Market Briefing For Friday, July 15
The financial future enters a 'gray' area given the green bombardment many central banks contemplate; in the form of so-called 'helicopter' money. There is a carefree attitude of 'why not stimulate' everything further at such low interest rate times, without a bit of concern about how this rolls over in the future. Or perhaps a worse fate for monetarists; the impossibility of hiking rates with the extent debt levels have, or will have reached. They may view this as plausible; but there's a problem: that's the history of markets often moving rates irrespective of 'official' policy intentions (look, for instance, at some European default spreads of late).
Thursday morning the post-Alcoa (AA) results euphoria continues, with JPMorgan's (JPM) results topping estimates, and with BlackRock (BLK) Q2 results at least meeting them. So on the surface things 'appear' sunnier while the forward risk of gasoline being thrown on the monetary fires seems to be subordinated to the 'here-and-now'.
Technically - the type of thrust we just had, especially as 'helicopter money' plans were either leaked or rumored (clarity remains to be determined as to which has occurred), gradually sucked in more money and improved basic participation. In a market like that with breadth improving as money comes in, you don't presume it's a final blow-off; though one should be aware of the possibility.
The combination of money flows in essentially a parabolic thrust with breadth is a sign of a mature (to say the least) up move; but also one unwise to be fighting aggressively; and we are not. While I have doubts that this move (and with some adjustments or corrections) can hold together through the rest of my journey, I'd like that to be the case as noted before. Perhaps it will settle into a high-level sort of range, rather than reverse straightaway; leaving open 'hope' for more upside thereafter; and (for once) avoid either a V bottom or spike-top kind of resolution, of which the market has had a series of over the course of many months. To wit: a market that spikes here a bit, corrects, but then tests the highs before roll-over risk becomes more evident is one that will leave more traders and investors just confused as to what comes next. We suspect it's more dangerous than realized.
Thus; If circumstances unfold differently than optimists envision, you get another huge 'house of cards' being constructed. Reaching mid-July in an overbought, as well as technically unsustainable, move that reflects an extended yield-chasing mania, we expect this blow-off to simmer down within the next few days; but not collapse unless there's an exogenous event of some type.
There are more existential threats; one of which is Italy's banking crisis; and what I've suspected since Brexit is an overdone concern about unwinding cooperation between the EU and the UK. From the start I've felt the issues will temper what in fact was already a bureaucratic Brussels maize that tempered long-held globalist supranational state-building ambitions; given the lack of proper fiscal structures.
I believe Britain's new Prime Minister May has the right idea about a stronger UK, and cooperation with the EU; and have felt Brussels's expressed resistance to an independent (perhaps point-based) residency/migration system like Australia's is an approach that Europe will acquiesce to; because it's mutually necessary for all the nations to accommodate current economic, trade, and security concerns.
In sum: we live in very interesting times; unprecedented for markets as regards a disconnect between corporate (not monetary) fundamentals, given equity market price levels. It's technically reflecting the insane credit market, as the 'helicopter' money crowd believes money-printing can be perpetuated; but in reality is merely a matter of timing as to when it unwinds as rates stabilize and eventually firm.
Of course they will presume higher rates, later, will thrust more funds into equities; and ultimately that may be so. In initial stages however, the opposite is the likelier outcome. We're not alone in criticizing the Fed for focusing on financial assets or stock price levitation, and not infrastructure or wages (household income) rises in lieu of what is intended to stimulate recovery, but actually functions as a restraint.
The Fed has been flip-flopping in their views of policy shifts all year; and now has a sort of 'resigned' stance of backing-away from intended firming stabilization and instead allows (as this week's reports show) deteriorate job conditions and lowest new hires in over two years). Meanwhile wholesale 'Inventories-to-Sales' hold at recessionary high levels and there should be more concern about monetary folly.
Conclusion: yes this is a form of parabola; though they won't surrender easily if we don't get an existential event. In fact, the (retired) Bernanke visit to Japan has far more to do with this than broadly recognized.
The latest attack on France, presumed to be an Islamist assault, reminds us all of how difficult it is to preserve both freedom and the rule of law during such times. I of course offer condolences and prayers for the victims, for France, and for all the fine citizens of Nice, who are struggling at this hour not very far away.
Disclosure: None.
Well said.