Opinion

The Beginning of the End

They sure are trying their best. To do what? To goose markets higher. It’s been quite the spectacle all year, but this Friday sure took the cake. The entire week had been a giant jerk fest of sudden rips and dips as headline chasing algos were ripping through support and resistance levels unleashed like fat kids at the candy shop. But this Friday was something else, almost designed to have markets overdose on an insulin spike.
Ever more hyped up on an impending China deal, every meeting, and movement of negotiators caused market spikes, a Trump tweet about “warm feelings”, a $82.7B repo operation by the Fed to keep things tidy, a sudden out of the blue $60B/month Treasury buying operation announced by the Fed, multiple Fed speakers to boot, what a scene.

And really Fed? You are throwing this $60B a month announcement out on a Friday with the $DJIA already up 350 points? What are you thinking here? The Fed knows this kind of announcement juices up markets. The Fed sheepishly claims it’s not QE. Oh piss off already. Expanding the balance sheet by $60B a month is a massive intervention any way you cut it or slice it. How big? Do the math. $60B per month is a run rate of $720B a year. And while they claim they’ll stop it in Q2 next year who really believe anything they say? Did you believe QT was on autopilot last year? Lol. Fool me once.

You know what else is $720B a year or $60B a month? The ENTIRE US MILITARY BUDGET. The largest military budget on the planet. Millions under arms, submarines, aircraft carriers, nuclear arsenal, bombers, fighter jets, military bases across the globe, satellites, drones, laser guided missiles, you name it. All of it runs at $60B per month.
So lest everyone is blind to numbers these days as everything is so monstrous our eyes glaze over I trust this comparison highlights how massive the Fed’s announcement was on Friday. But not QE. Right. Believe it if you so choose.

And yet, despite 2 rate cuts, the liquidity and news spectacle on Friday, no new highs. Everything including the kitchen sink is being thrown at these markets. The hype is palatable. And here we are. One year after rate hikes and balance sheet unwind on autopilot we’re back into crisis management, because that’s what rate cuts and balance sheet expansion is.
The ECB has cut and relaunched QE, the Fed has cut twice and is now running a US military budget size balance sheet expansion program.

Take these actions and place them anywhere else in history (2000, 2007, any time) and this would be called an emergency intervention program.

Why is nobody calling it that now? Because all of our senses and perceptions have been dulled by the constant droning on of central bankers telling us that without their existence the stone age is coming back? Please.

Yes they are all afraid of the consequences of debt/credit monstrosity they have unleashed and their only choice to blow an even bigger bubble.

Whether they will succeed is another question. But know that all this frantic action to manipulate the liquidity and rate equation is in response to one chart, the chart that says we are at the beginning of the end.
First comes the yield curve inversion, then comes the steepening, and that’s exactly what happened this week:

Why are central bankers acting like there is a global crisis? Because they know exactly the history of this chart and hence they are trying everything in their power to avert the inevitable. And if that means they have to lie and not call it QE then that’s what they have to do.

They’re buying treasuries because the US government has an insatiable demand for debt. Spending keeps increasing, courtesy both GOP and Democrats, increased military spending, liability obligations, you name it, revenue is not large enough as growth is slowing, hence trillion dollar deficits are here and debt must be financed and when you have that much debt to sell you need buyers. And now the Fed is back in the game.

It’s all a big game.

Also a big game: That big China deal which is no big deal at all, it’s no deal. Nothing is in writing, nothing’s been signed, but let’s call it a great phase 1 partial whatever that means:

Let me tell you what it doesn’t mean: No company is suddenly going to increase their capex or business investments beause in 5 weeks, maybe, something will get signed to buy more soybeans and pork as part of phase 1. They didn’t solve anything, it’s a face saving exercise and gives the Chinese time. Time for what? Time to see how the political situation unfolds in the US.

Impeachment? Here’s an out of field controversial and admittedly entirely speculative take on all this: Who’s says Trump is around for phase 2 or phase 3 as he called it yesterday? Everybody assumes he’ll survive impeachment and may well win the election next year. Who says he actually wants to? As radical as it sounds impeachment may be his best and most desirable option.

