What We're Reading

Ms. DiMartino Booth, why is the Federal Reserve bad for America?
Because of its intellectual dishonesty. The Fed noticed around 2009 that if they had had a more reliable and realistic inflation gauge on which to set policy, they would have seen the crisis coming. But despite that recognition, they chose to do nothing about it.

Are there more realistic inflation gauges?
Several Federal Reserve Districts have come up with alternative gauges. The underlying inflation gauge from the New York Fed for example also includes asset price inflation. And it runs about one percentage point higher than what the Fed measure is – they prefer the core Personal Consumption Expenditures Price Index, the core PCE.

How would monetary policy look like with a more realistic inflation gauge?
Monetary policy would be much different. The Fed would not have been able to maintain a monetary policy as easy as it has done over the last couple of years. Central bankers are hiding behind the core PCE being at 1,6%. The

Maybe you've never heard of MMT (Modern Monetary Theory). But no doubt, as the 2020 election nears, you will. It's the latest contentious buzzword to hit Washington, D.C.

The idea, despite its name, is not new or "modern." But it has set off a heated political and economic debate, with Fed Chairman Jerome Powell telling Congress last week that Modern Monetary Policy is "just wrong."

Does Modern Monetary Theory, or MMT, represent a brave new future of ever-expanding government spending to meet Americans' vital needs? Or is it a dangerous idea that could lead to runaway inflation, financial disaster and, ultimately, collapse?

The theory, in a nutshell, says that because the U.S. can borrow in its own currency, it can simply print more money when it needs to pay off its debts. All the Fed has to do is keep interest rates low. Simple. It's an increasingly popular idea among left-leaning economists.

Fed Chairman Powell: MMT Is 'Just Wrong'

Not surprisingly, however, when Fed Chairman Powe

The bulls are back. $SPX up nearly 8% in January and nearly 14% off of the December lows. What slowing global growth? What reduced earnings expectations? Trade wars? Who cares. It’ll all sort itself out, all that matters was the Fed caving in spectacular fashion laying the foundation for the big bull case. The central bank 2 step is back: Dovish + dovish = nothing but higher prices. The lows are in, what else can I buy? This pretty much sums up current sentiment.

And so goes the familiar script during emerging bear markets, a general sense of relief that the lows are in and a return of optimism and greed after an aggressive counter rally following an initial scary drop. Long forgotten are the December lows after a torrent consecutive 6 weeks of higher prices.

While indeed a renewed fully dovish Fed may be all that’s needed to keep 2019 bullish (after all this playbook has worked for the past 10 years) there is evidence that this rally may turn out to be a big fat bull trap.

And it’s no

With the SPX up ~8% in just the last month, increasingly nervous investors who still vividly recall the freefall days of December 2018, are wondering what will stop the unrelenting rally according to JPMorgan's Adam Crisafulli who writes this morning that while there are always risks, none of the (known) ones seem particularly threatening at the moment.

Still, according to the JPM strategist, investors should be wary about chasing the SPX above 16x (i.e. above ~2750) but the index is more likely to touch 16.5x (>2800) than it is to hit 15x (<2600) based on everything known right now.

With that modestly bullish bias in mind, Crisafulli lists 14 things that can go wrong and send stocks sliding once more.

1. TSYs and the USD fail to ratify the Fed optimism – at some point the TSY curve needs to steepen and the USD has to weaken in order to confirm the dovish takeaways from the recent Fed decision.  If TSY yields fall across the board (or even worse, if the curve flattens) and/or the USD sta

“Low volatility could be ‘the quiet before the storm,’” Nobel laureate Robert Shiller told CNBC last week, adding: “I lie awake worrying.” Over the past 20 years, the CBOE Volatility Index (VIX) has closed below 10 on only 21 days, 13 of which have been in the past two months. The current streak of 270-plus days without a 5% drawdown in any of the major U.S. indices is the longest since 1996. Meanwhile, U.S. equity values continue to diverge from earnings — Schiller’s Cyclically Adjusted PE Ratio (CAPE) has only been higher two times in market history: 1929 and 2000.

Past tense; that is.  A big move is coming in the S&P 500 and it will take everyone’s breath away. Simply put: The S&P 500 has traded in a multi-year consolidation range with a high of 2134 and a low of 1810. A breakout or breakdown out of this range could result in a measured technical move of the height of the range, i.e. 2134 – 1810 = 324 handles. Consequently a break toward the upside would target 2458 (15% above all time highs) and conversely a breakdown would target 1486 and represent a 30.4% correction off of all time highs.

