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Wednesday, November 23, 2016

Daily update 11/23 Ultra-Easy Money: Digging the Hole Deeper?

Wow, that was an exciting day. 

Curiously, today's low hit the low from yesterday exactly.  Odd.  Breadth was dead even.  New highs dropped just slightly to 262.  New lows picked up a bit to 34.  They remain elevated with the indexes at new highs.  Normally they are under 10 (15 at the most) in this condition.  This is likely related to bond funds continuing to sell off. 

The futures are forming a consolidation pattern at the high.  That can be good or bad.

The green count fell a bit more.  Unlike yesterday the red count turned up noticeably today.  Clearly people are not exactly piling into the big cap stocks here.  That might be dollar related.

The dollar is up over 6.5% since Oct. 1.  That will impact earnings considerably.  Interest rates have had the fastest move up in several years.  The real question is whether those moves are sustainable or not.  I am certain the dollar is as I think there is a global scramble for greenbacks going on.  The bond market is a different situation.  We clearly have a bond bubble.  I have not heard anybody try to say otherwise in a long time.  However, determining when a bubble is bursting can be quite problematical.  There seems to be some inflation worries in the market that may be driving the sell off.  Some of the current inflation we are seeing in the system is from the rapid rise in oil and other commodities.  That will be transient.  Some people seem to fear rising wages.  There has been a bit of an uptick in the wage data.  I believe that is driven largely by increases in the minimum wage.  There have been various increases all around the country.  That is much harder to judge how significant that is.  Whether the current inflation is transient or not really does not matter.  What really matters is people's perception of inflation.  Listening to people talk I think there is a developing perception that more significant inflation is on the way then what we have been seeing.  If that is the case then rates will continue to rise.  As weak as the economy is that would slow it down for sure.  We might already have seen enough of a rise to be noticeable in a few months.  The higher rates also hurts the Wall Street mantra that high stock valuations are justifiable because of low rates.  That could lead to trouble in stocks.  Don't forget about the risk parity funds discussed a while back.  These are leveraged stock and bond funds.  If bonds go down enough those funds might need to sell stocks to meet margin calls.

What happens to stocks is most likely going to be determined by what bonds do.  What happens to bonds is most likely to be determined by investor's inflation expectations.  I don't exactly know how to handicap that.  Predicting a stock market crash is always difficult.  It is pretty easy to see how the bond market could make that happen in this situation, but will that actually happen.  I mentioned a while back this is likely the moment of truth for stocks.  Is the 2 year consolidation a top or a base to go higher.  I believe we will find out in the near future.  Should it be a top the downside is probably pretty big given the over valuation and weak economy.  This is probably an important time to monitor investment portfolios closely.  There is lots of data and events coming up next month that could easily shake things up.

This is an extremely interesting paper on central banking from an insider.  Ultra-Easy Money: Digging the Hole Deeper?

Happy Thanksgiving to all.


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