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The Fed’s Frankenstein

“Commentators keep asking why the Fed can’t raise rates if the economy is so strong? They still don’t realize that the economy was never strong. They confuse a bubble for strength. Without 0% rates and QE the bubble can’t survive. But a return to those policies kills the dollar” – Peter Schiff on Twitter

I made that same argument about the Fed funds rate, the dollar and why the Fed has to keep “nudging” the Fed funds rate higher in a podcast conversation with James Anderson at Silver Doctors last week.

Yesterday’s 1000-point spike up in the Dow may have been the largest one-day point gain in Dow, but it was far from the largest percentage point gain. The two largest percentage point gains occurred in October 2008: a 11.08% gain on October 13, 2008 and a 10.88% gain on October 28, 2008. Those two days took the Dow just above 9,000. A little more than four months later, the Dow closed at 6,626. Yesterday’s market action was nothing more than evidence that the Fed’s Frankenstein has gone off the chain…

Despite official prevention efforts, two-way price discovery has been introduced to the stock market. The Establishment, lazy, entitled and fattened-up on the 10-year stock bubble, has gone into convulsions over the possibility that the stock market will do anything but move higher. The Wall Street Journal published an article blaming the Christmas Eve stock market massacre on the algos. Even well-seasoned market veterans like Leon Cooperman were whining about the two-way price action and the role of HFT-driven hedge fund algorithm trading. Where were these cries of distress when the market was driven relentlessly higher by QE-armed algos over the last 10-years?

Some chart “experts” have labeled the market “extremely oversold.” But the stock market has been extremely overbought for the better part of the last 8 years. By what measure is the market “extremely oversold” in this context? Looking at a monthly chart of the SPX going back to 1999, the MACD was at it’s most extreme overbought by far at the beginning of 2018.

But the current sell-off has barely moved the needle on the monthly MACD. It’s nice to draw symmetrical geometric shapes and lines which are fit to charts ex post facto (i.e. Monday morning armchair QB). But the fundamentals beneath historically overvalued financial assets are cratering very rapidly.

The drop in stocks since early October has done little to correct the extreme condition of overvaluation – aka “the bubble.” Using real numbers to calculate preferred valuation ratios used by “analysts,” rather than manipulated Government GDP/inflation and phony GAAP numbers used by these “analysts,” the overvalued condition of the stock market the most extreme in history.

A coordinated Central Bank-engineered bounce is to be expected and certainly there’s extreme political pressure in the U.S. for this. But more intervention preventing true price discovery merely defers the inevitable rather than fixing the underlying systemic problems. Furthermore, as evidence of the market’s reaction on Monday after reports hit the tape that the Treasury Secretary (head of the Working Group Group on Financial Markets) was convening the CEO’s of the six biggest banks to discuss the market sell-off, official intervention serves only to signal to the markets that something is profoundly wrong with the system, contrary to official propaganda.

Wednesday’s 1000-point price-spike reflects a completely dysfunctional stock market. Just like the big moves in October 2008, it also foreshadows a much steeper sell-off coming. The story did not end well for Shelley’s Frankenstein. Neither will it end well for the Fed’s creature. It’s going to get a lot more painful for those who have been conditioned to believe that stocks only rise in price.

Stocks Have A Long Way To Fall

“Once the Treasury Secretary starts to pump the stock market, you know  there’s a problem” – James Anderson, Silver Doctors / SD Bullion

The Central Bank money printing and artificial suppression of interest rates over the last 10 years did a good job of deferring the financial and economic crisis that hit in 2008. But this “treatment” served only to cover up the problems. It did not directly address and fix the problems. In fact, the monetary and fiscal policies implemented globally stimulated a record level of debt and derivative issuance at a rate that far exceeded the nominal growth rate in GDP. The markets are telling us that the system has once again exceeded the limits in its ability to “support” the amount of liabilities accumulated over the last 10 years.

