Market Briefing For Monday, September 12, 2016

The market has conformed to everything outlined all week. A lot of analysts are trying to correlate what's going on in the market with events or a slew of risks; while probably missing the simple conclusion:  it's overdue for decline as it is not solely a question of whether or not the Fed raises rates at the new FOMC meeting in Washington, it's also a Quarterly Expiration week, just incidentally. 
 

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Know that the credit markets have been moving toward this time of reckoning regardless of Fed or other central bank behavior; and only more recently because of it, as we've very clearly pointed out all week long (starting with concern BoJ was revising policy with vast implications across global markets; initially including equities as well). 
 

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Go look at TLT (20 year Treasuries) for-instance; and recall our view of the market running on fumes in early-mid July, as I departed for Europe; hoping the market's behavior would be relatively sanguine until after my return in early August (and we thanked the market for being accomodative). It labored on for a while accompanied by rates snugging-up as we observed, while the equity market tried ignoring it all. I stubbornly continued shorting the S&P during 'pops' as the behavior was persistent and ominous for equities; though realization that this was an 'epic' sort of risk increased merely by revelations Japan, ECB and perhaps BoE were joining the US Fed in 'reviewing' monetary policies. They already were; it just got ignored.

We didn't ignore any of this; and the intervening shakeouts were generally traded in a profitable way for those who swing; while investors advised to 'stay away' from stocks until bargains are created, definitely had to tough it out; but I bet they're glad they did, when they look at Friday's carnage, which actually was a minor decline. 

Actually, it was very orderly; which normally means more to come. It also adhered to the intraday forecasts of nothing but nominal intervening stabilization efforts; as we looked for it to evolve as it did, including the late post-squaring Friday fade. 
 

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Bottom line 

The essence is that many variations of systematic macro risks exist at this time. Not just credit markets, where the cycle basically ended as observed all week and before; but risk-parity (often volume-targeting funds) that remain heavily long both equities and fixed-income. That helped drive the recent correlation of the markets; and set up the risk as many charts we shared outlined. 

When one leg of the market suffers a macro drawdown, we've seen in the past that "shock" selling episodes can ensue, as other positions are taken down as well.  

We hold short Sept. S&P from 2182 or a hair higher, with just a break even mental stop (didn't lower it to totally avoid any chance of being caught up in a silly failing rebound); but suspect an intervening shift coming up in the new week.

A 'September to remember' may be in the cards. Tonight's focus is on the Fed; and was intended to continue our exploration of their impact on our economy, and global prospects, even before today's ruckus between the politicians as to whether or not the Fed belongs in the campaign (it absolutely does, as I'll delve into a bit). I also want to review this for new members, that haven't followed our perspective all through the doldrums of this Summer's market, as relate to monetary policy, and a Fed that clearly painted itself into a corner. 

This is not the only 'swan' (black or otherwise) circling this market; while absent an event, of course 'the Street' will attempt to keep the 'band playing on', and moves to the upside attempted. Coming out of two sell-offs intraday you say that again. In this case you get a bit of a technical reprieve after just two sessions earlier taking out the prior Friday's low before a fairly common comeback was mounted. 
 

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Now of course the pundits are rolling along a series of rationales for higher prices. These will oscillate between believing ever-higher levels will be seen for internet or technology stocks (whether FANG issues, Intel or even Apple post- presentation, should this be the least-hyped iPhone product introduction ever and find that there is something the market likes, such as wireless charging); financial stocks and Oil. Why? Because those are the areas that can move the Indexes.

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So, the present focus of attention is thus on the US exit policies. A Fed decision to raise borrowing costs would do more to weaken the Yen than anything BOJ would do. Kuroda wants to avoid a repeat of what happened in January. He introduced a negative interest rate only to see the Yen strengthen as part of a flight to safety in which a disintermediation of tremor was really felt in currency markets globally. 

Here's what you didn't hear in U.S. media as markets stabilized and advanced. In a speech today, Hamada said the BOJ should refrain from cutting negative rates further for now, because it has already had some negative effects on the banking industry and hurt household sentiment. No kidding; you think so Tokyo? You likely heard that Prime Minister Shinzo Abe told reporters, at the close of a Group of 20 meeting in Hangzhou, China this notable statement: 'that foreign bond purchases are illegal under the Bank of Japan Law, if they are meant as a form of currency intervention'. That would means the plans floated by Hamada to buy foreign bonds will likely not be implemented in the near-term, if at all. Again, this matters, and is a sign of how anxious 'they' and the world remain about US Fed intentions. 
 

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Domestically, one main concern summarizes perhaps the overall situation in-which government has tried but failed to 'inflate our way out of debt', incurred for years in money-printing frenzies, plus the other efforts the Fed felt obliged to embark upon, absent fiscal stimulus. So simply put: the problem is that heavier government debt is simply bad for growth. (It goes way beyond Trump's assertion about this being a 'false' economy; it goes beyond Clinton's somewhat self-serving response about it being 'inappropriate to discuss Fed policy,' given that nothing matters more than a thorough discussion about a leveraged society and where the can-kicking takes us and of course there has been no real effort in Washington to throttle the spending as politicians in general rarely take that road). 


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How the 'emergency' policies become counterproductive (our view now) is shown by a recent CBO study, as seven years after the trough of the recession, the U.S. is about to see a sharp and lengthy widening of its deficit. That's unhealthy since it means more Treasury issuance is required, and that competes with private-sector borrowing. As that hampers more vigorous growth, it creates greater uncertainties as to how (if even meaningfully) the debt will be repaid. Easy to say (politically this is out there this year but minimized lest voters figure it out) with even higher taxes and/or reduced entitlements.
 

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But really what was desired was faster growth. That would inflate our way out (not happening at least on the immediate horizon) while debasing the buying power of a majority of citizens concurrently. A typical monetarist approach to getting-out of a corner they painted the Nation into. That's why I've said the policy is not only so dangerously counterproductive after the 'emergency' needs years ago; but reflects what the Fed has done 'to us' rather than 'for us'. 

The nation doesn't quite feel it of yet, but imagine what happens to 'debt service' costs if they simply raise raise just a half point over time. Given sluggish growth, demographics, and a new economy where jobs won't return in higher-hourly weighs heavily in manufacturing the way it's going (plus indirect threats of trade wars by China), perhaps it's the stealth reason for the Fed's reticence to nudge rates even a hair higher. But they've got to, as this isn't going to be a placid world with the business cycle outlawed. So complacency and ignoring the topic won't fly well.