Month: February 2021

On Monday, congressional Democrats released a budget resolution for FY2021 that, when passed, will give them the option to pass coronavirus relief legislation through the reconciliation process with a simple majority in the Senate without Republican support. After President Biden met with ten moderate Republican senators, the White House quickly signaled its support for passing COVID-relief through the budget reconciliation process, which appears set to begin as soon as today.

• *SENATE TO VOTE TODAY TO BEGIN BUDGET RESOLUTION DEBATE: SCHUMER

If – or rather when – it is approved, Goldman writes this process would pose upside risk to its $1.1 trillion (5% of GDP) assumption for additional fiscal stimulus, although it does not see it rising as high as the initial Biden proposal of $1.9 trillion.

Here is a breakdown of what is coming next, courtesy of Goldman’s Alec Philips

1. On Feb 1, Congressional Democrats released a FY2021 budget resolution. The resolution itself is a non-binding document, but it would give them the option to pass coronavirus relief legislation through the reconciliation process with only a simple majority in the Senate, i.e., without Republican votes. The key detail in this document is that it instructs the relevant congressional committees to increase the deficit by up to $1.9 trillion, the same amount that President Biden’s American Rescue Plan calls for. This figure, if approved, would set the upper limit on the cost of the next round of legislation.
2. Following a meeting with ten moderate Republican senators (the same number required to pass legislation with the 60-vote bipartisan threshold), the White House quickly signaled that it supports using the budget reconciliation process to pass the next round of coronavirus relief legislation, rather than passing a bill through regular order, which would require bipartisan support.
3. These developments suggest “upside risk” to Goldman’s $1.1 trillion assumption for additional fiscal stimulus, though the final number will be lower than the $1.9 trillion envisioned in the budget resolution, for two reasons. First, with very narrow majorities in both chambers of Congress, Democrats need virtually every member to support the resolution and the bill that follows, and some centrist members have raised issues with the White House proposal’s $1.9 trillion cost. Second, Senate rules and precedents regarding reconciliation could pose obstacles to aspects of the proposal, particularly discretionary spending measures that could account for several hundred billion dollars of the Biden proposal that falls in this category.
4. House and Senate Democratic leaders have signaled their intent to pass the budget resolution this week. If they do, this would allow the relevant committees to develop the detailed legislation over the next few weeks, with the expectation of passage later this month or in early March, ahead of the March 14 expiration of enhanced unemployment benefits.

President Trump’s legal team has filed a response to House Democrats’ single impeachment article, arguing that he cannot be tried for impeachment because he’s no longer president, and that he did not engage in insurrection or rebellion leading up to the Jan. 6 Capitol riot.

“Incitement of Insurrection against him as moot, and thus in violation of the Constitution, because the Senate lacks jurisdiction to remove from office a man who does not hold office,” reads the filing.

Trump’s team also argues that as a private citizen, the Senate has no jurisdiction over whether he can hold office gain.

“The 45th President believes and therefore avers that as a private citizen, the Senate has no jurisdiction over his ability to hold office.”

Arguments from Trump’s legal team on impeachment (h/t @weijia):
-Trump cannot be tried for impeachment because he is no longer president
-Trump did not engage in insurrection or rebellion
-As a private citizen, the Senate has no jurisdiction over whether he can hold office again

— Rebecca Kaplan (@RebeccaRKaplan) February 2, 2021

Read the full filing below and check back for updates:

BFW_020221_17250 by Zerohedge

Authored by Lance Roberts via RealInvestmentAdvice.com,

In last week’s Technically Speaking post we discussed why we reduced risk in anticipation of a pullback in the markets. However, there are some warning signs which beg the question “is a larger correction coming?”

A Tough Start

What started out as a promising January, didn’t end up that way as markets dipped into the red for the year. More importantly, February tends to be a weak month which suggests the selling may not be over just yet. Such is particularly the case, as we will discuss momentarily, with many areas of the market technically stretched and over-valued.

As our colleagues at StockTrader’s Alamanac point out:

“Devised by Yale Hirsch in 1972, the January Barometer has registered eleven major errors since 1950 for an 84.5% accuracy ratio. This indicator adheres to the propensity that as the S&P 500 goes in January, so goes the year. Of the eleven major errors, Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001. The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. The eleventh major error was last year, 2020. Including the eight flat years yields a .732 batting average.