He sure is acting like he wants to get impeached, he’s practically daring not only Democrats but increasingly Republicans as well. Think about it. What if he really is trying to get impeached and nobody’s doing it for him? The logical path would be to do ever more outrageous things until they finally caved and impeached him. His sudden and unexpected move with the Kurds/Turkey caused big consternation with his Republican supporters who couldn’t quite fathom what he was doing. If he was trying to get impeached such a move would be consistent with such a move. Sounds too crazy? Consider this:

Why would Trump want to get impeached? It’s actually a win win for him. First off he would not have to risk losing at the ballot box next year. Despite all the claims to the contrary his poll numbers are dreadful, for someone not liking to lose a historical defeat in 2020 would not exactly be ego soothing. His entire narrative has been around fake news, fake polls, fake this and fake that. A defeat at the ballot box next year would be a historic repudiation of such a narrative.

If he and his team know a recession is very possible in 2020, then they also know they would likely lose for that reason alone. But it’s more than that. An impeachment process allows to lose the presidency but keep a deep state conspiracy narrative alive. I didn’t lose, I was pushed out by the evils from within. A much more appealing narrative, especially if it comes with a blank immunity check for everything that may well still be uncovered. See, losing the 2020 election doesn’t come with an immunity deal. It may come with an arrest warrant. But dragging the country through acparalyzing constitutional crisis would likely come with an immunity deal as people from both sides would practically beg him to step down. Sure he says, but gimme and my family a blanket get out of jail free card. Why don’t you President Pence? After all it’s been done before.

The political remains speculative, but the Chinese are well served in waiting and managing to get a tariff delay for October in exchange for buying some soybeans and pork. Who knows that the political landscape will be 2-3 months from now.

But what is clear is this non deal deal is not going to suddenly promote investment or sudden economy growth. It may produce a sugar relief high, but as I outlined before: Bulls need new highs or face a major double top. And so far, despite all this:

No new highs. Yet. Next week Q3 earnings will start rolling in in earnest. Besides the results, look closely at the outlooks, especially hiring, as jobless claims is still the missing link for bears. But this week bears got another checkmark: The steepening of the yield curve has begun. The beginning of the end?


For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

Advertisements

Categories: Opinion

36 replies »

    • The explanation are stock buybacks. Companies are frantically buying their own stock to better face the upcoming rising interest rates on their debt that the central banks encouraged them to accumulate with the promise that their governments won’t default, probably one of the biggest lies in history. Company insiders and funds sell, companies buy it up.

  1. Study your Carroll Quigley, no one gets a nomination unless they are controlled by financial interests at the top of the pyramid. Trump was installed for a reason.

  2. Sven, I can tell you’ve been thinking about Trump and politics, but you’re still at your best when you cover the market movements.

    Regarding the “wanting to get impeached” hypothesis:

    Did Trump want to get impeached for the first 2 years of his presidency during the Russia collusion fizzle? Was that the goal of all his inflammatory comments then?

    Here’s the Wall St Journal article on the current Democratic impeachment attempt: https://www.wsj.com/articles/ukraine-smoke-and-mirrors

    Getting the US out of the way of an invading Turkish force that’s been building for weeks might not be the best thing for the Kurds. But presumably some of them listen to the world news and knew it was likely coming. Trump wasn’t going to send in the US military against a NATO ally, even a quasi-ally, like the Turks. He could have objected strenuously, like so many presidents have done in similar situations in the past, which would have been a politically-correct, but hollow, gesture. He could have invoked pre-emptive sanctions on Turkey. But Turkey survived the last round, and their troops were already on the border. Erdogan has never been easily persuadable. So Trump opted for diplomacy and asked that they not do carpet bombing of civilians. And he fulfilled his pre-election promise to get American troops out of Syria.

    Or, he could have sent in tens of thousands of US troops and confronted the already amassed Turkish forces at the Syrian border, in order to protect the Kurds. And the US has an airbase with soldiers in . . . Incirlik, Turkey! And the US has to have Turkish approval to fly over their airspace (remember the Iraq war, when Turkey didn’t allow it, and the US had to invade only from the south?) So the Turks would have crossed the Syrian border first. And then there would have had to be a hot war with Turkey, which would have split NATO. Putin and Xi would have loved that!

    Just sayin . . .

  3. Sven, I can tell you’ve been thinking about Trump and politics, but you’re still at your best when you cover the market movements.

    Regarding the “wanting to get impeached” hypothesis:

    Did Trump want to get impeached for the first 2 years of his presidency during the Russia collusion fizzle? Was that the goal of all his inflammatory comments then?

