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Economics

The ‘Maestro’ Is Why Jay Powell Keeps Seeing (inflation) Ghosts

See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything….

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This article was originally published by Alhambra Investment Market Research

See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything. Its purpose is to maintain a different sort of money illusion (the original relates to how workers focus on nominal rather than real levels of compensation). This other money illusion relates to the hidden nature of money itself.

We’re told central bankers are it, therefore everything must be related to central bank monetary policy. If the dollar’s falling, the Fed accommodated. If it’s rising, Fed tightening. Rates go down because, everyone says, Jay Powell bought bonds. Yields go up because of rate hikes after the bond buying is over.

You go to the bathroom in the middle of the night, the FOMC must’ve voted for it.

It all goes back to before Greenspan, though it was the “maestro” who most clearly articulated the gross illiteracy and unsupported conceits behind much of Economics.

CHAIRMAN GREENSPAN. It’s really quite important to make a judgment as to whether, in fact, yield spreads off riskless instruments—which is what we have essentially been talking about—are independent of the level of the riskless rates themselves. The answer, I’m certain, is that they are not independent.

Risky spreads are, according to this view, in a sense controllable from monetary policy even from only the short end. Why? Because all riskless rates, Greenspan also said, were nothing more than a “series of one-year forwards.”

It was, in theory, all so easy and neat; the Fed from its single position could conduct all the instruments in the symphony as it wished, however and whenever wished. Thus, maestro.

Why, then, all the constant “conundrums” and “inflation puzzles” ever since? Dear Alan said he was certain, and he’s certainly been wrong.

The yield curve is no series of one-year forwards, nor are risky spreads utterly dependent upon hapless Economists at the Fed (see: swap spreads, as a start). Those at the Fed instead have repeatedly shown they have no idea how even short run interest rates work (see: SOFR) which means they can’t be literate in money like economy.

What do they do?

Influence public opinion via financial media. To wit:

The unquestioned assumption embedded here is palpable anyway; nominal rates are rising (“worst year for fixed-income since 2005” BOND ROUT!!!!) because inflation is “hot enough.” Reported like its some foregone conclusion, this inflation certainty dictated to the bond market via a suddenly hawkish Federal Reserve.

This is, at best, incomplete; most often, just plain backward. Thanks, Maestro. 

Had the yield curve behaved recently like it had earlier in this same year, this would be plausible. The yield curve, on the contrary, is performing very differently negating any chance for this to be the case.


Bond yields aren’t reacting to anything; they’ve helpfully sorted CPI’s for us all along. As I wrote earlier today, the yield curve has expertly, consistently interpreted the money Economists and central bankers can’t understand so as to accurately predict – for longer than a century – what is and will be inflation.

This often leads to conflict; central bankers say it’s one thing and bonds declare another, often the opposite. This differing viewpoint not just a post-2007 development, either, also noted today, bonds vs. Economists has been a one-way contest going back before 1929.

Our current case, therefore, very much like previous cases.

A flattening yield curve, conspicuously so, is the bond market recognizing: 1. It isn’t inflation, just transitory price factors, meaning lack of heat in the economy; 2. Policymakers repeatedly have shown they have no clue how or where to even begin figuring one way or the other; 3. Because they are clueless, they have likewise displayed a consistent tendency to make egregious forecast errors, such as 2018 or 2013; 4. Therefore, very much independent of the Fed, bond yields are instead disagreeing with Powell’s mistake by pricing a scandalously flattening yield curve with nominal rates already contradictorily low (tight money).

Bonds – not the Fed – have already sorted the inflation question. The problem is, as usual, the answer isn’t to the liking of mainstream Economics which can only interpret yields from the “certitude” of Greenspan. In that sense, inflation is a foregone conclusion. In the dream-world of media, the theme this year is solidly inflation. In monetary reality, unambiguously deflationary.

Just in time for Halloween, Jay Powell is back to seeing ghosts.

 










Economics

Omicron Selloff, Is It Over Yet?

In this 12-03-21 issue of "Is the Omicron Selloff Over Yet?"

What’s Driving The Omicron Market Sell-Off
Did The Omicron Selloff Set Up The Santa Rally?
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In this 12-03-21 issue of “Is the Omicron Selloff Over Yet?”

  • What’s Driving The Omicron Market Sell-Off
  • Did The Omicron Selloff Set Up The Santa Rally?
  • Internal Measures Suggest Risk Remains
  • Portfolio Positioning
  • Sector & Market Analysis
  • 401k Plan Manager

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What’s Really Driving The Omicron Market Selloff

While the media is running around trying to pin headlines on the market moves from the Fed to the Omicron variant, the reality is that we are in the midst of mutual fund distribution season. As Michael Lebowitz noted:

We believe the rotation is not a sudden change in mindset but, likely the actions of mutual funds rebalancing their portfolios. Frequently at year-end mutual funds sell the winners which have become overweight positions and buy the losers which are below their proper weights. The large returns this year in certain sectors are making these actions more visible than normal.

