Month: December 2019

Authored by Sven Henrich via NorthmanTrader.com,

Central banks came, saw, and saved everything again and set the global economy back on a path of reflation or so go many market narratives being sold to the public these days following the furious Q4 market rally to new highs.

The bond market may have a different idea and the charts need to be closely watched into 2020.

Hence I wanted to follow up on my recent interview on CNBC Fast Money where I was asked about the reflation trade and I referred to the 10 year and the $TLT charts.

Here’s the interview for reference:

I talk about the Fed a lot of course because I see them as the biggest market driver in 2019, especially in Q4:

And don’t think I’m just some twitter conspiracy nut.
You know I’ve been on this all year.
Others see it as well.
We all see it.
Yet the Fed keeps hiding in silence refusing to acknowledge their role. pic.twitter.com/dKmZ78IKoB

— Sven Henrich (@NorthmanTrader) December 30, 2019

The Fed of course trying to bring about the reflation trade, but then of course went overboard on the liquidity front when forced into fixing the leaking repo boat.

Markets took the rise in stocks and coming trade agreement with China as evidence that the reflation trade was fully back on.

Problem is: The bond market does not appear to agree.

In the interview I referred to a bear flag on the 10 year, $TNX. If there is evidence of a reflation trade to come where is it? It’s not evidenced in this chart:

Now a pattern is not confirmed until it shows confirmation, but this pattern here is very clean so far. The 10 year hasn’t even managed to approach the July highs which means the 10 year has entirely ignored the market rally of Q4.

Now the pattern has room higher for the 10 year, it could even headr into the 2.1% range and still be inside this pattern. But what the pattern suggests is that a break down could not only invite a retest of the lows, but even new lows are possible.

That’s a problem and would render reflation narratives wrong.

Which brings me to the $TLT chart, with one of the strongest most consistent trends out there:

Where did $TLT bottom in 2018? Right smack on top of its 2004 support trend line. 2019 has seen a furious rally in $TLT as yields collapsed world wide. In process $TLT printed its most overbought reading in this century.

So no wonder we saw a reversal and this reversal was seen as a bottom in yields. Well, what does this chart actually suggest? As with $TNX we see a flag building. A bullish flag also suggesting that reflation celebrations may be very much pre-mature.

If anything this chart suggests that if the pattern confirms and breaks out higher we may see a run back to the top of the upper trend line.

And you know what that means right? That the Fed is not only not done cutting rates it may be heading back to zero and then this Q4 rally, which may extend into early 2020, was just a liquidity mirage that failed to bring about reflation.

Remember where we are in the cycle:

The Q4 rally was as ferocious as it was one sided and it even exceeded my combustion scenario in target. But here’s what it hasn’t done: It has failed to recapture the broken 2009 trend and it has brought price to the apex resistance of three major trend lines. 2009, 2007 and 1987.

The other thing this rally has failed to do: Confirm reflation. And without that confirmation this rally is on thin liquidity ice as charts such as $MSFT and $AAPL are screaming for correction.

No, the bond market has been entirely consistent for decades now. Lower highs in yields and rejection at its long term trend line over and over again, a trend dating back to the early 1980s. As the world keeps accumulating ever more debt with no end in sight it can’t handle higher rates, hence the consistent rejections. The Fed tries hard to avert the inevitable by coming to the rescue at each sign of trouble, but in process they keep inflating the asset bubble while failing to bring about organic reflation.

So 2020 will very much be a battle of control. Bears may be fighting the Fed, but the Fed is fighting the bond market. And nothing is bigger than the bond market. Investors may want to keep that in mind as the bond market charts signal: It’s not over. Rising markets are evidence of the Fed throwing liquidity at the problem, but they are not evidence of reflation.

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At a moment the US struck five supposedly ‘Iran-linked’ militia bases in Iraq and Syria on Sunday, sending regional tensions soaring, unprecedented four-day long joint naval drills involving Iran, Russia and China outside the Persian Gulf were simultaneously winding down. 

Iran used the occasion of being joined by Chinese and Russian warships in the Gulf of Oman and Indian Ocean to declare that US dominance in the Middle East is now over.

“Today, the era of American free action in the region is over,” naval commander Rear Admiral Hossein Khanzadi said. “They must leave the region gradually,” he added.

And now Iran has not only said the drills are set to continue annually upon their close on Sunday, but is inviting other countries to join.

Feeling emboldened by the official participation of the Chinese and Russian navies, Adm. Khanzadi further told semi-official Mehr news agency:

We are seeking to achieve collective security, and for that purpose, we are inviting regional countries to join us [in the drills].

