By Kevin Muir
I love the ocean which is ironic as I live on a Great Lake more than 1,500 kilometers from the Atlantic. But you put me anywhere near an ocean and I guarantee it – I am jumping in. It doesn’t matter if the water is 15 degrees, I have to go for a dip.
Not having grown up with all the ocean-life, I try to rationalize my slight fear of sharks by convincing myself that my apprehension is like many other people’s fear of bears. Having spent many weekends at a cottage in the Canadian wilderness, I probably have an overly casual attitude towards bears. To me, they are just big raccoons. Yeah, a hungry grizzly deserves your complete and total respect, but most black bears want absolutely nothing to do with humans. After seeing dozens upon dozens in the wild, you realize they are not so scary. And this logic is what I use when thinking about sharks. Most of them want nothing to do with you.
However, I recently stumbled upon this research group that tracks different sharks, but specializes in Great Whites.
Continue reading Don’t Short the QT Hangover
By Anthony B. Sanders
S&P Valuation Near “Cheapest” Since 2016 (Inflation Expectations Cooling)
(Bloomberg) — The bond market is losing confidence in the Federal Reserve’s policy tightening projections after a punishing stretch for U.S. stocks.
Traders pared wagers on 2019 rate hikes last week as disappointing corporate earnings helped drag the S&P 500 Index down 10 percent from its record high at one point Friday. Markets are now factoring in fewer than two quarter-point hikes for next year, compared with the three increases that policy makers project. Tanking inflation expectations suggest some investors already deem Fed policy too restrictive.
Meanwhile, back on the equity farm, S&P500 valuation is near the “cheapest” since 2016.
Continue reading Bond Market Losing Confidence In Federal Reserve
By Trey Reik
[biiwii comment: very pleased to welcome Trey, a senior portfolio manager at Sprott, to our group of quality authors]
Over our two decades following global monetary affairs, we have often marveled at default confidence awarded the Federal Reserve. Don’t misinterpret us — the Fed’s power borders on surreal. Seven governors and twelve regional bank presidents set the price of money not only for the world’s largest economy, but through auspices of the dollar standard system, for the entire globe. No matter how practical “don’t fight the Fed” logic has proven over time, it does not diminish the folly that 19 capable and well-supported individuals might possibly price the world’s reserve currency more efficiently than free markets.
Record valuations for U.S. financial assets have inured investors to the daunting risks of unwinding eight years of QE and ZIRP. Because such radical monetary policy has never before been deployed, our 19 monetary mandarins, by definition, command no special insight into broad implications of Fed policy normalization. Into this unprecedented monetary vortex steps new Fed Chairman Jerome Powell, a seemingly low-key and forthright communicator bent on rational steps to normalize Fed policy. In this report, we share our perspective that the Fed’s dual policy agenda of simultaneous rate hikes and balance sheet reduction, rather than constituting some sort of scientifically-formulated policy elixir, amounts to little more than glorified brinkmanship — the Fed’s signature policy tool. Events of the past few weeks only serve to support our contention that Fed tightening is pinching global liquidity to a degree which threatens reigning valuations of traditional financial assets.
Continue reading Brinkmanship
By Anthony B. Sanders
Hurricanes Florence and Jerome
There is little doubt that Federal Reserve policies have resulted in mispriced risk and massive distortions in the economy. Fed Chairs Bernanke and Yellen were masters of distortion (keeping rates too low for too long) while Fed Chair Powell (Hurricane Jerome) is raising rates rapidly in the face of little-to-no inflation. Throw in Hurricane Florence and we have “The Mist” where fear changes everything.
Housing starts for September were released yesterday and, as expected, the numbers were down across the board (except for the West where it is seemingly always sunny).
1-unit starts (aka, single family detached) are still below 2000 levels thanks, in part, to The Federal Reserve dropping their target rate like a hammer to 1%. We got a massive construction response. That blew up, so The Fed dropped their target rate like a hammer … again from which Hurricane Jerome is only recently begun raising.
Continue reading The Mist! US Housing Starts Plunge Under Rising Interest Rates
By Jeffrey Snider
Somehow, the scale of May 29 keeps getting bigger. I should clarify, meaning that the very few data series that can pick up on what happened that day have had trouble picking up on exactly what happened that day. It was, to put it simply, a global collateral call of some undetermined magnitude. We know it was substantial by the earthquake across markets in the real world.
But how substantial?
Continue reading The Very (Very, Very) Big Things
By Charlie Bilello
This is the end. The end of accommodation. The end of easy money.