    Here’s the Wall St Journal article on the current Democratic impeachment attempt: https://www.wsj.com/articles/ukraine-smoke-and-mirrors

    Getting the US out of the way of an invading Turkish force that’s been building for weeks might not be the best thing for the Kurds. But presumably some of them listen to the world news and knew it was likely coming. Trump wasn’t going to send in the US military against a NATO ally, even a quasi-ally, like the Turks. He could have objected strenuously, like so many presidents have done in similar situations in the past, which would have been a politically-correct, but hollow, gesture. He could have invoked pre-emptive sanctions on Turkey. But Turkey survived the last round, and their troops were already on the border. Erdogan has never been easily persuadable. So Trump opted for diplomacy and asked that they not do carpet bombing of civilians. And he fulfilled his pre-election promise to get American troops out of Syria.

    Or, he could have sent in tens of thousands of US troops and confronted the already amassed Turkish forces at the Syrian border, in order to protect the Kurds. And the US has an airbase with soldiers in . . . Incirlik, Turkey! And the US has to have Turkish approval to fly over their airspace (remember the Iraq war, when Turkey didn’t allow it, and the US had to invade only from the south?) So the Turks would have crossed the Syrian border first. And then there would have had to be a hot war with Turkey, which would have split NATO. Putin and Xi would have loved that!

    Just sayin . . .

    [Sorry if this posts twice, your website spam filter seems to only like one of my email addresses.]

  4. Sven, you are quite wrong about the Fed being forced to buy Treasuries. Treasuries are top tier collateral in repo, and it is a mistake for the Fed to cause further problems in repo by turning Treasuries into inert bank reserves. That just shows how stupid the Fed is. They think the problem is bank reserves. They always make this mistake. The problem is a liquidity bottleneck. The Eurodollar system worked with virtually NO bank reserves before 2008.

    You are also wrong about the notion that there are too many Treasuries. Look at the PRICE they fetch. There is alway demand for Treasuries, because they are top tier collateral.

    It is clear that you do not understand the Eurodollar system. Go to Alhambra Investments and read Jeff Snider’s blogs in the Market Research section. Also take his Eurodollar University course on YouTube

    If you don’t thoroughly understand the Eurodollar system, you don’t understand anything. The main point about the Eurodollar system is that it is so huge (in the quadrillions) that Fed actions to control it are largely irrelevant. The Fed wont be able to control, much less prevent, the next collateral bottleneck THAT is the end we are near.

    • JR – I suggest you read Luke Groman’s work. Sven is correct that the Fed is being forced to buy treasuires due to the massive US deficits – and the fact that foreigners are no longer buying due to the strong dollar and cost of hedging. Jeff Snyder is also correct about the Eurodollar issues and from an insider the current repo problems reflects issues at Deutdsche Bank and other European banks. Note the massive rally on Friday in EUFN, DB, BCS, LG etc when the Fed announced QE. With respect to treasury yields, the market was obviously front running the Qe announcement over the summer – and as it was announced the market started selling – see the signifcant rise in the 10 year and steepening of the yield curve this week. The steepening of the yield curve will trigger the next recession. If equities correct significantly, the Fed will be back buying longer term treasuries.

  5. Love That… FAT KID IN CANDY STORE. This market truly is NOT normal. BI-Polar is more likely. We need a Major Flush in the market – Question is when ? A major reset must take place. Sven keep up the Great Work you are doing. You have helped many understand this PONY SHOW the fed is doing. Afraid of the Bubble. Peace

  6. With the Fed announcing $60B per month until end of January, where is the Fed at:
    It’s as if Jay Powell jumped off the Empire State Bldg and as he goes past the 20th Floor, he says that everything is fine, no worries.

  7. “If Trump survives impeachment” you say???? What world do you live in? First, the dems have NOTHING to impeach the president – that’s why they are not seriously considering it – it’s just theatre to make trump look bad. Second, do you remember how Clinton’s impeachment went? It’s just laughable the comments people make sometimes.

  8. Great Work Sven! Best by far.
    Trump & Fed scrambling this week to prop the market, and tweets just before Futures open…. clearly indicate the shady job. End is near and it’s not if but when

Comment:

This site uses Akismet to reduce spam. Learn how your comment data is processed.