Victor’s Perspective on Markets, the Economy and the Fed

by Victor Sperandeo, edited by the Curmudgeon


US Equity Markets:


The decline began on August 19th at the opening after the WSJ reported that the IMF would "NOT" grant China Reserve Currency status for at least one year.  Reuters ran a similar news story titled IMF Defers Decision on Adding Yuan to Basket of Reserve Currencies. That new reality caused the Shanghai Composite index to fall from ~ 3800 to 2850 from August 20th to 26th which was the catalyst for a cascade fall in global equity markets.


Our July 12th Bear in a China Shop post concluded:


"2.  If China does not get the increased reserve currency/ADR gift from the IMF, the payback for their U.S. hack attack and their island building will be very expensive indeed.


Indeed, the US told the IMF to "not “grant China reserve currency privilege. Payback had been harmful to all equity markets – until NY Fed President Bill Dudley expressed reservations on raising rates at the September 16-17, 2015 FOMC meeting.  That remark sparked a huge rally in US stocks this Wednesday and Thursday.  It's important to note that Mr. Dudley was a former VP at Goldman Sachs.   I wonder if Goldman made money when Dudley said raising rates "looks less compelling?”


My view of the US equity markets is that they will stay stable, with an upward bias, until the September FOMC meeting.  I expect the Fed to "not" raise rates at that meeting, which will then cause a rally that leads to lower 2015 highs for the popular stock market averages. My guess is that three days after the Fed postpones the long talked about rate increase, the stock rally will end.


That should start the 2nd bear market leg down.  Since 1896, the 2nd leg of a primary stock market decline (according to my DOW THEORY classifications) ranges between 20%-to-40%. If the Fed does raise rates, then the down leg will start around that time without a "3 day" rally.    


The US Economy:


On Thursday, US 2nd quarter GDP growth was revised sharply higher to 3.7%.   Why not?  That was only +61% -- above the 1st estimate!   What's a slight miss within The Bureau of Economic Analysis (BEA) - a government agency?


Shadow Stats' John Williams provides some evidence its bunk by showing the stagnant activity in GDI (Gross Domestic Income) - "the practical equivalent to GDP."  The balance of Consumption (GDP) and Income (GDI) was +3.75% versus +2.52% (or GDI quarterly +.63 x's 4). This certainly reinforces the constant cynical (but realistic) belief of manipulated government reporting across the board.  [Note: the CURMUDGEON couldn't agree more with that!]



The yellow metal has come off its lows, but it's still in a downtrend. The higher reported GDP 2nd quarter number, plus the big 2 day rally in stocks has capped the up move in Gold. The precious metals will only become profitable when inflation returns (which is not visible in the near term) and/or if real chaos becomes a constant.  Something the Fed can't control or fix with mere words by a prominent Fed official.


Side Comment:  Think about the power to move $1 trillion or more in markets on a “maybe” Fed comment that's pure rhetoric? Do you think our Founding Fathers had this in mind when they went to war against King George to create a nation of laws i.e. a Republic? But this is how the game is played when you control a printing press with no laws. The endgame will be atrocious, as manipulation has no fundamental foundation.




US Treasuries played their typical “flight to safety” role and rallied in price as stocks tanked. However, bond traders did not pay any attention to the +3.75% 2nd quarter GDP revision (because it was created by the minions at the BEA).  The 30 year T-bond yield declined from 3.24% on 6/24/15 (or 147.16 in price) to 2.72% (or 160.30 in price) on 8/24/15 for a 9.2% increase!           


Side Comment: Bonds have fooled most economists, market analysts and fixed income portfolio managers, as the Keynesian gambit (US fiscal and/or monetary policies) has been a dismal failure in that it has NOT stimulated economic growth.  Yet the US government or Fed policies don't change? It's not about economics, but rather a POLITICAL AGENDA that is about changing America from a Capitalist, free market, pro-growth country to a centrally planned Collectivist society.  The cost of this conversion has not yet been paid, in my humble opinion.


