Volatility

Posted on by Finster Posted in Allocation, Markets

Markets update

Well it’s been a wild decade in the markets these past few weeks. Heck, it’s been a wild decade just this week and it’s only 3/5 complete. The broad US stock market (VTI) had declined nearly 20% since February 18, then surged over 10% just yesterday. Commodities went along for the ride, with copper plunging then recovering. Energy prices as well. Even the normally staid gold retreated from all time highs and recovered much of it.

The signal risks being obscured by the noise. Yield curve inversion and uninversion signals remain in place, with their deflationary implications in tow. There remains stress in the credit markets and a proverbially tapped out consumer. US stocks remain at bubble valuations. Government debt still poses an existential threat. All issues which are independent of and which predate recent trade policy headlines. And finally, a Fed which was eager to slash rates on the flimsiest justification before the election is now recalcitrant even amidst crashing markets and recessionary omens.

There is no playbook for such a unique constellation of circumstances. Except for that timeless classic … diversification. Stocks, bonds, commodities … as appropriate for your long term goals and long term outlook. Financology follows events and trends as they occur, and discusses the history and outlook of and for the markets, but as recent developments spectacularly demonstrate, headlines can turn on a dime. So we look beneath the headlines.

This is no mere philosophical boilerplate; let’s look at a specific example. Recent media reporting has routinely attributed the ascent of gold prices to tariff fears. But a look at any five year chart of gold prices reveals that gold began to take flight around the end of 2023. The Fed had just ratified its intention to accommodate Wall Street pleading for monetary easing. Federal debt was exploding, and Russia sanctions were escalating. At the time Donald Trump was under criminal prosecution and not considered likely to win reelection, let alone about to unveil shocking tariff plans. Likewise, stocks began to sell off well before tariffs escalated on weakening economic data pursuant to yet earlier yield curve activity.

Understanding the real drivers of markets amid mass media disinformation has been key to informed investment decision making. We’ll follow up with emergjng developments affecting markets in the comments section.

37 thoughts on “Volatility”

  1. Reply
    Finster says:

    Speaking of gold …

    … even after global equity markets exploded higher supposedly on relief over a 90 day reprieve from the most egregious tariffs, gold continues to rally dramatically, now easily regaining the $3100 threshold after surrendering the $3000 mark mere hours earlier.

    In fact, despite media spinning the move as administration capitulation, the relief was limited to those countries that had not retaliated. It looks to me more like a classic Art of the Deal triangulation strategy to put China squarely in the crosshairs. Team Trump escalated China tariffs to a nosebleed 125%.

  6. Reply
    mega says:

    Talking to an old engineer who has links to Landrover.
    We talked a bit about EVs & battery tec……..he told me that Solid state battery testing is on going & will becoming, but the cost might be high as they seem to have rather a lot of silver in them…………could silver at last get its day in the sun?
    Mike

  7. Reply
    mega says:

    Bank of England postpones debt auction over Trump trade war losses

    The Bank of England has delayed plans for an auction of gilts after Donald Trump’s trade war triggered a sell-off across global bond markets.

    Threadneedle Street said it plans to delay a sale of longer-term bonds “in light of recent market volatility”, as borrowing costs rose sharply over fears the US president’s tariffs would spark a financial crisis.

    President Trump announced on Wednesday he would suspend the most severe of his “reciprocal” tariffs by 90 days, barring levies on China, following a sharp sell-off on bond markets.

    White House economic adviser Kevin Hassett admitted the turmoil in bond markets “may have” played a part in the US president’s decision to delay his “reciprocal” tariffs, although he insisted this had not been a “panic move”.

    An auction at a time of turmoil on bond markets would risk the Bank of England suffering sharp losses pn the sales.

    The Bank said: “Sales are being conducted so as not to disrupt the functioning of financial markets, and only in appropriate market conditions.”

    Two-year gilt yields have fallen in recent days, pushing up their prices on bond markets, amid increasing expectations of interest rate cuts by the US Federal Reserve and the Bank of England this year.

    However, longer-term yields have soared, pushing those bond prices lower, amid fears about damage to the world economy from President Trump’s trade war.

    1. Reply
      Finster says:

      Perfect example of media misinformation. Here’s another one. Spin 1 is that the Trump administration backed down, despite actually ratcheting up tariffs on the biggest trading partner. Spin 2 is its new religion, that all of the recent market travails are because of tariffs. Nothing about the yield curve inversion that unraveled last year or about the credit crunch or bear market that began weeks before April 2.

      Believing this would have left you assuming that yesterday’s policy announcement would leave markets in the clear for a while. Understanding that it there is much more than tariffs behind recent market action would have left you properly skeptical and cautious.

