As the fireworks dim and empty champagne bottles litter a table, beach, or kitchen near you, we can turn toward the markets and 2020 with open eyes and fairly easy signals.
In short, and as will come as no surprise to our readers: Just follow the Fed. It IS the market.
Below, I’ll share these signals with you.
The Dark Winter
Last year at this time the US markets were reeling in anguish and fear, as stocks tanked.
I was traveling from Paris to London and all eyes were on TV screens and headlines claiming the end of the financial world was near.
We too were concerned, but not at all surprised. Besides, we expected the Fed to “save the day,” which they eventually did-at least sort of…
The Q4 2018 shock that ushered in 2019 was something we called months in advance and was as easy to see as a cavity to dentist.
Entering 2019, the Fed had already spent months transitioning from QE to QT while raising short-term rates.
This was a perfect set-up for an over-supply of Treasury bonds dumping into the market and hence an obvious spike in yields and rates as bond prices fell in supply rush-an equally perfect set-up to tank a debt-driven market.
Et voila, the markets tanked right on que by Christmas eve…
As for this latest Christmas, the story was altogether the opposite. Instead of markets tanking, we welcomed Santa Claus in the backdrop of markets hitting new highs. This too was no great surprise.
Why the amazing change in twelve months?
Easy: The Fed had gone into stimulus overdrive in Q4 2019, once again confirming that this is a centralized rather than free market.
The Rosy Spring
We saw the first signs of the Fed’s “do whatever takes” panic-pivot in early 2019 when Powell first paused rate hikes and then began cutting rates-a complete 180 degree reversal from 2018 and a clear signal of more Fed panic, and hence more Fed stimulus.
As expected, we told readers to “party on” and turned temporarily bullish on the Fed’s fat-pitch right here in the early spring.
The Not-So-Hot Summer
By the summer, however, we turned sour again as yield curve warnings told us (and hence you) to go deeper into a cash hedge as our Storm Tracker rang warning bells.
We then warned of a bumpy autumn ahead.
A Bumpy Autumn
And boy were we right again-not because of psychic skills, but simple common sense. The bond market was literally handing us the warning signs.
By September of 2019, the repo markets completely freaked out and alas, so did the Fed. And again, right on que…
And as expected, our central bank began printing hundreds of billions of dollars to keep the inter-bank loan rates from once again spiking from 2% to 10%.
By October, the same Fed was now in full-on “QE-mode” for the first time since 2014.
This, folks, was pure steroids, plain and simple, and I literally stopped what I was doing from a river-bank in Utah and screamed, once again: “Party on!”
A Merry Christmas
And within months, the markets reached new highs, closing the year with an S&P up 29% and a NASDAQ up 36%.
Again, seeing this coming required no genius, just a few signals from the bond (rates) market and a hefty dose of common sense regarding the Fed.
2020-What to Watch For
Which brings us to the next cycle of crazy and 2020.
In short, what can we expect this year?
As always, and as usual, the primary market signal remains the US Federal Reserve.
Because the primary driver of the most inflated securities market in our history is the US Federal Reserve…
Love it (or hate it), the Fed is taking us into a full-on Twilight Zone as the US slowly transitions this year from unofficial to full-on official, open-market Fed debt-monetization, which is just a fancy word for printing money to purchase our government’s very own IOU’s…
The Magical Money Printer
Imagine, for example, if you had a money printer in your basement and that every time a car payment, tuition bill, mortgage deadline, credit-card statement or health invoice landed on your desk, you could simply print some cash and pay your debts.
Sound crazy, maybe even a bit fraudulent?
Well folks, that’s precisely how the US government operates today.
Don’t want to believe me? I really can’t blame you. Like so many things these days, the truth is stranger than our worst fictions and its oh so tempting to simply want to ignore or disbelieve it.
It may even be comforting, or even tempting, to embrace the warm and fuzzy notion that the Fed has outlawed recessions. After all, even children believe in Santa Clause, shouldn’t adults have a similar fantasy?
But for those of you concerned about the future of these doped markets and hence your money, you have no choice but to look at the truth-i.e. the simple math and data, and hence make the right decisions today.
The Simple Math
So, let’s look at the numbers. Perhaps you might want to fix another drink first…
For fiscal year 2019, the U.S. government had to borrow $11.5 trillion dollars to keep the engines running.
