jay Powell was due to make a very important speech on Fed policy.
It didn't seem to alter the message. It was a very carefully crafted speech, but not exactly what the market was hoping to force. In his 12-page speech, the Fed did NOT give the market (nor the President) the signal that they were planning the type of easing assault we are seeing at other central banks in the world. But he did make the comparison to the 1994-1995 period. We've been talking about this scenario all year, here in my Pro Perspectives notes. In 1995, the Fed was forced to reverse course, after a period of overly aggressive period of tightening, into a low inflation, recovering economy. As we've discussed, things worked out very well. The stock market and economy boomed over the next five years.
Importantly, Powell described the mid-90s Fed cuts as a “response to threats to growth,” but not a change in the rate cycle. This almost looks like a double-down on his “mid-cycle” cut comment in July. That didn’t go over well. Still, even if the economic situation remains solid, he's given us the roadmap for another couple of cuts.
Bottom line: They will keep tactically cutting rates until the geopolitical risks pass (namely the trade war). Now, with China's retaliatory threats this morning, and a Fed that didn't brandish a monetary policy bazooka, Trump wasn't happy. He responded with this … |
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The question everyone should be asking: Is this tweet, threatening to deal with "a very strong dollar," a signal that a dollar devaluation is coming?
Remember, we talked about the prospects of a Plaza Accord 2.0 earlier this summer. Here's an excerpt from my June note … "There are a lot of similarities between the U.S/China standoff and that of U.S. and Japan in the 1980s. That was ended with the "Plaza Accord" — an agreement between the U.S., Japan, Germany, England and France. The Plaza Accord was a plan to balance global trade, through a 50% depreciation of the dollar (vs. the yen and d-mark).
… we may wake up one day and find a similar agreement has been made between the U.S. and major global trading partners (which may include China, or not). It might be a deal between the U.S. and China to “revalue” the yuan (i.e. strengthen it). Or it may exclude China (just G3 economies). With the behavior in markets the past few days, it smells like something is cooking."
So, what happened to stocks, following the '85 currency agreement? Stocks rallied about 15% into the end of the year in 1985, following the deal. Stocks were up 16% in 1986, and rose as much as 40% year-to-date in 1087, prior to the October crash. Gold rose close to 60% of the next two years.
August 23, 2019 Throughout the post-financial crisis era, there have been some major policy signals given from the Fed at the Kansas City Fed's annual economic symposium in Jackson Hole.
Tomorrow will be another big one. Jay Powell will need to deliver a message that shows a clear willingness to ease more aggressively, even if it appears to be a pre-emptive strike on an economy that is currently doing fine. Inflation is soft. And we have growing prospects (in the past month) of an indefinite U.S./China trade war. The Fed has room (the interest rate market thinks a lot of room) to be positioned more aggressively. If we get these signals from Powell tomorrow, stocks should be on their way to a very big year (similar to 1995). And with the aggressive positioning from global central banks in the past month, including signals from the ECB that they will restart QE next month, gold should (continue to) be among the biggest winners by year end. As we head into tomorrow's big event the S&P 500 is up 16.5% year-to-date. Gold is up almost 18% (ytd).
August 21, 2019 That stock market fallout in December, led to a response from the U.S. Treasury. Mnuchin (Treasury Secretary) called out to major banks and the President's Working Group on Financial Markets (which includes the Fed) to "coordinate efforts to assure normal market operations."
That was the turning point. That put a bottom in stocks. Within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed's rate path — signaling a pause. The Fed's pivot fueled a V-shaped recovery in stocks, and by July stocks were on new record highs. But then we had another mis-step by the Fed (calling the July rate cut, just a "mid-cycle adjustment"). And, shortly thereafter, Trump escalated the trade war with China, sending the signal that China has turned its back on the prospects of a deal, opting to wait it out until the 2020 elections. Yields plunged. More global government bond yields have gone negative. The yield curve inverted. And the chatter recession and crisis has quickly returned. With that, last Wednesday morning, stocks were having the worst day of 2019, and the set-up across global financial markets was beginning to look very vulnerable to a melt-down. Once again, the major banks were summoned. Mnuchin and the President had what appears to be an emergency call with the heads of the top three banks (Citibank, JP Morgan and Bank of America). By the afternoon, stocks had stabilized. And any selling pressure in the major U.S. stock indices, have since been met with a persistent bid (i.e. large indiscriminate buying). The “Plunge Protection Team” appears to be at work. This sets up for the Fed to do a repeat of the early January repentance. On Friday, Jay Powell will be making a speech at the Kansas City Fed’s annual economic policy symposium at Jackson Hole. If he does indeed telegraph the aggressive easing that the markets are asking for (if not forcing), stocks should take off (i.e. a resumption of what has been a big year for stocks).
