The Department of Labor’s (DOL) jobs number was a big miss! So much so, that it led me to think that it might have been “a fix.” The reactions of many ranged from dis-belief to comments of the markets being nothing more than “a casino” as one trader remarked on the Talking Stocks Forum message board.
Now, at putting myself at risk of sounding like another “conspiracy theorist crackpot,” let me explain my rationale on this idea. Of course, readers should decide for themselves, but I only ask that readers consider the evidence.
First, keep in mind that the ADP payroll report showed 100,000 more private payroll jobs just the day before the DOL release. ADP is a very large payroll processing firm, and they have direct access to the payroll systems of many private employers. So, it stands to reason that ADP can see first hand if private employers are adding to or subtracting from their payrolls.
In the recent past, many popular media and government pundits have attempted to diminish the ADP numbers as being less reliable than the DOL’s numbers, but this attempt at slighting ADP’s results seems to be more of a miss direct attempt to inflate the value of the government report versus the actual payroll results of a top vendor in the payroll services sector.
The government report uses many adjustments including seasonality factors and a birth-death model for businesses that many experts question. The ADP number on the other hand, at least as it relates to private payrolls, is pretty much an un-doctored number.
So, if one assumes that the ADP monthly jobs report is is closer to reality (at least with private payroll figures), then let’s move on to some reasons that would be motivations for the Fed to hold interest rates steady (and keep bond interest rates low).
The first reason is the monthly Treasury bond auctions which occur this week in the U.S. As I have noticed time and time again, bond yields tend to fall in the week of each re-funding. However, there has to be some sort of fear of bad news in the air to drive down interest rates, and this bad news often seems to arrive in the week of each month when the Fed holds its largest bond auctions.
With our large sovereign debt ($19 trillion), it makes sense to try to auction off new treasury notes and bonds at as low of an interest rate as the markets will accept. As it is now, the US can only cover its interest rate payments, and that is at a stretch without sacrificing other areas of the bloated budget.
So, from the federal government’s position, it makes sense to try and auction off new treasury notes and bonds at the lowest possible interest rates. During times of fear, investor money typically rotates into US treasuries as they are perceived to be both liquid and safe investments. Bond prices tend to rise (and interest rate yields fall) during times of fear, due to the safety perception of this investment.
Yet, the Federal Reserve had been preparing us for another rate hike either in June or July, which is contradictory to the directions that yields take during times of worry. A rate increase seemed to be increasingly likely, and the short end of the yield curve was rising in anticipation of it. Rising interest rates create a problem of interest rate coverage– a financial concept that says that net tax receipts have to at least cover the interest rate payments on the treasury notes and bonds.
So, if the Treasury can auction off those debt instruments at lower interest rates, then those low rates remain intact to maturity some ten to thirty years out. Since interest rates are at near historic lows, and the amount of US debt is very large, it only makes sense for the government to try to auction off their paper at the lowest possible rates.
Now, back to the Fed. The US central bank had one caveat to its forecasts, and that was that an interest rate hike would be “data dependent.” On Friday, that data came in weak. So, the stunning low jobs number did “the dirty work” for the auctions by driving bond yields down and delaying a threatened Fed hike in June.
The low jobs number also helps several other concerns as far as keeping interest rates low:
Those examples include “Brexit,” China, and Europe. In the case of Brexit, the Fed can now avoid a mistake of raising rates right before the Brexit vote in the UK. A vote to leave the European Union could un-glue markets worldwide, and so keeping the US interest rates on hold (and thus keeping the US dollar soft) lessens the chance of large capital outflows from Europe and the UK, which could trigger a financial crisis.
And the lack of a Fed rate hike also keeps China from doing a devaluation of the yuan. The last major yuan devaluation occurred on August 24th of last year, and so take a look at your stock charts to see what happened last year on that date and you will understand why it is important for the Fed not to raise rates while China’s economy is weak!
China’s currency is weak but still pegged to the US dollar, so with the greenback now conveniently weakened, that takes pressure off China having to de-value its currency. A weaker dollar is in essence, a de facto devaluation of the Chinese currency relative to other currencies around the world. Yet, since China does not have to officially de-value its currency, the world financial markets remain calm.
So, regardless of whether you buy into my thesis that the weak jobs number was contrived, there is no denying that the result plays right into the hands of what the global elite were secretly hoping for.
So, welcome to the casino! The house welcomes you to pull up a chair, and place your bets on the next roll of the roulette wheel. The markets continue to gyrate without any consistent direction because the global elites (who control the financial institutions) are trying to keep a weak and sensitive financial system from falling out of balance.
So, we lurch from one crisis point to the next. While the Fed and other central banks talk about a controlled economic recovery, what they really seem to be doing is trying to keep currency crosses moving in a narrow channel so as to avoid a sudden spiral of financial conditions.
NOW, if all of what I have speculated on seems to make no sense, then I ask that you at least consider that the US dollar daily chart shows the buck was hitting the late January down-trend resistance line. That line is also very close to the down-trending 50 day line. So, when the greenback hit that yellow-dotted line on my chart, that was a natural resistance point where a reversal could take place….and it sure did!
Take a look….
So, was the Jobs number a fix? Whether or not you accept the theory of a contrived report, then perhaps we can agree on this: the US dollar chart was set up to reverse, and it was conveniently right for it to do so as far as “the house” was concerned! The Fed saves face because it cannot raise rates in the wake of weak data, and the day of reckoning in the financial markets is delayed yet again.
A few days ago on the Ace Talking Stocks Forum on December 10th, I put forth a hypothesis that we could witness a reversal in gold’s fortunes ( or more precisely its misfortunes) once the US Federal Reserve (“the Fed”) likely raises interest rates on December 16th. I realized at that time that such a view was definitely not mainstream. Then, this weekend, I read in Barron’s Streetwise column by Ben Levisohn that he believes there is the chance that the US dollar will have peaked once the Fed begins hiking rates. In other words, a dollar reversal may have already begun.
