Out of the Box: Stop, Look and Think
Several times a year the professional money manager, and the individual investor, should take the time to “Stop, Look, and Think.” In the rush of news, decisions, and the search for understanding, of the markets, this is an “absolute must” task. Stop means dead stop and to plant your feet firmly on the ground of common sense and rational thinking. Then you must look around and assess what is going on around you and what is, and can affect the markets and your decisions. Think means questioning your underlying assumptions, to see if they are still valid and then utilizing your little grey cells, to try and determine where we are going.
“Never trust to general impressions, my boy, but concentrate yourself upon details.”
America’s “Games of Thrones”
The United States is currently locked, and loaded, on three separate battlefields. The first being with China, where it appears that President Trump is making some progress. The markets, lately, have been almost solely concentrated on this field of endeavor and, each day, they have marched forward, or retreated, with the news pouring out from this interaction.
President Trump recently said, “We’ve come to a very substantial phase one deal.” He also stated that it will take three to five weeks to get written. The deal includes intellectual property, financial services and $40-$50 billion related to agriculture products. The U.S. will not be raising tariffs on the Chinese, next week, to the 30% level, as threatened, as part of this agreement. The markets acted as expected, as the news filtered out, with equities up, and bond prices down, as “risk-on” flooded back into the markets. Frankly, it is in both countries’ interests to get a deal done and so I am still of the opinion that something will get done, eventually.
Our second combat zone is with the European Union. No one talks about this much because the EU, and the ECB, diverts our attention whenever possible, “Nothing to see here, move on.” Please be clear, whatever the garbage tossed about in the Press, the ECB has absolutely no independence from the nations that control it. Therefore, what we know is that the ECB has been mandated to produce “Pixie Dust” money, and then utilize it to buy their nations’ sovereign debt and EU corporate debt, denominated in Euros, so as to lower borrowing costs to nothing, and in many cases, less than nothing, so that these countries can pay for their budgets and social programs. I can say, with absolute certainty, that the bond markets in the EU, have been rigged, and that it is all at the direction of the countries in the European Union.
Greece just sold $537 million of short bonds, with a yield of minus 0.02%, on Wednesday. Earlier this week, it sold 10-year bonds at a yield of just 1.5% which was a lower yield than comparable U.S. Treasuries. In 2012, yields on 10 year Greek bonds hovered around 24%. Fundamentally, this is just “Nuts.” Yes, I know the reason for it, which is the manipulation of the ECB.
The issue for the United States is the collateral damage, from all of the manipulating moves of the European Central Bank, as it affects our debt markets and our currency. The EU cannot afford to raise taxes, or sell-off assets, and so the ECB has made money from nothing, but thin air but, in doing so, has caused rancor for America. Consequently, the Fed, as America’s central bank, must stand up to these maneuvers and lower our interest rates as well to counterbalance the moves of the ECB. They will never admit to doing this, of course, but that is what must be done, in my opinion.
Our third “Game of Thrones” drama, is America’s own internal struggle. Impeachment is at the forefront of almost all of the headlines and the battle is bitter and nasty. My expectation is that the “Articles of Impeachment” will ultimately be passed by the House and then the real battle will begin. The trial will start in the Senate and the Democrats will no longer be in control. During the trial I expect all sorts of nasty surprises and I believe that some, or many, will move the equity markets to the downside. Consequently, I urge caution if, and when, we head into this part of the process. My take here is that President Trump will not get impeached but that all kinds of damaging evidence will get rolled out on the Senate floor. “Polinomics,” my invented word, will be front and center, as politics overtakes economic data to move the markets, as this gets underway.
I have been saying for months now, that the Fed should begin buying Treasury Bills. I have even told them that directly. The reason that I have given is that the Yield Curve has been misaligned by the lack of their presence which has caused all kinds of calls for some sort of a Recession, based upon an inverted curve. The Yield Curve was only inverted, I have pointed out many times, by the lack of the Fed’s involvement, which has now been cured.
The Federal Reserve, in a surprise announcement, on Friday, said that it will start to expand its balance sheet finally, next week, by purchasing U.S. Treasury Bills. The FOMC voted unanimously to begin to purchase Treasury bills at an initial pace of about $60 billion per month, starting Tuesday. The purchases will last at least into the second quarter of next year, they said. The Fed stated the Treasury Bill purchases will keep the level of reserve balances held at the Fed “at or above the level that prevailed in early September.” The Fed statement further said that the actions “are purely technical measures” and “do not represent a change in the stance of monetary policy.” The Fed also stated that this was not a new round of Quantitative Easing.
Yeah, well, er, ah, um, ahem, and don’t tell a soul but this is a new round of Quantitative Easing, no matter the claim. This will also increase their balance sheet significantly and while the Fed may point to shoring up the Repo market, as the cause, I think they are only admitting to part of the story. The Fed is now doing the right thing, in my view, even if they don’t admit to all of the causes for their new intervention.
All in All
Caution is advised. Grant’s Rules, 1-10, are always in force, but they are ringing louder these days. We are staring down the barrels of a number of muskets that are lined up and may fire. I am not calling for a wholesale retreat, but I am calling for hunkering down, as many significant events could play out, and perhaps some alarmingly, in the coming days.
“We balance probabilities and choose the most likely. It is the scientific use of the imagination.”
-The esteemed Mr. Holmes
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc. and
B. Riley Wealth Management
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