FRANZ HALS BANQUET OF THE OFFICERS OF THE SAINT GEORGE MILITIA COMPANY (1619); FRANZ HALS MUSEUM, AMSTERDAM
For Financial Essays on the Gold Standard and The Long View please click here
For Financial Essays on the Gold Standard and The Long View please click here
"I'll do business with anyone, but I'll only go sailing with gentlemen."--J.P. Morgan
September/October 2020
Analysis: "Manic Market Behavior", Barron's , week of September 7, citing Alan M Newman's Stock Market Crosscurrents (cross-currents.net), August 31: "Negative market divergences ae popping up everywhere we look. By themselves they cannot be relied upon as signals of a reversal--they are only warnings but, as we see today, very strong warnings. Given the enormous price explosion we would expect NYSE advancing issues as a percentage of total issues traded to be at a much higher level. At 51% we are not impressed in the slightest. Our interpretation is that the rally has run out of steam. On Nasdaq the picture appears even worse. Our indicator stands at 49.1%. Despite a more than 16% price increase over the past 50 trading sessions, the indicator is below 50%...Amazing! Then again, why should we be surprised? This phase is all about the giant momentum issues, which we suppose will include the heavily shorted Tesla (TSLA), up 76% in only 14 trading sessions....This kind of manic behavior is typically punished in the most severe way, somewhat like the huge one-month decline earlier this year but worse--far worse."
The Wretched Federal Reserve:
"Walter Zimmerman is the head of technical analysis at ICAP, the major institutional broker. In a research note he proposed the creation of a cabinet-level unit, the Department for the Study of Unintended Consequences, consisting of nongovernmental experts charged with critiquing all proposed government policies. Atop the list would be the Federal Reserve, whose sole policy, he writes, has become "to act as a bubble machine for equities."--As quoted in Barron's, June 22,2020 (and still relevant)
- The Congressional Budget Office said that the publicly held federal debt will equal or exceed the size of the U.S. economy in the fiscal year beginning on October 1st.--Barron's week of September 7, 2020
- U.S. companies have added record debt since the financial crisis. The ratio of corporate debt to GDP is 47% --an all time high. --Barron's week of June 22, 2020
Analysis: "Manic Market Behavior", Barron's , week of September 7, citing Alan M Newman's Stock Market Crosscurrents (cross-currents.net), August 31: "Negative market divergences ae popping up everywhere we look. By themselves they cannot be relied upon as signals of a reversal--they are only warnings but, as we see today, very strong warnings. Given the enormous price explosion we would expect NYSE advancing issues as a percentage of total issues traded to be at a much higher level. At 51% we are not impressed in the slightest. Our interpretation is that the rally has run out of steam. On Nasdaq the picture appears even worse. Our indicator stands at 49.1%. Despite a more than 16% price increase over the past 50 trading sessions, the indicator is below 50%...Amazing! Then again, why should we be surprised? This phase is all about the giant momentum issues, which we suppose will include the heavily shorted Tesla (TSLA), up 76% in only 14 trading sessions....This kind of manic behavior is typically punished in the most severe way, somewhat like the huge one-month decline earlier this year but worse--far worse."
- During the 2016 presidential campaign Donald Trump promised to eliminate the national debt within eight years. The current fiscal year deficit is projected to total a record $3.3 trillion, the result of the record contraction in the U.S. owing to the effects of the coronavirus and the massive federal spending to counter it. "As in wartime, governments need to spend freely in times of crisis. It should be recalled however that the federal deficit was running a $1trillion annual rate--nearly 5% of gross domestic product--before the virus hit. Ah, but this doesn't matter, chime in the 'analysts' who maintain that the debt has "room to grow", in the words of Capital Alpha Partners in Washington DC. This is based on CBO (Congressional Budget Office) projections that see the annual deficit remaining above $1 trillion annually through fiscal year 2030. Concerns about the magnitude of the debt miss the critical factor, and that is the interest on the debt. "Ultra low interest rates sugest there is more capacity for the federal government to borrow", Capital Alpha writes in a client note.
- The Insanity of Permanent Debt: "Modern Monetary Theory" (MMT) the au courant fiscal school of thought on the Left maintains that a country that borrows in its own currency can't default because the central bank can always print more money to cover it. And with interest rates so low there should be no impediment to borrowing for needed purposes. MMT advocates miss the point of why interest rates are so low, according to David Rosenberg of Rosenberg Research. Instead of being inflationary, the debt overhang is a massive deflationary cost. "It seems lost on a whole lost of people that principal does have to be repaid. And low, indeed negative real interest rates are predicting a future of economic stagnation. It isn't just the size of the debt but what it is used for. The current deficits provide income for displaced workers "as a means to preserve social stability". But this does nothing to preserve the economy's productive capacity. "The same holds true past private-public sector debt expansions including the mortgage boom and bust of 2002-2007 and the 2010-19 stock-buyback boom", Rosenberg notes. ---Barron's
The Wretched Federal Reserve:
"Walter Zimmerman is the head of technical analysis at ICAP, the major institutional broker. In a research note he proposed the creation of a cabinet-level unit, the Department for the Study of Unintended Consequences, consisting of nongovernmental experts charged with critiquing all proposed government policies. Atop the list would be the Federal Reserve, whose sole policy, he writes, has become "to act as a bubble machine for equities."--As quoted in Barron's, June 22,2020 (and still relevant)
- The Fed's corporate debt purchases were expanded in mid June from exchange traded funds to individual credits. The announcement of this new phase helped to turn stocks' steep losses just prior to the announcement into gains. The following day, Powell told the Senate Banking Housing and Urban Affairs Committee that the purchases are designed to ensure that the market functions properly.
- However: The market was already functioning better than properly. More than $1 trillion of investment grade corporate bonds have been brought to market this year [as of late June 2020] at twice the year earlier pace. High yield issuance is running more than 50% higher, at $180 billion. Historically low yields have translated into higher bond prices.
- The Fed's repurchase program will benefit bond issuers, which probably is not the intended effect. The biggest beneficiaries will be the biggest borrowers, as reported by analyst Alexander Scagg on Barrons.com. These include AT & T, which is laden with debt, Apple, the world's most valuable company with a market cap of $1.5 trillion boosted by massive share repurchases that could average $70 billion annually "for years to come" (Eric Savitz, Barrons.com); Verizon Communications which took on debt after its Vodafone's stake in Verizon Wireless and has been trying to pay it down to maintain investment-grade ratings; cable giant Comcast and Microsoft, #2 in stock market value just shy of $1.2 trillion.
- The Result: "The Fed's bond buying has unintended consequences. Cliff Noreen, head of global investment strategy at MassMutual, observes that while its bond portfolio's value benefited from the purchases, the lower yields reduce the portfolio's reinvestment rate, which in turn could hurt the insurer's future investment returns. Cheap financing for big blue chip companies means less for investors"--"Up and Down Wall Street", Barron's, June 22, 2020 (and still relevant..) "[Jim] Bianco [the head of Bianco Research, New York], thinks another unintended consequence of current policies could be inflation. Not immediately, with unemployment above 20% when counting involuntary part timers and those out of the labor force but willing to work. However, with aggregate demand supported by stimulus programs, price pressures could emerge in 2021 or 2022, he says, with lots of excess money chasing a constrained goods supply in an underemployed economy."
- "[Walter] Zimmerman [head of technical analysis at ICAP] foresees just the opposite: The excess capacity and overproduction in commodity-producing industries created by abundant cheap capital will snuff out every uptick in prices.This has occured over the past three decades in Japan, where there has been persistent deflation."