I am sure that many would consider such a reaction to be illogical, but perhaps not really when one considers that dollar and gold traders have been selling the rumor of a rate hike the past few weeks…so why wouldn’t these same traders buy the news of a rate hike once that is confirmed?
From a fundamentals point of view, the dollar bears and gold bulls might find a bid once traders see that the equity markets and the economy may not be able to sustain themselves in the wake of even one Fed rate hike. Of course, as many traders realize, the pundits and the financial news media keep talking about how they believe the Fed will hike rates 2 or 3 times in 2016….they come up with these assumptions based on the Fed’s dot plot chart which forecasts rising rates for the next few years. In past rate hiking cycles, it was not uncommon to see a cycle of rate increases happen over a few years time.
But what if that one tiny rate hike next week is all it takes to put the economy and equity markets into a downward spiral? My contention is that REAL interest rates are at zero or below and raising rates will choke off an already fragile economy. Then toss in the growing panic in the junk bond market (which I have successfully traded several shorts on the I-shares I-Boxx Corporate Bond High Yield Fund ETF/ NYSE: HYG) in recent months, and this situation puts pressure on both bond and equities markets as we witnessed in the past week.
If these pressures are greater than the Fed perceives, then this blows holes into the Fed’s dot plot dreams! This in turn, would put more pressure on the dollar and give gold and silver a huge boost because some investors and economists would be pushing for the Fed to reverse the rate hike and maybe even bring back some more Quantitative Easing (“QE”) to save the economy.
The more I think about it, the more I sense that a Fed hike could cause a dollar reversal, and hence, gold could take off higher once the reality sinks in that there will be no more rate hikes to come after next week’s hike. Barron’s columnist Ben Levisohn points out that of the last 11 initial Fed rate hikes over the last few decades, 5 of them led to a weaker dollar within days or weeks of the Fed’s hike.
He also points out that 5 major economies (Europe. China, Japan, Australia and the UK) have all attempted to raise interest rates since the 2008 financial panic, and in all 5 cases, those central banks had to take back their rate increases and some are now into new QE programs. So, what makes the US Fed think that this time it might be different?
The Fed says a rate hike is justified under its “dual mandate” from Congress that it should raise rates when 1) prices are stable or rising and 2) employment is rising. The pressure has been on the Fed to raise rates because many seers perceive that both legs of the dual mandate are being met. Additionally, many of these observers believe that recent strong jobs growth should generate greater wage inflation and pump more money into the economy.
However, this observer believes that the Fed is attempting to raise rates to relieve political pressure from the financial news media and the many Wall Street titans who believe the Fed must end emergency measures. They point to the dual mandate as satisfying that requirement. However, it seems to this observer that the Fed has forgotten the first tenet of a modern central bank, and that its real mandate is to control inflation and keep the economy afloat with liquidity when financial markets are shaky. Right now, both of these unanswered “natural mandates ” are telling us that the Fed would be wise not to raise interest rates–at least not at this time.
The Fed looks mostly at the core inflation rate and gives less emphasis to the full inflation rate. For many years, the Fed’s economists have insisted that the core inflation rate is a better arbiter of inflation in the economy because food and energy (which are excluded components of the core rate) are cyclical and volatile and can unduly influence the true path of inflation. Before the 2008 Financial Crisis, there was some evidence that following the core rate made sense, since for many years, inflation was exerting a strong pressure on the cyclical elements of the American economy. By excluding volatile food and energy prices, the Fed could be more patient and methodical in raising or lowering rates by looking at the more stable influence of the core inflation rate.
The Fed tends to use a rate published as the “PCE deflator” to measure the core rate of inflation. A year ago, this rate was at 1.6% inflation. Since the Fed has repeatedly said that it will work to keep inflation at 2% or below, this 1.6% reading was getting close to the high side of its range. Moreover, the perception among many mainstream economists is that a 2% inflation rate is a most natural rate that allows an economy to grow without over-heating.
Now, even the PCE deflator has slowed dramatically to a recent 0.3% annual rate. That is hardly any measure of inflation, even by the Fed’s own definition. Past Fed chairs would have felt no pressure to raise rates with such an anemic rate, but somehow, Janet Yellen seems to believe she must act. Looking at the official US inflation rate of the last 12 months (through October 2015), we see that the rate is a very low 0.2%. That’s the official rate, which is measured by a series of rules and tests set up by the Bureau of Labor Statistics (BLS). Right now, both measures of inflation tell us that inflation is almost non-existent.
More importantly, the low 0.25% annual rate of inflation (using an average of the two official rates) is a full 1-and- 3/4% below the so-called natural rate of inflation in a healthy economy. In other words, the Fed would be wise to consider a rate hike if the rate of inflation was near or greater than the natural rate of inflation. But the current situation reflects an actual disinflation rate in the economy. To hike interest rates in such an environment is the equivalent of putting brakes on an already slow moving economy.
As I pointed out, the Fed is focused (perhaps mistakenly to some extent) on increasing jobs, but let’s consider that most of the new jobs are lower wage ones and the workers in these jobs are just trying to pay the rent and don’t have much disposable income. These new jobs do not suffer from wage inflation simply because they are paid out at lower wages.
In this observer’s opinion, the Fed should be more focused on the real inflation in the economy–of which there is very little. To raise rates in such an environment–when the dollar is already strong and choking off exports– reminds me that the Fed may be ready to commit the same sin that it did in 1937 when it choked off the struggling economy with a rate hike. At any rate, the free markets will soon be telling us if the Fed is on the right track or not. To see how the markets react, keep an eye on the US dollar and Gold charts.
Hint: as I look at the daily Gold chart, I see rising a Chaikin Money Flow (CMF) and Accumulation indicators which are a sign that some (“smart money”) investors are taking positions of late in the precious metal. We will soon find out how smart they really are.
Strange markets indeed!
