Newsletter - 10/8/2023
What is happening in the Middle East is truly saddening: so much death, anger, hatred. I will comment only on the events as they relate to the overall markets and economy.
Hug your children, your spouses, your family.
I am truly saddened.
The Week in Review
US politics remained the focus of the market this week, along with bonds and possible Japanese CB intervention.
The markets remains extremely precarious to swift moves in either direction as participants try to figure out which trend will win out.
The battle really is between "hope" and "facts": bulls hope that the economy can avoid a large extended drawdown and are grasping at any signs of hope while bears are merely waiting for what they believe is the inevitable: a market collapse due to the overwhelming weight of negative data.
Government shutdown (postponed):
As evidence that the market has no idea what is going on, seemingly good news (shutdown avoided) was sold on Monday and Tuesday only to be completely reversed on Friday. Markets that are confused and tentative experience wild swings that appear to be in conflict with each other.
That is exactly the type of market we have now.
While the Gov't shutdown was avoided, it was only delayed. What's more, with the ousting of the Speaker, the chance for an expedited solution appears ot have gone down the drain.
Result: the Gov't shut down is more likely, not less.
But honestly, the government shutting down is merely a circus compared to what is going on in the currency and the bond markets.
While the Gov't mouthpieces might be preaching that all is good, the private markets are telling them the truth: the global and US economy are about done for this growth cycle.
Look, you cannot fund expansion with debt, either at the government, corporate, or personal level indefinitely. At some point, the credit will run out and for a consumer based econonmy like the US, that translates into contraction. There is absolutely no way to stop this - other than more "free" money from the global central banks - which only kicks the can.
The structural problems that caused and existed in 2007 have only become worse and I fear a truly epic downturn.
Yields on the 10 year:
This is simple. Here is the chart of the 10 year yield. The blue vertical line is the end of last week. The grey vertical line is the end of the most recent week. Yields are continuing to go up and that's despite apparent intervention by Japan.
The corporate bond market is calling "bullshit" on the central banks who say the economies are improving. This is all that matters right now.
Japanese Yields:
The Japanese are desparate to prevent their yields from rising so that their ultra low yield policy remains intact. However, they are fighting two different but related battles because they ALSO can't allow the YEN to weaken further against the dollar.
Because Japan'e economy has switched to an import based economy, when the Yen weakens, it makes imports such as fuel and materical more expensive.
If those two things become more expensive,, then manufacturing companies will pass that increase on to consumers, and that is inflationary.
If products and goods rise in price, then it is inflationary. And we know what interest ratres must do to combat inflation: rise.
So the Japanese must both strengthen the Yen vs. the Dollar AND suppress interest rates. They do this through intervening in the currency and bond markets.
While the Japanese this week did not specifically confirm (or deny) that they had intervened, I think the evidence speaks for itself.
"Someone" most definitely came in and bought Japanese bonds - remember that bond prices up, yields down.
The second image is the Yen Dollar chart. The proverbial "line in the sand" is 150. Note what happened this past week.
Here's why Japan matters:
The Japanese have been THE buyer of US Treasuries. They have done this to help the US Fed to keep US interest rates down. Buying bonds lowers yields.
If the Japanese decide to really get aggressive in the support of their own economy (which they should) then they will start selling US Treasuries.
Sell bonds and yields go up.
Simple, right?
Watch the Yen Dollar and watch Japanese 10 year yields. They will telegraph what's coming with US yields.
US yields up - stock market goes down.
SPY Commentary
The SPY has found support at the 420 level. And it has overhead resistance at 430. Those are the two levels to watch.
Whichever level breaks first will determine the near term direction.
IF price breaks topside. the gap will be filled.
IF price breaks lower, then 400 comes into play.
Selling "appears" to be narrowing as the MACDhisto on the bottom shows. However, this is not a leading indicator.
Bonds and Japan will dictate ultimately which way we go.
And then, sadly, we have what is going on in Israel. While currently it is a defined conflict in the Gaza strip, IF this expands into a regional conflict, then I would expect the stock market to go down.
