The Market Perspective

Three Energy Components in Lock Step

Weekend Oct  29, 2017

Heating Oil top and WTIC bottom have both broken out to new highs. Gasoline in center is not doing bad either.All are above their  34 day EMA.

NASD Soars in Gap Up, Energy Stirs, Rates Rise

Weekend Oct 28, 2017

Social Mood

Alan Hall on the similarity of baseball and the bull market.

 NASD

The NASD famously peaked at 5,000 in March 2000 after soaring its final  1500-2000 points in its last two years of the  1982-2000 bull amarket. Socionomics holds that the major part of the move often comes in the last throes of the bull move. So here we have a big 2.2% thrust above the upper channel at 'the end?' of this move. Note the apostrophes.  Our friends at EWI think this is the start of the end of the move from 2009. Erin Heim at stockcharts using the PMO indicator thinks it looks just great. Note we are also ten years out from the highs in 2007.

Industrials

Here is an update from last week, the Industrials have taken  out an upper trend line as well. The Transports remain subdued.

Weekly Advance Decline

This indicator has not flashed a sell signal since the buy in February of  2016. Other indicators suggest declining breadth like this one.

The number of stocks above the MAs should be expanding at new highs for a positive sign. But this indicator has been in decline since March and failed to break out as the NASD and DJIA hit new highs.  How long does this go on before we have a resolution?

Energy

Last week we were concerned that various levels would hold. On Friday they did. Specfically we wanted to see the XES hold it two shortest daily MAs.

XES

 XES Two Hour

The daily XES is making a higher low and the 120 bar above is bouncing off a prior support level.

Master Limited partnerships

AMLP

This looks like a good set up for a rally to me. I have maintained that a strong energy market is usually supportive to a strong stock market, ie, the economy can afford to pay more for energy resources.

FRAK Eagle Ford Permian

FRAK bounced right where it needed to, just like XES.

After my talk Friday at SA CPA CPE someone asked if I thought oil could get to 60. He meant WTIC and I said yes. Friday Brent did hit 60, up from 45. The media has doubted the move all the way up.

BRENT

CHK  AXAS  PTEN XLE are also bouncing nicely. My conclusion is that energy and energy  are over sold and bouncing to the upside. I would much rather buy out of favor depressed shares than tech stocks at nose bleed highs.

An interview with the new head of Cadillac was in the WSJ this past week.As Xi cements his power in China, that is Caddy's new destination market. My point being that yes there is plenty of oil supply, but plenty of oil demand as well.

CRB Index

CRB commodity index put in an impressive performance Friday, breaking to new highs. Point is, this confirms what we are seeing in energy prices.

The US Dollar surged friday to a new recent high. But US Commodity prices seem to be bucking that trend.

 

Gold and silver remain out of favor.We look for lows this December. The strong dollar is keeping PMs down but that is not the case for oil.

Interest Rates

The FED is a player, not THE player in the debt markets.

Jim Rogers

FIve Year Interest Rates

Another comment I heard yesterday was that the FED was going to ruin everything by raising rates. Well the FED has not done near what the market has to raise rates. The market has doubled the five year yield since last November, that is in one year. It matters not who Trump appoints as the next FED chief, rates are headed higher.

This is a classic example of mistaken causality. Perhaps the real reason is deteriorating credit quality. We have record levels of auto and student loan debt.Note the zero interest rate deals being offered by car makers now.  Franklin Templeton finally through in the towel and sold their massive holding of Puerto Rico bonds, while there is still someone to sell to. I am at a loss as to who the buyer was. Add to that bankruptcy in Hartfod CT. We have unfunded weakness in many city and state pension funds.   The Walking Dead should be starring Chicago and the State of IL rather than humanoid zombies. I suspect teh real reasons for rising rates are weakening credit quality coupled with massive Central Bank cash injections around the world.

 Five Year Note Yield since 2004

The bond market is in the exact opposite spot of where it was a Fib 34 years ago. This long term chart of five year yields shows that the markets are getting ever closer to testing the 2.5% resistance level. Note the waterfall decline from 5.25 to  2.5 during the financial crisis. Rest assured rates can rise just that fast as well. The potential for disastrous losses is enormous given how many low yield bonds are in the hands of those with no memory of the double digit rates in the  1970-80s. Even worse are those holding zero interest long dated bonds sold in Europe.

