Question #1: With unemployment rates at 50-year lows, inflation
below the Federal Reserve's target, housing (bankers' major collateral) at or
near record highs, and stock markets within 2% of all-time highs, why in the
Lord's name is a rate cut even being contemplated?
Question #2: Can there be any doubt that the Federal Reserve Board
is no longer "steward of the economy" but rather "Defender of
the S&P"?
Many, many years ago, long before central bankers became rock stars, and
during an era of true free market capitalism, to even imagine a Fed funds
rate of 2.5% was to paint a backdrop of high unemployment, negative growth
verging on depression, and sagging asset prices verging on deflation. A Fed
funds rate of 6-8% was associated with vigilant inflation controls, strong
growth and tight labor markets, where bond market vigilantes controlled long
rates by their (as opposed to Fed or U.S. Treasury trading desks)
selling or buying of treasuries.
This was the last period of non-interventionist monetary policy and it was
a safer, kinder world within which investors could navigate their portfolio
voyages with relatively reliable, simple indicators upon which to
implement strategy. If one forecast accelerating growth and constrained
supply, one bought gold and oil and waited for the reactions; if one
predicted Fed tightening due to overheated labor markets, one sold bonds or
shortened maturities while staying defensive in equity posturing. It was a
dot-plotless, tweetless, FOMC-meeting-less, CNBC-less world, when the only
financial show worth watching was Louis Rukeyser's "Wall Street
Week."
I suspect that by the time this missive is delivered, the Federal Open
Market Committee (FOMC) has either cut or left alone the Fed funds rate,
sending stocks either higher or lower, but what is painfully obvious, at
least to this self-effacing scribe, is that economic performance no longer
propels stocks. All stock price movements are either event-driven or
interference-driven, and that might also be said for both gold and silver.
Another idiosyncratic feature of all markets in the Year of Our Lord 2019
is that these FOMC circus shows are treated like Major League baseball final
games, complete with interviews, guest appearances, and revisionist
commentary with the only thing missing being the guy in the yellow frock
selling beer and hot dogs. In the hours that lead up until 2:15 p.m. EST on
FOMC day, stocks go into lockdown as the algobots are unable to focus on
anything that doesn't have the word "Fed" in it. You could have an
outhouse explode in Times Square and stocks would barely budge. . .
The following charts are illustrations of just how benign the U.S. economy
has become. There are no emergencies, financial crises, or political
boondoggles that would prompt anyone to action in the arena of fiscal
stimulus or interventionist molding of "conditions." Take a look at
these four charts and ask yourselves whether a rate cut is warranted or
whether a return to "quantitative easing" is required.
The answer: They are not required. However, since it is the fourth
chart that governs Fed policy, a 100-point crash in the S&P would indeed
prompt a call-to-arms by the Fed and you can bet that is what Trump will
demand if there is any type of negative reaction after 2:15.
Nothing appears to be requiring attention here. . .
Nothing appears to be requiring attention here. . .
Lowest unemployment rate in 50 years?
Less than 2% from all-time highs!
The prior four charts show me there really is nothing urgent in the
economic backdrop that requires stimulus other then the Fed trying to stay
"ahead of the curve," with the Trade War being the potential
catalyst for a slowdown. It is evident from Mario Draghi's actions at the
European Central Bank and Haruhiko Kuroda's at the Bank of Japan that total
capitulation to the sanctity of stock markets was the primary driver for
policy, and that will eventually be the driver for Jerome Powell and the Fed.
However, the risks will be greatest just before the markets decide that the
central bankers are now, and have always been, clueless in their stewardship
of the global economy becauese when that occurs, there are no arrows
remaining in the stock market quiver.
The "Squid" is ready to resume its downtrend. . .
Not only do I not know whether the Fed will cut or not this afternoon, I
don't particularly care. The trade, as I see it, is to fade the advance
because it appears that a cut has now been reflected by yesterday's 28-point
surge in the S&P. If they cut, traders will "sell the news,"
and if they don't, yesterday's jump will be reversed.
Ergo, the Goldman Sachs Sept. $180 puts for $3.80 appear to be ripe for
accumulation. I have also put on a modest position in the SPY July $280 puts
at $1.63 earlier. Remember that you should never go overboard, either bearish
or bullish, going into the FOMC, and always keep a bunch of cash available in
the event there are surprises.
Gold is this morning was trading down a tad and as I tweeted yesterday,
despite egregiously overbought conditions for the metals and the miners with
plus-70 relative strength indexes (RSIs) everywhere, prices are holding,
which has to impress. The odds favor fading the metals and miners based upon
the RSIs given that five prior times, big plunges followed.
Let the absurdity prevail. . .
[NLINSERT]
Charts courtesy of Michael Ballanger.
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