First I must apologize for my absence. I have been on the road show and opening new offices, certainly taking a heavy toll on my sleep and also this report. There is certainly a lot of potential volatility in the market between the US Elections, Puerto Rico’s upcoming July $2 billion default, BREXIT, Economic Data, and of course the Fed “go” – “no go” on whether or not they will hike rates. For all the potential volatility the market has remained in a narrow range – barring a few large daily moves.
If ones to measure the concern about the global political and economic conditions using the VIX, it would seem that we are currently in a rather benign state of affairs. Certainly it has reared its head of late, but only to return back into the low-mid teens. Clearly the market is not pricing in volatility and so far it has been right and is always late to do so.
[preface: I am NOT a member of the Democrat or Republican party, nor do I support any of the candidates discussed here]
If you would have asked me or practically anyone, the political party implosion that would have taken place was clearly in the GOP. However, after Trump had pulverized his competition and the GOP has reluctantly gotten in line – the real volatility and pending implosion is coming from the DNC. Who would of thought? Wasn’t Hillary pre-ordained and the primaries were just a mere formality as she was to be crowned the Democrat Nominee? If you asked Debbie Wasserman Shultz, the answer was yes. However, it was Bernie Sanders – not even a Democrat – who has galvanized the young and independent vote and has through some Soviet Era magic, given rise to the Socialist Phoenix. There were clearly shenanigans in the DNC; voter rolls lost, Hillary bent media early reporting, super-delegates, and a smattering of political games that has made a mockery of any democratic process. Hillary had over 350 super delegates before the first primary vote, clearly the DNC has chosen. One can only wait for what maybe a fireworks show at the DNC convention. Regardless of the results – the Bern Socialist movement has a foothold in the US and the teeth are deeply sunken into the flesh of liberty – just check your Facebook friends (or non-friends) for confirmation.
courtesy of wikipedia
But how does this play into the market? A Hillary Presidency would be more status quo; wishy-washy trade agreements, more government spending, easy money policies, big government with a touch of Socialism lite. However, the two other candidates; Trump and Sanders bring uncertainty to the table and that means volatility to the market. Trump will certainly TRY disrupt trade agreements as would Sanders. Sanders would of course TRY to implement that largest Socialist expansion since FDR, (emphasis on “Try” because Presidential power is limited, thankfully). Certainly a Trump or Sanders candidacy would impact trade, interest rates, debt formation, currency risk, and a host of issues that are tied one way or another into the equity markets.
courtesy of wikipedia
In market terms, we have time before concern is warranted. The elections are not until November, which seems like a world away. And even after the November election they will not take office until the following year and even after they take office it will be months before any of their plans would/could be implemented. Yet – we would/could see volatility prior to 2017 as people position themselves for those eventualities.
The US economic data is certainly not rosy and certainly not showing any signs of a robust recovery. The beginning of the 1st quarter sent concerns ripping through the market that a recession was imminent. Talk of NIRP (Negative Interest Rate Policy) was even broached in the Fed’s Congressional testimony. However, a good economic data point here or there quickly squashed those concerns and the market quickly rebounded back to close the quarter unchanged.
The second quarter however started to show cracks in those economic data points. There are two TYPES of economic data, one is certainly more subjective as it is based on polls and surveys and the other is just math. For the most part they live in harmony with one another, but we are beginning to see the math prevail. I have a saying; “You can choose to IGNORE the math, but in the end you can’t AVOID it!” The math is starting to become unavoidable.
The most recent Labor Report made one’s stomach turn. The US only created 38,000 jobs vs. the expected 162,000. While I have had my issues with the government issued BLS Labor Data – which has been lately conflicting with the ADP, Challenger, and Trend (private sector reporting) – it seems like the government just couldn’t avoid the math anymore and took a massive write down in one month. Not to sound conspiratorial, but until now the data was far better than economist had expected and continued to outpace all the private sector job reporting. Something was amiss and I can’t help suspect this was a form of managing the data to justify Fed policy. It’s not like this game hasn’t been played before, companies had played similar games with quarterly reporting, and taking charges today to boost future reports. The government data for U3 and Labor Reporting is so archaic using phone and written surveys in today’s modern age – mistakes and errors are par for the course, but more uncomforting is the potential of data manipulation. If you can’t decipher and verify HOW the raw data is collected, it is only fair to be suspect of its validation. I was never much one for polling and survey’s as any measure to extrapolate accuracy on any scale, just look at political polling and that has far better state of the art math and technology than our government.
