Storm's A Brewing: The dark clouds are starting to gather

By: Uri Estrin - September 24, 2020 09:14am EST
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Anything negative in the slightest may set off investors like a stampeding heard of wild buffalo .
Anything negative in the slightest may set off investors like a stampeding heard of wild buffalo .

The dark clouds are starting to gather. Sentiment is turning and the easiness of summer is fading. MacroTOMI has these past months held a view that an event of this magnitude would not, stimulus notwithstanding, pass by without considerable damage. It seems that other opinions are coming around to ours.

We recently wrote about the tenuous situation of the markets (read: State of the Economy:A house of cards) and wrote on July 15,2020 about the how we envisaged the Jobs market to play out (read: Employment Data show Probably Dead Cat Bounce) – the latest job numbers are starting to show that new job growth is losing steam.

While we opined that the prognosis was for long term adverse outcomes, we did so during a period of extraordinary exuberance. It was difficult to predict – and still is – when the markets will have their ‘aha’ moment.

What we can tell you is that the tide of sentiment seems to us to be turning. Nervousness over the election, supreme court nomination showdown and a lock-horned and potentially gridlocked congress mean that the anticipated (and expected) additional forthcoming stimulus may not arrive anytime soon. There may be an 11th hour ploy, to sweeten the voters and provide a shot of stimulus to do wonders to temporarily dissipate the clouds till past the beginning of November.

But the markets and the economic numbers are starting to show some interesting signals, only the fools should choose to ignore. Intraday volatility is picking up – wild swings between black and red in a single session. This tug of war could well be a precursor to a market waiting for an event to provide direction. Anything negative in the slightest may set off investors like a stampeding heard of wild buffalo . The corollary, is an announcement of more stimulus – it’s what the market and the gold bugs are pinning their hopes on.

I’ve often wondered if traders have thought what happens if one day, cry wolf, their expected stimulus doesn’t materialize. We may soon test that. The markets cannot sustain themselves on hope and prayer – they need something more.

House sales seem to be an outlier of ferverous activity. An enigma to many market watchers. But the inflation figures are waning, the jobs recovery is not terribly robust and the retails sales are showing signs that the ‘pent-up’ demand is fizzling out.

What’s super interesting are the short term stimulus distortions that many pundits were prematurely – and in our opinion, incorrectly – calling. Stimulus effects were clear; markets pushing new all time highs, Gold reaching records, the Dollar weakening and of course a bump in inflation.

Many opinions surfaced about the demise of the Dollar, the stratospheric gold price to come and such high real negative rates from wild inflation and the Fed’s no hike policy, that Treasuries were labeled garbage (and who woulld buy them).

The fact that all of these distortions are unwinding, signals to me that the stimulus sugar-high is receding. This bodes ill for many misplaced investors. Ironically, so far, Treasuries have remained in a very tight range. The 30yr vacillates between 1.4 and 1.45 mostly. If the aforementioned were true – negative rates, collapsing dollar, roaring stocks – why didn’t the long end of the yield curve blow out? Yields haven’t come down yet either to be fair.

If we don’t get more stimulus there is a high probability that the markets will weaken further, gold will lose more shine, Dollar strengthen and inflation will sink lower. Market uncertainty and lower inflation will ultimately push long term yields lower.

If we do get more stimulus (and another hurrah) – we could see the markets rise and gold shine a little more. If the monetary base expands without economic activity picking up (which is doubtful – read: The (almost) $10T question – and especially if it is monetary stimulus, long terms yields will fall.

Interestingly, we saw this same playbook in 2008. The 30yr yield has been on a steady downward trajectory from 4.5.

Interesting times ahead – it’s neither a time for the faint of heart, nor the faint of knowledge and experience.

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