I’ve outlined the bear arguments in detail in Feeding the Monster, so I won’t bother rehashing them here. However, in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.

This duality can be summarized in one chart:

Speaking for a bre

Most economists surveyed by The Wall Street Journal expected Federal Reserve officials to begin winding down their $4.5 trillion portfolio of bonds and other assets this year.

Nearly 70% of business and academic economists polled in recent days expected the Fed will begin allowing the portfolio, also called the balance sheet, to shrink by allowing securities to mature without reinvesting the proceeds at some point in 2017. Of the economists who expected a shift in the Fed’s balance sheet strategy this year, the majority predicted the process would begin in December.

In last month’s survey, just 22.2% of economists expected the Fed to begin shrinking its portfolio this year. Fewer than a quarter of economists in the latest poll expected the Fed to wait until the first quarter of next year to start to whittle down its portfolio, compared to a third last month.

In recent weeks, Fed officials have said they are discussing plans to start gradually reducing the large bondholdings the central

Stan Druckenmiller recently elucidated: “Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

Even with the bond market’s muted response to the Federal Reserve’s plan to begin winding down its almost $4.3 trillion portfolio of mortgage and Treasury securities, there are plenty of reasons why the calm probably won’t last.

Out of style for almost a decade, volatility may be on its way back if you take a closer look at the mechanics of the Treasury and mortgage markets. Despite the Fed’s mantra of seeking to carry out its policy shift in a “gradual and predictable manner,” analysts say the effects of ending the reinvestment of the proceeds from maturing securities will still be felt.

This is the “most highly anticipated event in central-bank history,” said Walter Schmidt, senior vice p

Wall Street pros say bull markets don’t die of old age. But after eight years of rising stock prices, being on the lookout for signs of a market peak makes good financial sense.

No bull lasts forever. Good times eventually are followed by bad ones, as investor euphoria gives way to fear and despair. The performance history of the Standard & Poor’s 500 stock index drives home the point: The 12 bull markets since the 1930s have all been followed by bear markets, or downturns of 20% or more, according to S&P Dow Jones Indices. The average bear market decline is a sizable 40%. Then there’s the mega-bears like the 2007-2009 rout during the financial crisis that knocked the S&P 500 down 57% and the nearly 50% slide after the internet stock bubble burst in 2000.

The current bull run, the second-longest in history and one that's generated a fourth-best gain of 254%, will eventually tire out, hit one final peak and head lower like all the rest.

The only question is when?

James Stack, a mark

I found this interesting (the rise) however I have my own reservations because of the possible change in rates and inflation in 2017.  When inflation rises, interest rates also normally rise to maintain real rates within an appropriate range. PE ratios need to decline to reflect the increase in the earnings discount rate. Another way to look at it is that equities then face more competition for money from fixed income instruments. The cost of equities must therefore decline to keep or attract investors.  Then there is the Rule of 20 to consider.  Rule of 20 equals P/E + long term interest rates (average of 10 and 30 yr bond rates).  If at or below 20 minus inflation -- the market is a buy.  If above 20 minus inflation -- the market is a sell. Today we're at just about 20.  I think I'll keep my cautious side up.  Keep moving up my alerts and stick to only brief swings.  Something tells me it's going to be an interesting year.  All focus on the Fed and inflation.  

During the past week (

The S&P 500 Financials sector has been a focus sector for the markets in recent weeks. This past week, the Federal Reserve Board increased the target range for the federal funds rate. Earnings for banks and other companies in the Financials sector are particularly sensitive to higher interest rates. In addition, this sector has recorded the largest increase in value (+22.2%) of all 11 sectors in the S&P 500 since the start of the fourth quarter (September 30). Given these developments, have analysts been increasing their 2017 EPS estimates for banks and other companies in the S&P 500 Financials sector over the past few months?

The answer is yes. In terms of EPS estimate revisions, 38 of the 63 companies (60%) in the S&P 500 Financials sector have seen an increase in their mean EPS estimate for 2017 since September 30. At the sub-industry level, the three subindustries that have the largest percentages of companies that have recorded an increase in their mean EPS estimate for 2017 (sin

In December of 1996, Greenspan was clearly beginning to worry about the economic fallout of a bursting asset bubble. Back then he had a front row seat and, in fact, a strong hand in creating the dotcom bubble, whether he admits it or not. He was so worried about the consequences of “irrational exuberance” that he declared these concerns “must be an integral part of the development of monetary policy.” And this was before he had even witnessed any of the actual economic consequences we have now lived with for two decades. Clearly, his worries were well founded but he wasn’t quite worried enough.