The near-term outlook for the market has diminished as every-down January since 1950 was followed by a new or continuing bear market, a 10% correction, or a flat year. However, it is challenging to envision a full-blown bear market with the Fed keeping a close eye on the market and the new administration working on additional fiscal stimulus.”

Read Jeff’s comments carefully. Excluding the 11-major “errors,” in the table above, a down January predicted a negative year 73% of the time.

Importantly, note the weakness that tends to follow in February.

Short-Term Technical Indicators

Last week’s sell-off sudden reversal may have been just a “warning shot.”  As noted in this past weekend’s Real Investment Report:  (For free email delivery click here)

“While I fully expect a reflexive rally next week, that will likely be an opportunity to reduce risk rather than chasing markets. Such will be the case until we see money flows start to turn positive again, suggesting some underlying buying pressure.”

Yesterday, the market did indeed bounce as expected. However, while the market did hold support at the 50-dma, the “money flows,” in the middle-panel, are still weak with a “sell signal” currently in place.

There are certainly many factors at play that could indeed reverse the markets in the short-term. As noted by Stocktrader’s Almanac above, the Federal Reserve is still keeping rates at zero and buying $120 billion in bonds every month. That liquidity has clearly, as noted by the rally from the March lows, showed up increased market speculation.

The chart below shows the weekly “positive net changes” to the Fed’s balance sheet. Not surprisingly, the Fed has increased their bond purchases whenever the market has weakened.

Of course, with inflationary pressures showing up throughout the economic system, there is a risk the Fed may become trapped by their own mandates of price stability.

A Word About Corrections

Before we go further with our analysis, it is important to discuss to distinguish the difference between a “correction” and a “bear market.” 

A “bear market,” which is not simply a 20% correction, is when the “price trends” of the market change from a generally rising to falling trend over an extended period. The chart below puts bull and bear markets into better context.

A “correction” is a very short period where prices reverse to some previous level of support but maintain the previous rising trend of prices.

The next sentence is the most important.

A “correction” can be accomplished by either:

1. A decline in price to a previous level of support, OR

2. A consolidation process whereby the market trades within a defined range long enough to resolve previous overbought or extended conditions.

The differentiation is important.

On a short-term basis, as noted in the first chart above, indicators can swing fairly quickly between overbought and oversold and generally result in “corrections by consolidation.”

However, over the intermediate-term, the indicators tend to denote larger “corrections by declines in price.”

Intermediate Indicators Worrisome

With that understanding, if we look at our intermediate-term indicators (using weekly data), the picture becomes more concerning.

Again, focus on the middle panel of “money flows.” Despite the “seeming” exuberance of the market over the last few months, money flows have continued to weaken.

In early November, we recommended increasing equity exposure to portfolios as the “buy signal” was triggered. Last week, we are now very close to registering a “sell signal” which historically suggests a deeper correction or consolidation may be in progress.

While the market could indeed bounce in the short-term, the decline in “money flows,” and the convergence of “sell signals,” does increase our concern of a bigger decline over the next month or so.

I added some Fibonacci retracement levels which also tend to align with more important moving average levels of support. The first level of important support is the one-year moving average (blue line) which coincides with a 25% retracement of the rally from the March lows. As of Friday’s close, (as we are using weekly data), such would entail a 10% decline from the recent highs.

Such a correction is well within the norms of any given year of the market. Deeper corrections are certainly possible if something “spooks” the market, however, we will currently concentrate on our short-term risks in terms of risk management.

Longer-Term Concerns

One of the more concerning charts we have been monitoring for some time is the monthly expanding price pattern. Once again, the market has struggled with the top of the expanding pattern as relative strength continues to deteriorate. With the markets extremely extended on a monthly basis, as denoted by the red arrows, such periods have had less positive outcomes for investors.

Monthly price charts are NOT TO BE USED for trading portfolios. Indications are only valid at the end of the month, and they are slow to turn.

Due to the lag, most short-term focused investors make assumptions the indications are “wrong” this time.  However, history tends to prove that extreme market extensions rarely resolve themselves to the upside.

Of course, what causes the eventual “reversion” is always an unexpected, exogenous event when sends investors scrambling for exits where there are few buyers.

As noted this past weekend, while everyone was focused on vaccines and more stimulus, the “Reddit Riot” has the potential to upend markets.