I clearly understood why there was a big selloff on Friday morning thanks to the poor jobs number and downward revisions to previous months (referring to the monthly BLS Jobs Report). What doesn’t seem to make sense is why the market rallied back so fast, if we are to believe what almost every pundit and market commentator told us, (since the Fed decided to hold rates at the zero-bound at their mid-September meeting), and that is that the markets were disappointed that the Fed failed to raise rates.
On Friday, we witnessed a capitulation. The Dow went from over 200 points down to finish higher by 200 points. What would change sentiment so quickly when the Jobs Report was so awful?
It was like that Jobs Report never existed Friday morning except to cause some traders a quick loss on their trades. Lol!
What is clear to the profitskey.com is that this is more entertaining than a 3-ring circus! The news media must look like fools for telling us that global depression is at hand as of 8:30 on Friday morning, but only 6 hours later, everything was “hunky-dory!”
This rally looks to me to be a true RELIEF rally! Notice that I bold-print and put in caps the word “relief.” This rally on Friday afternoon was a relief rally because there are many equity traders who are happy to keep 0% interest rates for a lot longer. Yep, that’s right! And if I am right, then this blows holes in the theory that the markets were wanting a rate hike!
Even before the Fed’s September 17th decision not to raise rates, I had noticed that the equity markets were still doing what they had done the past several years. That is, the equity markets fell when the US dollar rose and/or interest rates on the 2 year and 10 year US Treasury notes were rising. This was indicative of a market that continued to equate the Fed rate hike threat as bad news. So, I was firmly in the camp that still believed that a Fed rate hike would be bad news for the stock markets.
But in the days following the Fed no-rate-hike decision, the equity markets were plunging and under great volatility. Sure enough, the most popular market pundits were going on the financial news channels like CNBC, Bloomberg and others touting that the markets were in a tailspin because the Fed failed to raise interest rates. Some of these “experts” literally begged the Fed to re-consider and act quickly to raise rates at the October meeting. I must admit, I was questioning my own belief system–had I misinterpreted the markets actions in the days leading up to the Fed no decision?
I was of the belief that the markets would not take kindly to any rate increase at this time with China in a near recession and emerging markets and commodity producers falling into depressions. Perhaps I had been wrong?
Then, the amazing capitulation in the US equity markets occurred on Friday. The markets rallied 400 points from trough to peak. Suddenly, some people began to say the unthinkable: the markets seem to like that the Fed will likely not raise rates any time soon. My belief system was redeemed! My read of the market tea leaves was correct…and it was all of these pundits who might have been wrong….again!
After all, I have been saying for the past few years on this blog that I don’t believe the Fed will raise rates at all before 2016…you can go back and read my past blogs to find the reasons. All of these highly popular pundits have been getting it wrong the past few years, and I have been right on the money up to now. And keep in mind, I am not even sure the Fed will raise rates in 2016, but I leave that as an open issue to be debated for now.
So, why did the markets collapse after the Fed no decision? I think the pundits misinterpreted the causes of the market selloff. What the markets were reacting to was that China was spinning into a possible recession, and the world’s second largest economy has a great influence on markets these days. That cannot be ignored any more. The fact that the Fed did not raise rates was official recognition of how important China is to world markets. The reaction was related directly to what was going on overseas and not to the Fed’s decision to leave rates alone.
On Monday and Tuesday, we will have to watch for follow-through by the Bulls to see if this reversal is real. Once again, this reminds me of an adage I sometimes state on the Ace “Talking Stocks Forum”: “You can choose to believe what the market pundits say, or you can choose to follow a fact-based (technical analysis) strategy like we do at www.AceStockTrader.com . ”
In a free market, it’s your choice.
My belief is the Fed will be foolhardy to raise interest rates in September, with China dumping its treasuries. By selling their US assets, China is forcing interest rates higher, especially on the 10 and 30 year treasuries. The only reason the long bonds aren’t rapidly losing value is that we are in the grips of a new bear market, and stock investors are fleeing to the relative “safety” of bonds. Yet, bonds are failing to reach new highs because of the overseas selling of them.
By the way, China’s dumping of US treasuries has created QT….Quantitative Tightening! In other words, China has acted ahead of the Fed!
But this is QT in the worse way possible because selling tons of long bonds into the open market can create huge pressures on the debt and credit markets as well as equities–in effect, market disequilibrium! In the past, when the Fed raised rates, they would sell short term treasuries into the open market….but never long bonds! This QT by China with the long bonds is doing the work of the FED by raising rates (on the long end of the curve) even before the FED can act at its mid-September meeting. However, the sale of long bonds creates undue pressures on mortgage markets and other longer term markets in this country.
And China holds a lot of our treasuries ( and they can disrupt markets if they sell a lot of these). This is why I own one call on TBT….and I may buy more.
And I am keeping a close eye on gold because investors could suddenly lose confidence in owning bonds…..that could cause a dumping of the dollar and nearly all other assets….so, I suggest to keep an eye on gold for any sudden breakouts.
Sometimes, a simple but great title can capture the imagination and draw in potential readers. Such was the case when the Pulitzer-prize winning American author, Herman Wouk, penned a historical novel about World War II with the words: “The Winds of War.” To me, this title conjures up sweeping, epic images and distant sounds of bombs and missiles on the horizon growing louder with every breath of wind– and it foretells of a morphing anxiety amongst the people as they pack their bags and crowd the highways, train stations and airports to try and get out before the enemy arrives and all hell breaks loose.
For those movie buffs who have seen the classic movie, Casablanca, there is the image of Humphrey Bogart being pushed up on to the steps of the last train out of Paris in a pouring rain by his best friend, Sam– just before the Nazis marched in to take over that cosmopolitan city in the second World War. Bogie is left jilted by his lover (Ingrid Bergman) who was to meet him at the train station after receiving an inexplicable sour note from her as the train leaves the station. As the train chugs anxiously out of the station, the viewer sees that Bogie’s idyllic world of romance and fun are dashed against the hard reality of an impending war that he must escape as he will be a top target of the Nazis.
