Eye of the Storm

Back to the drawing board for the Federal Reserve according to William Dudley… it’s time for the Federal Reserve to “rethink” inflation models which are failing to support further rate hike adjustments within their “Model.”

The ECB press conference last night was interesting – Mario Draghi was congratulated on his recent birthday nay one reporter… she then turned to a series poignant questions regarding Asset purchases – which were skirted.

The tough questions found rambling and often quite absurd pronouncements of stability and crisis management. Greece and Cyprus have been abandoned, their collective economies have been left for dead.

October, according to Draghi, is where it all lines up… They will begin to announce their intentions in this timeframe.

Draghi very briefly discussed the Euro’s strength and potential effects on exports and inflation targets, there was nothing specific.

Nothing aggressive, concrete or remotely indicative of future Policy – other than continued Liquidity injections with laser like focus to project control over Member Bond Markets.

I suspect the 125 level will be about it by October, it’s been an open target and one that leads the DX to 86-88 potential.

The Euro is up 14.3% this year, a very large move – the Yuan has reversed and is making new highs.

The long end of the curve had a very large imbalance yesterday – Bonds were halted. A noticeable and telling sign arrangements are being shuffled rapidly.

Gold Reintroduced – PetroGold

The United States Dollar for Energy trade is winding down.

China’s power elite has provided an alternative to the U.S. privilege of Currency Senoirage – they are “Prepared” to link Oil to Gold convertibility.

PetroDollars are not long for this world, the Dollars twilight loses another candle to the winds of change.

China sees new world order with oil benchmark backed by gold

Yuan-denominated contract will let exporters circumvent US dollar.

It should be noted – this is Not a Peg to Gold as some are suggesting, but a link to convertibility.

China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.

 

 

 

September 15th

Janet Yellen will raise interest rates and confirm asset normilzation by implementing sales on the Fed’s Balance Sheet.

We could trade up and into this pivotal event – with OpeX one day behind.

I was asked via email what my thesis is for the prior post.

This is my thesis – train wreck ahead.

It is frankly the perfect setup…

***NOKO remains the vector for undoing this – this would provide the FED with cover it needs to stand pat. It would need to occur 3 to 6 days in advance.

Bonds a very real Negative

The long end continues to create issues for Inversion of the Yield Curve – the Short end remains in an extreme and perilous condition.

Since Timothy Bitsberger began moving UST Fundings down the curve – the intent has been clear for the past 20 years…

Pay attention to the Yield Curve – it will break the Government Debt and create a massive devaluation of US Treasury Debt Issuance.

The Dollar will provide ALL the clues.

 

Flawed Doctrine – A Hole Too Big To Fill

A worsening crisis – Chairwoman Janet Yellen failed to mention the World’s Central Banks continue pushing on a string as worsening financial conditions consume the Global Financial System…

…With rates @ 1.25% and a $4.5 Trillion balance sheet, count me a non-believer, but then I’ve never believed the Federal Reserve to be anything but a creature on a string.

Chairwoman Janet Yellen: “Our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years. Enhanced resilience supports the ability of banks and other financial institutions to lend, thereby supporting economic growth through good times and bad.”

A farcical thesis… would be gracious.

Disingenuous in the extreme for what was left unspoken – ZIRP, QE∞, $10.4Trillion of global debt securities trading with negative yields, all shined on.

Managed Money has been squatting within the ETF and passive strategies Complex for years – very little cash remains sidelined. A sharp downturn would require outright selling, as protection would not provide adequate capital for investment were it to be “In the money” at the proper time.

It rarely is, therefore unwinding much of anything appears to require an enormous lifting of all boats… something we should consider probable after the next correction.

ETF’s have herded capital into unprecedented positions. Years of declining volatility has become a one way trade placing greater risk of an abrupt and very sharp reversal.

I believe this dead ahead… a rapid and precipitous adjustment to the downside.

Liquidity and its attendant mis-pricing of Risk has never been so grossly distorted in my lifetime.

