Source: Michael Ballanger for Streetwise Reports 06/19/2019
Sector expert Michael Ballanger offers his take on various factors affecting the stock and commodities markets prior to today’s Federal Open Market Committee meeting.
Question #1: With unemployment rates at 50-year lows, inflation below the Federal Reserve’s target, housing (bankers’ major collateral) at or near record highs, and stock markets within 2% of all-time highs, why in the Lord’s name is a rate cut even being contemplated?
Question #2: Can there be any doubt that the Federal Reserve Board is no longer “steward of the economy” but rather “Defender of the S&P”?
Many, many years ago, long before central bankers became rock stars, and during an era of true free market capitalism, to even imagine a Fed funds rate of 2.5% was to paint a backdrop of high unemployment, negative growth verging on depression, and sagging asset prices verging on deflation. A Fed funds rate of 6-8% was associated with vigilant inflation controls, strong growth and tight labor markets, where bond market vigilantes controlled long rates by their (as opposed to Fed or U.S. Treasury trading desks) selling or buying of treasuries.
This was the last period of non-interventionist monetary policy and it was a safer, kinder world within which investors could navigate their portfolio voyages with relatively reliable, simple indicators upon which to implement strategy. If one forecast accelerating growth and constrained supply, one bought gold and oil and waited for the reactions; if one predicted Fed tightening due to overheated labor markets, one sold bonds or shortened maturities while staying defensive in equity posturing. It was a dot-plotless, tweetless, FOMC-meeting-less, CNBC-less world, when the only financial show worth watching was Louis Rukeyser’s “Wall Street Week.”
I suspect that by the time this missive is delivered, the Federal Open Market Committee (FOMC) has either cut or left alone the Fed funds rate, sending stocks either higher or lower, but what is painfully obvious, at least to this self-effacing scribe, is that economic performance no longer propels stocks. All stock price movements are either event-driven or interference-driven, and that might also be said for both gold and silver.
Another idiosyncratic feature of all markets in the Year of Our Lord 2019 is that these FOMC circus shows are treated like Major League baseball final games, complete with interviews, guest appearances, and revisionist commentary with the only thing missing being the guy in the yellow frock selling beer and hot dogs. In the hours that lead up until 2:15 p.m. EST on FOMC day, stocks go into lockdown as the algobots are unable to focus on anything that doesn’t have the word “Fed” in it. You could have an outhouse explode in Times Square and stocks would barely budge. . .
The following charts are illustrations of just how benign the U.S. economy has become. There are no emergencies, financial crises, or political boondoggles that would prompt anyone to action in the arena of fiscal stimulus or interventionist molding of “conditions.” Take a look at these four charts and ask yourselves whether a rate cut is warranted or whether a return to “quantitative easing” is required.
The answer: They are not required. However, since it is the fourth chart that governs Fed policy, a 100-point crash in the S&P would indeed prompt a call-to-arms by the Fed and you can bet that is what Trump will demand if there is any type of negative reaction after 2:15.
Nothing appears to be requiring attention here. . .
Nothing appears to be requiring attention here. . .
Lowest unemployment rate in 50 years?
Less than 2% from all-time highs!
The prior four charts show me there really is nothing urgent in the economic backdrop that requires stimulus other then the Fed trying to stay “ahead of the curve,” with the Trade War being the potential catalyst for a slowdown. It is evident from Mario Draghi’s actions at the European Central Bank and Haruhiko Kuroda’s at the Bank of Japan that total capitulation to the sanctity of stock markets was the primary driver for policy, and that will eventually be the driver for Jerome Powell and the Fed. However, the risks will be greatest just before the markets decide that the central bankers are now, and have always been, clueless in their stewardship of the global economy becauese when that occurs, there are no arrows remaining in the stock market quiver.
The “Squid” is ready to resume its downtrend. . .
Not only do I not know whether the Fed will cut or not this afternoon, I don’t particularly care. The trade, as I see it, is to fade the advance because it appears that a cut has now been reflected by yesterday’s 28-point surge in the S&P. If they cut, traders will “sell the news,” and if they don’t, yesterday’s jump will be reversed.
Ergo, the Goldman Sachs Sept. $180 puts for $3.80 appear to be ripe for accumulation. I have also put on a modest position in the SPY July $280 puts at $1.63 earlier. Remember that you should never go overboard, either bearish or bullish, going into the FOMC, and always keep a bunch of cash available in the event there are surprises.
Gold is this morning was trading down a tad and as I tweeted yesterday, despite egregiously overbought conditions for the metals and the miners with plus-70 relative strength indexes (RSIs) everywhere, prices are holding, which has to impress. The odds favor fading the metals and miners based upon the RSIs given that five prior times, big plunges followed.
Let the absurdity prevail. . .
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger’s adherence to the concept of “Hard Assets” allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.
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Charts courtesy of Michael Ballanger.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.
( Companies Mentioned: GS:NYSE,
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