The Reddit Riot

We have discussed the issue with surging margin debt previously, however, this is a specific risk related to the run on stocks like Gamestop and AMC Theatres.

Without getting into all the details of how “margin lines” works, the basic issue is that brokerage firms take on “credit risk,” by extended margin loans to clients. Here is the important part, there are two types of brokerage accounts: Type 1: Cash and Type 2: Margin.  If accounts are designated as Type 2, whether or not there is a margin loan outstanding, it requires that firms maintain a 10% collateral requirement of “cash” on their books.

Normally this isn’t an issue. However, since October, investors have been taking on massive levels of margin debt to leverage up their exposure to stocks.

In turn, the massive increase in margin loans has pushed negative cash balances to record levels.

While there was much angst in the media last week by firms restricting purchases of stocks that were skyrocketing due to the ongoing “short-squeeze,” those restrictions were due to a lack of sufficient collateral by firms to meet regulatory requirements.

If these short-squeezes continue or indeed worsen, there is a not so inconsequential risk that one or more firms could wind up in a financial meltdown.

As is always the case, leverage is the fuel that drives asset prices higher. It is also the fuel that “burns the house down” when things go in the wrong direction. It is also one of those things the Federal Reserve may have a difficult time trying to bail out.

Continue To Focus On Risk Controls

As noted above, we will likely get a rally as early as next week. However, it is likely we should consider using any rally to remove excess risk until the technical backdrop improves.

Here are the guidelines we recommend for adjusting your portfolio risk:

Step 1) Clean Up Your Portfolio

1. Tighten up stop-loss levels to current support levels for each position.

2. Take profits in positions that have been big winners

3. Sell laggards and losers

4. Raise cash and rebalance portfolios to target weightings.

Step 2) Compare Your Portfolio Allocation To Your Model Allocation.

1. Determine areas requiring new or increased exposure.

2. Calculate how many shares need to be purchased to fill allocation requirements.

3. Evaluate cash requirements to make needed purchases.

4. Re-examine portfolio to rebalance and raise sufficient cash for requirements.

5. Determine entry price levels for each new position.

6. Establish “stop-loss” levels for each position.

7. Calculate “sell/profit taking” levels for each position.

(Note: the primary rule of investing that should NEVER be broken is: “Never invest money without knowing where you are going to sell if you are wrong, and if you are right.”)

Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are adjusting exposure to areas we like now, and using the rally to reduce/remove the sectors where risk is most prevalent.

Stay alert, things are finally getting interesting.

Authored by Lance Roberts via RealInvestmentAdvice.com,

In last week’s Technically Speaking post we discussed why we reduced risk in anticipation of a pullback in the markets. However, there are some warning signs which beg the question “is a larger correction coming?”

A Tough Start

What started out as a promising January, didn’t end up that way as markets dipped into the red for the year. More importantly, February tends to be a weak month which suggests the selling may not be over just yet. Such is particularly the case, as we will discuss momentarily, with many areas of the market technically stretched and over-valued.

As our colleagues at StockTrader’s Alamanac point out:

“Devised by Yale Hirsch in 1972, the January Barometer has registered eleven major errors since 1950 for an 84.5% accuracy ratio. This indicator adheres to the propensity that as the S&P 500 goes in January, so goes the year. Of the eleven major errors, Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001. The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. The eleventh major error was last year, 2020. Including the eight flat years yields a .732 batting average.

The near-term outlook for the market has diminished as every-down January since 1950 was followed by a new or continuing bear market, a 10% correction, or a flat year. However, it is challenging to envision a full-blown bear market with the Fed keeping a close eye on the market and the new administration working on additional fiscal stimulus.”

Read Jeff’s comments carefully. Excluding the 11-major “errors,” in the table above, a down January predicted a negative year 73% of the time.

Importantly, note the weakness that tends to follow in February.

Short-Term Technical Indicators

Last week’s sell-off sudden reversal may have been just a “warning shot.”  As noted in this past weekend’s Real Investment Report:  (For free email delivery click here)

“While I fully expect a reflexive rally next week, that will likely be an opportunity to reduce risk rather than chasing markets. Such will be the case until we see money flows start to turn positive again, suggesting some underlying buying pressure.”

Yesterday, the market did indeed bounce as expected. However, while the market did hold support at the 50-dma, the “money flows,” in the middle-panel, are still weak with a “sell signal” currently in place.