In both stories, the backdrop (of the Winds of War and Casablanca) was World War II, a great and bloody conflict fought on three continents and across two oceans and a great sea. It was the greatest and bloodiest war of the 20th Century and of any century of mankind’s existence on this planet. The war had its roots from the last days of the First World War when the victorious Allied powers imposed onerous reparations and penalties on Germany. It was the great hyper-inflation period following World War I and the reparations that sowed the seeds of a madman’s rise to power in 1933 over Germany. Once Hitler was in control of Germany, he took control of the social order and he commanded military maneuvers to take over ever greater territory and control of Europe.
So, it is with trepidation that I use those words (i.e., the winds of war), to title one of my blogs. After all, this blog is mainly about stock and options trading and about technical analysis, which is a fancy term for stock charting. The lexicon of war has rarely ever been used in this blog; I usually use terminology such as “trades” or “stochastics” or “buy signals” on this site. Oh, sure, from time to time, I will harp about the great imbalances between nations over such matters as debt, balance of trade, over-spending and money printing, which in and of themselves, can be actions that help to plant the seeds of war. But this blog has rarely ever focused on the issues of war, though often times, local conflicts and civil wars always seem to creep into the headlines from time to time on the financial news channels and websites.
Conflicts around the globe are nothing new–they are always going on, but mostly in remote parts of the world and are of little interest to most investors or traders. For instance, the civil war in Somalia during the Clinton Administration drew attention from humanitarians, but it had little effect on stock, bond or currency markets. There was the war in Sudan which was in an area of little consequence to the markets, and again, was ignored by investors and traders. There were, of course, the US led invasions of Iraq and Afghanistan which were meant to weed out enemy combatants and their terrorist organizations. Though there was some market fear before those conflicts began, it turns out that American military superiority ensured victories for the West in both countries and this is one reason why US stock markets and energy markets remained buoyant (except of course for the Financial Crisis episode of 2008).
All of which brings us to year 2014– for the first time in my memory, which dates back to most of my many years on this planet, I cannot recall a time where there were so many growing conflicts at once in places that could matter to the markets. If not in all cases, they at least matter to many of us because they are occurring in places much closer to our comfort zones as citizens of the post-modern world of the 21st century.
In a matter of weeks, military conflicts have arisen between Russia and the Ukraine on the heels of a Winter Olympics that was a showcase for Russia. The Olympics showed a unified Russia with a revived pride among its citizens and in the wake of the accusations against the United States of spying on not only other governments and their people, but also spying on its own citizens in America, supposedly a land of people free from government oppression and tyranny. Within weeks, Russia had annexed the Crimea region of Ukraine and was engaged in a game of military deception by controlling “separatists” with loyalty to Russia in the eastern provinces of Ukraine.
To the south in the Middle East, Israel and its neighbors in the Gaza Strip and Lebanon have resorted to a new conflict of missiles and bombs launched into civilian areas. Meanwhile, once secure Iraq has fallen into splintered regional conflicts amidst a new civil war in that oil-rich country and there is now word of a possible civil war simmering in Afghanistan. The number of episodes in the Middle East has increased greatly in recent weeks, and it leaves an observer such as myself to wonder if these conflicts might all coalesce into one greater conflict as regional and global wars have been known to do if not contained by the super-powers.
Meanwhile, as these regional conflicts with real bullets, bombs and missiles grow more intense, we have an American president who seeks to keep the US out of these conflicts except in a peripheral sense, with possible controlled air strikes by fighter jets and drones. The approach of this president offers a pacifist message to the enemies of the developed western world. The reactions of the renegades are not surprising in the wake of a pacifist approach. From 1945 to the end of the George W. Bush presidency, the US was basically the police officer and mediator of the world’s conflicts. As examples, whether it was a hot war such as in Korea in the early 1950s or the Iraqi-Kuwait conflict of the 1990s, the US military intervened to control the spread of destabilizing influences.
However, in the wake of two costly wars in Iraq and Afghanistan and a financial crisis in the early years of the 21st century that has created contempt for aggressive government spending on foreign excursions, America has taken on a greater non-interventionist approach to world affairs. The current US president, Barack Obama, symbolizes this non-interventionist approach.
At the same time, the US stock markets trade as if these events are simply a distraction as in the so-called “wall of worry,” which is a trading philosophy that says that stocks perform best when fear is rising and traders short stocks. In this scenario, the shorts gang up on stocks because they foresee bad news, only to discover that a bit of good news (or not-so-bad-news) leads to a short squeeze. A short squeeze is where a heavily shorted stock causes traders to rush all at the same time to buy back stock that is in short supply so that they can cover their shorts–it is this massive rush at once to find limited stock that drives prices higher.
However, not only do markets tend to rise during the wall of worry, but in year 2014, I have also noticed a curious phenomenon amongst the news media outlets. The growing conflicts and local wars seem to be receiving only cursory attention from many news outlets and the stories seem to be pushed to the so-called “back pages” (a reference to the old newspaper days when editors would bury stories they deemed not-so-important to pages less visited by readers). These days, the news media seems more focused on domestic stories such as the illegal immigrant children border crossings (an important story in its own right, but not the only important story in my opinion), and the latest trending stories of TV and movie stars on the social media channels. In essence, the news media itself reflects the non-interventionist mood of the American public.
Even a few short months ago, there was one television show on the CNBC financial network that came on in the evening and which gave some good insights into these global conflicts–the show was called “The Kudlow Report.” Sadly, Kudlow decided he did not want to do the show any more, and I thought at the time that CNBC would continue this important overview of world events by replacing Kudlow with another anchor.