Silver Doctor’s James Anderson invited me onto his podcast to discuss the Fed, the stock market, the U.S. dollar, housing, Tesla/Elon Musk and, of course, gold. There’s a humorously edited video clip featuring Elon Musk at the end (it’s hilarious):

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

The Financial System Is Becoming Increasingly Unstable

Bloomberg posted an article this morning describing the Collateralized Loan Obligation market as “Wall Street’s Billionaire Machine.”  But I seem to recall that the CLO market was one of the financial nuclear bombs that blew up and triggered the financial system de facto collapse in 2008.  Well, it’s back – with a vengeance.  Of course the taxpayers were  once again sold a bill of goods never delivered when it was promised that the Dodd-Frank farce legislation would “protect” the system from the re-development of these financial weapons of mass destruction…

Bank stocks are in a bear market now and there’s a reason for that. Many of you have probably seen leveraged loan ETF charts that look like this:

The chart above shows an ETF operated by Blackstone that invests in senior secured leveraged loans. Typically these loans fund private equity leveraged buyouts. But any highly leveraged company with a junk bond credit rating is a Wall Street candidate for this type of loan.

What you’re seeing in the chart above is the beginning of an investor stampede out of this asset class. This asset flourishes in the type of money environment – Central Bank money printing and interest rate intervention – that has existed for the last 10 years. The loans carry a higher rate of interest than an investment grade corporate bank loan. This appeals to pensions and insurance companies, which need to find the highest risk-adjusted interest bearing investments possible. I like to call these: “c’mon in the water is fine” loans. These are the type of loans that get magically transformed in to CLO’s – like lead into gold – at least the for Wall Street scammers who do the transforming.

As I’ve mentioned previously, credit market investors tend to be more risk-averse than  equity players. They also scrutinize financial fundamentals more closely. To this end, bank debt investors are the most conservative. They also get to see the non-public financials of the companies to which they lend. That chart above reflects the onset of fear of in the leveraged bank debt market. It means that these investors likely have been seeing negative trends in corporate financials develop.

When I showed that chart to a colleague of mine earlier this week, his response was: “it looks like parts of the stressed financial system are breaking at the same time – dominoes are falling.” He was referencing the leveraged loan, investment grade and high yield debt markets. The latter two had been showing signs of breaking down well before the leveraged loan market started to crater. Investors have been pulling pulling billions out of all three segments of the credit market. The deteriorating financial condition of corporate America is spreading its wings. This is part of the reason the volatility in the stock market has ramped up recently.

Bank stocks are in a bear market and bank liquidity is drying up – There’s a massive liquidity crisis developing and the chart of SRLN reflects that. The sell-off in the housing stocks – down over 30% since the end of January foreshadowed this, just like the sell-off in homebuilders preceded the onset of the last financial crisis. This time it will be worse. This crisis is beyond the banking crisis 10 years ago. It’s everything. You do not want to be a creditor or own stocks going forward.

Looks like the Spanish philosopher, George Santayana, was correct:  We did not learn from the past and now we’re condemned to repeat it.

It’s Lose-Lose For The Fed And For Everyone

A friend asked me today what I thought Powell should do.  I said, “the system is screwed. It ultimately doesn’t matter what anyone does.   The money printing, credit creation and artificially low interest rates over the last 10 years has fueled the most egregious misallocation of capital in history of the universe.”

Eventually the Fed/Central Banks will print trillions more – 10x more than the last time around. If they don’t this thing collapses. It won’t matter if interest rates are zero or 10%. You can’t force economic activity if there’s no demand and you’ve devalued the currency by printing it until its worth next to nothing and people are toting around piles of cash in a wheelbarrow worth more than the mountain of $100 bills inside the wheelbarrow.

The price of oil is down another $3.50 today to $46.50. That reflects a global economy that is cratering, including and especially in the U.S. Most people will listen to the perma-bullish Wall Streeters, money managers and meat-with-mouths on bubblevision preach “hope.”

Anyone who can remove their retirement funds from their 401k or IRA and doesn’t is an idiot. Anyone thinking about selling their home but is waiting for the market to “climb out of this small valley in the market” will regret not selling now.

Forget Powell. What can you do? There is no asset that stands on equal footing with gold. You either own it or you do not.

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” – George Bernard Shaw

The Housing Market Is Sliding Down The Wall It Hit In Late August

A couple of my subscribers emailed me expressing frustration over the fact that their recent homebuilder puts are either not moving higher or losing value despite the sell-off in the overall stock market. There’s two factors. First, the homebuilder sector has dropped well over 30% since late January. To an extent there may be some seller’s fatigue. At some point there will be short term rally that could generate at 15-25% bounce in the sector. I believe that rally will occur from a lower level on the DJUSHB currently, but it’s always a risk if you are short.

