Morning Musings AKA Shallow Thoughts

Now that the US Government has delayed Tax Day for 3 months, the April tax windfall won’t happen. It will be spread out through the second quarter. The markets get a boost every year between now and mid May as the Treasury collects and processes tax payments into its cash account. It then uses that cash to temporarily pay down debt until mid to late May, when it starts net borrowing again.

That boost won’t happen this year, or if it does, it will be to a far smaller extent in late June.

Meanwhile, the Fed has boosted its Treasury purchases way beyond it said it would do. RIght now they’re buying more than the Treasury is issuing. The Treasury will catch up once it starts sending the stimulus checks.

But in the meantime the Fed is trying to stuff cash into the deflating bubble faster than the cash gets destroyed by margin calls.

It has been a losing battle so far, although overnight the US stock market fucutures showed signs of life. Those signs have quickly dissipated however.

Engaging in a little cosmic connection thinking, I sort of feel that between the massive money printing and the helicopter money that’s coming we could get a stupendous wave of CPI inflation.

A hyperinflationary depression. Wouldn’t that be special?

Over in today’s thread on the Capitalstool.com Stool Pigeons Wire, FXFox asked:

I simply can not imagine how they will stage inflation in such an economic environment. When everything breaks down, from what and how should inflation arise? We are talking about a complete breakdown of an economy, not a shift from one sector to another sector or something like that.

Those crazy moves in bonds, yields, fx and so on are due to market imbalances I guess. It is only my guess I have to say I have no further information what is really going on in the background.

Which gave me some more shallow thoughts.

What’s going on is that the capital of the dealer system and major banks has been destroyed because of overleverage.

If that was the bottom, it would be the first time in history that short frequency indicators didn’t give some sign first or concurrently.

There’s no liquidity. Liquidity is a combination of cash and excess collateral not already pledged to back a margin loan. The Primary Dealers no longer have enough cash and collateral to meet margin calls. So the central banks have stepped in to provide liquidity with free payday loans that never need to be repaid.

In my way of shallow thinking, which is probably wrong, the central banks are suddenly creating trillions of currency units. Let’s call them dollars for consistency’s sake. These dollars have neither fixed or financial asset backing that is adequte to cover the value of the currency issued. Nor is the production, nor any hope of production, or means to repay, adequate.

Governments no longer plan to route those dollars to dealers and leveraged speculators and corporate financial engineers, as they have done for the past 11 years with QE. Now they plan todirect them to consumers.

WIthout an increase in goods, the sudden increase in cash would cause the price of existing goods and production to rise, as Randolph Duke explained so well.

Or maybe not. Maybe it would just fill the income hole caused by massive loss of regular paychecks. So this could tilt either way, I suppose. Inflationary depression, or deflationary. I don’t know.

Oversimplification. Yes. But I think that higher consumer inflation is now possible, given the sea change in sentiment among the primary dealers and leveraged speculators. They are wiped out. Animal spirits are dead. Fear is a great motivator of deep and lasting behavioral change. They are not likely to be pusing asset prices consistently higher any time soon.

Too much leverage has finally killed animal spirits. I think for a generation or two.

I’m probably wrong.

Market Trading Setup for Friday, March 20, 2020

Hourly ES S&P 500 Futures Chart

The fucutures broke out of a base pattern this morning that began to form on Tuesday. The neckline was at 2460, and the measured move target was 2630. The breakout through 2470 broke the crash trend channel. The 5 day cycle projection was only 2520 however.

But everything looked good for an extension of the rally.

It fizzled before getting to either target. However, what I call a “return to the scene of the crime” is a normal feature of a jailbreak. If the pullback holds at or above 2425, the rally should extend. The most significant resistance is at 2520. If they clear it, then the measured move target of 2630 would be doable today.

But a move back below 2420 would put the bears back in charge. 1 day trend channel support around 2370 would then loom large.

Reminder- I’m only talking patterns for a day here. This is not the big picture. If you want that story, you must subscribe. Risk free trial and all.

China Stock Market 

Over in Asia, the Shag High Composite has set a bottom structure on the daily chart. The 8 week frequency cycle indicators don’t yet signal that a bottom is in.Let’s see how that stacks up next week.

S&P Futures Daily Chart

The ES has cleared the sharpest crash channel on the daily chart at 8:10 AM in New Yawk. It needs to stay above 2420 to sustain that breakout.

This only puts barely within the broader crash channel coming from the market peak. Breaking out of that isn’t in the cards in the short run. In fact, breaking into it on a sustained basis isn’t even certain yet. I’m watching it sink as I write. 

2300 remains obvious support. We got the bounce we expected from it overnight. But I was looking for a bounce to the centerline of the broarder crash channel at 2600. So far, no go. If this drops back below 2420, fuhgaddaboudit. 

If the market breaks 2300, good grief. The next support level from ancient histor is around 2188. The bottom of the crash channel is at 2120 today.

I mean really, we’re already in such deep trouble I guess it doesn’t matter how much lower this goes now. It’s already terrifying from a macro perspective. 

The cycle and momentum indicators are at least hinting at beginning bottom formation. But there still needs to be a positive divergence before a decent rally takes shape. We can’t be reasonably sure that this crash is finished until these indicators make at least one set of higher lows. And from these depths, probably more than one.

Department of Wash, Rinse Repeat – There’s no oversold parameter in a crash. Positive divergences are almost certainly necessary to form a good swing low. There are no positive divergences on the daily chart yet.

S&P Cash Index Hourly Chart 

The red bar at the far right shows where the futures have been trading overnight. The range neatly corresponds with the upper and lower trendlines on the hourly chart of the cash market in regular trading hours. That’s between 2500 and 2350. There will be no breakout on this chart unless something changes radically in the next hour.

There’s still no 5 day cycle projection and the phase isn’t clear. So we fall back to the old standard. The trend is your friend. Until proven otherwise.