There are certainly many factors at play that could indeed reverse the markets in the short-term. As noted by Stocktrader’s Almanac above, the Federal Reserve is still keeping rates at zero and buying $120 billion in bonds every month. That liquidity has clearly, as noted by the rally from the March lows, showed up increased market speculation.

The chart below shows the weekly “positive net changes” to the Fed’s balance sheet. Not surprisingly, the Fed has increased their bond purchases whenever the market has weakened.

Of course, with inflationary pressures showing up throughout the economic system, there is a risk the Fed may become trapped by their own mandates of price stability.

A Word About Corrections

Before we go further with our analysis, it is important to discuss to distinguish the difference between a “correction” and a “bear market.” 

A “bear market,” which is not simply a 20% correction, is when the “price trends” of the market change from a generally rising to falling trend over an extended period. The chart below puts bull and bear markets into better context.

A “correction” is a very short period where prices reverse to some previous level of support but maintain the previous rising trend of prices.

The next sentence is the most important.

A “correction” can be accomplished by either:

1. A decline in price to a previous level of support, OR

2. A consolidation process whereby the market trades within a defined range long enough to resolve previous overbought or extended conditions.

The differentiation is important.

On a short-term basis, as noted in the first chart above, indicators can swing fairly quickly between overbought and oversold and generally result in “corrections by consolidation.”

However, over the intermediate-term, the indicators tend to denote larger “corrections by declines in price.”

Intermediate Indicators Worrisome

With that understanding, if we look at our intermediate-term indicators (using weekly data), the picture becomes more concerning.

Again, focus on the middle panel of “money flows.” Despite the “seeming” exuberance of the market over the last few months, money flows have continued to weaken.

In early November, we recommended increasing equity exposure to portfolios as the “buy signal” was triggered. Last week, we are now very close to registering a “sell signal” which historically suggests a deeper correction or consolidation may be in progress.

While the market could indeed bounce in the short-term, the decline in “money flows,” and the convergence of “sell signals,” does increase our concern of a bigger decline over the next month or so.

I added some Fibonacci retracement levels which also tend to align with more important moving average levels of support. The first level of important support is the one-year moving average (blue line) which coincides with a 25% retracement of the rally from the March lows. As of Friday’s close, (as we are using weekly data), such would entail a 10% decline from the recent highs.

Such a correction is well within the norms of any given year of the market. Deeper corrections are certainly possible if something “spooks” the market, however, we will currently concentrate on our short-term risks in terms of risk management.

Longer-Term Concerns

One of the more concerning charts we have been monitoring for some time is the monthly expanding price pattern. Once again, the market has struggled with the top of the expanding pattern as relative strength continues to deteriorate. With the markets extremely extended on a monthly basis, as denoted by the red arrows, such periods have had less positive outcomes for investors.

Monthly price charts are NOT TO BE USED for trading portfolios. Indications are only valid at the end of the month, and they are slow to turn.

Due to the lag, most short-term focused investors make assumptions the indications are “wrong” this time.  However, history tends to prove that extreme market extensions rarely resolve themselves to the upside.

Of course, what causes the eventual “reversion” is always an unexpected, exogenous event when sends investors scrambling for exits where there are few buyers.

As noted this past weekend, while everyone was focused on vaccines and more stimulus, the “Reddit Riot” has the potential to upend markets.

The Reddit Riot

We have discussed the issue with surging margin debt previously, however, this is a specific risk related to the run on stocks like Gamestop and AMC Theatres.

Without getting into all the details of how “margin lines” works, the basic issue is that brokerage firms take on “credit risk,” by extended margin loans to clients. Here is the important part, there are two types of brokerage accounts: Type 1: Cash and Type 2: Margin.  If accounts are designated as Type 2, whether or not there is a margin loan outstanding, it requires that firms maintain a 10% collateral requirement of “cash” on their books.

Normally this isn’t an issue. However, since October, investors have been taking on massive levels of margin debt to leverage up their exposure to stocks.

In turn, the massive increase in margin loans has pushed negative cash balances to record levels.

While there was much angst in the media last week by firms restricting purchases of stocks that were skyrocketing due to the ongoing “short-squeeze,” those restrictions were due to a lack of sufficient collateral by firms to meet regulatory requirements.

If these short-squeezes continue or indeed worsen, there is a not so inconsequential risk that one or more firms could wind up in a financial meltdown.