The rest of the government and private sector data continue to show stagnant recovery and in some cases contractions. Sure, one can point out that we are better than the rest (Western economies), but that isn’t saying much in a universe of negative interest rates and contracting growth. The gulf between government reported data and economic reality is only becoming wider and some prominent people in the media and economics are taking notice.
Despite my criticism of data collection and formulation, the Labor Report job data was bad – no spinning it. However, it played right into the Feds hands (ironically at a perfect time) as they were again under pressure to raise rates. I have been clearly in the small minority camp that the Fed will NOT be raising rates this year, well certainly NOT before the November election. I find it odd that the media and other supposed objective reports are NOT tying the elections with Fed monetary policy. To think there is absolutely NO consideration by the President appointed Federal Reserve Board of Governors is rather naïve. The Fed’s rhetoric and policies impact the markets and economy, so yeah – it impacts voter decisions. Sure we would love to believe the Fed is totally unbiased and myopically focused on economic math – unfettered by politics and ideology, but hey they are human, have spouted their ideological views prior to becoming Fed members, and were appointed by President – which of course will be selecting people with a similar ideology and agenda.
courtesy of wikipedia
The shocking jobs data, coupled with the other weaker economic data is giving the Fed room to “PAUSE” again as to a possible rate hike. The message crafting from the Fed is becoming ever more political sounding and choked with rhetoric and no action. The use of “Pause” in describing their position to NOT raise rates sounds like it comes from the theater of the absurd. Barring their one 25 bps rate hike 6 months ago, it is not as if this Fed has been Hawkish and marching forward down the path of repeated rate hikes – which they are now only PAUSING this one time. The sad truth is this type of message crafting, as if the Fed is Hawkish and on a path, is only raising expectations they will hike rates. It is as if they are gaming the market, setting expectations of a rate hike and then not giving one – to BOOST the market again higher, with a message that easy money (low interest rates) will be here for another couple of months. This rinse and repeat strategy of crying wolf will soon fall on deaf ears as the Fed loses credibility.
The bigger picture, circling back to the economic data, is that the core foundation and fundamentals of the Western economies, including the US are on very weak ground. Apply a little reason and logic for a moment. The Western economies are running Negative Interest Rate Policies (NIRP) or close to it. They are printing Trillions of dollars. They are subsidizing government deficit spending by buying assets (bonds, mortgages, in some cases even their financial markets). And despite ALL this incredible government debt financing and stimulus the economies of the West are in tepid growth almost at a point of stall and the concerns of a recession continue to rear their head periodically, unless masked by a cherry picked economic data point. That shouldn’t be too comforting.
courtesy of wikipedia
Should Britain leave the Euro? Hell yeah – are you kidding. You could come up with lots of reasons and some are clearly focusing on the immigration problem and terrorism (see France and the tent cities outside the Chunnel). However, I have been skeptical from the start of the Eurozone and it was never immigration that concerned me. My concern has been focused on one thing that never made any sense; decoupling fiscal and monetary policy. Anyone that has taken economics 101 knows that you can’t have diametrically opposed systems. On one hand you have INDIVIDUAL governments running their own fiscal policy and running debt formation and on the other hand you have a CENTRAL planner over all the INDIVIDUAL governments running a monetary policy that can’t possibly take into consideration each of the individual government’s fiscal policies. It was doomed to fail from the start, as strong fiscally controlled individual governments will have to bailout and carry the water (burden) of the weak unaccountable irresponsible individual governments (see Germany vs. Greece). When the Euro was an idea, many economists ignored economics 101 as they were all on-board with the idealism of unification, trade, and immigration. As my saying goes, they ignored the math –but now they can’t avoid it. At least one economist forecasted correctly its failure – yet no one listened and those that did called him a fool: Milton Friedman 1998 Prediction of Eurozone failure
courtesy of wikipedia
The European Central Bank (ECB) along with the Monetary Fund and other agencies have repeatedly bailed out weaker nations at the expense of others. Now they are stimulating again and running a NIRP policy. We are seeing stronger nations taking on excessive inflationary risk on a devalued currency as the weak nations are hoping to inflate themselves back to prosperity, while still remaining fiscally irresponsible. Hatred between the Socialist states in the south (Greece) vs. the strong fiscal nations in the North (Germany) have been festering.
It is only a matter of time before the strong nations leave or the weaker nations are kicked out. While the UK is getting all the attention with this upcoming vote to leave the Euro, other nations are marching forward in similar fashion. Sweden is on the fence and will most likely leave if Britain leaves. France and Germany are saber-rattling as well.