Ten Year Note Price in Blue versus CRB in Red

The note price has risen amid falling yields while the CRB has fallen to new lows. Already the ten year note price has been retreating since 2012.  Now the CRB is getting up off the mat. Expect a 2018 acceleration in the note price decline and the CRB price increase.

Bottom Line

I will go with Decision Point, the bull market ain't dead yet. The depressed energy markets on the other hand may be attracting money looking for markets not presently over bought. This is bolstered by the rising CRB index and interest rates. We think the FED has little to do with this. Rather the specter of too much debt, poor debt quality, see Puerto Rico collapse, Chicago, Illinois, etc is causing debt worries. And this extends to what were once credit worthy cities like Dallas and Houston. Remember, the rating agencies will only downgrade when it is too late to be of any use to bond holders.

DJIA Monthly with PMO indicator

Yes the PMO is a lagging indcator on the slow moving monthly basis. B ut it is uncannily accurate.Here it is still climbing not flattening.

Gold and silver remain on track for lows this December.

Social Mood Continued

From The Hollywood Reporter

In 2010, Saw 3D was billed as the final chapter in the Saw series, but Lionsgate decided to have another go.

Directed by Michael and Peter Spierig, Jigsaw picks up a decade after the death of the eponymous murderer when police are puzzled by a rash of murders matching Jigsaw's signature moves. Matt Passmore, Callum Keith Rennie, Cle Bennett and Hannah Emily Anderson star in the R-rated movie, which earned a B CinemaScore. (The marketing campaign for Jigsaw included a national blood drive that collected over 125,000 pints.)

Lionsgate is a double winner with both Jigsaw and holdover from Tyler Perry's Boo 2! A Madea Halloween, which will take second place with an estimated $10 million in its sophomore outing.

Among the other new films, Suburbicon grossed a dismal $1 million on Friday from 2,045 theaters after getting slapped with a D- CinemaScore for a projected $3 million weekend, the worst nationwide launch of Clooney's directing career and the worst showing in decades for Matt Damon, who stars opposite Julianne Moore and Oscar Isaac. Suburbicon is looking at a ninth-place finish.

Damon and company are now lumped in the Dead Pool of Harvey Weinstein. Go to youtube.com and type in damon on trump or clooney on Trump. Their negative comments seems to have come home to their meager box office receipts.  Notably, to get an idea of privilege, Damon on one clip said he did not want to do Suburbicon as he had been working steadily for two years. Being a movie star is work?  Who knew?

https://www.youtube.com/watch?v=gHYfFwEoW8A

 

How long before the same occurs to the advertisers on Jimmy Kimmel's tv show. Kimmel is on record saying he does not care about losing Republican viewers

as he would not be interested in talking with them anyway. Do his advertisers feel the same way?

Spain sacks Catalonia's President anddismissed parliament.

Is anyone surprised violence is breaking out?

Entertainers eschewing half their potential audience for political reasons are being exclusionary.  Spain is doing the same with Catalonia.  I have an invitation to teach in Ireland, and the invite suggests I focus on Irish independence. Exclusionary mood is a negative for markets.

 

 

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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

 

 

Baseball and Stocks

thursday Oct 26 2017

 

Here’s Why Stocks and Home Runs Are at All-Time Highs

By Alan Hall, senior analyst at the Socionomics Institute

Preview

Here’s Why Stocks and Home Runs Are at All-Time Highs

By Alan Hall, senior analyst at the Socionomics Institute

This article was originally published on CNBC under the headline "Home Runs and Strikeouts Can Track the Stock Market."
________________________________________

Why in the world would Major League Baseball home run statistics track the U.S. stock market?

It's tempting to dismiss such a finding as a wild coincidence or a fluke, but as you can see in the chart, the relationship between the two has persisted for nearly 150 years. What's more, it gets even stronger if you add strikeouts into the mix. Most hitters and pitchers don't check stock tickers before swinging and flinging, and most stock investors don't check baseball stats before buying and selling. So what's the connection? The simplest explanation is that society's overall mood influences performance in both arenas.

For example, on Friday, June 2 of this year, the Dow Jones Industrial Average set a new all-time high for the first time in three months. The next day, confidence wafted on the breeze, along with the aromas of hot dogs and popcorn, as Seattle Mariners catcher Mike Zunino stepped up to the plate and gracefully swatted a "mammoth" grand slam. Zunino later told the Associated Press: "It's just nice to step in the box and feel like you can hit."

