Ain’t no mountain high enough!

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The market continues to hold strong as we wait for the monthly labor report tomorrow. I suspect that the string of economic data heading into the mid-term elections will be better than expected and reflect a strong recovery, despite the reality on the ground.

Ain’t no mountain high enough!

Marvin Gaye – Courtesy of wikipedia

Ain’t no mountain high enough, if it is built on inflated paper? The ECB (European Central Bank) announced their own version of QE this morning and jumped in with both feet. In a surprise announcement early this morning on the East Coast, the ECB would cut rates to .05 percent. This was soon followed by the ECB President Draghi’s announcement of launching their own bond buying program.

Currency War

The currency war in the West is now fully underway as all three major Western powers try to one up each other by devaluing their currency. Japan (BOJ) led the way via Abenomics and is firing full broadsides since late 2012 that has sent the Yen plummeting against the dollar and euro. The U.S. launched its own massive QE3 program in 2013 which halted the drop against the yen and also plunged the dollar against the euro. If Europe was going to play in the Western sandbox and follow the Keynesian model, their only choice was to follow suite. This is really not a surprise for those that understand the game, it was just a matter of time.

Courtesy of wikipedia

Do you really think the U.S. Fed will raise rates now as it is taking broadsides from Pacific and the Atlantic, dead center between trading partners, and risk a rise in the dollar that would trickle over to a larger trade gap? Of course if it was me running the show, I would end QE and start raising rates yesterday and strengthen the dollar and increase buying power. Of course that would be serving the savers, consumers, and the citizens of this nation and we can’t have that. Sarcasm aside, the Fed is ruled by the Keynesian mindset in a battle of likeminded western central bankers. We can only expect low interest rates for years to come and more accommodation.

Europe’s Problems, look in the mirror!

The problems in Europe are structural, not because of the ECB and monetary policy, but from fiscal policies of Keynesian and Socialism. Over 50% of France’s GDP comes from socialism, nations are bankrupt from massive deficit spending to support huge socialism. For decades Greece’s majority of employees worked for the government, with early retirement, huge pensions, and shorter work weeks. The rise of Socialism in France elected its first fully open Socialist President; who raised taxes, expanded social programs, lowered the retirement age, shorten the work week, and added a plethora of social benefits. Who is not going to vote for more free stuff, retire early, and get more government money? Portugal, Italy, Greece, and Spain, effectively known as the PIGS have bankrupted their nation on huge socialism policies that has created mountains of debt and when they can’t pay, they blame others and then asks for bailouts, which the ECB has provided, unfortunately.

Courtesy of wikipedia

It’s time we look in the mirror, as we are certainly not the fairest of them all. The ECB has only become an enabler, because these nations have NOT addressed their fiscal issues that have caused these problems, the U.S. and Japan are in the exact same boat. Government do nothing and only want to pass populist socialist policies to give out more free stuff to maintain their power over the people. Fiscal responsibility is a sure fire way of NOT getting re-elected. One only has to look at the rising star of Elizabeth Warren (Senator – D) in the U.S. that has gone full-tilt on Socialism and coined the term “You didn’t build that!” which Obama made famous or infamous (depending on who you ask).

This morning on CNBC, even Steve Rattner (Keynesian Economist) admitted that the huge socialist deficits in France and the PIGS are to blame for their economic woes. Yet, he doesn’t see that as a problem in our own nation. I guess it is blind arrogance, because it is easier to point out others faults than to realize your own. Are we not all (Japan, U.S., Europe) doing the same thing and ignoring fiscal responsibilities, running massive deficits, and huge QE programs? How is Europe a problem and we are not?

Dollar Rallies, Oh No!

The dollar index (DX) spiked on the news, as expected. Ironically that has helped keep a lid on gold and silver prices, for now anyway. One should see that as an opportunity, because we know the higher the dollar goes the more it will create concern about the trade deficit and deflation (a bad word among Keynesians). What do you think would happen in the midst of this currency war in the West, if the Fed decided to raise rates? I can tell you the results would be Yellen’s worse nightmare.

As the captain of the Fed ship, she can’t ignore the broadsides she is receiving from both sides. She is going to load all guns and start blasting back. A rising dollar and deflation pressure goes against everything she has been trying to accomplish.

There is no rate hikes coming, in fact we could be on course for a rate cut to full zero or even negative. She could launch another Operation Twist (buying long-term bonds) to flatten the curve. She could continue or expand existing QE3 program or launch into a new version with a new name, as a better marketing pitch to refresh the window dressing on the years long stale program known as QE.

Fed needs MORE POWER!