The second factor is the abrupt move in the 10yr Treasury yield from 3.25% down to 2.85%. This move occurred in four weeks. This is a big move in that period of time. Hedge fund algos are programmed to buy homebuilders when interest rates drop on the premise that lower rates stimulate home sales. It’s really that simplistically knee-jerk. That’s why the Dow can fall 400 points and the homebuilders remain flat or even move higher (stocks fall and the money flows into Treasuries which drives yields lower and homebuilders higher). Since the stock market began dropping in late October, the DJUSHB has moved from 595 to as high as 683 intra-day on November 28th. I’m surprised it didn’t bounce over 700. The move from 595 to a high-close of 686 on November 29th. This is nearly a 15% bounce. The DJUSHB closed at 643 this past Friday, down 5.6% from the 686 close.

But lower rates in the current context are not going to be a benefit for home sales. The mini-crash in the 10yr yield, combined with the flat yield curve, reflects a weak economy growing weaker. Potential homebuyers, in conjunction with the tightening credit market discussed above, are going to find it hard to qualify for a mortgage. Many no longer have the ability to make even a 3% down payment. Two weeks ago on Friday, when the stock market began to tank, the DJUSHB was up as much 14 points from Friday’s close. The DJUSHB closed down 8 points (1.2%) for the day. This was with the 10yr yield closing at its lowest yield since August 31st. On that day, the DJUSHB closed at 768. With the DJUSHB at 661, it’s 14% below where it was trading the last time the 10yr hit 2.85%.

Reinforcing my assertions above about the financial condition of prospective middle class homebuyers, The U of Michigan released its December consumer sentiment index on Friday. While the overall index was flat vs November, the future expectations component (the “hope” index) fell to its lowest level since December 2017. However, the homebuying conditions index fell to its lowest in 10 years. Recall that the homebuilders sentiment index for November plunged.

The graph below shows what’s going with builders in terms of actual economics. The chart plots the ratio of homebuilding permits to completions. Permits can be a fluff number because a homebuilder does not have put up much money to file a building permit. But completions reflects both demand and a homebuilder’s willingness to build spec homes (homes without buyer orders). A falling ratio indicates falling demand from buyers, rising order cancellation rates and risk aversion from homebuilders.

Another indication of the air flowing out of the housing bubble is the bidding war indicator. A subscriber sent me an article from the Seattle Times on the stunning drop in multiple bids for the same home across the country in the previously hottest bubble areas. In February 2018 in Seattle, for instance, 81.4% of listed homes had multiple bids. By November that number plunged to 21.5%, the lowest percentage of multiple bids on homes for sale in the history of the metric (Redfin began tracking this data in 2011). Other cities that made the top-10 list by Redfin include Boston, L.A., San Diego, Washington DC, Denver, Portland, Austin – all included in any list of the hottest bubble markets over the last 5 years.

The bottom line: We may have just seen the first real bear market counter-trend rally in the builders when the DJUSHB jumped 15% over three months. If the 10yr continues to drift lower, we might see one more push higher.

The above commentary is an excerpt from a recent Short Seller’s Journal.  The latest issue has a short idea related to new housing starts that has at least 50% downside.  To learn more about this newsletter, click here:   Short Seller’s Journal information

Trump’s Dilemma And Refuting The Gold/Yuan Peg Theory

The following is an excerpt from my December 6th issue of the Mining Stock Journal:

Trumps Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down starting in 2017 to stimulate exports and attempt to cut the trade deficit.  The dollar  fell from 97 to 88.  Gold ran from  $1125 to as high as $1360 – a key technical breakout level – by late April 2018.  Something had to be done to keep gold from moving higher…Trump started his Trade War in March, which  pushed the dollar higher.  Gold began tank.   Ironically, the trade deficit one again began to balloon.

If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared to do. This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.

I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold.

The other problem with pushing the dollar lower to stimulate exports – or at least attempt to stimulate exports – is the funding of Treasury debt. If foreign investors, who fund a large percentage of Treasury issuance, expect the dollar to decline it will significantly reduce the foreign funds that finance Trump’s spending deficit. That deficit – on-budget + off-budget – will likely end up somewhere between $1.5 – $2 trillion this year…

Refuting the yuan/gold peg theory – When the theory about the Chinese pegging gold to the yuan based on the chart correlation was floated, how come nobody bothered to check the other major currencies vs. the dollar and vs. gold? The dollar has traded higher as if on steroids since late-April. Gold was trading at $1360 in late April. Between now and then it has traded as low as $1170. The yuan began falling vs. dollar in late April. But so did the Swiss franc and yen. The euro began falling vs. the dollar in February.