Feeling "like you can hit" was "l'esprit du jour" in ballparks that Saturday. Six other MLB players also belted grand slams. Zunino's was the seventh, a new single-day record. "It's officially the grandest day in Major League Baseball history," wrote MLB.com.

That record-setting Saturday was part of a record-setting month in a record-setting year for Major League Baseball, mirroring the Dow Jones Industrial Average's record-setting streak to numerous all-time highs. In June, players hit more home runs than in any previous month in history. And on September 19, hitters broke the record for home runs hit in a single season.

The previous single-day grand slam and single-month home run records were set in May 2000, the year of the previous record high for single-season home runs -- and a year in which the stock market also set an all-time high.

Home runs weren't the only records set in baseball this year. Pitchers also threw more "immaculate innings" (striking out a side on nine consecutive pitches) than ever before. The New Yorker wrote, "it's true that the increased tendency to swing for home runs comes with an additional likelihood that one will miss: Strikeouts have also spiked to record rates."

Our chart plots 147 years of social mood as reflected by a PPI-adjusted index of U.S. stocks versus two indicators of baseball performance. The bottom line plots average home runs per MLB game. Homers have trended roughly parallel to the Dow/PPI, but the relationship is not perfect. Notable divergences surround some of the major peaks and troughs.

The middle line in the chart plots average home runs plus strikeouts per game, a new baseball metric which I dubbed the "Swing for the Fences" indicator, or SWAT -- not an exact acronym, but it's catchy and close enough. This performance index has had an even tighter relationship with the Dow/PPI, especially since the 1940s. Today, stocks, SWAT and average home runs per game are at new all-time highs.

Just as the fever for investing peaks and subsides, so do fans' attitudes toward baseball. Sports Illustrated and others have recently argued that the current deluge of home runs and strikeouts is a problem because it makes for a longer, boring game. One can almost hear the passion fading and the psychology shifting.

Robert Prechter's socionomic theory sees stock market indexes as more than just financial indicators. They are also indicators of changes in society's optimism and pessimism, our social mood. Positive mood produces optimism, confidence and stock market advances. Negative mood produces pessimism, fear and stock market declines. The same seems to be true for baseball performance.

Sabermetrics has come a long way in the past four decades, but stats that measure batter confidence and psychology have remained elusive. Perhaps part of the answer has been right under our noses, in the ups and downs of the stock market.

You Can Get Ahead of Fast-Moving News with The Thinking Person's Membership Imagine scrolling through the latest news stories, nodding and saying, "THAT makes sense." And "THAT is right on time." That is what Socionomics Members get every month. The same events that disrupt most people are confirmation to them. You can join them. Learn more about the Socionomics Membership

This article was originally published on CNBC under the headline Home Runs and Strikeouts Can Track the Stock Market.

 

An Interview with Robert Prechter

Weekend Oct 20, 2017

Here is an interview with Robert Prechter.

He has just published the fourth and fifth volumes of his series on socionomics.

My review is here for Society and Culture.

My research interest is in  how social mood drives market action.

I just received volumes four and five and they will be added to our Socionomic Library Collection this week.

Review our spring activities here. This link also covers the Donation Collection of Everything Socionomic.

Another New High for Stocks, A Bottom for Oil?

Weekend Oct 22, 2017

Stocks penetrated the upper channel  this past week to set new highs. This mimics the action of some indexes in  2007 with a summer high and then another high that October. Also recall the parabolic rise of oil and then violent reversal in  2008.

We are ten years out from Fall 2007 when the market topped. As shown above stocks have reached over the top of

the upward channel that has contained price thus far. t would take a weekly close below the  50 week MA to suggest a correction had begun.

Apple APPL

Tom McClellan noted this non confirmation by Apple, it should be leading. Instead it recorded an air pocket drop the last two days of this week.

Interest Rates are Increasing

TBF moves opposite bond prices. This may be the safest investment around at the moment.

Energy Service XES

XES has corrected, note RSI at top. To re instate the bull theory, XES needs to hold right here at 50 and  67 bar MAs.

USO Oil Fund

The MAs are finally beginning to turn up. This suggests a rally could begin this week lasing into December.

Hearing Oil

Hearing oil looks great bouncing off its MAs, this re enforces the rally idea.