Ultimately she will need the power to tax and legislate fiscal policies, if she really wishes to impact employment (part of her dual mandate). I keep going back to some of her previous papers and speeches, mainly the one of suggesting government subsidies to business to hire people and raise wages. She currently has no power to do anything, but it is an idea that Elizabeth Warren would embrace and we could see a power shift to the Fed in future.

Yellen is smart, articulate, with irrefutable credentials. Congress is full of politicians who like to battle on ideology and social issues; for the most part they do not criticize the Fed. Frankly Republicans and Democrats are both Keynesians and with a “do nothing” Congress, perhaps they would love to pass on some of their responsibilities to the Fed so they can get back to what they love, fighting over social issues like Gay Marriage, Abortion, Prayer in School, and the Border. They have no love, knowledge, or even cursory understanding of economics or business. Most of them can’t even do basic math, one actually thinks Guam would tip-over if too many people were on the island, and another thought 400 million people will lose their jobs if we don’t pass this bill (note there is not even 350 million people in this country). So, no, Congress is not apt at economics, math, and sometimes even reason. They would happily give more power over to the Fed and it would be Warren that could lead that charge all the way into the White House.

Courtesy of wikipedia

I see our nation in a pivotal time in which we could have a shift of power from government to the Fed, combined with a rise of Socialism. The same thing happened in 1932 when FDR got elected. The Fed has already launched into a program of unprecedented magnitude; printing trillions of dollars, funding government deficit spending, buying mortgages, lending money against junk collateral, and huge swaps with failing nations abroad. All while our trusted elected officials do nothing, expect spend more money and placate populism. The U.S. is no different than Europe in this regard and it is too bad the likes of Steve Rattner fail to look in the mirror.

Market Reaction?

The market should rally off the ECB QE rate cut news. We should see the dollar increase and that could depress commodity prices, including dollar priced gold, silver and oil.
This is VERY important – do NOT confuse the drop in commodity prices with a Supply & Demand issue, it is not. The reason that commodities have declined is because they are priced in U.S. dollars and the dollar is going up as Japan and now the ECB launch into their own massive devaluation game. The Fed will respond, but probably not until AFTER the mid-term election.

BRICS watch and wait…

The broader currency war is between the BRICS and the West. For now the BRICS are letting the West battle each other to devalue against each other in some Keynesian death spiral as the BRICS continue to gobble up commodities at lower prices (trade weighted in devalued western currencies). In fact the West is doing the BRICS bidding, unfortunately the West is so myopically focused on their Keynesian game they can’t see the big picture and it will be the West’s demise and they will (as per usual) be late to respond.

History is the greatest forecaster, because it repeats itself over-and-over. Too bad that History, along with math, science, and even current events are low on American educational priorities. I guess ignorance is bliss and blind faith in government knows best will rue the day. The answer ringing in my ears; “It’s football season, who cares!” seems to be our sad reality.

By the way, Go Fins!

Courtesy of wikipedia

Support & Resistance

INDU 17,000+
We are holding up well and will most likely hold above this level into tomorrow Labor Report. ECB has given the US markets another reason to rally, for now.

NDX 4000+
Tech sector continues to be the biggest volatile sector, despite the recent rise. Apple’s big technology release will most likely send an upward jolt into this index.

SPX 2000
A consolidation zone that could easily turn into a support area with today’s ECB QE announcement and certainly if we get a good Labor Report (not too hot and not too cold). The VIX should head back down into the mid-11 range. It could head lower if we get a decent Labor Report that helps boosts the market higher.

RUT 1170+
The broad based index is still lagging behind the other indices and volume remains lite. We could get a strong rally on the Labor Report, but I suspect we will see resistance on any rally up at the 1200 level. Look at 1170 as short-term support for now.

Porridge just right!

The ADP report (private payrolls) shows 204,000 jobs created in August, which came in slightly below the 220,000 estimated. The headline number will still show a 200,000+ number, which will boost confidence. However it is NOT strong enough for the Fed to justify raising rates or ending accommodative policy.

We need to see similar results in the Labor Report tomorrow, to boost confidence but not too hot to bring forth concern that the Fed would raise rates and end accommodation. Especially in light of the ECB’s QE salvo.

A hot number would certainly be great for Obama heading into the mid-terms, but too hot would put the brakes on the equity market as foolish fear about the end of the Fed’s uber-accommodative policy would end soon.

It needs to come in just right, not too hot and not too cold.

One Response to “Ain’t no mountain high enough!”

  1. McRocket says:

    Great preview, IMO…one of the best that I recall reading.