I guessed wrong on that assumption–instead, CNBC chose to fill in the 7 o’clock hour with one of its many previously recorded reality shows about greed and scams. I guess you can’t blame them, really. The reality docu-dramas are probably cheaper to produce than is a live news show with satellite links to high-expense-report journalists in remote and dangerous parts of the world such as the streets of Baghdad. Not only might the docu-dramas be cheaper to produce, they certainly carry a lower cost per show when they can be repeated as re-runs time and time again.
To be fair, CNBC reportedly has seen lower viewer ratings and decided that many traders and investors were not really all that interested in how geo-political events might affect their investments. Who can blame them, really? We have these conflicts seemingly growing more nasty with each passing day, and yet, stocks keep climbing, with the stock market’s only focus being whether the Fed will keep the easy money flowing.
Only the bond and precious metals markets seem to be paying any attention to the winds of war on a fairly consistent basis. The players who define the stock market seem to take the view that if we wake up the next morning with no serious injuries to ourselves, then it is okay to bid up the stock indexes to another set of new highs.
Let’s forget that Israel and the Palestinians seem to be engaged in some sort of new violent struggle with each other that is killing and maiming innocent families and children and causing great fears in the middle of large cities. So far, it’s a test of wills as each side fires missiles at the other–something similar happened back in the 1980s before a full-fledged war ensued between Israel and Lebanon.
While we’re at it , let’s ignore Russia’s dalliances with eastern Ukraine and let us pretend that it doesn’t really mean all that much to anyone except investors in Russian stocks or in platinum metals, of which Russia is a major producer. We can also choose to ignore a powerful ISIS group in Iraq and the quick, decisive moves of the Kurds in taking over critical oil fields near in Kirkuk. Hey, the oil is still flowing freely out of southern Iraq, so to quote the famous words of the comic strip character Alfred E. Neumann, “me worry?” Heck, no!
However, I am not one to ignore these sudden dark changes in world events, but it is difficult to set up bearish bets on the market when the stock market seems to ignore all the warning signs. It seems this “goldilocks” stock market will just keep plowing its way higher until these crisis events are right at our door-step. I, myself, have placed various bets on gold and silver stocks in this year, and I am keeping a watchful eye on when stocks might finally turn down. Who knows, maybe I am the over-reacting one? Perhaps events are what investors believe– a wall of worry to profit off of, as in the end, rarely do events turn out to be as bad as many fear.
Yet, I am reminded of the folk tale my father loved to tell me as a child of the boy who cried wolf. As many of us know, there was a real wolf lurking out in the pastures, but the boy’s family grew complacent of the boy always crying wolf and nothing was ever there. We know how that story ended, and not well for the family’s flock of sheep!
Similarly today, we have warning bells going off in strategic places around the globe. The US and its people see and hear about these events, but choose to ignore them so long as we are not directly affected. Our leadership in government is similarly in tune with the non-interventionist mood. The standard news media follows in their footsteps by giving the public the kind of news they really want and not what they should hear. Hey, our stock portfolios continue to rise! Our 401ks are getting us back to even! Our homes are getting closer to being above water again on their mortgages. Why worry about events a half a world away?
It seems that only gold investors, those humble and seemingly misguided souls, understand that something big is brewing, as the price of the precious metal is up 13.5% so far in 2014. Quickly, precious metals are becoming the number one investment class of 2014, after a couple of years of selling off. Finally, in the words of the great British leader, Winston Churchill, there is this: “Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing has happened.” Year 2014 is fast becoming one of those years marked by such ignorance.
Today, I wish to follow-up on a couple of previous blogs with recent updates from the news.
Recently, as I predicted in my blog last month, China came down pretty hard on the Bitcoin. They basically have barred the on-line services like Baidu (BIDU) and Tencent (TCEHY) from accepting payment in Bitcoin. Furthermore, pressure was put on China’s largest bitcoin exchange from accepting Yuan in exchange for Bitcoin. I theorized that countries with positive balance sheets and balance of trade such as China had the most to fear from the Bitcoin. As a result of these actions in China, the value of the Bitcoin collapsed by hundreds of dollars in the past week.
Since my blog, I have come across other opinions, and I have refined my views of the upstart currency. More precisely, it seems that the Bitcoin is an exchange medium lacking any store of value beyond the perceptions of what people believe it is worth. For example, even fiat currencies (such as the US dollar and most all foreign government currencies) are backed by assets such as debt instruments, and further backed, in an indirect way by Special Drawing Rights (SDRs) of the International Monetary Fund (IMF) and World Bank. Also, they are implicitly backed in an indirect way to some small extent by gold.
However, the Bitcoin has no store of value backing it. Its value is simply the result of supply and demand. So, if perceptions are that it is not such a great investment, then its value should fall, because Bitcoins are not anchored by any stores of value. Despite all of its inherent weaknesses, the US dollar, by comparison, is anchored in value by “assets” which mostly consists of debt paper issued by the US treasury. Also, as I mentioned in my previous blog, the value of a country’s currency has historically been linked to the Gross Domestic Product (GDP) of a given country. The US has the highest GDP still, which is one reason its currency remains the world’s main reserve currency. (As I have also pointed out numerous times, the US dollar has many problems these days too, but for the simple comparison versus the Bitcoin, I have to spell out reasons why the world economic community accepts dollars more than other currencies.)
Also, as I think about it, the Bitcoin is not so much of a challenge to paper currencies, but more of a challenge to other forms of electronic payment systems. Electronic payers such as the credit card companies like Visa (V), Mastercard(MA) and Discovery, as well as Paypal, Ebay’s (EBAY) popular payment system, might be more threatened by Bitcoin.
However, if Bitcoin is viewed in this light, then what makes Bitcoin so special? How is it any better than Visa or Paypal? I suppose the argument can be made that Visa or Paypal requires one to convert between currencies if doing business overseas or traveling abroad–Bitcoin, if it is to be accepted worldwide, could conceivably do away with currency exchange and its costs. Otherwise, I cannot think of any advantage that Bitcoin offers over a service like Paypal.