There is still some sloppiness likely over the next week, but such should theoretically provide investors the entry point for a “Santa Rally.”

Stock market December performance

But such should not be a surprise. In mid-November, we discussed the need to reduce risk against a potential correction. To wit:

Does this mean the market will experience a significant contraction? A pullback to the short-term moving averages would not be surprising and would encompass about a 3-4% drawdown.

What would cause such a correction? I don’t know. However, we are entering the mutual fund distribution season where fund managers need to distribution capital gains, dividends, and interest. Given that most funds are carrying very low cash levels, they will likely have to sell holdings to make those distributions.

Then, on the 23rd of November, we added:

Investors’ “wish lists” are hung by the chimney with care, hopeful the “Santa Claus rally” will soon be there. While they remain “snug in their beds, the historical data dances in the heads.”

It certainly seems there is little to worry about.

Except that dip at the beginning of December.

But is the Omicron selloff over?

Omicron Selloff Tests 100-DMA

In the short term, selling pressure is starting to peak, and downside risk got reduced given the more extreme oversold conditions. As a result, volatility also spiked into excessive overbought levels, and the market held strong support at the 100-dma (orange line) on Friday.

S&P 500 market breadth resistance

We are using the more extreme oversold condition to add trading positions to our portfolio. The upside is likely limited to the bottom of the previous trend channel (blue dashed line) that began in 2020. However, we can take advantage of the rally back to those levels to bolster returns in portfolios.

Notably, any failure at that running lower trend line would be concerning. Such would suggest either a retest of current lows in January or, should that support fail, a very different market in 2022.

As noted above, while the media is frantic to pin sell-off on the “Omicron variant,” it is all quite normal within the context of historical trends. Lastly, another of our technical indicators, the McClellan Oscillator, confirms our analysis of a deeply oversold market.

S&P 500 stock market vs oscillator

Please note that I am consistently speaking of “short-term” opportunities.

While the current decline could strengthen back into a longer-term trend, we treat each increase in equity exposure as a trade until proven otherwise.

One mistake individuals make is trying to “buy the dip” and not respecting the potential for much more significant downside “dipping.”

Always maintain your stop-loss levels.



Daily Market Commnetary


No Guarantees

The current “Omicron selloff” in the markets, combined with distributions, will leave portfolios “offsides” heading into year-end. As a result, portfolio managers will begin to “window dress” portfolios for year-end reporting around mid-month. As shown in the seasonal chart above, that “buying” is what typically pushes markets higher.

Such was a point I discussed with Charles Payne on Fox Business yesterday.

Is a “Santa Claus” rally guaranteed? Absolutely not.

However, as noted, my Mom said I was a “good boy” this year, so I am hopeful I will get more than a “lump of coal” in my stocking.

Besides, I am not sure Santa Claus can afford coal this year anyway.

Coal Prices

While I am optimistic as we head into year-end, I would be remiss not to point out the obvious risks.

Internal Measures Suggests Risk Remains Present

Over the last few weeks, we have discussed the continuing deterioration of market internals from breadth to volume to expanding new lows. At the same time, while market internals weakened, broad markets continued to rise. As shown, stocks trading above their 50- and 200-dma and the bullish percent index turned down in mid-November. Such suggested the market was at risk of a correction; all that was needed was an event to shift psychology.

That’s how you get the “Omicron selloff.”

S&P 500 market technical breadth and participation

However, as Sentiment Trader pointed out this week, other internal measures suggest that investors may see lower returns near term. To wit:

“New lows are one of the most critical breadth measures to monitor in a bull market, especially long-duration ones. When they expand to current levels with the market near a high, something is amiss with market participation. The shot across the bow is a warning that we should be alert to rising risks. As always, it’s essential to use a weight-of-the-evidence approach and not rely upon any single indicator.

The previous risk-off signal from October 2018 led to a substantial decline for the S&P 500.”

S&P 500 vs Lows

As they conclude:

“When new lows expand and the market is near a high, something is amiss with market participation, suggesting rising risks. Similar setups to what we’re seeing now have preceded weak returns and win rates on a short and medium-term basis.”

While the market is now very oversold, volume remains relatively weak along with money flows. Such suggests there is a risk of more selling pressure following any short-term bounce. So, as is always the case, be sure to manage your risk exposures accordingly.

There will be a time to become considerably more aggressive, but we need improvement to the underlying technicals first.



Will FANG Wind Up Like BRIC?

