If you follow my blog or my social media, I have stressed the importance of the bond market. It is the dog that wags the tail and tells us where stocks will go. The debt market is the largest market in the world, and when problems arise, it will happen because of debt. After the great financial recession of 2008, we did not solve the debt problem, we just papered it over with more debt to deal with it later. Because of this, we are slowly approaching a managed/controlled market as these academic economists really are making things up on the spot and implementing them as policy.
I have been posting about yields inverting for a few months now, but this past week, we had the 1 month treasury yield invert with the 10 year treasury yield. Just crazy.
|US 1-MO||2.478|| -0.005|
The media is now talking about the inverted yield curve…which has a 100% record of forecasting recessions and economic crisis’.
This means now that the clock is ticking faster. The US and Canada can begin to cut interest rates again…to zero and maybe even to negative rates. Europe, Japan, Switzerland, and to some extent Britain (at 0.75%) really cannot do much. The only weapon they have in their tool box is to go more negative? This tells us that negative interest rates do not work, and these central banks really do not know what they are doing.
Quantitative Easing forever or infinity? This just means that inequality, and inflation will continue to increase making life tough for people, but there will be easy access to credit. I have been speaking about a confidence crisis. Banks, mainstream media have been speaking about how great the economy has been, heck President Trump has even said this is the strongest economy ever. If we go into a recession, central banks will need an excuse to save face, they can blame President Trump’s tariffs and tax cuts…in fact CNBC spoke about Trump’s tax cuts as a reason for slow economic growth and spending (to blame retail store closures).
If central banks do go back to QE, or governments need to bail out banks again…the socialists in the Democratic party in the US will pounce on this opportunity. They will use this for their modern monetary theory/helicopter solution saying why bail out banks when we can print money and give it to the people in the form of universal basic income etc. The laws of economics will cease to exist, and it seems we are going to a managed/controlled system. This requires a bigger government (which we have), and a more restrictive/authoritarian government, which is what we are seeing…we are hearing stories of censorship now on social media and this will get worse as they try to control the narrative.
But to summarize, I have said that this year we will begin to see the crisis unfold which will require interest rates to drop again. As much as I hope I am wrong, it is all unfolding as expected. The clock is now ticking faster.
I believe that the bond trade will be great, people will buy bonds not for yields, but for capital appreciation. As yields go lower (which they will since we going to cut rates), bond prices go up, the inverse relationship. We will eventually get to a point, where it makes no sense to hold long term bonds for yields (pension funds etc), this means we will see a sell off of bonds-which will be the big trade (short bonds). This will cause interest rates to spike which will fleece the middle class. One caveat is that the central banks can buy these bonds if they keep printing money…this is the tragedy of the situation we are in, controlled and managed markets.
Now to the Federal Reserve.
Fed chair Jerome Powell said there will be no interest rate hikes anymore for 2019…but maybe one rate hike in 2020/21…
Also, US GDP was downgraded, and slower growth was mentioned.
Balance sheet reduction would go from 30 billion a month, to 15 billion a month beginning May 2016, and will continue until the end of September 2019.
Many are now predicting interest rate CUTS this year, I have also mentioned that the next rate move will likely be a cut. The world is up to eyeballs with debt, and cannot survive higher interest rates. Central banks are stuck, and Japan is the ideal scenario now.
When this bond reduction program ends, the Fed can very well go back to adding to their balance sheet. Perhaps initiate QE again, or if problems get worse, initiate it before September 2019. Again, just crazy times now.
What is important is to look at the US Dollar:
We had a huge red candle as the US Dollar sold off on the dovish Fed. But look at the rally afterwards. We even broke a swing lower high, meaning technically, we will resume an uptrend.
The Dollar had everything required to keep falling, but why did it keep going up? As I said, money will flow to the US Dollar because it is the world reserve currency and also a safe haven currency. Money will continue to flow into treasuries, because even though the yields are low, compared to European bonds etc, they are high. As I said, the problems of the world get exacerbated as the US Dollar gets STRONGER. Watch emerging markets whose debt is priced in US dollars. We are already seeing the affects on Turkey and India. As the Dollar goes higher, it is a sign for me that people are worried…the Fed will have to effectively kill the US Dollar…perhaps by cutting rates.
A quiet economic calendar this week:
- Wednesday: RBNZ Interest Rate Decision, Draghi Speech.
- Thursday: US Q4 GDP, Tokyo CPI ex fresh food (March).
The US S&P had a big red day on Friday. We formed and engulfing candle and we have closed in a support zone. It would be nice to see a pullback before we take out the 2800 level. That is the level I am watching for a continued move lower.
I would NOT be surprised if markets continue higher. I have already mentioned in previous posts on WHY the Federal Reserve cannot allow stocks to fall. To be honest, the central bank mandate is now to keep assets propped up.
CADCHF is one that is already in the continuation phase. I would watch for another lower high, perhaps at the 0.7450 zone before heading lower. One to watch, but again, the trend has already begun, and we might see one more wave in the downtrend.
AUDCAD was on the list last week, and we had our break. Not the best looking, but it still is worth watching. We have stayed above the break out zone, and the next area is up ahead at the 0.9575 zone. A break above that would be more interesting.
GBPCHF with the daily break on Friday. Again, I do not like to take Friday positions, would rather just wait for the market to open again. Let us see how the follow through occurs.
GBPAUD is interesting. I will watch the 1.8410 zone to see the strength of the break.
EURCAD on the daily is looking to confirm its first higher low. To see this, we will need a break of the 1.5200 zone. That would be our first wave in the uptrend and we generally see a minimum of 2 waves in a proper trend. This one can continue higher.
Do like NZDJPY on the daily, we had our break, would watch for a retest of the 76 zone.
I like the head and shoulders we see on CADJPY on the daily chart. Again, I would like to see a pullback before shorting. Can go down to the 4 hour or 2 hour chart for this.
Really like Copper here. Probably my favourite chart for this week. We had our break already, unfortunately on a Friday. Now, I would like to see a pullback before we break lower.
AUS 200 has been on the radar for awhile. Still on the watchlist. Let’s see if we get our break below. Again, nice uptrend, and then price began to stall showing the trend is weakening/ending. A topping head and shoulders pattern too, we should expect either a continuation higher…which I will not trade, or a break lower, what I am looking for.
Really like the US Dow 30. Watching for the break of the 25370 zone before entering.