Market Sell-Off?

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As expected the market is coming under pressure after the New Year. The problems stem from the underlying weak economy, both domestic and abroad. The economy has never been as strong as some of the headline data would suggest, because of the Federal Reserve interventionist policies have artificially boosted the data. It was always the intention for the Fed to buy us time, but the fundamental problem is that when you “buy time” in hopes of the private sector gaining enough strength to carry the water on its own, the private sector can become addicted to stimulus and “easy” monetary policies.

Market Sell-off?

Fed buys time

The 2nd in command of the Fed, the Co-Chair Fisher, has said we have front loaded a 3-year bull market from the Fed’s accommodative policies (and it is over). Is he right? I seem to think so, we have driven money out of the fixed income (bonds) for years, which pay next to nothing and driven money into the equity markets. While that was not the sole intention of the Fed, which was to spur borrowing by keeping rates low. Undoubtedly, a fundamental expectation when you set rates at zero and increase the money supply, asset inflation occurs.

The larger concern is that we have an invisible dam of inflation that has been building. In my previous post I mentioned the concern with the ramping of the money supply and the decline of the velocity. Think about it this way, there are trillions behind a massive dam and at some point the dam will over flow or worse break.

Courtesy of FRED

Courtesy of FRED

Can’t help but wonder looking at the above two graphs with the trillions injected to stimulate the economy and now over 100% debt to GDP, how much is Fed intervention vs. the real economy. No doubt Fed QE has juiced us out of recession. Yet, QE1, QE2, QE3, Operation Twist, TARP, TALF, Discount Window, and a plethora of programs to kept GDP aloft (albeit volatile), has been at the expense of trillions – which looks like a bubble of epic proportions. Also don’t forget the government fundamentally changed the way we calculate GDP and added 100s of billions of non-tangible assets.

Potential Recession?

There has been talk of a potential recession again in the U.S., perhaps only a mild recession. One of the key indicators has been U.S. trucking tonnage which has been down 3 of the last 4 months and 6 out of the last 11 months. That last time it saw a significant fall off was in 2008 – 2009. Holiday sales were also mixed and with stagnant wage growth and a low employment participation rate, it doesn’t bode well for strong growth. While the potential recession is not showing significant alarming indications that would be significant, the underlying data remains weak. I think we could hope for stagnant economic growth at best. That is not to say that several market sectors may certainly over perform, but to generally bet on the market as a whole may see more volatility than the typical long investor can stomach.

Currency War

The currency war continues to wage in the background without garnering the headlines. Currency wars are boring, it is about trade balances, bulk shipping, monetary policies, and interest rates. Yet it is the driver of the markets and economies. The Fed is playing a dangerous game of taking a hawkish stance of raising rates. The rate hike expectations of 2015 drove the dollar higher and that created what seemed to be disinflation that could quickly become deflation. The gas price and broad commodity price declines were certainly driven by the dollar action. What is very concerning is the flood of money supply and ever decreasing velocity. Disinflationary pressures while the Fed is running ultra-easy monetary policy and zero rates can create future disastrous effects. If not handled with care and unwind thoughtfully an epic fail may occur in the future that makes 2008-2009 crash pale in comparison.

I am not trying to be an alarmist, but rather offering a note of caution. We have been over-hedged in all our positions since November and so far it has paid off. I don’t expect a market crash today or tomorrow (not that it couldn’t happen), but I do see significant market volatility.

The ECB has already talked of negative interest rates as they injected another round of their version of QE. Japan’s printing presses have been running into over-drive and even bought into their own financial markets. China has cut rates as well. The world is easing as the U.S. took a baby step to becoming Hawkish. There is no doubt a bubble building in the bond markets, we have seen them implode in Iceland, Greece, Cypress, Detroit, Puerto Rico and many other places – places that do NOT have printing presses. The ability to print your own money doesn’t solve the problem, it only hides it and makes it bigger. What would happen if Japan, U.S. and Europe could not print more money to monetize their deficit spending? Simple answer – take a look at Detroit or Greece.

I don’t know if Guttenberg realized he created a monster.

Support & Resistance

INDU 17,000
The pre-market shows we will break 17,000 this morning. The question is can we rebound and close above 17,000. This is more of a physiological level, but a significant one. 16,800 is the next support area, if we close on the low.

NDX 4400
The 4500 level looked like support, but after two days I am not sure if it can hold. I would look at 4400 as support. Surprisingly Apple has been heading lower and I saw in the pre-market it breaking below $100.

SPX 2000
We bounced off 2000 in December, but we look to visit it again this morning and break below it. I would look at 1980 as short-term support.

RUT 1080
I have mentioned of years that the Russell is the best measure of general market order flow. Want to know if money is generally flowing into or out of the market, the Russell is the broadest measure with no single stock driving it higher or lower – which is a problem with the narrower based indices. The Russell is in a precarious position and I see 1080 as a very important support level that we bounced off of in October. If this index continues to close lower, it is showing a broad exit in the equity markets. Below 1080 – I have no idea and a close below 1080 does not bode well for the broad equity markets. If we can close strongly above 1100 today – it may be a good sign that the bottom is in.


Today it will be about how the market closes. If we close on a bounce with strong volume and above key supports, it may reflect confidence in the equity markets and a time to buy. Creating a short-term low. If not, then we are in a precarious area in which the market can easily head lower.

The North Korea bomb test news is only adding volatility to the market, but is not the cause of the market sell-off. The market sold off on Monday and there was no North Korea bomb. Sure it can add volatility or even spark a move – but fundamentally there are broader problems at work in the market.

3 Responses to “Market Sell-Off?”

  1. Luana says:

    Please, what do you mean by velocity when you use it this way: “What is very concerning is the flood of money supply and ever decreasing velocity.

    • Silexx says:

      The velocity of money is the number of times one dollar is spent to buy goods and services per unit of time.

      If you print (create more) money into the supply, the velocity should increase (or so the theory goes). Dollars move faster.

      The increase in money supply should create an increase in the velocity. This is expected to create INFLATION.

      The decrease in money supply should crease a decrease in the velocity. This is expected to create DIS-INFLATION.

      The Fed has increased the money supply, but money is not moving – it is actually slowing down.

      People are not borrowing and/or banks are not lending. People are not spending because they are saving, more likely do not have money (wage growth is almost stagnant).

      So the Fed has printed trillions and it is not moving. There attempt at creating monetary inflation has failed. Now they have a dam of trillions and when velocity accelerates it could bring forth inflation very fast. This is one of the hidden dangers of hyper-inflation – it will come unexpectedly, fast, and furious – because there is trillions in the supply. It COULD come like flash flood – if the Fed can’t keep it under control.

  2. Luana says:

    Ah, a very cogent explanation. Thank you!