Unleaded Gasoline

Unleaded Gasoline

The big jump Friday look like the similar jump at the end of August. PMO at bottom is very positive.

Hecla

We expect a low in gold silver and miners in December. Here a break of  4.5 would set up a deeper fall to perhaps 3.

CDE is in the same position, a fall under 7 would apparently take the price lower. Let's hope so for a great December entry.Dollar strength is also weighing on this sector.

Stocks show no sign of a top yet. Interest rates are rising.Gold and silver are correcting. Energy should be setting up for a rally.

Social Mood

The great comedians, like Bob Hope and Johnny Carson, avoided partisan politics. Sure Hope poked fun at all Presidents, who all laughed along with him. He was welcomed by both parties. Carson regularly drew 9 million on his Tonight Show. Today is totally different writes Rich Lowry.

 

Once a down-the-middle comedic voice who co-hosted the unapologetically vulgar The Man Show on Comedy Central, Kimmel uttered what could be the epigraph for our times, saying of viewers who strongly disagree with his political views, “I probably won’t want to have a conversation with them anyway.”

Read more at: http://www.nationalreview.com/corner/452773/johnny-carson-jimmy-kimmel

This is typical of he and Colbert not to mention Kathy Griffith with her severed head of Trump. While Kimmel may write off Republicans and Trump Supporters (different people indeed) one would think the advertisers would welcome sales to any party, apparently not. Recall the recent attack on advertisers on Sean Hannity. USAA had to recant its non support after protests from its military policy holders.

Add to that the charge of Trump abusing the Gold Star Widow and we have negative mod all around. It has had zero effect on stock prices thus far, and that is world wide. But the negativism does not square with a bull market mentality.

 

[email protected]

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

 

 

 

A World Wide Demand for Stocks

Thursday Oct 19 2017

Bob Prechter  has devoted his last five monthly EWT to an  elaborate outline of Fibonacci and time relationships back to the  1932 and 1974 lows to this high in the stock market. It won't be over till its over but this week is the  30thj anniversary  of the 1987 crash. That happened a Fib 5 years from the start of the bull in  1982.  And we are a FIB 34 years out from the collapse of duPont Walston in my first disastrous foray into the stock market.

John Murphy at stockcharts.com observed the over bought nature of the market in his update yesterday. It is a bit of a relief to see yesterday's action reversed in pre open trading.

 

Learn more about Leonardo of Pisa here.

1987

The bond market had topped in price in March 1987. Rates fell from about  7% to  10% by October.  Stocks had advanced 3.5x since 1982 from  800 to  2700. So called portfolio insurance was popular among big funds. It was the  50th anniversary of a market turn in 1937.

Stocks had been selling off since mid September, the final Swoon that Monday, as John Templeton observed on Wall Street Week the following Friday, was the end of the short term bear market. Watching that day  the market had come back from the lows of the morning, I thought we might close down 50 points by day end. But at noon the heads of the NYSE and the NASD suggested they might just close the markets. That did it with everyone racing for the exits, a waterfall of selling into a non existent market took the market down  500 points.

2017

Stocks have not had any indication of sell off but are in a parabolic arc upward. In today's WSJ Ralph Acompora has run out of room to paint the rally on the side of his barn. Circuit breakers have been created to suspend trading for various time periods if the indexes fall fast enough. The idea is to abate the panic in the meantime.

What could go wrong?

On page A2 of today's WSJ Trump seems to determined to repeat the error of the disastrous Smoot Hawley tariffs of the 1930s. Trump is obssessed with NAFTA. Hundreds of Chambers of Commerce have sent letters of protest and economists do not agree. Here in Texas the trade route from Laredo to Dallas along I 35 regularly grinds traffic to a halt.  This is the view of Democrat union  protectionists. Clinton signed NAFTA over their protests.  The WSJ ran an editorial this week showing just how hard ditching NAFTA would hit the auto industry.  Over regulation here and improved conditions elsewhere have resulted in the move to Mexico.  But that results in more wealth their which is channeled back here. A tour or of the luxury goods available in San Antonio dept stores frequented by Mexican visitors  is truly amazing.

Page A  10 has a photo of what is left of Marawi in the Phillipines. It is literally a Mad Max scenario complete with severed heads. As Peggy Noonan observed in  her column, Americans own guns because they do not believe their government will protect them.

Wave 5 can certainly go as far as it wants. So far not much pullback which is worrisome in itself. At bottom CCI is way over bought, the opposite of late 2008-early  2009.