From the start, Iranian officials have touted the joint naval drills as sending “a highly significant message” to the US and their allies, especially given the United States has struggled to attract key European allies to join its own ‘maritime naval mission’ in the gulf to thwart Iran. Instead, Europe has initiated its own mission which leaders have emphasized has nothing to do with the US project. 

Adm. Khanzadi continued, “There is no threat facing the Persian Gulf region except for the presence of foreign forces such as the US, which are endangering the security of this region.” He also said Iran is planning future such drills with regional allies in the Caspian Sea. The weekend’s joint exercises were the first of their kind, and were conducted across an area of 17,000 square kilometers to demonstrate “various tactical exercises”.

Setting off an Iraqi insurgency against U.S. forces just in time for an election year is not the dumb move I thought Trump would make, but that’s what seems to be happening

— Daniel Larison (@DanielLarison) December 30, 2019

The statements inviting other powers to join Russian and China for next year’s exercise come after Tehran charged Washington with committing acts of “terrorism” by its weekend airstrikes on sovereign Iraqi soil.

Russia too condemned the airstrikes as “unacceptable and counterproductive” in a foreign ministry statement on Monday.

Cartoon shared by Iran Navy’s Telegram channel amid joint naval drills with Russia and China which started today and will last until Monday pic.twitter.com/dBE9Q7JPX9

— Reza Khaasteh (@Khaaasteh) December 27, 2019

And Kataib Hezbollah — which lost at least 24 of its members with scores more wounded in the US airstrikes — urged all Iraqi paramilitary groups to work to expel American forces from Iraq.

“We have no choice but confrontation,” a Kataib Hezbollah statement said. “Trump should know that he will pay a heavy price in Iraq and the countries where his criminal forces are present.”

Authored by Odeon Capital’s Dick Bove

I have a very simple theory related to the growth in stock prices which has been discussed here before. As I see it:

• There are a number of shares in the equity markets; and

• A number of dollars available to buy those shares.

When dollar growth outpaces the growth in shares, the value of shares goes up. When share growth increases faster than the available dollars share values go down. Presently, the Federal Reserve is aggressively increasing the number of dollars available. The assets of the Federal Reserve are up approximately 10.3% in the past three months – an annualized rate exceeding 40%.

Consequently, M2 growth y-o-y which was growing at 3.2% in November 2018, is now growing at 7.6% y-o-y. The economy is not growing rapidly enough to absorb this growth and the competition from the money and bond markets, domestically and overseas, is not compelling.

I do not have accurate numbers for the number of shares outstanding but press reports suggest that there has been a slowing in the number of new offerings while share buyback programs remain relatively strong.

Money supply is expanding at above average rates and share growth is not. Consequently, share values are expanding — not likely to stop soon.

While the left remains stuck on the scapegoating and finger-pointing, scoring political points wherever they dare – no matter the cost to their credibility – one man has spoken out in finding a silver lining for the terrible events that occurred in a Texas church this weekend.

“We lost two great men today, but it could have been a lot worse. I’m thankful our government has allowed us the opportunity to protect ourselves,” exclaimed West Freeway Church of Christ Senior Minister Britt Farmer following the terrible shooting in his Texas church.

West Freeway Church of Christ Senior Minister Britt Farmer: “I’m thankful our government has allowed us the opportunity to protect ourselves” pic.twitter.com/5fLSnSjQzg

— Tom Elliott (@tomselliott) December 30, 2019

Texas Lt. Gov. Dan Patrick told reporters during a Sunday night press conference that the churchgoers were armed due to a law that took effect in September, making it legal for people to have guns in houses of worship. The Texas church gun law came about after another mass shooting in Sutherland Springs in 2017 was mercifully stopped by an armed neighbor.

Texas DPS Director Jeoff Williams took it a step further. As Daily Caller reports, Williams said that the congregants who charged the shooter had saved everyone else in that building.

“The citizens who were inside that church undoubtedly saved 242 other parishioners, and that might get swept aside,” he said.

“It was miraculous. The true heroes in all this are the people who were sitting in those pews today and responded, the immediate responders.. it was truly heroic.”

All of which is ironic since Democratic Presidential nominee candidate and former VP Joe Biden was outraged at the time at the decision…

“Dealing with firearms, it is irrational, with all due respect to the governor of Texas, irrational what they are doing. On the very day you see a mass shooting… and we’re talking about loosening access to have guns, to be able to take them into places of worship, it’s just absolutely irrational. It’s totally irrational.”

WATCH: Joe Biden attacked the Governor of Texas for allowing church-goers to carry weapons just a few months ago pic.twitter.com/fuZmfabo5a

— Jack Posobiec 🇺🇸 (@JackPosobiec) December 29, 2019

So, the question is – what would Biden have said if dozens of churchgoers were killed in Texas this weekend?