Preface to all sector posts: I’m not going to dance around it: I am very short again. I have 99 different short positions and am aggressively positioned for the week ahead. I have gone through all my charts and have broken a portion of them into distinct sectors. Here is the next gallery, and as always, you can click on any thumbnail for a larger image. You can scroll left and right through the gallery.
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No one was expecting any interest rate changes from The Federal Reserve yesterday, but I was hoping that The Fed was going to announce a reversal in their policy of paying interest to banks for depositing their excess reserves with The Fed as opposed to lending it out to businesses and individuals.
(Bloomberg) — The Federal Reserve left interest rates unchanged and stayed on course to hike in December despite recent jitters in financial markets and a critical president.
The U.S. central bank said “economic activity has been rising at a strong rate” and job gains “have been strong,” acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its statement Thursday following a two-day meeting in Washington.
Risks to the outlook appear “roughly balanced,” the Federal Open Market Committee said, leaving that language unchanged from the prior meeting in late September. Inflation expectations, which have slipped slightly in recent weeks according to some measures, were described as “little changed, on balance,” the same as in the last statement.
Well, if risk is so roughly balanced, why do banks still have so much money parked at The Federal Reserve in the form of Excess Reserves?
One notable bit of evidence that emerged on Wednesday was the fact that it qualified as an IBD Follow Through Day (FTD). I have done a lot of research on FTDs over the years. Much of that research can be found here on the blog. Unusual about this FTD is that it occurred in conjunction with SPX making a new 20-day high. This triggered the study below, which I last discussed in the 10/19/2011 blog.
Results here are impressive over both the short and intermediate-term. To get a better feel for the short-term returns I have listed the instances below.
I thought this chart was really interesting and worth highlighting, particularly given I’ve been writing a lot about emerging markets recently. The reason I highlight this chart is because in October the emerging markets composite manufacturing PMI rebounded to a 5-month high. Now it is important to note that this is a relatively volatile index month-to-month and ideally we’d like to see another stronger or at least stable month to confirm… but this is a really promising sign. The worst case scenario for EM from an indicator perspective would have been to see a precipitous and unabated decline and breakdown through the 50-point mark which delineates economic expansion vs contraction. In short – it looks like EM has stopped slowing.
Well, let’s take one last look at what the odds are saying about the election today. I guess we’ll know in about 16 hours or so where things really wound up.
Over the course of time, it certainly seems like the odds have been strengthening for the Dems. You wouldn’t know it from a lot of the news out there, though. Depending on where you look for the news, it’s either going to be a huge red wave, a huge blue wave, or no wave at all. No one seems particularly interested in data. Just conjecture.
It seems over the past few years the only certainty has been rising uncertainty, and the folk at Economic Policy Uncertainty have a set of indexes which map this trend out well. Their indicators use algorithms to generate readings based on the flow of news. As the charts below show, there are some important trends in these indicators, and a couple of key linkages with global equities and global stock market volatility.
The key highlights on global economic policy uncertainty are:
-The trend of the past decade has been for rising economic policy uncertainty.
-The peaks and troughs of policy uncertainty tend to line up with the swings and cycles in global equities, for a few good reasons.
-The spike in volatility is consistent with the rise in the economic policy uncertainty index, and the global equity market correction – and is a possible contrarian signal.
1. Global Economic Policy Uncertainty Trend: The first stop is to remark on the overall trend in global economic policy uncertainty, which has been on an almost consistent upward path. Aside from the broad trend there are clear spikes and troughs in the indicator, and visually this tends to map to the swings and cycles in global equities. Like clockwork, the indicator has made a particular surge in the October readings, which lines up with the heightened market volatility we’ve encountered. This makes sense both from the point of view that greater policy uncertainty is bad for markets, and bad market conditions also feed-back to foster policy uncertainty.
Terry Goodkind wrote an epic fantasy series. The first book in the series is entitled Wizard’s First Rule. We recommend the book highly, if you’re into that sort of thing. However, for purposes of this essay, the important part is the rule itself:
“Wizard’s First Rule: people are stupid.”
“People are stupid; given proper motivation, almost anyone will believe almost anything. Because people are stupid, they will believe a lie because they want to believe it’s true, or because they are afraid it might be true. People’s heads are full of knowledge, facts, and beliefs, and most of it is false, yet they think it all true. People are stupid; they can only rarely tell the difference between a lie and the truth, and yet they are confident they can, and so are all the easier to fool.”
Does this not aptly describe the belief that the dollar will lose its reserve status, will collapse relative to other paper currencies, and is facing imminent hyperinflation with a skyrocketing gold price?