2018/02/11 Weekend: The ‘Demand-Pull’ Bond Bear

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Weekend: Sunday, February 11, 2018

The ‘Demand-Pull’ Bond Bear

As longtime readers know, along with many other informed analysts we have been very dismissive of the Phillips Curve as a guide to resurgent inflation. On one hand, it just hasn’t performed as previously observed. Even the Fed, which has placed so much weight on further improvements in labor market conditions as the key to inflation reaching its 2.0% target, has noted that lower US unemployment has indeed not caused the classical inflation increase it (among others) had been hoping for. Yet there were good reasons for that which we have explained in previous analysis since early 2015.

As recently as our February 1^st Commentary: ‘Normalcy’ Unbiased? post we revisited what had been the historically depressed levels of velocity of the US Monetary Base. That was the problem with the Fed’s previous (2015 until mid-2016) ‘normalcy bias’. In its most concise expression, drags on business confidence due to the Obama administration post 2008-2009 Crisis excessive regulation created a lack of economic strength despite the Fed’s Brobdingnagian balance sheet expansion.

Yet it is apparent in headlines and individual company actions that all this is changing. (Also see the US Monetary Base Velocity graph in that February 1^st post.) And if that is true, then the impact on the inflation calculus is likely changing as well. While much of this is anticipatory while inflation levels remain relatively low, the market is classically ‘a creature of expectations’. This explains quite a bit of the pressure on global government bond markets in spite of still less than rampant inflation.

Expectations of stronger corporate earnings leading to investment, hiring and rising incomes are dominating bond market psychology. That is ultimately due to the potential return of ‘demand-pull’ inflation… a phrase that has not been a part of the financial industry lexicon for over a decade. We suspect younger market participants have only heard it during their academic economic education. Yet prior to that…

Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.

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2018/02/06 ALERT: ‘Crash’ or ‘Correction’?

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ALERT: Tuesday, February 6, 2018

‘Crash’ or ‘Correction’?

We are coming to you a bit later than usual in order to take the unusual step of providing a bit of a longer-term chart with technical indications to clarify the key US equities question. And this is going to substantially be a technical discussion after all of the background on what might have been plaguing the previously strong US equities since the beginning of last week. Please reference much more on that in last week’s emailed notes and especially Thursday’s Commentary: ‘Normalcy’ Unbiased? post along with the full Market Observations update after Friday’s US Close.

After such an extreme rally since the beginning of the year into a major new high on January 29^th, and such a radical selloff over the past week into earlier this morning, there is the obvious key question... is it a ‘crash’ or still only a ‘correction’?

As seen in the 2-year weekly front month S&P 500 future chart with the broadest bull channel out of the February 2016 trading low with key MAs (shortly after today’s US opening), the answer is… a ‘correction’, at least for now.

We will add quite a bit to that trend view below. Yet for now it is of course easy to question what might have caused such a sharp reversal of opinion from the new extreme all-time highs near the end of January? Well, as we had cautioned in those notes since early last week, it was at least to some degree due to govvies weakness (i.e. higher US interest rates) finally weighing on otherwise upbeat equities psychology. Good news is bad news! That became more glaringly apparent after last Friday’s extensive late session US equities weakness in the wake of the strong US Employment report.

Authorized Subscribers click ‘Read more…’ (below) to access balance of the discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review options. As this is a market-specific ALERT, outside of expanded levels discussed for the S&P 500 future the Market Observations remain the same as last Thursday’s Commentary: ‘Normalcy’ Unbiased? post updated (lower section available to all Gold & Platinum subscribers) after Friday’s Close, and there is no Extended Trend Assessment.

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2018/02/01 Commentary: ‘Normalcy’ Unbiased?

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Commentary: Thursday, February 1, 2018

‘Normalcy’ Unbiased?

As longtime readers know, we were significantly critical of the Fed out of early 2015 through the first half of 2016 for its blatant ‘normalcy bias’ (beginning with our dual January 2015 It’s Lack of Reform, Stupid Parts 1 & 2 posts.) This was not just the Fed’s fault, as the pressures on business and banks from the many benighted Obama administration policies in the wake of the 2008-2008 Crisis defused much of what might have been a more productive result from the Fed’s Quantitative Easing (QE) efforts. The impediments to investment and hiring meant even the Fed’s final expansion of its ultimately Brobdingnagian balance sheet growth didn’t provide major economic growth. The last, and most massive, QE-Infinity extension of the program came after a Fed Chair semi-annual hearing on July 17, 2012. While Sen. Corker (R-TN) was pushing Chairman Bernanke to agree the Fed should force the Congress to put through business-friendly reforms by limiting further QE, the final word came from a downbeat assessment from Sen. Schumer (D-NY.) He ended his chat with the infamous entreaty…

“Get to work Mr. Chairman.” Although there was little financial analyst outcry at the time, this was a very radical occurrence. Never before had the political class so blatantly dictated the future path of monetary policy to the head of the Federal Reserve. We had also reviewed the degree to which in spite of this it was not going to help the real economy much in our August 2, 2012 QE is the Opiate of the Perma-Bulls post. The problem was that due to the business headwinds flowing from the Obama administration policies, there was a significant lack of corporate reinvestment of the massive additional liquidity being pumped by the Fed. In classical economic perspective, this is characterized as the ‘velocity’ of the monetary base. And that is only picking up again since the second half of 2016, when hopes for change in government policy fomented more confidence.