My colleague Albert Edwards had an excellent piece out this week answering a question I have had.

“It is the 20th anniversary of the invention of the BRIC acronym. BRICs, for those who need reminding, was dreamt up by the then Chief Economist at Goldman Sachs, Jim (now Lord) O’Neil, who predicted that the emerging economies of Brazil, Russia, India and China would enjoy superior economic growth and investment returns relative to the developed economies. A few days ago Jim O’Neil marked this anniversary with an update in the Financial Times.”

Coincidently it is also exactly the 10th anniversary of my note that ridiculed ‘BRICs’ as an investment idea entitled ‘BRIC = Bloody Ridiculous Investment Concept’ – A. Edwards

We should not overlook the importance of his commentary. In 1999, the “dot.com” bubble was in full swing, and valuations ran at nearly 42x trailing earnings on a CAPE ratio basis. Today, the top-10 stocks of the S&P 500 comprise almost 30% of the entire market capitalization of the index. With valuations once again approaching the dot.com levels of exuberance. (Valuations are just the reflection of investor psychology.)

S&P 500 valuations vs stock market

In Case You Missed It


The Next Crash

As Michael Lebowitz noted in “Is A 2000 Market Crash Possible?”

“P/E valuations are grossly extended, and in both calculations nearing or surpassing levels in 1999. The graph also show valuations are well above those of 1929.”  

The point here is that valuations matter. The growth expectations for the FANG stocks far exceed any conceivable realistic outcome. As Allbert concludes:

“Investors are desperate to believe the EM and BRIC growth story, for they have so little alternative. The story of superior growth for the EM universe is as entirely plausible as it is entirely misleading. Valuation is what matters for investing in EM, not their superior growth story and certainly, EM equities are not relatively cheap. Yet investors persist in the BRIC superior growth fantasy. But it is no different from many of the other investment fantasies I have witnessed over the last 25 years only to see them end in severe disappointment.” BRICs have indeed been terrible investments over the past decade, underperforming both MSCI World and even the EAFE index by a very wide margin.

Put a date in your diary to look out for my Global Strategy Weekly on 2 Dec 2031. For I have a similar feeling that in a decade’s time FAANGs (and US tech generally) will go the way of the BRICs as another example of acronym investing going horribly wrong. Indeed, only recently I noted that despite US IT’s EPS relative now declining sharply, its nosebleed PE valuation at 30x looks vulnerable vs the market’s 22x – the widest gap since the Nasdaq bubble.”

FANG stocks

Valuations always matter, and they matter a lot. The problem is that investors don’t learn this lesson until it is often far too late to matter.



Portfolio Update

Over the last couple of weeks, we stated that after raising cash and reducing hedges, we were “sitting tight” as we got through the Thanksgiving holidays. We worried about a correction during the first couple of weeks of December as mutual fund redemptions took hold. That sell-off came as Omicron headlines sparked the algorithms into sell mode. Now, much of the overbought and extended conditions in the market are reversed.

With that correction, we are now starting to slowly increase our equity risk exposure as we head into year-end. Given the statistical probability of a year-end “Santa Rally,” we want to position portfolios for that potential opportunity.

However, we are maintaining very tight stop-losses on all of our trading positions, as there is NO GUARANTEE that the market will rally into year-end. As with any good “poker player,” we are “playing the odds.”

We added a trading position in the S&P 500 index on Thursday morning and late Friday afternoon. We also nibbled on some energy exposures after the correction in oil prices. Over the next few days, we will opportunistically add exposure to our Technology, Finance, and Healthcare sectors. We are also monitoring Communications and Discretionary for opportunities as well. The goal will be to increase our equity weighting to 60-70% in our 60/40 allocation models. (Yes, we can overweight and underweight equity risk.)

Portfolio model allocation

Lastly, no matter what you decide to do, do it safely. Chasing markets is fine until something goes wrong. So, have stop levels in place, manage your risk exposure relative to your financial objectives, and take unnecessary risk.

There are still plenty of things that can go wrong by year-end. So, don’t screw up an excellent year by making a stupid mistake this close to the end.


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"Black Friday" Plunges, “Black Friday” Plunges As Covid Variant Rattles Markets

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By Lance Roberts, CIO

The post Omicron Selloff, Is It Over Yet? appeared first on RIA.




Author: Lance Roberts

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Economics

Leveraged Bitcoin Traders Flushed Out In Epic Overnight Crash  

Leveraged Bitcoin Traders Flushed Out In Epic Overnight Crash  

The price of Bitcoin was rangebound on early Friday around the $56k handle….

