by Lee Adler
Wall Street traders await the first Friday of every month with bated breath.
Why? Because it's Nonfarm Payrolls Day!
When the news is posted at 8:30 a.m. ET, the market often gyrates wildly in response. And today was no exception!
So let's walk through exactly what happened in the markets the morning of Sept. 7, and look at what impact we can expect this to have moving forward.
by Lee Adler
Europe has always played a huge role in the U.S. markets. The U.S. Treasury reported that European investors and central banks held $1.6 trillion of U.S. Treasury securities in June. More importantly, they had purchased $114 billion of that over the past year, including $32 billion from April to June.
And although there's no breakdown of U.S. stock and corporate bond holdings by country, Treasury holdings are about one third of total foreign securities holdings. Assuming that ratio applies to European holders, then they hold a total of roughly $4.8 trillion in U.S. assets, and added nearly $100 billion of that over the April-June period.
There's little doubt that this has helped drive the stock market blowoff.
That cash flows into the U.S. markets. When European investors buy Treasuries, most of those purchases are from U.S. Primary Dealers, even if they are not direct purchases of US stocks. The dealers use some of the cash they get in those sales to Europeans to buy stocks. When European investors, or U.S. corporations in Europe, buy U.S. assets, that adds liquidity to the U.S. system and fuel for the inflation of the U.S. stock market bubble.
by Lee Adler
Many of you remember the old Warner Bros. cartoon series, Looney Tunes – specifically the slapstick episodes involving the hilarious duo, Wile E. Coyote and the Road Runner.
Somehow, in every episode, the fast-running ground bird manages to outwit the coyote, despite repeated attempts by the coyote to catch and eat it.
No matter how ingenious and complex the contraptions the coyote devises, they always manage to backfire – often with the coyote running off the cliff, falling deep into the canyon, as seen from a bird's-eye view.
And this is exactly what we are seeing right now with the Federal Reserve.
The market is overinflated, and the Fed has concocted an elaborate plan to engineer a soft landing.
But it won't be a soft landing. It will be a hard landing, just like the coyote running off the cliff and falling deep into the canyon.
by Lee Adler
Stocks fell sharply on Wednesday – then they gained it all back, and even rose a little further, on Thursday.
Ostensibly, that was because the Turkey crisis deepened on Wednesday and was resolved on Thursday.
The market's gyrations are enough to make your head spin.
And so are the changing stories.
But I don't buy them.
by Lee Adler
Tax collections fell in June as the Trump tax cut continued to bite into federal revenues. The fall in tax collections, combined with the rise in spending stemming from the congressional budget-busting agreement signed by Trump, is causing an increase in the government's issuance of Treasury bills, notes, and bonds, month in and month out.
That increase in supply puts downward pressure on bond prices and increases in interest rates and bond yields. It isn't obvious in the bond market at the moment, since the 10-year yield has traded in a tight range around the 2.80s. But short-term T-bill rates are soaring, with the 13-week bill hitting 2% last week.
Meanwhile, increased debt-financed deficits have kept the U.S. economy running hot, but there are hints of slowing in current data. That's not supposed to happen. Tax cuts and deficit spending are supposed to stimulate spending.
by Lee Adler
Right now, you may be wondering whether it's time to buy some extra bullion.
I don't blame you.
As you know, I don't consider myself a gold bug, but I do track the metals weekly in my Wall Street Examiner Precious Metals Pro Trader. Those of you who are gold bugs (and I have deep respect for you) can use that information however you see fit.
I just tell you what the charts are telling me.
And right now, they're telling me that May is an absolutely critical month for gold.
Gold has traded in the same range for 47 of the last 52 months. It's easy to forget how gold used to move in sustained trends. Is it finally ready to make its move and start another sustained trend?
by Lee Adler
OK. So maybe I was a bit too alarmist in my last post. It's a bad habit, but just how patient should we be with this market before we get out?
The truth is, not very.
Bulls have made money in this market for nine straight years. Nine years without a bear market! And now the Fed has loudly and specifically turned hostile to asset price inflation. It told us that it would pull the punch bowl. Then it told us that it is pulling the punch bowl. Then it started to pull the punch bowl. Now it is continuing to pull the punch bowl at an ever-increasing rate. And the U.S. Treasury is exacerbating that by doubling the amount of supply it is bringing to market.
As I said last Wednesday — it just does not get any more bearish than that.
by Lee Adler
As the market stages a spirited rally off a test of the lows and the 200-day moving average, it's important to keep one thing in mind. Liquidity factors are not going in the right direction and won't be for a long time. Consequently, I see every rally as a gift, an opportunity to sell before the real ugliness gets underway later this year.
The most important driver of liquidity, after the Fed, is the U.S. Treasury, and it is not a positive. It is sucking hundreds of billions of dollars out of the worldwide liquidity pool that fuels financial asset purchases.
Four factors have exacerbated that problem. They all require the Treasury to borrow more money, issuing more and more debt for investors to absorb without the help of the Fed replenishing the cash pool as it did every month under QE. In effect, the Treasury is crowding out the stock market.
by Lee Adler
I'm not one to toot my own horn, but I do just want to observe that so far, the bear market that I believe began in January is proceeding right on schedule.
I pointed out in early February that stock prices had inflated by an astonishing 24.9% over the 12 months ended Jan. 17, leading to an all-time record overbought reading on the Composite Liquidity Indicator (CLI). That upside extension even exceeded the degree to which the market was oversold versus liquidity at the February 2016 bottom. We therefore knew then that the market was in an extreme buying panic – a mania – from September through most of January. I said then, "That leaves a lot of room for a decline."
And as it turns out, I was right.
The early February market break was the start of it and we are probably now in the second phase of that decline and in the very earliest stages of the first leg of a major bear market. The inflation rate of stocks has already dropped from that shocking 24.9% in mid-January to just 10.4% annual change in the week ended March 23. I expect the 12-month rate of change to turn negative later in the year.
As I wrote in early February, "The level of overextension of stock prices from the liquidity trend reflects an extreme degree of risk of rapid deflation of the stock market bubble." That overextension has barely begun to be corrected. The risks remain high.
by Lee Adler
In its not so infinite generosity of spirit, every week the Fed gives us reams of data. Some of that data is quite revealing and quite useful for our purposes. The data helps us to understand the current monetary/liquidity environment, which helps us to understand the context of the current market milieu. That in turn helps us to divine where the market might be headed.
But there are times when the Fed thinks its information might be too helpful to us. So what does it do? It eliminates that item from its data. Poof! Something that had been helpful to us for years no longer exists.
It has happened before, and it just happened again with an item that had been extremely revealing.
Apparently this information had become too useful to us. So, naturally, the Fed made it disappear. Now only the Fed knows about it. Oh, that data is still being collected, but they buried it with several other items into a useless catchall line item.
