Dow futures update from Oct 5th to Oct 30th
Market Update; October 29, 2015
Word Smithing at the FOMC
Beyond the semantics of the FOMC, an objective look at the Fed’s decision tree will be based on weak fundamental data that will continuously kick the can down the proverbial road until there is a threat for inflation to unhinge upwards. The bottom line is the economy is not strong enough to withstand an upward trajectory of interest rates, especially the financial casino on Wall Street. The facts of the matter are the following:
- Weak economic data; labor declining, PMI dropping, durable goods falling precipitously, homes sales considerably lower than expectations with the average prices lower along with overall manufacturing output shrinking.
- Europe skating near recession; China on the verge of meltdown; and Emerging Markets on the verge of a mass credit default.
- Japan overtly buying securities (maybe a proxy for the Fed here in the United States?); China reducing interest rates and lowering reserve requirements; the ECB extending, perhaps ad infinitem, the purchasing of European government bonds (quantitative easing European style).
- Commodity currency countries are suffering both declining revenues due to radically lower commodity prices, demand destruction as the global GDP erodes and the “threat” of higher rates in the U.S. This has also caused considerable disintermediation of investments from these countries into US dollars. The net effect of this disintermediation and “expectation” of higher USD interest rates is these countries are exporting deflation to the U.S. and the U.S. is exporting inflation to these countries … a very bad predicament as the emerging market/commodity currency countries’ economies are being crippled by a two-edged sword; internal inflation and severely depreciating revenues.
- The continuously burgeoning U.S. debt. Just now, Congress has again untied the Administrations and Washington bureaucrat’s hands from fiscal responsibility with another increase (unlimited for two years) in the debt ceiling. Higher interest rates will add to the debt spiral as ZIRP has held the interest on the debt to 6% of the Federal spending (approximately $230B in FYE 2015). This is a massively compounding problem; as both the interest rate and the overall debt increase, the total interest payments geometrically scale higher. For instance, at a 4.0% total borrowing cost (currently the total borrowing interest costs due to the Fed’s purchase of Treasury securities is only 1.2%) and total outstanding debt increasing to $20T, the annual interest payments alone would equal $800B or nearly 4x the current financing costs.
- The “D” word is becoming self-evident worldwide. Deflation is Kryptonite to the Fed and their “targeted” inflation scam of 2%. Increasing interest rates, as discussed above, will only increase the value of the USD at the expense of all commodities, minerals and goods priced in dollars. Therefore, higher interest rates will directly lower the likelihood of the Fed obtaining its magical goal of 2% inflation, but in fact will increase the probability of further disinflation, deflation and debt collapse. Another deleveraging debt spiral will certainly put Ms. Yellen on a respirator as she feverishly pumps the electronic printing press with rapid twitches of her index fingers ballooning evermore the Fed’s reckless balance sheet.
- The Keynesian Fed, led by Marxist socialist Janet Yellen, is deathly afraid of a stock market meltdown. So much so, that we believe the next steps would be either a Negative Interest Rate Policy (NIRP), overt buying of U.S. equity securities vies-a-vie Japan or both. The Wall Street casino and all its financial engineering marvels benefitting the “one-percenters” (stock buybacks, increasing dividends, mergers, acquisitions, leveraged buy-outs, etc.) will crumble in a New York minute once the gravy train of the Federal Reserve interest rate put is removed from the board game. A deleveraging spiral will ensue as the massive “carry-trade” and margined securities tumble back to enterprise values. A 30% plus “correction” would be a minimum expectation.
- Heading into the 2016 election, the Fed will unlikely spoil the Wall Street party and the mirage of economic prosperity given this Fed is the first ever to have all of its appointees rendered by a single American president.
Therefore, expect the wordsmiths to gently massive the language of ZIRP into the future and prepare for well-orchestrated “excuses” to either maintain the current zero interest rate policy and/or to introduce the likelihood of NIRP, equity security purchases or both. Also, please remember that QE (Quantitative Easing) has never ended, as the Fed readily admits, while maintaining the purchasing of new treasury securities and mortgage backed securities with the maturation of their existing monstrous $4T portfolio.
Crude Oil Trade Update: We have exited our position in Crude Oil at $50.56 for now we will sit on the side lines until further notice.