As is always the case, leverage is the fuel that drives asset prices higher. It is also the fuel that “burns the house down” when things go in the wrong direction. It is also one of those things the Federal Reserve may have a difficult time trying to bail out.

Continue To Focus On Risk Controls

As noted above, we will likely get a rally as early as next week. However, it is likely we should consider using any rally to remove excess risk until the technical backdrop improves.

Here are the guidelines we recommend for adjusting your portfolio risk:

Step 1) Clean Up Your Portfolio

1. Tighten up stop-loss levels to current support levels for each position.

2. Take profits in positions that have been big winners

3. Sell laggards and losers

4. Raise cash and rebalance portfolios to target weightings.

Step 2) Compare Your Portfolio Allocation To Your Model Allocation.

1. Determine areas requiring new or increased exposure.

2. Calculate how many shares need to be purchased to fill allocation requirements.

3. Evaluate cash requirements to make needed purchases.

4. Re-examine portfolio to rebalance and raise sufficient cash for requirements.

5. Determine entry price levels for each new position.

6. Establish “stop-loss” levels for each position.

7. Calculate “sell/profit taking” levels for each position.

(Note: the primary rule of investing that should NEVER be broken is: “Never invest money without knowing where you are going to sell if you are wrong, and if you are right.”)

Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are adjusting exposure to areas we like now, and using the rally to reduce/remove the sectors where risk is most prevalent.

Stay alert, things are finally getting interesting.

A Moscow court is mulling whether to extend opposition activist and politician Alexei Navalny’s current 30-day jail sentence after he returned from Berlin last month where he recovered from an alleged nerve agent poisoning which he’s blamed on Russian intelligence on orders from Putin. He could reportedly be handed a stiff three-and-a-half year prison sentence related to a 2014 embezzlement case and subsequent probation violation, which he has said is “politically motivated”. 

Russia’s foreign ministry is now angered at the spectacle during Tuesday’s court proceedings which saw a large number of Western diplomats crowd the courtroom.

Spokeswoman Maria Zakharova said that while they are free to attend public trials, the fact that there were some 20 of them from countries including the United States, Bulgaria, Poland, Latvia, Austria, and Switzerland, shows there’s an attempt to meddle in Russia’s internal legal affairs. 

The trial is taking place in Moscow City Court, and after the unusual influx of foreign diplomatic personnel into the proceedings on Tuesday, Kremlin Spokesman Dmitry Peskov was also prompted to say:

“They are free to act in accordance with the Vienna Convention on Diplomatic Relations, but not outside this convention. Of course, diplomats must not interfere in Russia’s domestic affairs in any way and what is more, they must not allow any actions that would be in any way associated with attempts to pressure an independent court,” according to TASS.

For the Kremlin, the scene constitutes more “proof” of a hidden foreign hand behind the Navalny saga. Putin has also previously suggested a foreign intelligence plot to put pressure on Russian leadership. 

Further according to TASS:

He [Peskov] pointed out that these foreign diplomats must “define their actions somehow.” “Either they agree with the need to take tough action against those who violate the Russian law, or this is an attempt to put pressure on the court. I reckon they will define their position somehow,” he said.

WATCH: Alexey Navalny appears in a Moscow court in handcuffs pending a decision on whether the Russian opposition leader will be jailed for up to 3 and a half years on alleged violations of probation https://t.co/55KbF2KOzb pic.twitter.com/w927PUP0HU

— Bloomberg Quicktake (@Quicktake) February 2, 2021

The hearing comes after two consecutive weekends of sizeable protests in various Russian cities which the government has declared illicit.

All eyes are on Navalny’s fate, given the US is now threatening new sanctions and other punitive measures while demanding his immediate release. 

Navalny today told the court that Putin’s “fear and hatred” are behind the politically motivated case against him. “The aim of the hearing is to scare a great number of people,” Navalny said. “They jail one man to scare millions.” https://t.co/FK9RFYtTSK via @RFERL

— Christopher Miller (@ChristopherJM) February 2, 2021

It’s Russia’s prison service which is requesting the longer prison sentence, alleging “unlawful conduct” during his probation period.

Since his return from Berlin to Moscow, he’s reportedly urged supporters to take to the streets from his jail cell while also leveling charges of unprecedented theft and corruption against Putin and his associates.