Well, the Federal Reserve finally announced its tapering program which is scheduled to begin in January. In brief, the Fed will reduce bond purchases from $85 billion a month to $75 billion. In essence, it’s a small start, but nonetheless, a reduction in the wild money-printing that the Fed has resorted to in an attempt to induce greater growth and inflation in a weakened economy. In order to get the stock market and other risk investors on board with the pullback of the free-flowing “punch,” the Fed chairman, Ben Bernanke, announced that zero interest rate policy would continue at least until 2015 and perhaps 2016.
Bingo! As I pointed out long ago in two previous blogs well over a year ago, the Fed was planning to hold short term interest rates near zero at least until early 2016 even though the news media and market pundits acted like this could not be predicted… and the reason I said this was one of economic mechanics. In short, the Fed’s Quantitative Easing (QE) policies were sacrificing the purchase of short term treasury bills for longer term treasury notes and bonds, as well as long-dated mortgage-backed securities. In essence, the Fed was whittling down its holdings of short term treasury bills to zero!
Further, as I alluded to then, the Fed would not be able to sell any maturing long term paper until 2016, which would be the earliest date that the Fed would have capital to buy back some t-bills. Why this is important is that the Fed can’t mechanically raise short term interest rates without having the t-bills on its balance sheet; once on the balance sheet, the Fed could then sell the bonds into the open market, thus forcing interest rates higher as it has done in the past. (The Fed does have an untested back-up plan that would force banks to sell excess reserves and thus, accomplish the same task if it could not do it itself.)
I just checked the Fed’s balance sheet, and it shows a big ZERO next to Treasury Bills, so it still has no t-bills. In fact, you may wonder how does the Fed hold interest rates near zero if it doesn’t own any? That’s a good question, and all I can say is that it has a marvelous “communication strategy” that effectively compels the big market players in debt securities to keep these short term debt instruments near zero. That communication strategy basically acts to keep all members of the banking and investing communities in line so if one acts out of line, the other members, will in theory, make the renegade member pay dearly with financial losses.
However, to help soothe the nerves of the debt trading institutions that support the t-bill market, the feds do a good job of containing inflation, if only by modifying the measurements of what goes into a Consumer Price Index (CPI) or other official inflation reports. Just as important is a news media that does not question how inflation is measured officially, and so long as the accepted notion is that inflation does not exist, the Fed is able to contain short term rates for a very long time with the cooperation of all parties.
This all works fine in Washington, but I can’t help but notice that same car model I bought new five years ago now costs about 20% more–or that the same groceries I buy each week are costing me about 10% more than they did a year ago. Or how about that mobile phone bill I pay each month? Each time a member of my family upgrades to the latest, greatest smart-phone, I notice new surcharges added to my bill–permanently. From just two years ago, my monthly phone bill has jumped over 25%!
If you don’t believe that inflation is worse than officially reported, then try this: watch an old movie from 40, 50 or 60 years ago and pay close attention to any price or wage mentioned or shown in the movie. It might be the cost of a loaf of bread or a gallon gas or how much a store clerk earned–compare that to today’s prices. You will be amazed at how much more these things cost compared to only a couple generations ago! By my own back-of-the-envelope calculations, general inflation has increased by 1,000% since the mid-1950s (though I think wage inflation has lagged considerably). Yet, the calculators that use official government statistics will show inflation has increased by “only” 730%. That car of mine that I mentioned (now transferred to my college-aged son) is supposed to cost only 8.3% more, but as I say, it costs about 20% more for the same model today which also comes with fewer features in its standard offering. So why don’t more people ask where is the dis-connect?
So, what does this mean for investors? In short, the Fed will continue to keep the punch bowl out for those who seek to use local, cheap debt to create a carry trade into more rewarding payoffs elsewhere. This policy should continue to create the leverage that the bloated markets require to continue to reward the risk investors. So long as the market participants know that the Fed will keep the punch bowl out (all they had to do was read my blogs from 18 months ago!), they will know how to play the game to reap their gains.
However, the Fed is now prepared to turn off the fountain that feeds the punch bowl so that it won’t be over-flowing like it has been in 2013; but the punch bowl will be left out for another couple years at least. Or, will it? What could cause short term interest rates to rise sooner? In my opinion, only a rapidly rising inflation rate, and one that could not be hidden by government contrivances, could cause a re-think on rates. If inflation were to take off in strong manner in 2014 or 2015, this could compel market participants to start selling off t-bills at higher rates and thus forcing the proverbial punch bowl off the party table.
Indeed, the seeds for a massive inflation have been sewed into the fabric of the economy via Fed stimulus measures, but so far, those seeds have failed to induce an increase in the velocity of money circulating in the economy. If that should change, then the markets could force short term interest rates higher, and the Fed could either print money to try to contain those rates or sit idly by while the bond markets take control. If the bond markets were to get the upper hand, then a stock market crash and general asset crash could be in the cards. If, somehow the Fed were to print money to buy those rising t-bills, then the value of the US dollar itself could be called into question.
Even now, the market pundits talk of a rising dollar as the Fed begins its tapering program, but I can’t help but think that the communication strategy by these pundits is failing miserably….as I look at the US Dollar Index chart (see below), the US dollar recently experienced a “death cross” and the breakdown from a head-and-shoulders pattern, which are technical terms that mean the forex community of currency traders are selling dollars, and not buying them, as the pundits would have us believe.
Now, if only the massive communications strategy against gold could also begin to fail as it seems to be failing against the dollar supporters, then this could get to be a very interesting 2014!
It’s been a busy month for me which has not allowed much time to post my latest observations on the markets. I would like to remind readers that I do post on the Ace Talking Stocks Forum on a fairly regular basis under the name of “AceStockPlayer”, and there are a number of other traders who also post daily commentary on stocks, the markets or whatever grabs them at any moment in time…the Forum is open to public view (please read the disclaimers on the site before contemplating any actions on your part and always seek the advice of a registered stock broker or investment advisor– note that the forum does not offer any such advice–the forum represents only the opinions of anonymous posters which are not intended as investment advice.)