The financial well-being of entire generations has been permanently damaged. Think of the Baby Boomers whose retirement dreams turned to nightmares through two stock market crashes in less than a decade. Think of the Generation Xers whose dreams were shattered by the housing bubble and the mortgage crisis. As a group these latter folks, even though they are now entering their peak earnings year

This is one of the stranger things we've seen recently.

The research team at the San Francisco Fed earlier this week published a letter analyzing one startup's analysis of Fed communications.

Economist Fernanda Nechio and researcher Rebecca Regan looked at data from Prattle, a textual analysis specialist, as part of an examination of the Fed's communication strategy following the financial crisis.

The short of it is that Prattle was accurately able to predict what the Fed's infamous "dot plot" would look like upon its next release.

Since 2012, the Fed has released a Summary of Economic Projections (SEP) — which contains economic projections from meeting participants — after every other Federal Open Market Committee meeting. The SEP also includes the dot plot, which is an aggregated forecast of where Fed officials see interest rates at various points in the future.

Prattle's findings show that Fed communications ahead of SEP releases can indicate where the Fed's median expectation for i

Tranquility that has enveloped global markets for more than two months was upended as central banks start to question the benefits of further monetary easing, sending government debt, stocks and emerging-market assets to the biggest declines since June. The dollar jumped.

The S&P 500 Index, global equities and emerging-market assets tumbled at least 2 percent in the biggest rout since Britain voted to secede from the European Union. The yield on the 10-year Treasury note jumped to the highest since June and the greenback almost erased a weekly slide as a Federal Reserve official warned waiting too long to raise rates threatened to overheat the economy. German 10-year yields rose above zero for the first time since July after the European Central Bank downplayed the need for more stimulus.

Fed Bank of Boston President Eric Rosengren’s comments moved him firmly into the hawkish camp, sending the odds for a rate hike this year above 60 percent. He spoke a day after ECB President Mario D

We’ve been bulls on 30-year Treasury bonds since 1981 when we stated, “We’re entering the bond rally of a lifetime.” It’s still under way, in our opinion. Their yields back then were 15.2%, but our forecast called for huge declines in inflation and, with it, a gigantic fall in bond yields to our then-target of 3%.

The Cause of Inflation

We’ve argued that the root of inflation is excess demand, and historically it’s caused by huge government spending on top of a fully-employed economy.  That happens during wars, and so inflation and wars always go together, going back to the French and Indian War, the Revolutionary War, the War of 1812, the Mexican War of 1846, the Civil War, the Spanish American War of 1898, World Wars I and II and the Korean War.  In the late 1960s and 1970s, huge government spending, and the associated double-digit inflation (Chart 1), resulted from the Vietnam War on top's LBJ’s War on Poverty.

By the late 1970s, however, the frustrations over military stalemat

Over the years, it's become essential (to me) to understand monetary policy and money flows across the globe. With all of the recent 'pining' over whether the Fed will begin to raise rates this year, I felt this piece from Financial Times gave a great representation of who is worried over what, and why.  I truly recommend you give if it a read.  There's also more discussed on this article.  Enjoy.

Why is the Fed considering raising interest rates now?

Why have rates in the US been held so low for so long?

(Edited 2:00pm)  I especially enjoy the part when the commentator withdrew his request for an interview after Schiff refused to blame everything on China.  Yes, MSM wants us to believe it's all China's fault.  Don't drink the koolaid.  Use your head.

Hat tip Ed

In the stock market, until recently, just about any news was good news.

Company earnings stumbled? Investors shrugged them off, sending shares higher. Economic growth was disappointing? So what.

But now that is changing.

Consider the recent trading in Apple, the world’s most valuable public company and a certifiable stock market darling. Apple announced third-quarter results on July 21 that were “amazing,” according to Tim Cook, its chief executive. Revenue rose 33 percent over the same period last year, and earnings per share were up 45 percent.

But investors seized on the fact that demand for the iPhone and the company’s new smartwatch didn’t meet expectations. Apple’s shares have lost 11.3 percent since then.

“I thought the break in Apple was a pretty big deal,” said Bill Fleckenstein, a veteran money manager at Fleckenstein Capital in Seattle. “They made all the numbers, but units were light. Maybe that is a precursor to what the entire tape is going to show us.”

The reaction to C