Authored by Charles Hugh Smith via The Daily Reckoning,

Gamed speculation — using knowledge of how markets can be pushed to profit those doing the pushing — has long been decried.

Declaring that the unproductive profiteering of greedy speculators will be the death of the Republic goes back to Rome, and in American history, to Alexander Hamilton’s battle in 1791 to pay the speculators who had bought up the new nation’s war bonds for pennies on the dollar full value plus interest.

Gamed speculation — and the cheery presumption that there will always be a liquid market of chumps willing to buy insiders’ pumped-up balloons — inflate and pop bubbles, with devastating consequences not just for the broken speculators…

But also for conventional investors who naively believed “the market” was in fact a market (smirk) rather than a mechanism to enrich those who have the capital and knowledge to engineer profiteering behind the curtain.

An interesting intersection of dynamics has led to the curtain being ripped aside by the democratized speculations of WallStreetBets, a crowdsourced pool of speculative capital which shares many characteristics with online gaming and live-action role playing (LARP).

Only the gains and losses are in real dollars. The fortunes made and lost in GameStop (GME) are very real indeed.

How Dare the Serfs Play Our Game!

Wall Street and the politicos who profiteer as insiders are naturally horrified by both developments:

1. That the curtain of how super-wealthy insiders and their only the wealthy can play entities such as hedge funds have manipulated markets behind the curtain for decades, leading to an unprecedented economic inequality in which the top 10% skim fully 97% of all income from capital. To have their game hijacked by a bunch of young gamers is beyond appalling to the New Nobility, who firmly believe their insider manipulations were the exclusive preserve of their crowd in the castle.

2. Not only are the mechanisms of manipulation now visible to all, an unruly rabble of commoners has ganged together to play their own version of the speculative game of skimming staggering profits from a rigged “market.” How dare they!

No wonder the skimmers and scammers and political refuse that passes for “leadership” in today’s America are shocked, shocked by the open and openly gleeful democratized speculation that (like cryptocurrencies) is enriching the wrong people, i.e. commoners.

It’s as if the debt-serfs, tax donkeys and decapitalized peasants stormed the castle at night and broke open the jewel box and the stash of champagne, and proceeded to swing from the chandeliers, mocking the self-serving privileged who’d been pillaging the nation for decades via their legalized looting.

Where do these developments lead? An interesting question. Unfortunately for Wall Street insiders and their political-scum apologists, we can’t unsee the levers behind the curtain.

The End of the New Nobility?

The insiders can’t put their legalized looting genie back in the bottle, for everyone has seen how “markets” are manipulated to enrich those pulling the levers.

If the political-scum apologists want to end democratized speculation, they’re going to face blowback when they try to protect the rights of the New Nobility to continue manipulating markets to their exclusive advantage.

The rage against the New Nobility’s lock on capital, rigged markets and 97% of all the income generated by capital has been simmering to a boil, and political-scum apologists had best tread carefully.

How do you unrig a rigged speculative market? You don’t. It simply crashes into a putrid sinkhole. Phantom capital vanishes into the thin air from whence it came.

Ponder the similarities of the Cisco Systems speculative frenzy in 2000 and Tesla’s speculative frenzy in 2020.

Dang, the levers of the machinery behind the curtain just broke. The Fed is heading for failure. But it already was. Let’s look at the bigger picture…

Why the Fed Will Fail

The Fed will fail as a result of two dynamics: diminishing returns and the U.S. dollar’s role as a global reserve currency. The Fed’s reign as the godhead of financier-banker supremacy has been fun and games for the past 12 years of stock market euphoria, but that’s about to change.

All those expecting the Fed to sink the U.S. dollar to near-zero to “save the stock market” don’t seem to realize that they’re also expecting the U.S. to surrender its global hegemony, which rests entirely on the U.S. dollar.

The USD is the world’s dominant reserve currency. It dwarfs the next largest reserve currency, the euro. The Chinese yuan, due to its peg to the USD, is a proxy for the USD. It’s a tiny sliver of global reserves.

The owner of a reserve currency can create “money” out of thin air and trade it for autos, oil, semiconductors — real-world goods that were not created out of thin air. All these real-world goods required tremendous investment and significant costs to be produced and transported.

No wonder trading something for nothing — a remarkably good deal — is termed an exorbitant privilege.

It is not an exaggeration to say that the ability to create “money” out of thin air and trade it for real-world goods is the foundation of America’s global power.

