The impression that you sell
Passes in and out like a scent
But the long face that you see
Comes from living close to your fears
If this is up then I'm up but you're running out of sight
You've seen your name on the walls
And when one little bump leads to schock miss a beat
You run for cover and there's heat, why don't they
Do what they say, say what they mean
One thing leads to another
-- "One Thing Leads To Another" Woods, Agius, Curnin, West-Oram, Greenall (The Fixx) 1983
Like a Flare
The very idea of popping a flare is to allow a more hidden force to catch an unprepared force by surprise out in the open, or to get a better look at whatever is out there. It's really a pre-night vision technology type thing. Then again, when I was a kid, you could hide in the dark. In the modern era, the idea is for an inferior force to pop flares at night as the bright light renders the use of modern day night-vision optics not just useless for a short spell, but possibly painful. There was a time, prior to the use of modern technology, that immediately upon understanding that the area of operations was being illuminated that those upon the field would close one eye in order to preserve the individual's natural night vision. For if one fails to cover at least one eye, that individual will be rendered essentially blind temporarily once artificial daylight turns back into night.
Traders and investors alike were put in an awful position on Tuesday. It was not enough that a Communist Chinese warplane buzzed Nationalist Chinese (Taiwanese) airspace. It was not enough that South Korean fishermen are reporting an inordinate amount of Chinese fishing boats in their waters. It was not even enough that Morgan Stanley's highly rated analyst Katy Huberty took her current quarter projections for Apple (AAPL) app store growth from 19% down to 11%, which in turn knocked her estimate for Apple's service sector growth from 28% to 25%. Huberty notably left her "overweight" rating on the stock as well as her $161 price target. (Note: Market Recon has a $165 price target on AAPL).
These moves indeed did put some broad pressure on equity markets early in the Tuesday session. They were not the headline, however. They were part of the landscape. I think you all know where we are headed.
Like the flare that illuminates the battlefield, her words either clarified what some had expected, or distorted thought development, as she was overtly stepping out of bounds. Was she blocking, and tackling for her friend, Fed Chair Jerome Powell who maybe had communicated to her a potential need to run with the football earlier than previously alluded to? Was this the first sign of some kind of fusion between the Executive Branch and a central bank surrendering it's "official" independence? You laugh? You sneer? Modern Monetary Theory? These are really the questions that real traders were asking each other on Tuesday morning.
One thing we know about Treasury Secretary Janet Yellen is that she is very careful and very measured. Let's be very clear. Her opinion here as an economist is not incorrect. Yellen, at a conference hosted by The Atlantic, said "It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat, even though the additional spending is relatively small relative to the size of the economy." As the investing public, we as a collective immediately recognized how highly inappropriate it would be for a Treasury Secretary to message in public a trajectory for (short-term) interest rates in clear opposition to what either the Fed Chair himself or more broadly the committee (FOMC) has been willing to transmit to the public, or to the marketplace. Correct or not, this was an error. I think.
If Yellen had merely erred in expressing publicly her opinion, she then dug her heels in. "So it could cause some very modest increases in interest rates to get that reallocaton. But these are investments our economy needs to be competitive and to be productive." Might just be a highly intelligent mind thinking out loud. Sure does sound like someone expecting that from here, fiscal and monetary policy will be working together. The high-speed algorithms that pass for the modus operandi through which price is currently discovered had a field day. Testing certain technical levels, and bottoming... yes, bottoming equity markets prior to the noon hour on the east coast, and then methodically putting together a four hour plus rally into the closing bell that would carry on through much of the night.
"Did I Do That?"
-- Jaleel White (as the fictional Steve Urkel)
Our Treasury Secretary was not done for the day. Janet Yellen appeared at a Wall Street Journal event after the markets had closed for the regular session. She did make her best attempt to walk back here earlier comments. Yellen said "Let me be clear, it's not something I'm predicting or recommending" in reference to her earlier remarks on using the tools of monetary policy to tame a potentially forced overheating of the economy through fiscal exertion. Yellen also said that she does not anticipate inflation becoming an issue, but it sure must have been on her mind earlier in the day. No?
Think about it, gang. This morning, the ADP April (private sector) Employment Report hits the tape. This Friday, the BLS will lay the whole April Employment ball of wax upon us. A million jobs created? Does she know? We already see decade high pricing for so many commodities. Public facing corporations are already facing higher input costs even before the Federal government asks officially (taxes) for more. These corporations are going to be forced to ask their clientele, the public (you) for more, especially as a great number of folks return to offices, and try to return to more normal levels of both social and recreational activity.
There is, and will be a period of heightened consumer level inflation. This will be exacerbated by increased scarcity of certain materials both raw and finished. I think Yellen said what we all might be thinking. That does not let her off the hook, unless she was sent out to test the waters. If that be the case, then she is doing her job, though in doing so, crosses lines best left uncrossed.
Most folks today have never been through a serious inflationary period, much less anything that might be considered an "inflation scare." No one among us can tell for sure whether or not this bout of inflation is truly transitory. I think we can almost guarantee that as year over year inflation numbers hit publication that there will be a scare. Yellen also sees the economy hitting full employment by next year.