Market tops occur amid widespread optimism. We have detailed this from $24 cup of coffee to the $2 M Bugatti and $800,000 Ferraris on sale. In fact the decision to expand Ferrari production from 7,000 units a year to 10,000 is emblematic fo such optimism. That planned 52 story office building in Midland, TX which was cancelled just in time for the oil crash, is the same sort of idea.

 

 

 

Seven Year Decennial Theory Collapse

Wednesday Oct 18, 2017

Check ou the graph on the back page of Section Two of today's WSJ. Spencer Jakab shows how each ten year slice of DJIA history ended badly in its

7th year, as in 1987.  The glaring exception is this year.  Bob Prechter has mapped out an elaborate Fibonacci  metric suggesting the market has completed multiple Elliott Wave Patterns, we should be looking for a top.  At Insiide Track, Eric Hadik concludes  the markets are at a Gann time and price conjunction worthy of a top. 

Yet the markets keep on chugging along.  Even articles in the WSJ admit the market is over priced.

I have been preparing a talk for the annual San Antonio CPA Continuing Education day. I will present examples of how understanding social mood can help  predict accounting regulation or the failure to pass GAAP IFRS convergence .  I will also show how a socionomic analysis of political mood would have warned John Stumpf at WFC he was walking into his demise before Congress claiming responsibility but not accountability

 

I am always looking for some image to demonstrate the power of linking social mood to social action. And this week I spotted one.

A New York restaurant is offering a $24 cup of coffee.A pound of the raw beans runs to the hundreds of dollars. A California coffee shop raises the ante to $55!.  What does this tell us?  There are at least two messages here. The buyer is feeling expansive and more than willing to indulge in a personal perk.  And the second, is that apparently, the buyer is confident that the money will continue to stream in to finance such a purchase. Notice the elaborate contraption used table side to prepare the uber priced treat.

Bugatti is marketing a car for over $2 million. The WSJ continues its Mansion Real Estate section on Fridays. Now the Starbucks $4 latte has been taken to new levels.

Such behavior is common in frothy markets.  During the last tech boom in Austin, $12 glass of wine with lunch was common, In the late stages of the  1970s oil boom in West Texas one company began using Cadillacs as company cars. In her book on Enron, Mimi Swartz noted that the presence of too many exotic sports cars in the company parking garage was a danger signal.

I give up on attempting to call a top here. And it may be that Trump's roll back of regulations and promise of tax cuts, along with higher interest rates is sparking new confidence in the economy. Emerging markets are higher world wide.

Money Supply Explained

Tuesday Oct 17, 2017

From time to time  the herd of financial analysts will focus on different things.

In the  1970s-80s it was the Money Supply,  this theory popularized by Milton Friedman.

In later eras, how much of the US Bond auction would the Japanese buy?  Today it is the Chinese buying our debt.

Or would the  401K money continue to support the stock market.

Recently do we need more Quant Easing, buying of bonds by the FED

The popularity of theories comes and goes, and once gone, I mean, when was the last time you heard anyone concerned about money supply.

 

Deflation Basics Series: The Quantity Theory of Money

By Elliott Wave International

Here's our challenge.

In order to be aware of the investment pitfalls and opportunities that deflation can bring, we must first understand the basic elements of why it occurs. So our challenge is to try and make monetary economics, a subject that most people would find duller than watching paint dry on a wall, understandable and, dare I say it, fun! It's a big ask but we like a test, and so here is the first in our Deflation Basics Series -- The Quantity Theory of Money.

The Quantity Theory of Money (QTM for short) is the very essence of the true definition of inflation and deflation. You see, most people think of inflation and deflation as the rise and fall or prices when it is actually all about the rise and fall of the quantity of money.

The QTM has its origins in the 16th century and the writings of the Prussian polymath Nicolaus Copernicus as well as followers of the School of Salamanca such as Martín de Azpilcueta. As European nations looted the Americas for gold and silver, an increase in the price of goods in general was noted as the metals were brought back to the Old World. This observation, via the writings of, among others, John Locke, David Hume, John Stuart Mill and Ludwig von Mises, led to a link between the quantity of money in an economy and the level of the price of goods.