The Dollar:


The greenback keeps bouncing off the DXY support at 93.5.  Of course, the dollar moves up and down based on what the Fed will do with interest rates.  Since they haven't yet decided on a Sept. rate rise (as per Fed Vice Chair Stanley Fisher at this weekend's Jackson Hole WY Fed conference) the DXY will continue to trade in a narrow range.  It's moved between 98.00 and 93.5 since this past April.


The recent bounce in the dollar was likely due to the upward revision in 2nd quarter GDP.  Evidently, currency market participants were impressed with the incredible strength in the US economy?  That AGAIN raised the possibility of a Fed rate increase at their Sept 16-17 meeting, which would be BULLISH for the greenback. Hence, the dollar see-saw goes up and down. The Fed will raise rates as soon as they are able to get away with it, and therefore the DXY will trade in a fairly narrow range till it does.


Crude Oil (Guest commentator Brent Berarducci):


The steep downtrend in crude oil (see chart in Monday's CURMUDGEON post) was interrupted this week when Oct Crude Oil futures rose an astonishing 16% in two trading days to close the week at $45.22.  While sharp rallies in bear markets are to be expected, this was the largest move in years and occurred with no meaningful change in energy fundamentals or the geopolitical background.  In a report to clients, I examine if there are reasons to consider this move a trend reversal or just a volatile upward correction in a continuing downtrend.  Please email me if you are interested in the report:


The FED:


Recall the purpose and function of the Fed:  it directly controls the US monetary system to pursue two primary mandates: to 1] promote price stability and 2] ensure maximum sustainable employment.  Price stability is usually interpreted as low and stable inflation.  The impetus for this explicit objective was the highly volatile inflation of the 1970s (Curmudgeon: thank you Paul Volker!). 


Permit me to quote from Fed elites via an August 28th WSJ article titled: Central Banks Rethink Inflation:


Central bankers aren’t sure they understand how inflation works anymore. Inflation didn’t fall as much as many expected during the financial crisis, when the economy faltered and unemployment soared. It hasn’t bounced back as they predicted when the economy recovered and unemployment fell.                                                                                                  The conundrum challenges much of what central bankers thought they understood about the world, as well as their ability to do their job. How will they know when to raise or lower interest rates if they’re unsure what causes consumer prices to rise and fall?


There is definitely less confidence, a lot less confidence” about how inflation works, James Bullard, President of the Federal Reserve Bank of St. Louis, said in an interview here Friday."                                                                          


This is a shocking surprise comment!  The Fed's Bullard evidently sees the world in a Keynesian vacuum.  So now the Fed admits they don't have a clue of how to do their jobs? Yet it is full speed ahead!


Curmudgeon Comment:  Not much attention has been given to an August 18h WSJ editorial by Minneapolis Fed President Narayana Kocherlakota, who is also a member of the FMOC.  In Raising Rates Now Would be a Mistake, he wrote:  “Given the prevailing economic conditions, higher interest rates would push the economy away from the FOMC’s economic goals, not toward them…The U.S. inflation outlook thus provides no justification for policy tightening at this juncture. Given that outlook, the FOMC should ease, not tighten, monetary policy by, for example, buying more long-term assets or by reducing the interest rate that it pays on excess reserves held by banks. Along these lines, the board of directors of the Minneapolis Fed has for the past few months been recommending a reduction in the interest rate that the Federal Reserve charges banks for discount window loans.”


History Lesson:


Economist and philosopher Friedrich von Hayek explained why Central Planning can NEVER be a success.  In a 1945 essay titled:  The Use of Knowledge in Society, he states:


"The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use -never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality."                                                                                                      


This is why ONLY free markets can be the singular means to efficient ends, as no one (especially not small cabals) have the KNOWLEDGE of the many that make a market or the desires and wants of a population of a nation.   Those that attempt to do otherwise (i.e. to circumvent free markets) are described by Hayek as:  "Intellects whose desires have outstripped their understanding."                     


Good luck and till next time…


The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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