The Morning Call
7/12/21
The
Market
Technical
Once again,
massive liquidity wins the battle. As
you know, mid-week investors grew concerned about a slowing economy made
possibly worse by the delta variant. (I
have covered the delta variant issue in prior posts and hopefully produced
enough documentation for you to realize that while it is more contagious, it is
less deadly than the mothership. Sort of
like a bad case of the flu.) Meanwhile,
the FOMC minutes were a tad more hawkish than expected. But the ECB and the Bank of China saved the day
with dovish moves. All of which
illustrates the strength of my current short term pin action premise: ‘I
can’t see an end to this uptrend as long as the money keeps flowing with
abundance and in the absence of any major negative exogenous event.’ Still this schizophrenic price action makes my
head hurt.
The S&P hasn’t
closed below its 200 DMA since June 2020.
As you might
expect, the long bond’s reaction to the aforementioned headlines was exactly
the opposite that of equities---strength in reaction to the fear of a slowing economy and a sell off when all that was
forgotten. In the process, it challenged
its 200 DMA but fell back. Nonetheless,
TLT has still decidedly negated the prior downtrend off the August 2020 high
and remains in a very short term uptrend.
Let’s see what new machinations investors can come up with this week.
https://www.nytimes.com/2021/07/08/upshot/interest-rates-inflation-us-economy-bond-market.html
GLD had a much
less frenetic week that stocks and bonds.
Indeed, it calmly advanced, partially
closing that huge gap down open of three weeks ago and resetting its 100 DMA from
resistance to support. Perhaps
investors were buying a hedge against the volatility in the major markets.
The dollar followed
TLT’s lead last week (though more subdued), rising early on and selling toward
the end. And like TLT, momentum remained
to the upside.
Friday in the
charts.
https://www.zerohedge.com/markets/stocks-soar-all-time-high-bonds-bullion-and-bitcoin-bounce
Fundamental
Headlines
The
Economy
Review of Last Week
While there wasn’t
a lot of data releases last week, what there was was overwhelmingly downbeat. So, after a one week respite in a negative
trend, the stats resume their disappointing results. Unfortunately, it adds evidence to my read on
the economy: the data continues to confirm that the post Covid burst of
economic activity is falling short of expectations. As you know, the Markets started to worry
about an economic slowdown last week.
Let’s see if there is any follow through.
The Fed and its
‘transitory’ inflation forecast remains at the center of investors’
attention. The FOMC released the minutes
from its June meeting last week. In them, the members recognized that the
economy has not fully recovered, but (and this is a big ‘but’) they believe that
it is improving faster than they originally expected and hence anticipate moving
forward with ‘tapering’. If they
continue in that belief, it obviously would not be good for stocks. That said, for the last decade, the Fed has
used the flimsiest of excuses to keep QE running full blast. So, if indeed the economic growth is decelerating,
I suspect the ‘tapering’ talk will be put on hold.
The next excuse.
The distortions created
by QE.
https://www.zerohedge.com/markets/great-post-pandemic-boom-great-big-dud
The $64,000
question is, what impact will a continuing aggressively expansive monetary policy
have on inflation. So far, its effect
has been minimal; so, there is a decent case for that scenario to
continue. On the other hand, if the
primary cause of inflation is too much money chasing too few goods, then sooner
or later the economy and Market will pay for irresponsible monetary largess. My concern is that time is now and that the
risk to the (1) economy is that it continues to slow and inflation continues to
rise [stagflation] and (2) Market is the loss of faith in the Fed and a subsequent
mean reversion.
Overseas, the numbers
were slightly positive, keeping the dataflow pattern erratic. So, we continue to get little help on the
economic growth front from the rest of globe.
However, the central banks continue to do their parts---both the ECB and
the Chinese government reiterated their accommodative monetary policies last week.
China’s credit impulse
has bottomed.
Bottom line. ‘As
you know my opinion is that following an initial snapback (which may already
be over), the US economy will likely return to its former subpar secular growth
rate, stymied by an irresponsible mix of fiscal/monetary policies.’
US
International
Mau Japanese
machinery orders were up 7.8% versus estimates of +2.6%; June PPI was +0.6%, in
line.
June German PPI
was +1.5% versus +1.7% recorded in May.
News on Stocks in Our Portfolios
What
I am reading today
It is important to
know/understand what you won---The Chinese variable interest entity is a case
in point.
https://www.ft.com/content/ceb9d46b-5795-4da1-8ac1-50ba9221ff1e
Are the tax rules on ETF’s
about to change?
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