If the Fed prints dollars to near-infinity and the dollar loses value relative to other reserve currencies, the U.S. loses its exorbitant privilege of trading “money” created out of thin air for real-world goods.

So everyone expecting the Fed to “print” the dollar to zero is claiming the Fed is consciously choosing to lay waste to the foundation of American power — just to boost Big Tech Robber Barons and zombie global stock markets.

The Fed Can’t Have It Both Ways

Recall that the Fed is not the Empire, it’s the handmaiden of the Empire. The Fed’s dual mandate — for PR purposes, stable employment and prices — is actually balancing the conflicting demands of a global and domestic currency.

The inherent problem with a reserve currency is that it must meet global economic needs and domestic needs, and these are intrinsically in conflict. America’s billionaires and pension funds want the U.S. stock market to loft higher on the back of a declining dollar, but that diminishes the global purchasing power of the dollar — a trend spiraling down to economic ruin.

The Fed’s balancing act has run out of runway. It’s either destroy American hegemony by crushing the USD or secure hegemony and let the stock market function as a “market” rather than as a device to further enrich the top .01%.

As for diminishing returns: consider what the Fed “bought” by handing $1 trillion to financiers, banks and billionaires in 2008-09 and what it “bought” with $3 trillion last March. The Fed’s balance sheet shot up from $925 billion on 9/9/08 to $2.08 trillion on 9/9/09 — an injection of $1.16 trillion to “save” the global financial system (and the U.S. stock and debt markets) from complete meltdown.

The Fed continued goosing markets higher, adding another $1 trillion by 2013 (balance sheet $2.96 trillion). So the Fed “bought” a five-year rally in global risk assets — a rally that sent wealth and income inequality into orbit—for a mere $2 trillion.

Last year the Fed had to print over $3 trillion in three months to “save the markets” from a reckoning with reality.

So will the next “save” require $5 trillion, or will it be $7 trillion? And what are the consequences for such insanity on the U.S. dollar’s global hegemony?

“Choose Wisely, Fed”

So the Fed has a binary choice: preserve America’s global hegemony or further enrich the billionaires. You can’t have both. Hegemony requires a currency that’s increasing its value relative to other currencies, not plummeting to near-zero.

If the Fed chooses to further enrich the billionaires and top .01%, then the skyrocketing wealth-income inequality will unravel the domestic social and political orders. There is no way that will be a “win” for the Fed, as the resulting backlash against the Fed’s stripmining the nation to enrich the top .01% will have consequences for the Fed as well as the nation.

So the Fed will fail. If it spews endless trillions to further enrich the billionaires it will destroy the exorbitant privilege of the reserve currency and the global hegemony that privilege enables.

If it preserves global dollar hegemony by not spewing endless trillions, global stock and debt markets will experience the equivalent of a financial tsunami, earthquake and hurricane hitting all at the same time.

It’s either/or – there is no win-win. Choose wisely, Fed.

Emini futures are pushing higher above 3800, rising above the large gamma strike at this level, with the VIX sliding 4 pts to 26 which has added to the equity tailwind. According to our friends at SpotGamma, call open interest has increased 15k at 3800, and the first resistance level is showing up at 3812 and then 3838 (on the downside, there is little support until 3750).

While there is a sense of tone change in positioning, there does remain an ominous gamma “void” down from 3800 to 3750, with SpotGamma warning that notional gamma levels remain low “which infers higher volatility” while put prices have ticked up vs calls as you can see below.

There are two ways to look at this data, according to SpotGamma:

• Markets are now better hedged, and stock buyers/call buyers can step in off of 3800 and push to the 3900 Call Wall fueled by declining implied volatility (ie vanna)
• Call buying is fading and markets are structurally weakening/topping

One obvious response here is “Thanks, the market could go up, or could go down” but as SG elaborates, the point is that “markets appears poised for further volatility, with little positive gamma until 3850, and a void down into 3700.”

Finally, SG brings attention to the following long-term chart of realized volatility (complete with technical analysis), and concludes that “there is no doubt the “amplitude” of market movement has increased since the Covid Crash, but it also appears poised to break out.”

And similar to the breakout above, the next chart of the SPX shows the importance of all that gamma at 3800: “Through January markets made no headway and lacked conviction, which syncs with markets starting again today at 3800.”