I am writing this two hours before the futures market opens but venturing a guess, I would expect them down initially. But I also expect the market to be bought since the "Buy the DIp" mentality has been "rewarded" so many times in recent years.
Now is the time to remain nimble.
Middle East: what to watch
Night comes before the dawn. Evil never wins.
Both nice sayings and both true, if you retain hope, and have enough time.
While deeply saddened, I still have hope. But it is being tested for sure. However, there are possible scenarios that we need to look at.
Conflict remains confined to Gaza:
If the conflict remains in Gaza and Israel, the net effect on the markets will be neutral. Of course, the world's powers do NOT want this to remain in Gaza as is evidenced by who is backing whom in this conflict. This is another proxy war between the US and Russia - but also Iran, China and many anti-Western countries.
Prediction: Markets drop initially but then resume "normal" behavior.
Conflict spreads but remains regional:
If this occurs it WILL put downward pressure on the global markets. While, perversely, war is actually good for economies, it is very bad for the stock markets in the mid term.
There is a large risk that Iraq, Iran, Syria or Egypt will provide overt aid to Palestine and trigger a regional conflict beyond Israel / Gaza borders.
If this occurs, the market will drop quickly but eventually find a bottom.
Washington is stuck again between ANOTHER rock and a hard place. If they increase their support via proxy then the price of oil will skyrocket which is inflationary and then the US economy's risk of collapsing exponentially increases.
If Washington does the least it can do to support Israel, then they will lose even more influence in the region.
I believe they won't risk the latter and choose to let inflation and the economy explode in the event of a broader regional conflict.
Prediction: markets down 20%.
Proxies decide to become "unproxied":
If the global powers involved decide that the only way to sustain their influence in the region is to directly engage one another, then WW III has begun. This is not a doomsday scenario but a very real possibility.
Any talk of "peace keeping missions" that involve boots on the ground would effectively signal to me that events are beginning to spiral out of control.
Prediction: markets close for days.
The US has a real problem:
The US is at great risk of even further over extension of its influence.
The US cannot fund a war in Ukraine and a war in the Middle East. And that's if the conflict does not spread regionally in the Middle East.
If you are an adversary of the US, let's use China, now would be the perfect time to invade Taiwan.
Or, for North Korea to attempt to "reunify" with South Korea.
There are so many ways that this goes bad for the US geopolitically and to be frank, I see no possible positive results.
WEEKLY HOW WALLSTREET SCREWS YOU:
On Friday the jobs number came in hot and that caused a market drop. At first. But then the market rallied and many were asking WTF is going on??
Well, the stock market knows that the initial numbers are always revised. Why?
Well, because there is the headline number, which is released and a big "to-do" is made about them.
Then the governement quietly revises the numbers one or two times later - when no one is paying attention.
Why would this happen? Because Wall Street knows what the numbers will be and they trade off of it. And they also know that the numbers will be revised and they trade off of that also.
Take a look at first the history of revisions in just 2021:
Now, let's take a look at what's beneat the "good" numbers, Effectively, almost all the jobs created were GOVERNMENT JOBS.
Government jobs to not translate to economic growth. In fact, since they are funded by taxes, they signify additional expense to you and I.
And this ends this week's episode of how you are being screwed.
UPCOMING WEEK:
Initially all eyes will be on the Middle East and oil. Oil was down bigly last week but i don't expect that to continue, especially with what occurred this weekend. And yes, I do think that the oil price was monkey hammered down by the FED and its global central bank friends. It remains to be seen if they have "lost control" of oil just as they have lost control of interest rates.
Beyond the Middle East, I will of course be watching the US 10 year yield (5% is the "all hell breaks loose level), Japan and whether or not the market can continue to follow through after Friday's rally. The fake manufactured rally.
It is only a matter of time before something breaks. Until then, I remain very cautious.
Yes, I am glad that I closed my VIX short. Yes, I am concerned about the QQQ ultra long I opened on Friday. But I have position sizing on my side so even if I were to take a complete loss, the portfolio would be just fine.
Longer term, the market is going down. I've covered at length why. Now we just have to wait for the first domino to fall. Some experts agree with me:
CLOSING COMMENTS:
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Thankyou Family!
theBoss
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Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.