Control Panel: Another bear market rally?

Investment Analysis Clubs Macro Economic Trends and Risks
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All METARs know that the Federal Reserve has repeatedly announced its intention to quell high inflation by raising the fed funds rate until inflation declines to its target (2%) and then hold for a sustained period until it is clear that inflation won’t pop up as it did in the 1970s. They also announced that they plan to maintain a “neutral” fed funds rate which neither stimulates nor slows the economy once their inflation goal is reached.

Despite this clear guidance, the markets have rallied joyfully whenever the inflation rate drops a couple of tenths of a percent in hopes that the Fed will soon cut the fed funds rate. There was a bear market rally in June 2022 which was smacked down by Fed Chair Jerome Powell. The markets have been popping again since the latest inflation reports, despite the very high inflation rate. Fed officials have been warning about this.

The stock market Control Panel looks positively cheerful. The bond Control Panel and Treasury yield curve show that bond prices have been rising (interest rates falling).

The Fear & Greed Index is in Greed. The trade is risk-on since stocks are rising relative to the UST. Junk bonds, which had been rising relative to the UST are no longer rising. The USD is falling. Oil is rising, natgas is stable.

The real economy depends upon consumer spending, which is 70% of GDP.

As Savings Slowly Shrink, Consumer Spending Is on Borrowed Time

For now, spending remains strong as consumers use hoard of savings to catch up on experiences they missed during the pandemic

By Harriet Torry, The Wall Street Journal, Nov. 20, 2022

It is the $1.7 trillion question for the U.S. economy: How long can the savings consumers built up during the pandemic keep their spending going?

The answer: about nine to 12 more months…Economists estimate that headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in “excess savings” from Covid stimulus — the amount above what they would have saved had there been no pandemic…

The Federal Reserve Bank of New York said credit-card balances increased 15% year-over-year in the third quarter, the largest increase in over two decades. The rate of delinquency, that is debt more than 30 days past due, rose across income groups…[end quote]

Personal savings have dropped to below the pre-Covid level. Consumer loans are rising fast.

When consumer spending slows a recession could start. If inflation stays high (as it probably will due to rising wages and rents) we will see 1970s-style stagflation.

The METAR is sunny for next week. But this is a bear market rally. I don’t think it will last.

Wendy

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The Yen is breaking out. I am concerned that it will be a sudden rush in Japan to dump the US Treasuries. I can not say when but extremely soon. The fire is lit in Japan to dump the US paper and buy Yen. Looks lit, I want to couch my words when talking about the future.

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Thee vast majority of the US government bond holdings in Japan are held by the Japanese government and the bank of Japan. They do not respond to the same profit motive as private/commercial investors. To the Japanese, long-term relationships are very important and I would not think that they will be dumping US bonds unless their trade with the US tapered off for reasons less transitory than a mere recession.

Jeff

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Jeff,

Do you have any link to that break out of US Treasury ownership in Japan.

AIG pre 2008 was buying US Treasuries and other bonds to offset lower rates in Asia and to sell insurance in Asia. Japan in particular I thought. You certain Japanese insurers did not partake in such transactions?

Either way the BoJ wants the Yen to appreciate. The Yen has broken out. I just do not know if there will be follow through. Yellen and Powell think there will be and have planned to buy the long end of the curve when it happens.

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What I have noticed is vested interests, like bubblevision, shouting from the rooftops anytime anyone at the Fed says anything even slightly hinting at a reduction in the rate of rate increases. They could keep the market levitated with this hype until it eventually happens.

Steve

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Jeff,

Unless you have better numbers careful there.

The only readable part of this is the first paragraph and a half, but what an opening paragraph on this topic. The rest seems to be behind a paywall.

snippet for fair use
October 26, 2022 01:06 JST
TOKYO – Japanese life insurance companies plan deeper cuts to holdings of U.S. government bonds as the cost of protecting against the risk of a weak yen outpaces gains from higher interest rates.

In investment plans released by Tuesday, seven out of 10 major insurers said they would cut holdings of foreign debt, mainly U.S. Treasury bonds, in the second half of the fiscal year ending March.

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Found this:

https://ticdata.treasury.gov/Publish/mfh.txt

Jeff

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Those holdings are often the respective central banks, but in total included banks, insurers and other institutions ie mutual funds, bond funds, and several other instruments.

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The stock market bubble was inflated by margin debt. As the interest rate on margin rises it becomes more expensive for traders to borrow. Less margin corresponded to the bubble and a falling market.

Even bubblevision hype can’t levitate a market if traders aren’t bidding stocks higher due to the higher cost of margin. And the Fed is tightening that noose.

Wendy

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CNBC etc Barrons etc sucker in the small investors. It is a dirty little job.

But the small investors can find out very quickly they are losing money. Literally that day.

Fooling people and changing the course of the market are two different things.

If the market trades up that can be all sorts of reasons, FA, TA, News. The small investor can luck out for a day, a week, a month, but realities the little guy really is not equipped to know will come into play.

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Just out of curiosity, with full employment and end of year contributions frequently being mandated - along with mutual fund rebalancing, what do you think of the chances of a Santa Clause rally this year (and a matching “deflation” of the market 1st quarter 2023)?

Jeff

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The amount of cash on the “sidelines” dwarfs any end of year contributions and top offs. And mutual fund rebalancing simply moves money around, it doesn’t really add new money. In fact, if there’s still a lot of 60/40 portfolios out there, with bonds having gone down so much this year (and perhaps still to go down a bit over the next 5 weeks), rebalancing could end up shifting as much out of equities and into bonds as vice versa.

So while we are somewhat likely to get a Santa Claus rally, it’ll be mostly due to that mountain of cash waiting to be deployed somewhere.

That said, the market had been behaving “oddly” in recent years. What were general seasonal trends seem to have shifted based on all sorts of other things. For example, this year, “sell in May” didn’t work well at all. “Sell in January” or “sell on the first day of spring” worked a lot better.

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Jeff and Mark,

It might depend on this follow through for the USD.

There are three possible positions, up down or sideways. All three right now are on the table. Down is the least likely. Up after such a climb this year is a bit less likely.

Getting to the 200 and bouncing like this is a powerful rise. Even if that means sideways longer term. Historically at this point in the 1950s we’d get sideways.

Short term this is buying power and going to dampen the nominal cost of energy. The last rise in the price of WTIC was based on the drop in the dollar.

The market is seeing lower rates for the 10 year. When that shifts to higher rates the market will drop. Because the value of equities will drop.

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@ Jeff,
There’s always room for a rally - start of year, mid-year, end-of-year, Santa Claus rally, Santa Clause rally (if it looks extremely beaten up, it could rally)

HohumYNWA
Open for plotting moves

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DXJ is up and away

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Japan is in an interesting position. The country can afford to have fewer jobs and more retirees while shifting to supply side econ and planning for more efficient corporations. The US failed often to have more efficient corporations. The Japanese can plan this instead of our approach.

The population has been dropping for some years now.