The charts of the Swissy, euro and yen vs the yuan over the last 12 months are all largely flat over that time period. More to the point, the chart of gold vs all four of those currencies (yuan, Swissy, euro and yen) over the last 12 months looks very similar:

As the chart above shows, the price of gold in all four currencies – yen, yuan, euro, Swissy – has been correlated. The argument could be made that gold is “pegged” to any four of those currencies. The yen, euro, Swissy make up a large portion of the dollar index. Gold is thus not pegged to the yuan so much as it is trading inversely to the dollar,  which is expected.

The Trade War Is Not The Problem With The Global Economy

I chuckle when the hedge fund algos grab onto “positive” trade war headlines and trigger a sharp spike in stock futures.  Settlement of the trade war between the Trump Government and China will do nothing to prevent a global economic recession – a recession which will likely deteriorate into a painful depression.  The Central Bank “QE” maneuver was successful in camouflaging and deferring the symptoms of economic collapse.  Ironically, treatment of the symptoms made everyone feel better for a while but the money printing ultimately served only to exacerbate the underlying financial, fiscal, economic and social problems that blossomed after the internet/tech bubble popped.

Trade war “hope” headlines coughed up by Larry Kudlow last Friday morning were designed to offset the disappointing job report and sent the Dow up 156 points in the first 12 minutes of trading. But alas, the gravity of deteriorating systemic fundamentals took over and the Dow ended up down 558 points:

All three major indices closed below their key moving averages (21, 50, 200 dma). I wanted to show the chart of the Nasdaq because, as you can see, the 50 dma (yellow line) crossed below the 200 dma (red line) last week. This started to occur for the SPX on Thursday. The Dow’s 50 dma remains above its 200 dma, but that will likely change over the next few weeks.

The point here is that investors, at least large sophisticated investors, continue to use rallies to unload positions. The stock market has a long a way to fall before the huge disparity between valuations and fundamentals re-converges. This reality will not be altered even if Trump and China manage to reach some type of trade agreement. Nothing but a painful “reset” can correct the massive overload of fiat currency and debt that has flooded the global financial system over the last ten years.

I also believe that a massive credit market liquidity problem is slowly engulfing the system. This is a contributing factor in the yield curve inversion, which moved from the 3yr/5yr interval to the 2yr/5yr interval last week, thereby reflecting the market’s growing awareness of the percolating systemic problems. In 2008 the liquidity problem began with widespread sub-prime bond defaults and was compounded by derivatives connected to the sub-prime credit structures. This time, it appears as if the credit market problem is starting in the investment grade bond and leveraged bank/senior loan markets.

It was reported last week that $4 billion was removed from leveraged loan funds over the last three weeks. Although the loans are leveraged, these are typically senior secured “bank debt equivalent” loans. Money is leaving this segment of the loan market because of a growing perception that the leveraged senior loan market is becoming risky. Loan and bond investors are more risk-averse than stock investors. They thus tend to be more vigilant on the ability of debt borrowers to make loan payments.

Currently there’s a record high amount of triple-B rated corporate debt outstanding. This amount outstanding is higher than any other rating category. At some point, as the economy continues to weaken, a large percentage of this triple-B rated will be downgraded. Assuming cash continues to flee the loan market, and as a lot of low investment grade paper is moved into junk-rated territory, it will exert huge pressure on bond yields. It will also make it much harder for marginal credits to raise capital to stay alive.

General Electric losing access to the commercial paper market is an example of the market cutting off a source of liquidity to companies that need it. It’s also a great example of a company with a large amount of outstanding debt that is headed toward the junk bond pile (GE is one notch away from a junk rating – at one time it was a triple-A rated company). Ford is headed in the same direction – the stock of both companies trades below $10. If this is happening to a companies like GE and Ford, it will soon happen to smaller companies en masse.

