Category: Economy

Jerome Powell gave his first testimony before the House Financial Services Committee. Only the first 30 minutes is worth watching.

I watch these closely  to get hints about what the fed might do. As he spoke the dollar and treasury yields jumped and stocks fell. The market interpreted his comments as hawkish. The new word is there might be four rate hikes this year instead of three.
However, he said nothing that was not already detailed in the monetary policy report published on February 23rd. The monetary policy report praised the Taylor Rule. From the report:

Economists have analyzed many monetary policy rules, including the well-known Taylor (1993) rule as well as other rules that will be discussed later: the “balanced approach” rule, the “adjusted Taylor (1993)” rule, the “price level” rule, and the “first difference” rule (figure A).2 These policy rules generally embody the three key principles of good monetary policy noted earlier.

I don’t believe Powell  is going to do anything that might surprise the market.

The fed released its Monetary Policy Report today.
Below is what they expect the Fed Funds Rate to be in the future.

They are going to be very slow and very cautious raising rates.
They did leave themselves lots of wiggle room though.

Haruhiko Kuroda, the man determined to destroy the Japanese Yen, got appointed to a second term on Friday. Below are central bank balance sheets over the past few years.

The Federal Reserve has not expanded its balance sheet since late 2014. The BOJ is still very active with bond purchases across all durations. The 10 year Japanese bonds are yielding 6 basis points (Basically zero). The BOJ is also buying Japanese stocks. No other major central bank has done this in the post-crisis period. We are currently holding a long position in the Japanese yen, which looks set to rally over the coming weeks. We also have a long position in Japanese stocks, which looks set to fall over the coming weeks. After a few weeks I expect the downtrend in the Japanese yen to continue, which should be constructive for Japanese stocks.
To understand just how crazy the BOJ is watch the video below.

The video is four years old. Since than, things have only gotten crazier.

The yield curve has been trending upward.

Long term interest rates are climbing a lot faster than the short term interest rates. This will make it more profitable for banks to lend money. Money supply growth has been downward slopping since the summer.
If these conditions continue, the money supply growth will begin to tick up again. This will further support stock prices. Investors should slowly accumulate stocks in the performance tab.

The US government is about to go into spending hyper drive.

Their projection are based on low interest rates for the next 10 years.

I don’t believe the great bond market that started in 1981 is over just yet, but the idea of predicated interest rates out 10 years is absurd. The one thing we learn from history is this- interest rates can spike rapidly.

The amount of hysteria displayed among all parties is astounding. The market is down less than 10%. Yet even the white house chimed in on the down stock market. The correction approaching is long over due. I said so here and here. I also believe this correction is going to last a few weeks. Below are some charts of the Dow.

The first issue is the amount of small speculators who are wildly bullish. This is the “dumb” money. Second the RSI hit above 90. As far as I remember, I have never seen it this high.
The market is in the process of unwinding this overbought condition. It will take time. Further down side is to be expected. This should be used as a time of accumulation. The elements of a 2008 style recession are just not there. The market is ever changing. Therefore, my opinion is subject to change. A few months from now conditions could be different. Especially if the Fed begins to unwind its balance sheet.

There is a sea of red the last few days. The bond market is looking like a nightmare. The dollar and bond market are oversold. The general market is overbought. It is looking like a correction may be underway. We are holding our positions. I also will be added a few new positions soon. Calling corrections with precision is impossible so I will not bother. I think we are in the latter stages of this bull market and more money is to be made. I do not see any evidence that a recession is on the horizon (6 months). I think 2018 will be much like 2017. Modest 10% pull backs followed by making new highs. When I think this bull market is approaching its end I will say so.

In the mid 2000’s all we heard from reputable economist, such as Joseph Stiglitz, was that Venezuela was a model country. Hollywood had a loud mouth about Venezuela also. Unfortunately for them, the internet keeps good tracks of all these foolish statements which I have bookmarked. All of these people have gone quiet since the people in Venezuela are now eating trash. I does not get much worse than this.