2016/04/05 TrendView VIDEO: Global View (late)
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TrendView VIDEO ANALYSIS & OUTLOOK: Tuesday, April 5, 2016 (late)
Global View: All Markets
Is there a Yellen Put? We are about to find out.
Based on the reversion to dovish positions in her speech last Tuesday, it would be easy to imagine the equities would now be well underpinned on any setback. Yet as has been apparent of late, that does leave room for those erratic setbacks. And ‘erratic’ is a typical market tone for a bear market rally, especially a substantial one. For all of the magnitude of the rally from the January-February lows, much of that is for the same reason as the rally back from August and September lows: the news becoming so bad that a classical ‘bad news is good news’ central bank psychology set in. This is the tendency toward believing the central banks can resuscitate the robust growth from prior to the 2008-2009 crisis. Yet as we noted in our March 23rd Commentary: Fed’s ‘Normalcy Bias’ Crumbles:
The next financial crisis will occur when the investment and portfolio management community (and ultimately the investing public) realizes that the central banks alone cannot restore the robust growth from prior to the 2008-2009 financial crisis.
While that may seem a rather radical statement with which to begin exploration of whether that ‘Yellen Put’ is now in place, we have been noting it for some time. And the additional research behind that view is spread out across the major early December post noted below, with more telling recent updates in the extended sections of our March 6th Equities’ Goldilocks Psychology and the March 16th Equities Still a Major Bear.
In the latter lies the key to our confidence that within the rapid rally back from those early year lows the bear is alive and well. It is the nature of volatility at the top of extended bull markets that is more often the case than a precipitate plunge. For more on that see the Current Academic Volatility Timing Insight section of that March 16th `post. In the meantime, the rationale behind the US equities rally remains the renewed assumption that the forbearance of the Federal Reserve means ‘risk on’ is safe for now.
The next test of that proposition comes on Wednesday afternoon’s release of the minutes of the FOMC’s last meeting on March 15-16. Based on their reversion to more hawkish comments again in the wake of the major downward of FOMC rate hike projections, there will likely be quite a bit of comment from the more hawkish FOMC members that will be at least as prominent as that of the more accommodative members.
And that is where the ‘Yellen Put’ comes in. If it is indeed in place, then any immediate damage to the equities from those hawkish views will be temporary. We shall see.
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Video Timeline: It begins with macro (i.e. fundamental influences) discussion on the 'Yellen Put' potential noted above along with discussion of how the economic data had eroded once again for Asia and Europe. That said, there were some bright spots, and US data went from weakness on Monday to overall strength Tuesday. Other than the holiday-delayed Chinese Services and Composite PMIs Wednesday morning that was the last data until the release of the FOMC minutes Wednesday afternoon.
It moves on to S&P 500 FUTURE short-term at 03:00 and intermediate term view at 06:30, with OTHER equities from 08:30, GOVVIES beginning at 11:00 (with the BUND FUTURE at 13:45 including implications of the early March expiration rollover) and SHORT MONEY FORWARDS from 15:30. FOREIGN EXCHANGE covers the US DOLLAR INDEX at 18:00 EUROPE at 19:30 and ASIA at 22:30, followed by the CROSS RATES at 25:30 and a return to S&P 500 FUTURE short term view at 28:45. We suggest using the timeline cursor to access the analysis most relevant for you.
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Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion and TrendView Video Analysis and General Update. Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December that in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize in 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
▪ There are further signs the world is waking up to our previous admonition (expressed again above) that the central banks’ loss of credibility is the real risk. On April 5th the Financial Times ran an excellent analysis of this in Wisdom wanes for ‘don’t fight the Fed’. [As usual, we suggest anyone who does not have a Financial Times subscription take advantage of their very attractive trial subscription offer.]
It notes, “Gnawing at investor sentiment is what central banks can do to offset fundamental forces, led by weaker emerging market growth and supply gluts for many commodities, while highly levered companies face falling revenues and lower profitability.”
And strategist Alan Ruskin at Deutsche Bank observes, "Unfortunately for Yellen, risk is trading increasingly like they are losing faith with the big central banks, because [our italics] central banks can’t create value where there is ‘none’, in growth dependent commodities, or relatively rich, earnings depleted equities.’’ And further on that, “We feel too close to [our italics] the market fearing central bank ineffectiveness for comfort. The market rejoices in Yellen’s dovishness, but with a fear about how long the impact will last.”
▪ This is all consistent with Thursday’s Global View post that included a CNBC panel discussion from shortly after Fed Chair Yellen completed her Tuesday speech and Q&A session. It is interesting for the diversity of topics briefly touched upon as well as the far less supportive views of some previous Federal Reserve fans among the participants. CNBC Senior Contributor Larry Kudlow (previously with the Cato Institute) is generally a fan of the Fed, yet has felt the December rate hike was misguided. He noted something that we (among others) have said since even prior to that hike:
If you want to know if any FOMC rate hike is well-warranted, just watch the yield curve. If the FOMC hike is the right path, the long dated high grade bond yields should rise as well. Yet in moves there in both January-February in a major way and even on last week’s hawkish pronouncements from some Fed officials long-dated yields fell. This is a clear sign the Fed moved too soon in December, and Chair Yellen’s caution is the right path. There was also some real disaffection from CNBC’s Steve Liesman who is typically a big fan and defender of the Fed.
▪ It is also consistent with much of our view on the confluence of factors that will burden the global economy and equities this year. As we have focused on since January 2015, this is of course based on the degree to which the political class has failed to deliver anywhere near the necessary level of structural reforms that are the necessary complement to the central banks Brobdingnagian liquidity infusions (QE) and insanely low interest rates.
The highly partisan US political parties are the worst offenders, possibly because they have had the most aggressive central bank QE and psychological market support (the ‘Fed Put’… whichever regime might be in place.) They have accepted all of the central bank largesse as a giant gift which allows them to avoid doing anything in all of the key areas like environment, labor rules, fiscal, trade liberalization, and many other important fronts, including the sorely needed tax reform…
▪ And just this morning (Wednesday April 6th) the Financial Times major column one front page article headline is US tax crackdown provokes foreign fury. In terms of the real impact on long-established companies desire to invest and hire in the US the Obama administration and Treasury Department may have not just shot themselves in the foot… they may have blown it clean off!
It provides the following insights which begin, “A White House tax crackdown designed to put a halt to Pfizer’s planned $160bn takeover of Allergan has provoked fury from foreign multinationals with operations in the US.”
“Rather than using a scalpel to deal with this issue they are using a machete,” said Nancy McLernon, president of the Organisation for International Investment, a trade group for foreign companies in the US.
“It’s a misguided approach. They’re trying to go after those companies that are doing something they think is problematic and carelessly hitting a whole class of employers.”
Alex Spitzer, a senior tax executive at Nestlé US, said: “It’s radical and would have a chilling effect on jobs and investment in the US. It would increase our cost of capital and therefore make our investments less palatable.”
The bottom line is that once again instead of providing the necessary overall reform the US administration and its Treasury Department have opted for gimmicks. The unfortunate part of gimmicks is they very often backfire into proverbial ‘unintended consequences.’
In this case there is not only the specter of less multinational investment and hiring in the US. The lack of ability to ‘invert’ will mean that US corporations who are under competitive pressure from their less heavily taxed international rivals will simply sell out to the more well-funded overseas companies. Now they will not even be US companies any longer, who might have chosen to return to the US once the tax regime becomes more enlightened. Nice work fellas!!
The TrendView VIDEO ANALYSIS & OUTLOOK is accessible below.
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