Leveraged Bitcoin Traders Flushed Out In Epic Overnight Crash  

The price of Bitcoin was rangebound on early Friday around the $56k handle. The world’s largest cryptocurrency then spiked when the kneejerk read of the November payrolls came in as very disappointing, seen as postponing the Fed’s plans to accelerate the taper but then began to decline during the US cash session to about $54k-$53k handle by late afternoon as the narrative flipflopped and near unanimous consensus emerged around a Fed announcement that Powell would announce a much faster taper on Dec 15 leading to rate lift off by June.

Then at midnight into the early hours of Saturday morning, during the traditionally illiquid Asian session when things normally go splat in the night for cryptos as one or more super levered Asian momentum chasers blow up, Bitcoin suffered a massive liquidation and crashed into a bear market down to the $42k level, tumbling into a bear market. Price has recovered some, now trading around $47k. 

We noted that the action was that of a margined whale getting liquidated…

… an assessment Vijay Ayyar, head of Asia Pacific with crypto exchange Luno in Singapore agreed with, telling Bloomberg the action overnight was leveraged buyers of Bitcoin being flushed out. 

“Markets have also been jittery with all the uncertainty around omicron, with cases now appearing in many countries,” Ayyar said. “It’s hard to say what that means for economies and markets and hence the uncertainty.”

So far, Bitcoin has found support just below the 200dma. 

The plunge is just another sign of risk aversion sweeping across global markets as equities sink and fate havens soar. Spiking inflation is forcing central banks to tighten monetary policy, reducing liquidity for risk assets. However, as we first pointed out yesterday, we are now at the point where the market is starting to price in the first future rate cut – sometime in 2023-2024 – resulting from the Fed’s overtightening cycle.

The omicron variant of COVID-19 has also compounded risk aversion as it derails the global economic reopening. 

Today’s global cryptocurrency market cap is $2.28 Trillion, down 17.5% in the last 24 hours. Total cryptocurrency trading volume in the last day is at $236 billion. Bitcoin’s market cap of all crypto is 38.68%. 

That said, El Salvador President Nayib Bukele is using the dip to buy even more Bitcoin. 

Tyler Durden
Sat, 12/04/2021 – 07:46






Author: Tyler Durden

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Economics

Labor Market Update: November 2021

By Peter Rupert The BLS establishment data released this morning showed a payroll employment gain of 210,000. This from the WSJ before the announcement,…

By Peter Rupert

The BLS establishment data released this morning showed a payroll employment gain of 210,000. This from the WSJ before the announcement, “Economists surveyed by The Wall Street Journal estimate that employers added 573,000 jobs in November, on par with October, and unemployment ticked down to 4.5% from 4.6%.” That is a big miss but, as has been remarked on several times in this blog, this forecasting thing is not ez. There were, however, upward revisions for September (up 67,000) and October (up 15,000) to take a little sting off the November headline number. While the private sector increased 235,000 the government sector declined 25,000. Maybe Omicron fears drove the decline in retail employment of 20,400 and the small gain in leisure and hospitality of 23,000. As many people have noticed, there are no cars for sale it seems. Employment in motor vehicles and parts fell 10,100.

Average hours of work inched up from 34.7 to 34.8, giving a little more oomph to today’s report. One way to think about production of goods and services is to measure the inputs into producing those goods and services. The “headline” employment number, seen as disappointing by many,” is only one measure of the productive capacity…and a partial one at that. To get a more complete measure, multiply the number of those working in the private sector by their average weekly hours of private workers times the number of weeks in a month. And no, there are not 4 weeks in a month. For months with 31 days there are 4.4286 weeks; for months with 30 days there are 4.2857 weeks; for 28 days it is 4.0 weeks and for 29 days it is 4.1429 weeks. Going from September to October total hours of worked climbed about 3.5% and from October to November total hours fell about 3%. Average hourly earnings climbed 8 cents to $31.03; however, year over year inflation has outpaced the growth in average hourly earnings.

The household survey showed an increase in the civilian labor force of 594,000 and an increase in those employed by 1,136,000. With population increasing 121,000 this lead to a big increase in the employment to population ratio, from 58.8 to 59.2. The number of people unemployed fell 542,000 and the unemployment rate dipped to 4.2% from 4.6%. It is remarkable to see how quickly the number of unemployed and the unemployment rate have fallen compared to other economic recoveries.

Initial claims popped up 28,000 to 222,000 in the week of November 27 after the claims hit the lowest in 52 years last week at 194,000. Continued claims fell

Overall, the labor market continues to strengthen even given the shortfall in employment compared to what was expected. Of course there is still plenty of mismatch it appears as there are still more job openings that unemployed persons. One place this is showing up is in the number of self employed persons. In April of 2020, just as the pandemic was starting, there were 8,221,000 self employed. That number is now 9,997,000.

Author: peter.c.rupert

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