The commentary above is an excerpt from the latest issue of the Short  Seller’s Journal.  Also included is an updated analysis on Tesla and why I am increasing my short exposure in the stock plus follow-up on my Vail Resorts (MTN) short presented a week earlier. You can learn more about this newsletter here:  Short Seller’s Journal information.

 

The Friday Avalanche In Vail Resorts Stock

I recommended shorting MTN to my Short Seller’s Journal subscribers in my December 2nd issue.  While I expect MTN to lose at least $200 over time, I did not expect nearly 25% of that price-decline expectation to occur in 5 trading days after I presented the idea.

After I sent out my newsletter last Sunday, a subscriber sent me a link to a Motley Fool article titled, “Why You’re Smart To Buy Vail Resorts Now.” I had to laugh. I certainly hope that report didn’t deter any of my subscribers from shorting MTN or buying puts. I booked a 4-bagger on the puts I bought last Friday. I had several subscribers email me with thanks, most reporting gains anywhere from 2x to 5x (I always advise that shorting shares gives you the best probability of success shorting but I use put options and present put option ideas with every short idea). Here’s an excerpt from this idea presentation last week:

Shorting MTN was an idea I had been thinking about for a few months. About two weeks ago I heard a radio ad from a Denver-based, national mortgage firm (American Financing) which pitched the idea of using a home equity loan to raise money for a down payment to purchase a ski resort condominium or house. At that instant I knew the top was in for both the mortgage underwriting business and mountain real estate. Shorting Vail Resorts is pretty much the only avenue for expressing a bearish view on mountain resort real estate.

The insiders at MTN must agree with my view. Over the last three months there have been 23 open market stock sale transactions and zero purchases. Over the last 12 months, there have been 38 open market stock sales and 1 purchase. The purchase was for just 225 shares in December 2017.

With the help of Fed money printing and highly accommodative bank commercial real estate lending policies, MTN went on a large resort acquisition spree. The highly accommodative Government mortgage programs helped MTN capitalize on 2nd home resort home sales. The stock ran from $16 in early 2009 to an all-time high of $301 on September 4, 2018.

The stock trades at a 30 p/e, which is absurd for a business with a top line that grew just 5% year over year for its fiscal year 2018, which ended at the end of September. As the falling economy begins to take a wrecking-ball to the resort industry, Vail Resorts revenues will tank and the Company will begin to take big asset write-downs (real estate and building values). This will send the stock mercilessly lower.

Having studied, researched and traded the real estate industry for the better part of 25 years, including trading this sector as a junk bond trader on Wall Street in the 1990’s, I know that mountain resort real estate has a beta of at least 2 vs metropolitan real estate.

When the sector goes bad, mountain properties go bad times at least 2. Vail Resorts is not immune to this just because Vail and Beaver Creek cater to the wealthier demographic. Many of MTN’s resorts host the middle class. This is the middle class that uses home equity loans to buy vacation properties. We saw the downside effect of mountain resort real estate leverage on Friday when MTN lost $48 – or 17.8% of its value – on one day on one earnngs “miss.”

I have not had a chance to dig elbow-deep into MTN’s earnings report yet.  But by the time I release this Sunday’s next issue to my  subscribers, I’ll have a good a idea about what happened and why last quarter and where my next bet will placed based on what will likely happen over the next 12 months with Vail Resorts’ fundamentals and stock price.  That said, I have mentioned to colleagues that I expect, based on a rapidly deteriorating economy, that this coming ski season – though likely a banner year for snow quality – will fall well short of analyst expectations in terms of skier visits and money spent.

You can learn more about my stock shorting newsletter here:  Short Seller’s Journal.

Trump’s Trade War Dilemma And Gold

If the “risk on/risk off” stock market meme was absurd, its derivative – the “trade war on/trade war off” meme – is idiotic.  Over the last several weeks, the stock market has gyrated around media sound bytes, typically dropped by Trump,  Larry Kudlow or China,  which are suggestive of the degree to which Trump and China are willing to negotiate a trade war settlement.

Please do not make the mistake of believing that the fate the of the stock market hinges on whether or not Trump and China reach some type of trade deal.  The “trade war” is a “symptom” of an insanely overvalued stock market resting on a foundation of collapsing economic and financial fundamentals.  The trade war is the stock market’s “assassination of Archduke Franz Ferdinand.”