While we will be returning to that below, first we will review a key factor in that sea change: Donald Trump’s election victory. Many (even some who broadly agree with his agenda) are offended by Trump’s style (such as it is.) Yet there is a basic nature to it that does inspire some confidence. Like the moment depicted in the opening graphic.

Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.

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2018/01/25 Commentary: The Key: Draghi or Trump?

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Commentary: Thursday, January 25, 2018

The Key: Draghi or Trump?

While US equities continue their tax reform-driven bullish romp, things are different for the weak tone in the govvies, and very different for the outright bearish trend in the US dollar. There are various factors driving these different responses that are indeed to some degree related to US tax reform. That is especially for misguided interpretation that has left the US dollar under pressure instead of rallying. We have already reviewed the likely overall lack of US inward investment that the tax reform proponents have promised as well as the lack of corporate profit repatriation at length in previous posts (see our January 1^st Commentary: What Just Happened… or Didn’t? post.) So it is the case we will only be analyzing the currently accelerating US dollar selloff and the possible beginning of a more active selloff in US govvies that have been more resilient than might have been expected after last week’s failure below major lows (see last Friday’s Commentary: Showdown at Govvies Graveyard.) 

In case you’re wondering about the answer to the title inquiry, it’s a trick question: the answer is both. Each has a bit of influence on both govvies and US dollar. As the ECB turned out to be still circumspect in its removal of accommodation at today’s post-rate decision press conference, it is a bit surprising govvies remained weak. That was even so for the still resilient Gilts and Bunds. Of course, the US govvies weakness might also have been influenced by the disarray displayed by the US government, which has at times been part of a weakening US government debt market (see January 14^th Weekend: Incredible? …or Not So Much? observations on the last great govvies bear.)

Yet it is possibly the case lower confidence in the US government is also creating an aversion to the US dollar in spite of ECB accommodation. That would not be to the currency itself so much as a lack of the appetite anticipated prior to tax reform passing for inward investment into the US. Outside of a few high-profile commitments there has not yet been a general flood. That also applies to much anticipated major offshore US corporate profit repatriation, once again with a few exceptions.   

Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.

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2018/01/19 Commentary: Showdown at Govvies Graveyard

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Commentary: Friday, January 19, 2018

Showdown at Govvies Graveyard

Is this it? Are we finally witnessing the US government bond market rolling over and dropping into a far more bearish trend? After demonstrating such impressive sustained resilience in the face of the ‘bond vigilantes’ calling for inflation on the US economy initial 2010 recovery from the 2008-2009 Crisis (fueled by the first phase of what became the Fed’s massive Quantitative Easing – QE program), is it finally failing? Of course, the full extension of the Fed’s QE program into a Brobdingnagian beast that grew the Fed balance sheet by trillions of dollars left bond vigilantes ever more bearish US government bonds… previously all to no avail. That was due to the various regulatory impediments to strong enough US economic growth throughout the post-Crisis period.

That saw a lack of business investment, which left the ‘velocity’ of the US Monetary Base so low that nothing like normal levels of inflation were anywhere in sight during the post-Crisis period right up into early 2016. [For much more on monetary velocity see our December 8, 2015 Will 2016 be 2007 Redux? (late) post. That includes a link back to a previous post with a discussion by the St. Louis Fed.] On one hand, that now seems to be changing. Yet there is a more pernicious aspect to the recent consistent bid in the US government yields that may be as telling, if not more so.

There is a review of long-term historic factors in our January 14^th WEEKEND: Incredible? …or Not So Much? post regarding the loss of confidence in the US government. Under the inept Carter administration (and G. William Miller Fed) back in the late 1970’s there was a global view the US was no longer in control of the global agenda, or any budget discipline. That exacerbated an already decade-long trend toward higher yields.

In a different way the same thing seems to be occurring at present. The metaphorical showdown now is similar to the high tension three-way graveyard duel at the end of Sergio Leone’s 1966 movie The Good, the Bad and the Ugly, with interesting twists.  

Authorized Subscribers click ‘Read more…’ (below) to access balance of the discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review options. As this is a ‘macro’ assessment, the Market Observations (lower section) remain the same as Tuesday’s update in our last Weekend: Incredible? …or Not So Much? post, with no Extended Trend Assessment in this post.

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