August 20, 2019 Within the "deregulation" pillar of Trumponomics, dialing back the Volcker rule has been one. The Volcker Rule, under the Dodd-Frank Act was the post-financial crisis response to proprietary trading at the big Wall Street banks.
They banned it. And that has had major consequences for the liquidity that banks used to provide in global markets. Hence, that is, in part, why the swings in markets have become so violent (post-financial crisis). Of course (related), it has also damaged their, historically, very profitable market making businesses (which is classified as "trading revenue"). The line of managing the risk of market making activities and speculative trading, by the big banks, is a blurry one. And the Volcker Rule put the burden on the banks to prove that their trading activity is against their market making activity. That weakened the market making businesses of the banks and increased compliance costs. And the major Wall Street banks haven't been the same since. If we look at the five largest investment banks, the total revenue from fixed income, commodities and currency trading at banks has been cut in half since 2009. Today, two of the five bank regulators approved revisions to the Volcker Rule that soften that scrutinty on bank market making activity. This is a big step in a process that could unlock tremendous pent-up value in bank stocks.
August 19, 2019 The most important news last week, didn't come from the President's twitter account. It didn't come from China. It came from the mouth of an ECB governing council member.
Olli Rehn, voting ECB member and the central bank head of Finland, was vying for the head job at the ECB earlier this year. He didn't get it. It went to the IMF chief, Cristine Lagarde. Last week, Rehn laid the groundwork for the ECB to roll out another big stimulus round in September.
Remember, as we discussed last week, the catalyst for the melt-down in global bond markets was the one-two punch from the ECB and the Fed back in December. The ECB officially quit QE. Days later, the Fed hiked again, into an ugly decline in the stock markets, and, moreover, Jay Powell said their quantitative tightening program was on “auto-pilot.” This sent a clear message/reality check to markets that (at least a portion of) the $14+ trillion in global liquidity that the big three central banks have pumped into the world — that promoted stability and little to no inflation – was getting sucked out. With that, we now have the ECB, importantly, heading back to the QE business. And it may involve outright buying stocks. Let's take a look at how that might impact German stocks. As you can see in the chart below, the DAX remains 14% from the record highs that were made in early 2018 (German stocks have been in drawdown for 17 months) … |
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The Bank of Japan has been in the business of buying Japanese stocks for a long time. But under the Abe plan, it has become a key tool in the massive QQE program at the Bank of Japan since 2013. With the BOJ involved in stocks, it reduces the risk premium in the stock market. And in a world of zero interest rates, the lower risk in stocks is an incentive for capital to chase the higher potential returns of stocks. The idea is that it ultimately drives demand and inflation in the economy.
How has it worked out for Japanese stock prices? Here's a look at the chart … |
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As you can see in the chart, the Japanese stock market has doubled since the BOJ started in 2013. During the same period, U.S. stocks have about doubled too (not unrelated).
But after six years of outright buying ETFs, the BOJ is now the top shareholder in 55 of the 225 companies in the Nikkei 225. And they own more than 75% of the Japanese ETF market. It has worked for stock market investors. But many would argue it hasn't worked for the economy. Growth in Japan has run about 1% annualized over the period. And inflation, a little less. But Japan's asset purchases (including stocks) have been a big contributor to what has been feeble global economic recovery, rather than a global depression. We will see next month if Europe has been forced to follow Japan’s lead (buying stocks). If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
August 16, 2019 Yesterday, we talked about the one-two punch from the Fed and ECB last December, that set up for a global liquidity shock.
Let's take a look closer today … As we know, the Fed went on a three year monetary policy "normalization campaign." But the view from the Fed proved premature. After an initial hike in late 2015, the global economy found trouble again. And by early 2016, the Fed was forced to stand-down. They didn't hike again until Trump was elected, and the prospects of aggressive pro-growth policies were coming down the pike. Leaning against those policies, the Fed hiked another 200 basis points over 25 months. And at the beginning of 2018, they began "quantitative tightening" (i.e. shrinking their balance sheet). Since January of last year, the Fed has removed $642 billion from the global economy. Meanwhile, the BOJ was continuing to pump about $25 billion a month into the global economy. And the ECB was good for about $20 billion. The ECB and the BOJ not only served as the offset to QT, but they combined to represented a buffer against shocks to the global economy (still in 'do whatever it takes' mode). But the balance sheet of the three most powerful central banks in the world peaked in August of last year. And then the ECB quit QE in December. |
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With that, as you can see in the chart above, the liquidity provided by QE has been on the decline. But maybe most importantly, is the potential (if not noticeable) shock to the system created by the "rate of change." In combination the three most powerful central banks had been pumping liquidity into the global economy at a double-digit rate throughout the post-crisis period. Now we have a negative rate of change.
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This seems to be what is sending global bond markets haywire. And appears to have forced the ECB to reverse course. Yesterday, an ECB official said they need to announce a significant easing package at their September meeting.
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