Trump’s Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down the dollar from 97 to 88 to stimulate exports. After Trump was elected, gold was pushed down to $1160. It then ran to as high as $1360 – a key technical breakout level – by late April. In the meantime, since Trump’s trade war began, the U.S. trade deficit has soared to a record level.

If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared accept – especially considering the massive paper derivative short position in gold held by the large bullion banks.  This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.

I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold. Ultimately, the U.S. debt problem will unavoidably pull the plug on the dollar.  Ray Dalio believes it’s a “within 2 years” issue. I believe it’s a “within 12 months” issue.

Irrespective of the trade war, the dollar index level, interest rates and the price of gold,  the stock market is headed much lower.   This is because, notwithstanding the incessant propaganda which purports a “booming economy,” the economy is starting to collapse. The housing stocks foreshadow this, just like they did in 2005-2006:

The symmetry in the homebuilder stocks between mid-2005 to mid-2006 and now is stunning as is the symmetry in the nature of the underlying systemic economic and financial problems percolating – only this time it’s worse…

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The commentary above is a “derivative” of the type of analysis that precedes the presentation of investment and trade ideas in the Mining Stock and Short Seller’s Journals. To find out more about these newsletters, follow these links:  Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

The Trade War Shuffle And The Fukushima Stock Market

The market is already fading quickly  from the turbo-boost it was given by the announcement that China and Trump reached a “truce” on Trump’s Trade War – whatever “truce” means.   Last week the stock market opened red or deeply red on several days, only to be saved by a combination of the repetitious good cop/bad bad cop routine between Trump and Kudlow with regard to the potential for a trade war settlement with China and what has been dubbed the introduction of the “Powell Put,” in reference to the speech on monetary policy given by Fed Chair, Jerome Powell, at the Economic Club of New York on Wednesday.

It’s become obvious to many that Trump predicates the “success” of his Presidency on the fate of the stock market. This despite the fact that he referred to the stock market as a “big fat ugly bubble” when he was campaigning.  The Dow was at 17,000 then. If it was a big fat ugly bubble back then, what is it now with the Dow at 25,700? If you ask me, it’s the stock market equivalent of Fukushima just before the nuclear facility’s melt-down.

Last week and today are a continuation of a violent short-squeeze, short-covering move as well as momentum chasing and a temporary infusion of optimism. I believe the market misinterpreted Powell’s speech. While he said the Fed would raise rates to “just below a neutral rate level,” he never specified the actual level of Fed Funds that the Fed would consider to be neutral (neither inflationary or too tight).

I believe the trade negotiations with China have an ice cube’s chance in hell of succeeding. The ability to artificially stimulate economic activity with a flood of debt has lost traction. The global economy, including and especially the U.S. economy (note: the DJ Home Construction index quickly went red after an opening gap up), is contracting. Trump and China will never reach an agreement on how to share the shrinking global economic pie.

While Trump might be able to temporarily bounce the stock market with misguided tweets reflecting trade war optimism, even he can’t successfully fight the Laws of Economics. His other war, the war on the Fed, will be his Waterloo. The Fed has no choice but to continue feigning a serious rate-hike policy. Otherwise the dollar will fall quickly and foreigners will balk at buying new Treasury issuance.

For now, Trump seems to think he can cut taxes and hike Government spending without limitation. But wait and see what happens to the long-end of the Treasury curve as it tries to absorb the next trillion in new Treasury issuance if the dollar falls off a cliff.  Currently, the U.S. Treasury is on a trajectory to issue somewhere between $1.7 trillion and $2 trillion in new bonds this year.

Despite the big move higher in the major stock indices, the underlying technicals of the stock market further deteriorated. For instance, every day last week many more stocks hit new 52-week lows than hit new 52-week highs on the NYSE. As an example, on Wednesday when the Dow jumped 618 points, there were 15 news 52-week lows vs just 1 new 52-week high. The Smart Money Flow index continues to head south, quickly.

For now it looks like the Dow is going to do another “turtle head” above its 50 dma (see the chart above) like the one in early November. The Dow was up as much as 442 points right after the open today, as amateur traders pumped up on the adrenaline of false hopes couldn’t buy stocks fast enough. As I write this, the Dow is up just 140 points. I suspect the smart money will once again come in the last hour and unload more shares onto poor day-traders doing their best impression of Oliver Twist groveling for porridge.