The high drama playing out in the financial markets has been an earthquake with the UK at the epicenter. The BOE stepped in today with a safety net for the plunging UK bond market, sparking a rally across global markets notably including US Treasuries, stocks, gold, copper and oil. In other words the US dollar gave back some of its recent gains versus just about everything else under the sun. The celebratory mood in Wall Street and Silicon Valley reflects hope that their gravy train will keep on running, not new hope that middle America will regain any of the prosperity it has lost to the bicoastal elite over the past two or three decades.
But maybe that is reading too much into a one day spectacle. As they age, trends tempt momentum players in and money piles up on one side of the boat. Short positions in stocks, bonds and commodities against the dollar have grown too large. Everyone profiting from the same trade is impossible, so the boat must lurch the other way.
Another way of saying this is bonds, stocks and commodities were oversold and the US dollar overbought. The difficulty for traders and investors is gauging whether the reaction represents a sustainable trend change or a transient correction.
I don’t pretend to know. With the tools at my disposal however, I continue to think US stocks are not only vastly inflated and overvalued but underdiscounting the negative profitability outlook, while US bonds are overdiscounting how much the Fed will have to do to tame inflation. In short, stocks have come down less than they need to while bonds have come down more than they need to. If stocks rally very far, it will only encourage the Fed to grow even more resolute, so the balance of risks appears strikingly asymmetric. And while I think the market will come to see it my way, there are no guarantees whether or when, so while we can weigh them in favor of our expectations, it remains prudent to not bet all the chips on any one outcome.
In the financial media, however, today appears to be more about Wall Street self-serving and distortions than any genuinely good news. How much are stocks really up? And how much of this is actually dollar down? The S&P 500 is “up” 1.96% at the close. Gold is up 2.07%. Copper is up 2.98%. Oil 4.21%. Long term treasuries, as measured by VGLT (10-30 years maturity) are up a staggering 3.17%. (TLT (20-30 years) is up 3.35% and EDV (20-30 year zeroes – a close proxy for SS “Bonds”) is up 4.18%.) While talking heads wax giddy about supposed gains, the stocks of our great companies actually lost ground today to mere chunks of inert metal. It’s not a one day wonder either … they have the twenty first century to date.
But don’t expect to hear this on CNBC. Or Bloomberg, etc… because these outlets are there to market Wall Street and Silicon Valley, not the competition.
As we’ve remarked ad nauseum, when everything looks “up”, check your units. Check that you’re not standing on the deck of the Titanic claiming the ocean is rising. Indeed, the breadth of the price increases across asset classes leaves no other rational conclusion than the overwhelming move is in the unit of measure you’re using … this is a “dollar down” day. Many more days like this, and a dollar won’t buy you a stick of gum.
That’s what Wall Street media mouthpieces are celebrating. And it’s not good news for ordinary Americans, or … pointedly … for a Fed that for the first time in decades appears to be putting their interests first.