QTM is the cornerstone of monetarist economics which was largely developed by Milton Friedman, gaining popularity during the 1970s. Put simply, the Quantity Theory of Money can be expressed as the "Equation of Exchange":

In plain speak, the amount of money in an economy multiplied by the number of times that money is used, equals the price of stuff bought multiplied by the amount of stuff bought.

Let's take a simple example.

If an economy has $1,000 in total and that money is turned over 3 times during a month, total spending equals $3,000 that month. If the amount of stuff bought was 100 items, then the average price of each item would be $3,000 divided by 100 which equals $30.

We can re-arrange the Equation of Exchange to solve for the price level, P:

Therefore, in our economy:

Now let's assume that, the next month, money supply increases from $1,000 to $2,000, with the velocity of money and the amount of stuff bought staying the same. What would be the effect on the average price level?

The average price level has gone up from $30 to $60. The average price of goods has gone up due to the inflation of the money supply.

The next month, the money supply decreases from $2,000 to $500, with the velocity of money and the amount of stuff bought staying the same. What would be the effect on the average price level now?

The average price level has gone down from $60 to $15. The average price of goods has gone down due to the deflation of the money supply.

This basic example shows the relationship between the level of the money supply in an economy and the average level of prices. The catch comes, of course, with the old economics chestnut, the Latin phrase ceteris paribus (all other things being equal). In the ivory towers of academic economics all other things can remain equal, but in the real world, they don't.

So our assumptions in the example above that the velocity of money remained at 3 and that the amount of stuff bought remained at 100 would have to be challenged. In fact, one of the main criticisms of the QTM is that the velocity of money does not remain constant and changes due to the vagaries of spending impulses. However, if money supply didn't change but the velocity of money went down instead, the effect is the same -- lower prices (assuming the amount of stuff bought remained the same that is!).

Monetarists in the 1980s thought that, by targeting money supply growth, the level of goods and service prices in an economy could be controlled. However, although there is a link between the general level of prices in an economy and the amount of money, it is not rigid, and prices can move up and down for a myriad of reasons.

Nevertheless, the general relationship in the Quantity Theory of Money stands. More money in an economy (inflation) tends to lead to higher prices and less money (deflation) tends to lead to lower prices.

What You Need to Know NOW About Protecting Yourself from Deflation The best way to protect yourself from deflation is to first understand what it is. In this free, special report, you'll learn about this unexpected risk and what it can do to your portfolio. You'll also get 29 specific forecasts for stocks, real estate, gold and new cultural trends, to help you prepare and protect your wealth. Get instant access

Your Bond Fund: It's Riskier Than You Think Quantitative Easing (QE) changed the bond markets in ways many don't realize. And now that QE is unwinding, investing in bonds comes with pitfalls that are too risky to overlook. This new resource from EWI's Murray Gunn offers insights you don't want to miss. Get your free report, Your Bond Fund: It's Riskier Than You Think. Get free, instant access

This article was syndicated by Elliott Wave International and was originally published under the headline Deflation Basics Series: The Quantity Theory of Money. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

A 240 Year Revolution

Friday Oct 13 2017

Re Making America’s Political Parties

"You have no idea how great this feels to be back here at work in the people's house," the 51-year-old Louisiana Republican said to a chamber packed with lawmakers, including senators who had crossed the Capitol to welcome him back.

Republican Majority Whip Steve Scalise

I wish Steve a speedy recovery from the shooting attack. But that said, this quote demonstrates just how out of touch the Majority Whip, and his fellow Beltway Insiders are about reality. Work, what work Steve? Exactly what is it that the Republican Majority in both Houses has accomplished in nine months?

America is 240 years out from its initial creation as an independent country. The Beltway Insiders simply do not realize this is the first re-make in 240 yeas. 1773 saw the creation of the Boston Tea Party. In 2012 its descendant ran unsuccessful Senate candidates. 1775 saw the Nation readying for rebellion and in 1776 it began. 2015 recorded the first successful independent Presidential candidacy launch and in 2016, 240 years after 1776, the rebels installed a new leader. All of this is happening due to a national shift in mood, and in both parties. Let’s take a look.

The Constitution makes no mention of political parties. Indeed, George Washington warned against them. But Thomas Jefferson and James Madison began what became the official Democrat party in 1828, making it the world’s oldest political party.