The Federal Reserve hiked interest rates last month for the 8th time, bringing the Effective Fed Funds Rate up to 2.18%, its highest level since April 2008.
More importantly, the Fed Funds Rate now stands above U.S. core inflation (2.17%) for the first time in 124 months.
Continue reading This is the End
By Doug Noland
October 3 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell said the central bank has a ways to go yet before it gets interest rates to where they are neither restrictive nor accommodative. In a question and answer session Wednesday with Judy Woodruff of PBS, Powell said the Fed no longer needs the policies that were in place that pulled the economy out of the financial crisis malaise. ‘The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore. They’re not appropriate anymore… Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral… ‘We may go past neutral, but we’re a long way from neutral at this point, probably.'”
Market bulls grimaced. Powell: “We may go past neutral, but we’re a long way from neutral at this point…” CNBC’s Jim Cramer called it “amateurish.” Chairman Powell was certainly candid, something shockingly unusual for a Fed chair. So atypical was his candor, the Chairman was misconstrued as a novice unschooled in the art of modern central banking.
Continue reading Contemporary Finance’s Defect
By Elliott Wave International
Fact: The direction of interest rates does not determine the stock market’s trend
Investing is hard. You, like many others, probably watch financial TV networks, read analysis, listen to talk shows and talk to fellow investors, trying to understand what’s next.
One popular stock market “indicator” is interest rates. Analysts parse every word from the Fed, hoping they hear a clue about interest rates. They assume that falling rates means higher stock prices, while rising rates means lower stocks.
But does the conventional wisdom about interest rates and stocks square with reality? Let’s do a brief historical review.
From October 1974 to December 1976, the stock market rose as the Fed funds rates trended lower. This occurred again from July 1984 to August 1987. Conversely, stock prices faltered as interest rates climbed from January 1973 to October 1974 and again from December 1976 to February 1978. So far, so good: rates up/stocks down, or vice versa.
But stock prices have also fallen as interest rates declined — more than once. Take a look at the chart below. The commentary is from the February 2010 Elliott Wave Theorist:
Continue reading Will the Fed’s Rate Hikes Choke the Stock Market Rally?
By Michael Ashton
I mentioned a week and a half ago that I’d had a “really cool” idea that I had mentioned to a member of the Fed’s Open Market Desk, and I promised to write about it soon. “It’s an idea that would simultaneously be really helpful for investors and help the Fed reduce a balance sheet that they claim to be happy with but we all really know they wish they could reduce.” First, some background.
It is currently not possible to directly access any inflation index other than headline inflation (in any country that has inflation-linked bonds, aka ILBs). Yet, many of the concerns that people have do not involve general inflation, of the sort that describes increases in the cost of living and erodes real investment returns (hint – people should care, more than they do, about inflation), but about more precise exposures. For examples, many parents care greatly about the inflation in the price of college tuition, which is why we developed a college tuition inflation proxy hedge which S&P launched last year as the “S&P Target Tuition Inflation Index.” But so far, that’s really the only subcomponent you can easily access (or will, once someone launches an investment product tied to the index), and it is only an approximate hedge.
Continue reading The Neatest Idea Ever for Reducing the Fed’s Balance Sheet
By Anthony B. Sanders
Arbing The Federal Reserve
The Federal Reserve did it to themselves. The have one rate at which banks can store deposits with The Fed (currently 1.95%) and another rate for institutional investors (1.75%). If this isn’t a riskless arbitrage opportunity, I don’t know what is.
(Bloomberg Businessweek) — The Federal Reserve is, among other things, a bank for banks: They keep deposits there and earn interest at a rate currently set at 1.95 percent. Big institutional investors that aren’t banks can also deposit money at the Fed, but they use a different program with a lower interest rate: 1.75 percent.
This suggests an obvious trade. An institution could deposit money with a bank, which would then turn around and deposit it with the Fed. The Fed pays the bank 1.95 percent interest, the bank collects a fee for its trouble, and the institution gets the balance—say, 1.9 percent.
Continue reading Why Is This Supersafe Bank Scaring the Fed?
By Anthony B. Sanders
10-Year T-Note Yield UP From 2.06% To 2.90%
The Fed’s Quantitative Tightening (aka, Fed Shed) has resulted in a decline of their balance sheet of $245 BILLION since September 2017, about one ago.
And the 10-year Treasury Note yield has climbed from 2.06% in September 2017 to 2.90% today.
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