Equities are seeing a summer stock surge

I want to explain the markets in really simple language, since there are some very basic problems in the largest securities market in the world and the projections associated with what is going on.

Fed chair Janet Yellen is in a tough spot. Yellen & Co. wants to raise rates but the rate of inflation is not growing. The Fed’s tools for the economy are to control inflation from getting too high, by raising rates.

Late last week Yellen gave the markets all they need to know by intimating that a pause in rate rises is on the table after seeing prices stagnating and retail prices are falling fast.

On Monday morning the 30-year US bond is 2.9% yield and the 2-year US paper is 1.35%. The difference between the two rates is too tight for the 28 years of duration. That is called flattening of the yield curve. Bank stocks hate tightening since that squeezes the profits on loans.

When there is little inflation — like now — raising rates can cause deflation. Deflation or stagflation (a less sever form of deflation) is when prices fall because too few dollars chasing goods.

The Fed was said to be raising rates quicker recently in order to have the ability to lower rates later in the event of economic slowdown like a deflationary hiccup.

So what does the stock market see? A celebration.

As I have often said here, capital goes where it is treated best. So look for stock indices to set all-time highs on just about a daily basis, since little cash will go into debt with the diminished returns.

Another factor in the summer stock surge is equities are buoyed by low inflation. Shares always move higher in a low-inflation environment. So we have a perfect storm in the markets.

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This quarter turned stocks into pints

More than $11 trillion was lost in global equities prices in the quarter ending Wednesday.

Naturally all markets rally today on the window dressing that occurs on the last day of a month, quarter or year.

That $11 trillion is not lost on all market players. As traders go in and out of stocks to eke out profits in a down market. No the everyday people, who are advised to stay in the market for the long haul are the big losers. Retirement accounts have taken a beating this quarter since most are not actively managed to cut losses.

So we enter the cruelest month for the markets — October — with an US monthly payroll report on Friday.

BTW, I still have Glencore on my radar, despite stories floating around that the firm may go private as the stock rallied briefly. Again who or what will backstop the huge losses on the company’s books? The Fed? The ECB?

Interesting times.


Europe’s economy slipped into negative inflation, which by any measure means deflation. Central banks across the globe fear a deflationary spiral, since they have no ability besides further easing to combat it.

Bit what does that mean for the consumer? Less debasement of currency as prices fall. Pricing power moves to the consumer. Why buy a washer and dryer today, when it could be cheaper next week.

It’s not a draconian event for consumers — in the short term — but can lead to layoffs if it persists from a longer period of time.

So enjoy it while it lasts.

The Fed's own deflategate

So the Dow Jones is down 10.8 percent since the March highs, in full correction territory.

This latest downturn has more to do with the slowing global economy and the deflationary inputs that are coming ashore here in the US.

Whether it’s through cheaper crude oil or price cuts by overseas suppliers struggling to keep market share.

Of course, this is the principle concern of the Fed, since they have no tools to combat deflationary price spirals. Falling prices — helpful to consumers with constrained budgets — is seen as problematic to economists when looking at attempts growing an economy.

The Fed uses the terms, “inflation is growing under trend,” which means they are looking to achieve a 2% inflation rate.

This is almost impossible in the current environment to achieve when countries are fighting a currency war, by debasing their money against other currencies in order to spur growth.

 

Fed vice chair Fischer tries to talk up inflation

Former Israeli central banker and now Vice Chair of the Federal Reserve Stanley Fischer was jawboning at Jackson Hole conference over the weekend, since Fed chief Janet Yellen did not attend.

He believes the Fed is on track to raise rates this year, until it won’t be able too. He also said the Fed won’t wait for inflation to hit 2% benchmark before raising rates.

Well in a deflationary economy does that mean when it hits 1%, because we will not get near 2% anytime soon while global prices and growth are sliding.

Crude oil is the barometer of growth still. And as West Texas oil slides bank into the $30 range, it shows that the slowdown is accelerating.

Global shipping indices are also at multi-year lows, during the important holiday inventory build.

Just a by the way, how comfortable are you with the second most powerful banker in the US — that being Fischer — holding dual citizenship in the US and Israel?

It certainly gives me pause.


 

So the last day of August is upon us. The stock market now enters the silly season.

Here are the three exchanges numbers before the open.

Dow Jones: 16,643.01

S&P 500:  1,988.87

Nasdaq:  4,828.33

We’ll come back to these numbers in two months. Chances are they may be 10%-20% lower, without having a change in rates.

Fed is closer to QE4 than rate hike

“If you don’t have yer growth, you can’t have yer rate hike. How can you have a rate hike if you don’t have yer growth?

If Pink Floyd was writing on economic realities, then this could be a line out of “The Wall.”

The thought behind the music is, the world is nearing a deflationary recession, central banks will be cutting the value of their currencies to find growth, and you want to raise rates?

Yellen and Co. know this to be true, they will see it in retail sales numbers later this week. The American consumer is keeping their collective hands in their pockets.

Look at the retailers trying to capture the consumer in back to school sales. Huge discounts and we are just getting underway. A 70% off sale four weeks before school starts, does not portend good tidings for this stores.

You will here analyst say, “The Fed is pushing against a string,” which tells you it has no leverage to hike.

Just look at the Fedspeak on inflation. “It’s running below trend.” Translation, there is no pricing power for the manufacturing, wholesalers or retailers.

The US consumer knows this and figures that the product will be cheaper in the future then it is now and puts off a purchase, that deflationary.

That’s what the Fed fears, because it has no tools to combat deflation. Raising rates would only make the matter worse, so that is why I say The Federal Reserve is closer to QE4, then raising rates.


 

I ran into Jim Rickards, author of “Currency Wars” among other books yesterday.

Jim’s book reads like a financial news segment for today. It’s the dynamic of central banks slashing the value of their currency to spur growth, but it rarely ever works to the benefit of the people.

China’s central bank is now in the second day of “defending its currency,” which means all Chinese are taking haircuts of their wealth.

I would not say Jim is a gold bug, but he does believe there is a place in the portfolio for the precious metal as these currency wars take place. Gold is up $25 in two days in NY as a result of the debasement of the yuan.

In this scenario gold is a store of wealth. An investment to preserve value, while currency value falls.

Let’s say China will not be the only central bank to cheapen its currency this week. Other Asian trading partners — who live on the premise of being a cheaper alternative to China’s manufacturing — will need to debase their currency along with Russia. This is the war aspect of currencies.