The Morning Call
3/20/23
The
Market
Technical
While the S&P
was up for the week, I don’t think that means a lot. The critical points are
that it (1) bounced off the 38.2% Fibonacci retracement level (~3817), (2)
rallied hard, (3) then challenged and failed to close above its 200 DMA. In short, it would appear that the battle lines
are drawn. We just have to wait to see
which support/resistance level falls.
Stay tuned and on the sideline.
The long bond did
exactly what you would expect when banks start going toes up. It reset its 100 DMA from resistance to
support and is now challenging its 200 DMA.
If the turmoil in the banking industry continues, it seems likely that
TLT will continue to rally. That said, it remains in both a short and intermediate
term downtrends and would have to move considerably higher to reverse those
trends. With the outcome of this week’s
FOMC meeting very much in question, I wouldn’t be making any bets on TLT.
GLD performed as
you would expect when bank insolvency is the lead headline. As you can see, not only was it up but in the
process made multiple huge gap up opens.
That in itself is enough to suggest some caution. However, it is also nearing its all-time high
which occurred in 2011. If I wanted to
own gold, I would wait to see how it handles that all time high (~185.20). Also note that it has challenged that level
twice in the interim and failed to follow through. Careful is the word.
Surprisingly
enough, the dollar really didn’t do much of anything amidst all the turmoil in
other markets---likely the result of so many contradictions among those factors
that have a bearing on it: inflation versus recession; bankruptcies in the US
versus bankruptcy in Europe. That said,
bear in mind that UUP is in short and intermediate term uptrends---and a trend
is in place until it’s not.
Friday in the
charts.
https://www.zerohedge.com/markets/bonds-bitcoin-bullion-soar-bailouts-fail-stem-bank-run
Fundamental
Headlines
The
Economy
Last Week Review
The
stats last week were negative including the primary indicators (the primary
indicators one positive, one negative). However, for the first time we are starting to
see some weak economic data and lower inflation numbers. So the good news is that it
appears Fed policy is starting to bite
inflation. The bad news is that it also
appears to be starting to impact the economy in a negative way.
It
is too soon to be making a call on either count but at least there is some hope
that inflation is beginning to subside.
That said, I have constantly said that a declining inflation rate is not
the same thing as getting to the 2% stated Fed goal. So this is going to be a long row to hoe
before we can feel comfortable that the inflation dragon has been slain,
https://www.schwab.com/learn/story/waves-inflation?cmp=em-QYC
The
other and more immediate concern is the strength of the economy. As you know, the debate for the last month or
so has been soft landing versus hard landing versus no landing. With the
bankruptcy last week of multiple banks, I think that we can take the no landing
alternative off the table.
I
also think that there is never just one cockroach, meaning there is a decent
likelihood of additional banking/credit mishaps---despite the major banks
bailing out First Republic and the Fed assuring us that it will make all mega-depositors
in any bank whole.
Not
everyone agrees that the First Republic bailout is a good thing.
Unfortunately,
there are more negatives.
One
is that making depositors whole is just another form of QE---which is a major
factor that has us in the current economic mess in the first place. Meaning pumping money into the system however
magnanimous the reason is still inflationary.
The
second problem is that the sphincters of all bankers have to be a bit tighter
today than they were a week ago, suggesting the lending standards are about to
become a lot tougher---and that would create a recessionary impulse.
The
bottom line being that a slowing economy overlaid by a monetary impulse is way
too reminiscent of what happened after Covid crisis. In other words, this is not the path out of our
current economic problems. Indeed, it would
seem that the only feasible way out of our current circumstance is either a
hard landing or a tighter for longer Fed.
And that’s not good for the economy or the Market.
Regrettably, 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.
Headlines
The
Economy
US
International
The January EU
trade balance was E-30.6 billion versus estimates of E-28.5 billion.
The February
German PPI was -0.3% versus consensus of -0.5%.
Other
Bottom line
The
latest from BofA (must read)
The latest from
jeff Gundlach (must read).
https://www.zerohedge.com/markets/fed-broke-gundlach-likes-gold-fears-expanding-wars-most
News on Stocks in Our Portfolios
What
I am reading today
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