It’s a mad world, plus gold, silver and equity markets.
Diary-Week 12-It’s A Mad World-Tom Fitzpatrick
By Tom Fitzpatrick
May 9 (King World News) – “I find it hard to tell you, I find it hard to take. When people run in circles it’s a very very Mad World, Mad World” (Tears For Fears Classic from 1982- The Era of Ronald, not Donald)
It is Saturday the 9th of May and we have just had a polar vortex deliver some of the coldest weather on the planet compared to the average. Several locations also registered their lowest May temperatures ever recorded and coldest weather this late in the season. Lows dipped into the 20s in 20 states (That is Fahrenheit, people) Like we didn’t already realize that the real World has become even crazier than financial Markets.
The Financial markets had their “crazy moment” too as we saw them price in the possibility of the Fed moving to negative rates by December 2020.
As I have said many times I do not think the Fed will go to negative rates (I actually think negative rates will go in the dustbin of history as one of the most misguided policy tools EVER-albeit as I said last week that view and $4 will barely buy you a cappuccino in NYC.
What I believe does not matter.
Both Ex Fed chairs Bernanke and Yellen have talked about negative rates not being off the table. That does not matter either. Ken Rogoff has talked of deeply negative rates. That does not matter either. Chair Powell has said “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” In addition he has quickly scheduled to speak on the economy on May 13th at 9.00 am EST after last week’s events. And in a way that doesn’t matter either.
On the day yes, with most expectations are that he will push back on the idea of the Fed going to negative rates. But what World are we living in people? There has been little correlation to what the Fed says it will do or not do and what actually happens in financial crises. In 12 days in March the Fed took the whole interest rate structure to ZERO and followed it up with numerous other unprecedented monetary policy measures. He will not come out and say categorically that the Fed will never go to negative rates. He will not completely close that door because in the middle of a crisis you do not close any doors. He will likely re-iterate another version of his March comments above.
Here’s the problem. The Fed will react to the environment we are in, as we saw with the aggressive reaction in March .There will likely be no absolute denial that negative rates cannot take place. From a psychological point of view (and that is ALL that matters in a crisis) that means that ZERO bound in the mind of the market is not a “Line in the (quick) sand. It is not a “Maginot Line” (Although that line did not work out to well either). This is hugely important in my view. (Remember the one that doesn’t matterJ)
IF ZERO is not believed to be a “Red line” then the whole relativity to the other parts of the curve changes. It is no longer 0 to 40 basis points on 5’s or 0 to 70 basis points on 10’s or 0 to 140 basis points on 30’s. That first number suddenly has no floor if you do not believe in ZERO and at that point the positive yield on other parts of the curve backed by the full faith and credit of the US Government looks very different and much more attractive when you look at alternatives around the World.
I continue to think that we are being incredibly naïve about the speed and magnitude of the economic recovery and also the economic destruction that is taking place before our eyes.
In my view that reality combined with market “perception” about the ZERO bound barrier may be enough to start the “Race to ZERO” throughout the curve that our long term charts have suggested for some time.
Equity markets had a good week for the first time in 3 weeks (They broadly closed down the last 2 weeks in a row)
While overall the Equity market continues to show resilience it does so with:
* Falling momentum
* Price action that still resonates with 2008 (DJ Tran Index) and 1929 (DJIA)
So, even if the train is moving more slowly than it was you will are still get killed standing in front of a slow-moving train. In Feb 2020 at the all-time highs the signals of trouble began to grow and gave us a roadmap for the turn. You cannot pre-empt that at this point and the market looks like it will try to possibly make a marginal new high. If it did and then stalled we could end up with the same triple momentum divergence picture seen at the all-time high in Feb.
If we look at the momentum dynamics of ES1 what we see is:
* A surge into the 2,885 high posted on 17th April.
* A fall of 168 points; a rally of 248 points; a fall of 194 points and a rally of 162 points. That is a cumulative round trip of 766 points over 15 trading days , with waning momentum and a net change on Friday’s close from the impulsive high of 17th April of just 43 points
A weekly close on ES1 above the strong 2,965-3,030 range would nonetheless have to be respected in showing a picture that looks much more constructive.
As noted in last week’s Diary note we still see the potential for the front contract in WTI to “eke out” a $30 + handle.
The Gold Picture
The Gold picture became more balanced in the last week
* Often a move that heads “too far too fast” can correct in 2 ways.
* A correction sharply lower in price- Which into early last week looked the greater danger.
* A correction by way of time. i.e. continued consolidation before higher again. At the end of last week the picture started to look increasingly like the latter.
Silver Breaks Higher
* Signs of a break higher in Silver already started to materialize that I think is even more relevant after last week’s interest rate story.
On G10 FX last week I said there looked to be a danger of a USD bounce.
* That did in fact materialize but could, I suspect, be subject to another near tern correction as momentum wanes and the interest rate picture comes to the fore again.
So for this week it looks like interest rate markets will be back to center stage with the battle of supply, inflation, balance sheet growth, economic recovery continues to go up against the view of economic destruction, disinflation, structurally high unemployment for some time and too much market complacency optimism (My view).
That’s what makes a market.
Have a good week. Be well, stay safe.
***To listen to James Turk discuss the global collapse, what investors should be doing right now and where the major markets are headed click here or on the image below.
James Turk On The Financial Collapse
***Also Released: James Turk On How We Get To The Other Side Of This Financial Collapse CLICK HERE.
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