The World Grinds Further Down The Road Of Disaster While Wall Street Enthusiam Rockets Higher
These wild mood swings in fund manager surveys are driven by the most silly of economic data points - the Shanghai Index has risen 70% since November. Unfortunately, the casino managers on Wall Street seem to generally believe the stock market is the economy. Something we clearly understand is not so. The government shoveling liquidity into the markets has simply afforded interim fuel for asset market stabilization. How does that translate into new capital in the economy to create jobs and pay bills be they government or business or individuals? It doesn't.
Below is a graphic representation of Federal Reserve monetary policy. There are many methods of determining monetary conditions and this is simply a proprietary representation of public policy that I use. The overlapping blue line is a short term moving average to help visually determine directional trend.
While many were chattering about rally after rally in 2008 and none materialized, we wrote often that there was no such sign of any tradable bottom. That was not only validated by market data but because liquidity was being withdrawn from the economy at an incredible rate as shown on the graphic. And, when everyone became very bearish late in 2008, we wrote quite a few times that the seeds of a rally were building. Within days of the above graphic rising above its short term moving average in early December, copper and oil bottomed. Both have rallied about 70%. And, we finally got a monster stock market rally. The first real rally since the bear market started.
Now we see liquidity is waning again. Just as Wall Street has driven most critical credit market instruments to nonsensical levels once again. And, as Wall Street is extremely bullish on China once again. None too coincidentally 10 year Treasury rates shot up ten percent in the last two trading days of last week. Most assuredly many bond traders are looking at similar data to the graphic above and seeing that the cost of capital must rise in concert with reduced liquidity.
The market seldom moves appreciably higher when liquidity is turning negative as it has today. But seldom is just that. This is a highly unusual time when liquidity has been withdrawn from economic activity yet Wall Street has ample liquidity. For now. So the market could be driven higher due to this anomaly. Frankly, as we have discussed before, this is why Wall Street is able to front run credit and has gained an ill-warranted mystique where stocks lead the economy. Everyone buys this baloney including the Conference Board, ECRI and many other highly regarded firms which use substantially faulty data in some of their economic analysis.
The reality is Wall Street is a monopoly. When free markets aren't at work as in monopolies, incompetence is the rule rather than the exception. And Wall Street as an entity is most definitely unbelievably incompetent as we see today. $12 trillion of incompetence and counting.
I have a mild bias that the above data point will turn constructive at some time in the next few months but let me be honest. I simply don't have a good handle on whether that will happen as the immediate world has become quite unpredictable. Put another way, shorter term forecasting has now turned from mathematical probabilities to a spin of the roulette wheel - another reason to hate stocks. Financial markets are obviously very vulnerable over coming months. Not because of historical claims of sell in May and go away but because today's data tells us to be cautious.
Let's close on a few remarks about our beloved dollar as it starting to gain press given the ten year Treasury yield is moving re the comments above. I remain constructive on the greenback regardless of the ever increasing chatter that the dollar is going to collapse. I'm not sure what many are thinking when they talk about a dollar collapsing. In fact, the U.S. government's policy is actually an attempt to create a falling dollar. Monetizing debt, quantitative easing, low interest rates - these are tools meant to induce a substantially weaker currency. It's part of the race to the bottom of the barrel we have written of so often. So people parroting a falling dollar seemingly are buying into government policy objectives. On that note, don't believe the Federal Reserve, government or traders can control the dollar any more than they can control the economy or the stock market. There are both intermediate term and long term factors playing into a stronger dollar. Factors no government can control. Longer term factors aren't even being discussed yet the seeds are being planted. We'll talk specifically about these seeds later. The dollar is not likely to rise like a moon shot as it did since this crisis started and as we have written it could easily retest or even marginally break prior lows but we would need to see macro factors substantially different than anything seen to date for the dollar to crash.
We have already said the world is moving to a self-funding economic model and that China is going broke hence won't have the capital to continue to fund the U.S. government spending spree. Yet dollar bears continually use China's waining appetite for Treasuries as support for a dollar crash. Even though they don't realize it is indeed China that has the short end of the stick and their waining appetite will be driven by their own economic calamity. Regardless how exactly is a waning demand for Treasuries bearish for the dollar? It is bearish for Treasuries. And, we have said for the last few years Treasury rates are going higher due to waining demand. In other words, everything continues to unfold as we anticipated. Frankly, to some extent I believe a dollar crash is a near impossibility. But, rather than back myself into a completely inflexible statement I will simply say that it is not impossible but highly improbable without substantial changes in macro factors. As we said before this crisis unfolded, the dollar and yen remain two of the most constructive places to park money regardless of increasing chatter.