Certainly it is the immigration problem that is spurring the headlines – but the real crux of the position that has been a slow boil is the separation of fiscal and monetary policy. Even if Britain votes to stay in and that placates other nations, the EU will eventually break-up because that math doesn’t work. In a cold sort of way, perhaps the recent immigration problem that has ushered in these referendums is a good thing, if they work – as it could break-up the EU now before it becomes too big of a debt bubble that it implodes in epic fashion in the coming years.
The US political game is certainly driving entertaining headlines, but will have little bearing on the markets until October and November when the general race heats up. The current volatility this week will be driven by Fed testimony and of course the BREXIT vote. The market has rallied recently into expectations of the BREXIT vote getting shut down, but that doesn’t change the weak economic landscape that could stifle a continued market rally.
Looking ahead we also have another big headline that will rear its head next week, the big Puerto Rico default on $1.9 billion. They have already defaulted on $400m in May and while it made headlines it didn’t rock the market. US Congress passed the bill for the Fiscal Control Board, but that will have to be passed by the Senate and signed by the President – even if it does, it will not change the fact that PR will fail to make their $1.9 billion payment July 1st. A Fiscal Control Board will have to be appointed, they will need weeks – months, to review the balance sheets and budgets and then – maybe – slowly find the path to solvency for both bond holders and Puerto Rico.
PNP nominee Rossello courtesy of wikipedia
Meanwhile Puerto Rico is in its own radical political election cycle. The expected PNP (Republican) nominee (Pierluisi) – who supported US Congressional bill and efforts, failed to win the PNP primary. The PNP nominee (Rossello) – like his PPD (Democrat) opponent do NOT support the US Congressional Fiscal Board bill. That has tossed in another monkey wrench into PR politics, as part of the general election fight was assumed to be over the PNP nominee who support US Congressional Fiscal Control Board vs. PPD party nominee that opposes it. Now both party candidates oppose it and it is anyone’s guess who will win. With the current governor not up for re-election, the current appointed leaders of agencies as well as PR Congressional members of the PPD party are now looking toward Bernier (the once Sect. of State who is now the PPD candidate for governor). Things will only heat up in PR and with the July 1st expected default of $1.9 billion – it could send waves into the financial fixed income markets as well as the US political election process – as everyone will be wondering “What to do with Puerto Rico?”
Support & Resistance
INDU 17,500 – 18,000
This has been the general broad range since April. Dovish Fed testimony coupled with a “No Go” on BREXIT vote will send this market up to and possibly through 18,000. If the Fed sounds more Hawkish and the BREXIT gets passed then we are quickly back to 17,500 and testing that support.
NDX 4360 -4560
The tech heavy index has been rocked with good and bad news. Apple keeps facing issues that draws this index down, but a few Unicorns bring it back to life. I see support in the 4300 area and resistance begin to kick in at 4500. Expect volatility.
SPX 2060 – 2120
Much like the Dow Jones, the S&P 500 has been snared in a range and driven up and down by the whims and expectations of Fed monetary policy. To hike or not to hike – that remains the question. The VIX did pop to 20+, but that is coming off and we could be back down in the 13-15 range if the Fed takes a dovish tone with a failed BREXIT vote. Yet – I think the VIX remains underpriced in the sub 15 range, as any problem can rear its head quickly. 2040 is broad support on a pull back.
RUT 1140 – 1200
The one bright spot has been the Russell Index which has bucked all the trends and concerns of the narrower based indices. It pushed up through 1150 for a while and we saw an influx of buying after it seemed recession fears were over at the end of the 1st quarter. The 2nd quarter had the index pull back to previous resistance, now support – but still remains strong. I would watch the 1140 support area closely – an uncertain or hawkish Fed and a BREXIT could send this index to 1100 quickly and break down through 1140 support. So far this index continues to show hope in spite of all the potential volatility on the horizon.
I apologize for the lack of reporting lately. As some of you may know I have been spending time in Puerto Rico on business during the crisis, which is taking up a good amount of my time.
I see a bright future for Puerto Rico once we move pass this crisis in one form or another. There are many misconceptions about Puerto Rico – mostly driven by uninformed media headlines. There remains a vibrant private economy and people are not collapsing of ZIKA. I know there are dark times ahead for PR, but now is the time to forge and make ground. You want to buy when everyone is selling and sell when everyone is buying and now is the time to BUY! I am not sure how or how long it will take to recover in Puerto Rico – but it will. People (the media) have a hard time assessing a situation while amid what seems a dire situation and when they are so far away and removed from what is actually happening here.
I hope to be more active in the coming weeks with the Market Preview. In the meantime – we are tethered to Fed policy and rhetoric and driving up the “wall of worry” with BREXIT and other issues.