Passing the blame – “Increased resilience of the financial system” is now wholly dependent on the present Administration – their course of action(s) – regulatory reform long promoted is again the dire enemy of Wall Street and the Federal Reserve.

Janet Yellen has politicized the issues of regulatory reform – it is safe to assume President Trump will be walled in once again. The FED Chair may have made her last speech, but payback… she’s a cruel mistress.

 

 

 

 

 

 

 

Consolidations

Markets are being driven by headlines once again, this period of consolidation has been interesting to observe.

The Dow and S&P are trading in channels that permit just enough volatility.

The ES is presently attempting to get up and over 2247.50 – 3 attempts have been made today.

Gold & Silver remain inversely correlated for now.

I frankly don’t see a further substantial downside until after Labor Day.

The markets are being contained by program trading on the overnight sessions in Asia/Europe – into the early AM session Stateside from 6AM onward.

The S&P and Dow have targets well above our current levels:

Dow: 23,000 – 23,300

S&P: 2520 – 2580

From there we will need to see where Bonds, Dollar and Metals are trending.

We should see a reaction high in Gold the second to third week in September – I had been looking for August to be pivotal back in March and it’s been interesting this far.

Silver targets remain: $17.87 $17.98

Gold targets remain: $1338.80, 1362.50 are open as well.

Markets appear convinced monetary policy will remain eased indefinitely. Participants believe Central Banks are boxed in and unable to respond to their own mandates.

At the moment, they are correct.

Jackson Hole provides a few insights in US/Euro policy course adjustments… frankly its noise in my humble opinion – more bull horning BS from the Temple of Monetary Mayhem.

Central Banks indecision is having a material impact on risk.

This should serve to severely reduce leverage – but will it.

I’m not so sure.

Until there is an accident, which will be used to further interventions – we will need to wait and see what develops.

There are a certain something that will break the Markets loose in September… it’s out there.

Will it be tax cuts and reform?

Budget deficit?

Treasuries will not be a hedge during the next round of Risk Off – the Long End is struggling to maintain at present. A selloff there seems assured, further opening the potential for a stepping of the Yield Curve.

Corporate Debt is in trouble, serious trouble… Small caps have been underperforming with the continuing economic contraction.

Fundamentally – it is an enormous mess.

It seems axiomatic Central Banks will do what they always do in times of crisis… screw us – the taxpayer.

 

 

Macro Influence Ahead

The Federal Reserve has “realized” its inflation models are indicating there is something is wrong with their assumptions.

The most recent Fed Minutes indicate the while financial conditions remain loose… tight labor markets and solid economic growth (by their metrics) – befuddle the 2% price goal for five straight years.

A large percentage of FOMC level pullers believe further rate increases are necessary.

The same Fed Minutes present a lack of confidence in their Monetary policy decisions – and they are uncertain of which dials to adjust into September.

Doubts over waning inflation during the past months is dividing the Federal Reserve – timing of the next increase in interest rates are in serious question.

The lack of “Inflation” (their data) has Fed officials growing concerned the disapppointing inflation numbers are a sign that something has fundamentally changed in the economy.

As I suggested the Bond Market is providing some interesting challenges on Yield Curve Inversion:

90 Day Treasury bill @ .99%

2yr @ 1.31% +12bps

5yr 1.76% -17bps

10yr @2.19% -25bps

Long bond @ 2.78% -29bps

Sellers remain – 5 years out to 30.

The Federal Reserve can increase their buying, but this would fly in face of decreasing their Balance Sheet pileup in September. With $2.5 trillion in Treasuries and $1.8 trillion in Mortgage Backed Securities – $1.4 trillion of the $2.5 trillion in Treasuries have maturities of less than five years. $1.1 trillion are from 5 to 30.

They would need to liquidate the long end of the Curve – in order to create a meaningful steepening within the Yield Curve.

They know precisely what they are doing… their are no accidents through ignorance – only malice.