Just remember that as Fed Chair, Yellen was consistently incorrect in her assessments of just what was "full employment". Yellen was also a failure in her attempts to increase consumer level inflation, By her own admission, she was unable to understand why the "Phillips Curve'' (the relationship between the unemployment rate and inflation) actually works in real life. In my opinion, Yellen underestimates the importance of velocity. I am not calling out Janet Yellen here because of the seeming regularity of her mistakes.
All recent Fed Chairs have made their share. Yellen was a vast improvement in that position over the grossly overconfident (he's so courageous, just ask him) Ben Bernanke, and though Jerome Powell has done a truly heroic job in getting the economy through its greatest crisis since at least the Great Depression, he had to learn on the job, made some mistakes, and now flirts with error in timing the unwind.
There is no doubt that equity markets moved toward cyclical sectors and away from growth on Tuesday. Aggregate trading volume increased significantly as losers beat winners by a rough 4 to 3 at the NYSE and by something close to 3 to 1 at the Nasdaq. Declining volume bested advancing volume by about 3 to 2 in aggregate for names listed at both primary exchanges. What we don't know... what I don't know, is while the Nasdaq Composite, Nasdaq 100, and Russell 2000 all plummeted, they all finished well off of their lows. The Dow Industrials and Dow Transports both turned green ahead of the close. The S&P 400, 500, and 600 all closed lower, but not horrendously so.
Clearly there was some professional distribution. That said, does the increase in trading volume reflect any change in sentiment, as one might suspect had it occurred somewhat differently... or this increase in trading volume is merely reflective of a mid-day turn-around? I don't really know. I suspect the latter. I was a net buyer on Tuesday, In fact, I didn't sell squat. What I do know is that when investors get scared... uhm... I mean when algorithms get spooked, that they draw first blood from the most highly valued type names where they probably have over time, the greatest profits.
The worst performing industries for the day were computer hardware (from the Technology sector) led lower by Apple, and Roku (ROKU) , as well as internet names (from the Communication Services sector) led lower by Snap (SNAP) , and DoorDash (DASH) .
Hot Off The Sarge's Desk
Policy makers need to understand this. If push comes to shove, economic growth must be prioritized over market performance. Yes, that hurts guys and gals like me. The good of the many comes first. Understand, my friends and readers in DC (Hi Jay), that the yield curve is what is now sacred. Increasing short-term interest rates only serves to flatten the curve if for any reason the slope of the curve does not steepen in response to free market pricing.
We know that eventually there has to be a tapering of asset purchases. I think it best that as asset purchases ebb, that the short end of the curve be pinned to levels close to zero for as long as possible. You want to control inflation, let the long end trade. Will that hurt markets? It could. Will it slow the economy? Not as much as will a flat curve. You apparently want to tap the breaks but not come to a halt, correct?
You can even sell the long end if it will not move on its own, and use the proceeds to buy the short end. Yes, a dollar zero "Reverse Twist", glad you're paying attention. Not only does that prevent continuance of pricing bubbles across certain asset classes, this could provide the pause that you apparently crave. Just be sure that the velocity is there. Should the M1 stock ratio reported by the St. Louis Fed drop below an even 1.0, all bets are off. That would mean that nearly all of the demand across the entire ecosystem had been engineered through fiscal policy. If there is no organic demand, then there is no public velocity. If there is at some point, no public velocity, well then... the jig is up.
Have Any of You Geniuses...
... even thought about replacing the fiat with something more quantifiable than good faith? We all know that as debt to GDP levels reach for the sky (or how about true total debt to organic GDP?), that increasing deficit spending will test the very limits of an already extended super-cycle. Bring back the gold standard? Well, whatever nation that did so, would instantly have the most highly desired currency on the planet. No doubt about that, but that would at first hurt trade balances, unless of course sellers demanded to be paid in this currency... very possible.
There are many ways that a currency could be backed by gold or other hard assets and still maintain the required elasticity in money supply. We could use all sorts of fractional methods. I am here for you if this is beyond your depth. Hey, the banks aren't the only ones capable of slicing and dicing reserves to death.
What if a basket of precious metals were to be used as backing, with some kind of a connection or balance with one or two key cryptocurrencies. Could be a way to use at least the cryptocurrencies of higher quality for a proper purpose. Cryptos do not serve as a medium of exchange, but neither do precious metals unless there is an "end of days" kind of crisis. Cryptos are still experimental as a store of value. Keeping the lights on would be an issue. That said, cryptos are divisible, and supplies while scarce... are elastic. Just some food for thought, because there is going to be a future even if we screw up the present.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Apr): Expecting 823K, Last 517K.
09:45 - Markit Services PMI (Apr-F): Flashed 63.1.
10:00 - ISM Non-Manufacturing Index (Apr): Expecting 64.2, Last 63.7.
10:30 - Oil Inventories (Weekly): Last +90K.
10:30 - Gasoline Stocks (Weekly): Last +92K.
The Fed (All Times Eastern)
09:00 - Speaker: Chicago Fed Pres. Charles Evans.
11:00 - Speaker: Boston Fed Pres. Eric Rosengren.
12:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
15:00 - Speaker: Chicago Fed Pres. Charles Evans.