The Democrat party has steadily narrowed its base after losing with Carter, Mondale, Dukakis, Kerry, and now Hillary. During the Obama Presidency a massive 900+ seats were lost. Democrats occupy the fewest governor offices since the 1920s. Party strength is now bi-coastal located in few states concentrated in a few large cities such as Los Angeles, Chicago, New York City, and Boston. Yes Hillary won the popular vote but really she would be President of California, Illinois, New York, and Massachusetts

And, not only did we have the first ever Independent Candidate (Trump) win the Presidency, we nearly had two Independents nominated. If it were not for Hillary’s super delegates and back-room manipulation via Wasserman Schultz, Bernie Sanders, a declared Independent, would have been the nominee.

Meanwhile the sanctimony of East West Coast Elites is melting by the hour. Harvey Weinstein has been fired and now Amazon suspends Entertainment Chief Roy Price, both over sexual harassment charges. Women are taking center stage.

On the Republican side, Indignation has displaced Accomplishment in the Senate. Three Republican Senators blocked the six-year promise of repeal and replace the ACA.  Trump accomplished what McCain could not in 2008 which is why McCain won’t vote for anything Trumpian. The Democrat Russian collusion in the election argument lost credibility. Senator Corker and even Peggy Noonan, former Reagan speechwriter, are asking if Trump can be contained (Corker) or even if he is sane (Noonan).

Meanwhile Trump is re-making the Federal Judiciary. And yesterday he signed an Executive Order, crafted by Rand Paul no less, to unravel the ACA administratively. In his spare time, Trump remakes the NFL.

So where is this going? That is hard to say. I suspect, like the 1775 Revolution, which took until 1783, this may take until 2023, which would be the mid-term elections after the next Presidential race. It may be that the Republican Party splits, the Corker McCain faction hanging on while the Trumpians form a new third party. That would put the US on the road to becoming Italy or France, where no party ever holds a majority for long.

As George Carlin noted, Planet Earth is a bit fed up as well. We have multiple hurricanes, an earthquake in Mexico City, and wildfires in California. Planet Earth lets it be known that too many people are living where they should not be, along the no way to drain the Gulf Coast or Puerto Rico. Puerto Rico managed to combine a hurricane alley location with a Greek Political system, with predictable bankrupt results. The message for Mexico City is that if one builds on an earthquake prone lakebed, adopt an earthquake proof building code.

Negative mood is on the move from political parties to Hollywood. And even the Planet seems to have fallen under the spell of striking back. As Jerry Lee Lewis would say, there’s a shole lotta shakin’ goingon.

 

When the FED Reduces its $4.5 Trillion Balance Sheet

 

What Happens When the Fed FINALLY Reduces Its $4.5 Trillion Balance Sheet?
From the Insights column of our Interest Rates Pro Service

By Elliott Wave International

So, there we have it. Deflation has started.

The Federal Reserve announced last month that they would start to reduce their $4.5 trillion balance sheet in October, thereby starting the process we call Quantitative Tightening (QT). As expected, they are aiming to do it gently and quietly, by not reinvesting bonds as they mature, starting with sums of around $6 billion of Treasuries and $4 billion in Mortgage-Backed Securities (MBS). The scale of non-reinvestment will gradually increase. Once in full swing, the Fed's balance sheet could reduce by up to $150 billion each quarter.

Conventional analysis might conclude that the Fed's balance sheet reduction (deflation) would be bad for US Treasuries and MBS -- after all, those are the instruments not now being bought by the Fed. Notwithstanding the fact that we dismiss that sort of causality thinking anyway, we're not conventional analysts, and take a different angle.

As the Insights column of our Interest Rates Pro Service alluded to last month, the Fed's QE program has crowded out investors in the US Treasury space. The market supply of US Treasuries was reduced by the Fed's program and so it forced bond investors to buy other instruments, such as corporate bonds. Now that more US Treasuries are going to be available for investment, those funds may be tempted to switch the corporate bonds they hold back into ("safer") US Treasuries. The unintended consequence of QT, therefore, may well turn out to be a widening in corporate bond yield spreads.

So, what to look for? Our Bond Market Monitor tracks corporate bond spreads on a daily basis, so the first sign of stress can be seen there. We will be keeping an especially close eye on the trend of the Bloomberg Barclays Global Aggregate Credit index yield spread because, as our chart below shows, it may have found solid support at the old 2014 low.

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This article was syndicated by Elliott Wave International and was originally published under the headline What Happens When the Fed FINALLY Reduces Its $4.5 Trillion Balance Sheet?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.