The Morning Call
2/13/23
The
Market
Technical
The S&P couldn’t
sustain the prior week’s upward momentum.
So, the 23.6% Fibonacci retracement remains near term resistance. The newly set very short-term uptrend remains
intact and acts as support. Let’s see
which one gets successfully challenged.
Current momentum points to the Fibonacci level as the most likely. On the other hand, the bullish narrative is
starting to fade.
Recession
forecasts at odds with bullish formations.
Plus, it appears
that investors are starting to consider the ‘higher for longer’ scenario.
The long bond had
a really rotten week---beginning a challenge of the recently established very
short term uptrend (if it remains below that boundary at the close Tuesday, it
will void the trend). The good news is
that it has that big gap down open which will need to be filled. We need
for both bonds and stocks to continue in uptrends for the Fed ‘lucks out’
scenario to remain the accepted narrative.
GLD continued to
fall. Not surprising with the rise in
both interest rates and the dollar. And
it will likely continue to do so as long interest rates and the dollar are
going up.
As noted above,
the dollar continued its rally off the lower boundary of its short term
uptrend. That’s not very consistent with
the messages being sent by stocks and gold.
So, I would
characterize this week’s pin action among all our indicators as confusing,
though as I mentioned above, investors appear to be questioning the Fed ‘lucks
out’ story line---and that would not be good for the equity boys.
Friday in the
charts.
https://www.zerohedge.com/markets/stocks-bonds-slammed-fed-pivot-party-crashes
It is all about liquidity.
https://www.zerohedge.com/the-market-ear/it-all-about-liquidity-risk-weakness-ahead
Fundamental
Headlines
The
Economy
Last Week Review
Last
week was not a big one for data. But what
there was in the US was negative (along with one downbeat primary
indicator). Overseas, the stats were
evenly divided.
There
wasn’t a lot of other mentionable economic news either, save for a Powell interview
and several Fed member speeches. What
was notable is the Market is starting to rethink its belief that the Fed isn’t
as hawkish as it says that it is---which is that it will hang tough until it
sees a clear path to a return to 2% inflation.
If only.
Were
that to be the case, then my Fed ‘chickens out’ scenario becomes more likely
(i.e. the Fed holds tough. Then when the
natural consequences of tight monetary policy manifest themselves in the
economy, the Fed panics and turn on the monetary spigots---again). It also means the increased likelihood of a ‘knock
your dick in the dirt’ recession.
The
other thing that is bothersome to me is the absolute incompetence of our ruling
class’s foreign policy.
(1)
that Chinese balloon was no accident; the Chinese
intent on retaking Taiwan is well known and the lowest risk way to accomplish
that is when it is facing an indecisive, inept US leadership---meaning that if
China is going to move, it will be within the next two years,
(2) also, it may not
be an accident that Ukraine is chewing up the US weapons arsenal. There was a report last week that indicated
that the US now has only about a week’s worth ammunition, tactical rockets etc.
if the s**t were to hit the fan.
I am
not trying to war monger the current situation.
I am just saying that I believe that the risks of some kind of negative
geopolitical event occurring in the next 18-24 months are higher than the
Market appreciates.
But
back to the real world----
Bottom
line: my opinion hasn’t change…. Regrettably, the economy is too deep in the
doo doo for the ‘lucked out’ scenario to prevail long term. Years of fiscal profligacy have left us with
a debt to GDP ratio far in excess of the boundary marked by Rogoff and Reinhart
as the level at which the servicing of too much debt negatively impacts the
growth rate of the economy. And years of
irresponsible monetary expansion have led to the misallocation of resources and
the mispricing of risk.
Correcting those self-inflicted wounds won’t be easy. It will take years
of fiscal and monetary restraint to do so.
And that would mean less fiscal stimulus and interest rates staying
higher for longer than many now expect.
Hopefully, the Fed
will view the improving economy as a reason to continue to unwind its balance
sheet. If we/the Fed get ‘lucky’, then
the Markets will hopefully stay reasonably calm as the Fed pursues its QT. If not, then expect turmoil and the Fed likely
‘chickens out’.
In the meantime,
as long as investors are buying the Fed ‘lucks out’ story, the Market will
likely continue its upward trajectory. Longer
term, I am not so positive---meaning continuing irresponsible fiscal and monetary
policies, i.e., slower secular growth, higher secular inflation and lower
multiples.
Headlines
The
Economy
US
International
Other
Fiscal Policy
Cost of US government debt keeps
rising.
Inflation
The
importance of the recent seasonal adjustment factor for inflation (must read).
Recession
The optimists view.
https://www.nytimes.com/2023/02/09/business/economy/fed-economy-recession-rebound.html
Shanghai container index falls dramatically.
https://www.zerohedge.com/markets/shanghai-container-index-falls-triple-digits
Bottom Line.
A contrarian view of tight credit spreads.
https://allstarcharts.com/credit-is-fine-whats-the-problem/
The latest from BofA.
https://www.zerohedge.com/markets/hartnett-no-landing-h1-23-leads-hard-landing-h2-23
The whole market is short energy.
What
I am reading today
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