That’s effectively $11.5 trillion in IOU’s from Uncle Sam-otherwise known as US Treasury bonds, bills or notes.
That’s a lot of debt. What’s even crazier, is that 70% of that debt burden (i.e. $6 trillion) is in the form of bonds that mature in 6 months or less.
This basically means the US government needs to roll-over its debt every 6 months in much the same way a college kid needs to use his Master Card to pay his Visa bill, and when all else fails, dial up his rich uncle for a bailout of printed cash.
Needless to say, if a scenario ever arose where the cost of that short-term debt ever spiked to say 10%, the US would stop dead in its tracks-even our rich Uncle Fed would be tapped out.
Mortgage prices and corporate debt defaults would sky rocket and Uncle Sam would be looking at trillions more in interest payments. In short, a real “uh-oh” moment. Everything would simply tank. Game over.
Well folks, that’s precisely what happened to the repo markets in September, and needless to say, that sudden rate spike scared the living daylights out of Powel, which is precisely why he hit the print button on over $500 billion in printed money in a matter of seconds.
By printing money to buy bonds, this keeps prices up and the yields (and hence rates) on those bonds low rather than fatally high.
By October, the Fed was printing billions and billions and billions to buy its own IOU’s, which means the U.S. is now basically funding itself within the short-term funding markets, which also means the Fed will do whatever it takes to keep those rates low.
By extension, this also means the Fed is in a corner. It has NO CHOICE but to expand its balance sheet-i.e. print more dollars out of thin air to buy its own debt.
No choice at all-unless the bank regulators revisit the Basel rules and allow more dollar liquidity-but either way, this just means more dollars in the market.
What This All Means for Your Money
Well, if more dollars are about to flow into the system, and rates are now desperately forced to the floor, the recent rise of the US dollar (and pull back on gold pricing) is likely to reverse, which means in the next 6-12 months gold will begin its steady climb.
Again, were not gold bugs, but the facts of math, history and common sense confirm that gold is a critically important asset as a long-term insurance play rather than short-term speculation/flip.
No Wheelbarrow Runaway Inflation
Many smart-thinking folks naturally wonder if runaway inflation is now inevitable given how much money printing is going on at the Fed and other central banks around the world.
After all, printing trillions of fiat currencies out of thin air tends to dilute their value and harken images of Weimar Germany and crazy inflation where stacks of notes are needed to buy a stick of butter.
For now, however, such concerns are far way.
First, there’s a massive gap between actual inflation (around 10%) and reported inflation (around 2%). The bond market runs off the reported (dishonest) data, rather than real data, and hence this buys markets years of time before the wheelbarrows appear…
Secondly, the governments and central banks have a lot of tricks up their sleeves to buy more time, including emergency measures not seen since WW II, such as forced caps on Treasury yields and other capital controls that limit your dollar freedoms.
Again, such measures can buy lots of time-so don’t just buy rice, guns and water.
Thirdly, given how low our national income (i.e. GDP) is and how mountainous our debt is, you can expect to see more “helicopter money” in the near-term, which the fancy lads call MMT, but which we call pure insanity.
Insane or not, trillions in printed dollars do buy more time, and for now, even new market highs, despite the grotesque imbedded risk and poison inherent to all these short-term measures.
What to Do?
As increasingly informed investors, you are now aware of all the tricks, forces and desperation behind these market moves, from their December 2018 lows to their December 2019 highs.
It really is a rigged to fail game, but if you know the players and tricks behind this game, you can play it to your own advantage.
By March, we will be rolling out a portfolio service that signals which simple moves you can make as the conditions in this Twilight Zone market change, bear or bull, crazy to even more crazy.
You see, no matter how insane, there’s always a sector to play, from cyclicals and industrials, to emerging markets and the EU.
Our signals and systems track flows and rates so that you will be in the safest spots, properly hedged in shifting cash recommendations, while simultaneously positioned to exploit the real value plays, like buying bottoms and avoiding deadly tops.
We know you will see the value in such a simple approach and are excited to share it with you soon.
In the interim, enjoy the current Fed support, stay hedged in Storm Tracker cash recommendations and most importantly, have a fantastic 2020.
Matt & Tom
6 responses to “Looking Ahead: What We See for 2020”
January 03 2020