Central Banks

     

 

 

The Bubble Machine

The launch angle of the U.S. stock market over the past decade has been steep and relentless. The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent. New highs continue to be reached practically every day.

 

S&P 500 weekly, since the low of 2009. A party of roaring 20s proportion in terms of duration, extent and end point valuations (a post-war inflation episode triggered a devastating bear market from November 1919 to August 1921, in which the DJIA fell from ~120 to ~64 points. It then rose until early September 1929, topping at ~380 points. By the time it peaked, Wall Street had created all sorts of new-fangled instruments such as the then highly popular investment trusts, everybody was speculating on margin and the equivalent of today’s FANGs such as RCA (“Radio”) traded at previously unheard of multiples – as did the rest of the market. Numerous sharp corrections along the way had eradicated the perception of risk in investors’ minds. We have discussed the parallels between the two eras before, and in the meantime another parallel can be discerned in the charts. In late 1928 the market suffered a sharp sell-off in the normally seasonally strong period, very similar to what occurred in 2018. It was the biggest correction of the entire bull market, but the market swiftly rallied again and by February 1929 it made new highs. It then proceeded to build a chart formation known as “three peaks and a domed house”. The three peaks of 2019 are not a perfect replica of the basic schematic of the formation, but the timing is in line with it (they are supposed to be established within 6-10 months). George Lindsay’s original schematic is very detailed, it is therefore unlikely that the pattern will repeat perfectly every time. The so-called domed house can take up to 7 months to form, but we would focus on the shape rather than the precise duration. Whether the formation does indeed form remains to be seen. It is definitely something worth keeping an eye on. [PT]

 

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Monetary Lunacy, Nipponese Version

Earlier this month, Bank of Japan (BOJ) Governor Haruhiko Kuroda commented that Japan’s central planners are considering a 50-year government bond issue as a long-term means of putting a floor under super-long interest rates.  How this floor would be placed is extremely suspect; we will have more on this in a moment.  But first, the dual benefits – according to Japan’s central planners…

 

Kuroda-san: the man with a plan, or rather, a plethora of plans (過剰な計画). [PT]

 

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Incrementum Advisory Board Discussion of 23 Oct 2019

In late October the Advisory Board of the Incrementum Fund held its quarterly meeting (a transcript is available for download at the end of this post). This time the board was joined by special guest Dan Oliver, the manager of Myrmikan Capital and president of the Committee for Monetary Research & Education.  Myrmikan inter alia publishes excellent and quite original research on gold which we hereby highly recommend.

 

Dan Oliver of Myrmikan Capital

 

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Prettifying Toxic Waste

The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?

 

The yield-chasing hamster wheel… [PT]

 

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The Sky is Falling

 

“We believe monetary policy is in a good place.”

– Federal Reserve Chairman Jerome Powell, October 30, 2019.

 

The man from the good place. “As I was going up the stair, I met a man who wasn’t there. He wasn’t there again today, Oh how I wish he’d go away!” [PT]

 

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Wildfire Surge

The hillsides are always brown in the land of fruits and nuts come autumn.  After baking away all summer long in the hot sun, the dense sage and chaparral covering the coastal hillsides and canyons are dry and toasty. Though, before conditions get better, they must first get worse.

 

California is ablaze again… as every year.  [PT]

Photo credit: Noah Berger / AP

 

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Ominous Pronouncements

The prices of the metals barely budged last week. It is interesting to note that last week, more than one central banker felt it necessary to say something about a possible next crisis. And at least one of them said something about gold.

 

Lost as always, and apparently slightly nervous these days… [PT]

 

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True Money Supply Growth Rebounds in September

In August 2019 year-on-year growth of the broad true US money supply (TMS-2) fell to a fresh 12-year low of 1.87%. The 12-month moving average of the growth rate hit a new low for the move as well. The main driver of the slowdown in money supply growth over the past year was the Fed’s decision to decrease its holdings of MBS and treasuries purchased in previous “QE” operations. This was partly offset by bank credit growth in recent months, which has moved to 6.6% y/y after being stuck below 4% y/y throughout 2018.

 

US broad true money supply TMS-2, year-on-year growth w. 12-month moving average. After establishing a new 12-year low at  1.87% in August, TMS-2 growth has rebounded to 3.09% in September. In 2000, the low in y/y growth coincided almost precisely with the peak in the S&P 500 index. The next major low was established in 2006, about one year before the stock market peak. It is worth noting that in both cases, money supply growth actually soared during the subsequent bear markets and recessions. This illustrates the fact that slowing and/or accelerating money supply growth exerts its effects with a considerable lag.

 

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Under the Influence

 

“This feels very sustainable.” 

– Federal Reserve Chairman Jerome Powell, October 8, 2019

 

Understandable confusion… [PT]

 

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Chaos in Overnight Funding Markets

Most of our readers are probably aware that there were recently quite large spikes in repo rates. The events were inter alia chronicled at Zerohedge here and here. The issue is fairly complex, as there are many different drivers at play, but we will try to provide a brief explanation.

 

There have been two spikes in the overnight general collateral rate – one at the end of 2018, which was a first warning shot, and the one of last week, which was the biggest such spike on record, exceeding even that seen in the 2008 crisis.

 

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Groping in the Dark

This week central planners pursued their primary mission with steadfast conviction. They planned. They prodded. They prearranged tomorrow to save us from ourselves. Some also grubbed a little graft for their trouble. Other central planners took to debasing the dollar to price fix the federal funds rate within a narrow band of tolerance.  What in the world do they think they are doing?

 

Central planning committee in the analysis and forecasting phase… [PT]

 

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An Odd Combination of Serenity and Panic

The United States, with untroubled ease, continued its approach toward catastrophe this week.  The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement.  Yet, on the surface, all still remained in the superlative.

 

S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]

 

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