…and finally, I wish you a very Happy Holiday season! Thanks, and I hope you return again and again in 2014. It promises to be an exciting year around here!
Copyright 2010-2014 by Chiron Information Services. It is acceptable to link blogs from AceStockTrader.com so long as credit is given for the source of this original content. Otherwise, written permission is required to reproduce any of our blogs.
The uptrend line from September 2011 (which coincides with the last significant debt ceiling debate in Washington) has given way in late September after a two year run higher. Then, in the first week of October, the neckline of a Head and Shoulders pattern gave way. Together, these two events are significant to technicians like myself.
The break point of the Neckline was about 81, and the head reaches to
85, thus this suggests a 4 point target from the 81 break points toward a goal of 77. However, the 77 target is an intermediate one….the break of the two year up-trend line is more significant for the long run and could mean a bigger drop is in the cards ultimately. One would think that gold and silver should be doing well now, but they both still seem to be under pressure, My guess is that political manipulations are working to hold these metal prices under control so that they do not ignite further worries among general investors.
If the dollar continues to drop, as I expect, then I think that gold and silver will rocket higher. Another thought: perhaps big money traders are also containing the price while they work to accumulate more for their accounts while the debt ceiling debate rages in Washington?
Of course, it’s no secret that the US is running out of time to raise its debt ceiling limit, or possibly suffer a technical default on its bonds. Such an event should figure to decimate the dollar, if it is to occur. Most observers consider a US default a remote possibility, but I am not so sure of that thinking myself.
One other note: even though precious metals are under containment at the moment, I have noticed that the Chinese Yuan currency has been rising and appears to be ready to break out of its trading band with the US dollar….this would be very significant, I would think, in currency trading circles. Average investors can buy into the Yuan by investing in the Exchange Traded Fund with NYSE symbol CYB. I would also suggest that there may never be a better time to buy some gold or silver at this time, in case the US does default. Though gold and silver are presently contained, a break higher could occur at any time,
Even if Congress does raise the debt ceiling limit, this should still favor gold and silver in the long run since it means the dollar will continue to degrade in value over time (though a short term pullback could occur upon the news of a debt ceiling resolution before October 18th or close to that date, should that occcur). I should point out that there are some bearish patterns on precious metals charts too, so there are many who think gold is set to tumble. I don’t count myself in that camp, but be aware that could be the short term result.
So, what’s a trader or investor to do? Park your money in money markets or bank savings accounts? I am not so sure of that strategy either, as money markets and savings deposits invest in short term US debt instruments. Hmmmmmm, maybe it’s time to look at an investment in Chinese Yuan?
Copyright 2010-2014 by Chiron Information Services. It is acceptable to link blogs from AceStockTrader.com so long as credit is given for the source of this original content. Otherwise, written permission is required to reproduce any of our blogs.
It’s no secret by now that recent comments by the Federal Reserve’s Chairman about “tapering” bond purchases has triggered significant turbulence in stock, bond and commodity markets around the world. The imbalances have been triggered by sudden withdrawal of carry-trade financing of simple, profitable trades–trades that are profitable only so long as the Fed remains “status quo” in its stance with quantitative easing.
The Fed’s official announcements have never wavered on the $85 billion a
month purchases…Chairman Bernanke only suggested “tapering” during Capital
Hill testimony when put to the question by a Congressman–and followed that up a week later at a news conference by stating that tapering
would only occur IF market conditions continued to improve with the
word IF emphasized.
So, for one thing, it seems that on the surface, markets over-reacted since the Fed has not done anything yet to slow down bond purchases from it’s $85 billion a month pace. The second thing to consider is that even when the Fed does start to taper (as soon as September according to some prognosticators), that it will only be slowing down its purchases to a smaller monthly number; it almost certainly won’t be ending its bond purchases “cold turkey.”
Yet, the world markets reacted to this tapering speculation as if the Fed had not only ended its bond purchases, but was out-right raising interest rates. Of course, Fed officials were wheeled out in the past few days to calm markets by telling the world that short-term interest rates would remain low (near zero) for an extended period of time.
Well, I say, of course!
(Image of the Federal Reserve Building, Washington, DC)
I personally believe that most people, including a number of market pros, do not really understand Fed policy or the complexities of how the Fed conducts its policy. A Case in point were the comments by esteemed money manager, Ron Baron on CNBC-TV this past week. Mr. Baron said he attended a private dinner where former US Treasury Secretary Tim Geithner spoke. According to Mr. Baron, the former Treasury Secretary said that the Fed would not end its QE (including tapering) for about 5 years.
When questioned about this, Mr. Baron was fairly certain that Geithner meant that tapering would not end for 5 years. Of course, most Fed watchers, including myself, were almost certain that Mr. Baron had misinterpreted the Secretary’s remarks. More likely, Mr. Geithner meant that the Fed would not raise short term interest rates for about 5 years and/ or begin to unwind its previous bond purchases of US Treasuries and Mortgage Bonds. As far as tapering goes, it would be almost reckless of the Fed to continue its quantitative easing program for 5 years. For one thing, the Fed’s balance sheet would balloon to a very dangerous point. Indeed, some Fed watchers (myself included), already worry that the balance sheet of the Central Bank is too large. It’s capital-to-debt ratio is more stretched than that of the world’s most shaky banks (at roughly a 2% ratio currently).
Second, another 5 years of quantitative easing (QE) would surely cause huge disruptions in world markets by continuing to prime an artificial carry-trade as well as exporting inflation to other parts of the world that may not want our exports of dollar cash infusions. Politically, the Fed would not be able to continue its QE program for as long as 5 years without incurring the wrath of many of our trading partners.
Now, I am not here to try and sound smarter than Ron Baron; the guy has proven to be an investing genius, by using a fairly simple formula over the years. He invests in under-valued companies that have strong cash flows and are priced with low earnings yield. His fund has returned handsome gains through smart investing, low turnover costs, and compounding returns. It’s not that this formula is something new, but few money managers have had the convictions of Mr. Baron to carry through with their investment plans in unwavering fashion and reward investors.Yet, the comments of Ron Baron about Fed policy seems to point to an interesting observation: even many professional money managers and otherwise smart financial types don’t fully understand how the Federal Reserve works or how it carries out its policies.
Tapering itself, concerns withdrawing (slowly) the bond purchases of longer-term debt instruments. This is why the 10-year treasury note and 30-year bond’s interest rates have spiraled higher in recent days, as they are long term bonds. Many forms of long term financing, such as mortgages, longer term corporate bonds, and auto loans with several years of payments have reacted negatively. However, shorter term financing, such as 30-day and 90-day corporate money market instruments have barely budged.
In other words, tapering affects longer term debt financing. This longer term debt is subject to bigger swings in the value of the bonds, because, a 100 basis point move in the interest rate on a 30 year bond reflects higher interest rates for up to 30 years, which is offset by a lower bond price over 30 years. (The prices of bonds and notes fall when yields rise, and vice-versa.) Contrast this to a one-year note where the interest rate affects the price of the note for only one year.
Now, another thing to understand is that before the Fed can begin an exit strategy (which means raising interest rates as the economy improves and also to control inflationary pressures), it must first end quantitative easing. This means the Fed must taper its bond buying program down to zero new purchases of long term bonds and continue with only its long term program of buying and selling short term notes.
However, The FED is trapped with a very limited EXIT STRATEGY–it’s
only tool for exiting its low interest rate strategy is to use Excess Reserves on deposit with its
member banks–the Excess Reserves strategy, though brilliant, has never
been tested in the real world. It is basically an unproven theoretical
strategy that the FED will use only if it’s back is up against the wall
in having to raise interest rates.
This leads up to the observation that the Fed likely floated a trial balloon recently to see the reaction of the world markets to the threat of pulling back the punch bowl a little. As we have seen, the markets have reacted rather violently to the loss of the QE stimulus, if even done slowly over many months. We have already seen how just the mere
suggestion of TAPERING has caused huge sell-offs in places like Japan
and the Emerging Markets where the Yen and Dollar Carry-trades help to
support the leverage in those markets.
Another observation: if the Fed allows
long-expiration interest rates to climb, then this raises the US
Treasury’s borrowing costs. Even with today’s very low interest rates,
the interest payments are the 4th largest item in the US’s
“budget”; imagine what would happen if interest rates on the 10 year
were to double to market fair value at 4%!!!
Through all of this exercise, there is one thing that is apparent… and that is that the Fed’s continuous stimulus of the US economy (and the world economy through the carry-trade function), has put markets in the precarious position of massive upset and dislocation at the very thought of ending “the sugar high” created by the US Central Bank.
The more I look at it, the Fed has no choice but to begin to taper its bond purchases, no matter how slight, to get markets use to the idea that they cannot always have a crutch to prop them up. Otherwise, the capital system of finance we as Americans have long known and which affects our daily lives in so many ways, is doomed.
What’s also worrisome, and little talked about by the financial media, is the Fed balance sheet. No one ever asks how the unthinkable could occur, but what would happen if there were “a run” on the bank–not just any bank, but a run on the central bank? Could it happen?
With an estimated less than 2% capital-debt ratio, what would happen if the depositors of the Fed’s capital were to suddenly demand their money back? I guess that amounts to understanding who the investors of this capital are?… which I assume are its member banks in the reserve system.
The Fed is all powerful, and the member banks always fall in line when the Federal Open Market Committee (FOMC) sets policy. Yet, I ask, what would trigger such an event? Is it unthinkable? It’s such a complex subject that no one seems to have an answer, or at least, no one who knows is willing to offer an answer. At
any rate, I think some members of the FOMC are beginning to pressure
Mr. Bernanke into curtailing his QE program before we have to find out
what could happen to the Fed’s own capital if it had to suddenly sell
some of its assets (bonds) before they reach maturity. A bankrupt
central bank would be the technical result.
Perhaps the answer is purely academic, because the Fed will always have its printing press and can create as many dollars and as much “capital” as it pleases.
In the end, the real result may some day be played out in the currency markets when other countries of the world become fed up with Fed policy. Based on recent strength in the US dollar and the fragility of world markets, it seems that day of reckoning has been delayed for a much later date–or at least that’s what the market pundits want us to believe. My concern is that in this fast-paced computer-driven financial world we live in, the world capital markets themselves may suddenly choose to dis-obey the voices within the government (and quasi-government) institutions that guide monetary policy. Value is in the eye of the beholder after all.
Anyway, I apologize for daring to think the unthinkable.
Copyright 2010-2014 by Chiron Information Services. It is acceptable to link blogs from AceStockTrader.com so long as credit is given for the source of this original content. Otherwise, written permission is required to reproduce any of our blogs.
all along that the dollar would be getting stronger as the Fiscal Cliff
draws near as supposedly more money barrels into the “safety” of US
Treasuries….well, I do hear that the demand for Treasuries is strong
right now….but a curious thing is that the US dollar has not been
I was looking at the UUP (a popular ETF that tracks the US$ against a basket of 6 world currencies) chart just a day or two
ago, and I am surprised at how weak it looks compared to the non-stop
blather I heard from some observers that it would
get stronger and stronger by year’s end.
here’s the US dollar chart itself….ummm, where are those who told us
to bet the dollar and sell everything else? It hasn’t happened
yet….although I suppose there’s still time if the Fiscal Cliff
situation isn’t resolved….my hunch is we will go over the cliff, and so conventional wisdom holds this to be an austerity type event, and the dollar should be strong in such a situation
am holding off on more gold purchases until that happens….once we are
over the cliff, the sell-off in gold will be over just as
others are chasing into the short trade….gold should really shine once we get
moving into February and March, imho!