      Believing this would lead you to think that all our financial and economic worries would go away if Donald Trump would just disappear and let the financial elite have their way. Exactly what the financial media wants you to believe.

      Understanding that there is a deflationary process under way would leave you prepared. Follow Finster if you want to understand what’s really going on!

  9. Reply
    thrify says:

    I have no doubt you are correct that our current economic conditions are deflationary/disinflationary. But I can’t quite see the fundamental forces moving that direction. Freidman tells us “…inflation is always and everywhere a monetary phenomenon…” and that insight has guided us well since he write it in his book in 1966. Can you help me see the reduction in money supply underpinning these deflationary winds? Thanks.

    1. Reply
      Finster says:

      Good question; thanks, Thrifty. The value of currency is like anything else; not only a function of supply, but also of demand.

      Let me put it in context. It’s a simple thing but challenging to communicate, mostly because we’ve been ingrained in indirect and obscure terminology. A deeper dive is in Deflationary Crash.

      First thing is to realize is that currency is a security like any other. It goes up and down. But we don’t see those daily movements directly because we use currency itself as the pricing unit. We only see them through the prices of other things.

      Currency goes down, it takes more of it to buy the same stuff. Prices rise. Currency goes up, it takes less of it to buy the same stuff. Prices fall.

      Currency is also like any other security in that it can experience a short squeeze. You’re familiar with what happens when that happens to a stock. Too much short interest, and even a small gain prompts people to buy to cover their shorts. This is a surge in demand for the stock caused by people needing to acquire it to repay the stock they borrowed, causing the value of the stock to surge.

      What happens when there is too much currency sold short? The same thing. Demand for the currency surges as people need to acquire it to cover their short positions. It’s really very simple, but not so obvious because we use different terminology for it. We call a short position in currency “debt”.

      Another obstacle created by our terminology is that when most things are going down, we call it a bear market. When they’re going up, we call it a bull market. But when currency is in a bear market, we give it a completely different name: inflation. When it’s in a bull market, we call it deflation. This gives the impression that something different is going on compared to when any other security falls or rises. But it’s the same familiar thing, just given a different name that obscures its similarity.

      Another blind spot of conventional economics is looking at money supply, but not money demand. With all due respect to the great Milton Friedman, it’s Econ 101. Supply and demand.

      So deflation is just a rise in the value of the currency created by rising demand for it as people who owe it try to acquire it to cover their short positions … to repay their debt. This occurs system wide, but an obvious example is brokerage account margin calls. If the Fed dithers and fails to timely match the demand increase with an increase in supply, the only thing that can happen to the market value of the currency is rise. The Fed’s main error though is usually in failing to reverse the supply increase when the demand increase fades, producing more inflation and sowing the seeds for the next crisis.

      Years of inflation persuade people that currency can only go down. Massive short positions (debt) build up. Then when money tightens a bit, it can trigger a short squeeze. This happened in 2008, it happened on a smaller scale in 2020, and I believe it’s happening now. It’s noteworthy that each of these three instances followed an inversion and uninversion of the yield curve, as the Fed belatedly tried to reverse its earlier inflationary excess.

      The ultimate cause of deflation? Seemingly paradoxically, it’s inflation. The Fed creates inflation (bear market in currency) by expanding supply via lending money into existence. As the debt builds to excess, it provides the tinder for a short squeeze, that is, deflation (bull market in currency).

      Interesting to note that this morning’s March CPI confirmed a softening in consumer price increases. All prior to April 2. I don’t want to make too much of it, because changes in the value of the currency only gradually make their way through the pricing chain to consumer prices; they show up first in asset markets, where things reprice in real time, tick by tick. But in conjunction with the message from real time asset markets, the conclusion is clear.

      I’ve tried to keep this as brief as possible in order to not make it appear complicated. It’s only because the language of conventional economics is inadequate that it’s as long as it is. If I’ve left any gaps please call them to my attention and I’ll try to fill them.

    1. Reply
      Finster says:

      You betcha, Mike. Prices for virtually everything traded in real time markets are falling, with the conspicuous exception of gold. I suspect the reason gold is not confirming is that it’s looking past the right now and sniffing out the likely Fed response. The Fed can tolerate falling stock prices but when Treasury prices start falling it comes under intense pressure to intervene. And we know the Fed always intervenes too long and the next inflation cycle is under way.

      Gold says it could be a doozy.

  13. Reply
    mega says:

    EU to cut tariffs on Chinese EVs – but add a minimum price
    The European Union is reportedly in talks with China to roll back tariffs on the Asian giant’s electric vehicles.

    Last year, the EU imposed extra duties of 17.4pc on cars made by BYD, 20pc on those made by Volvo-owner Geely and 38pc for SAIC.

    German media, including Zeit Online, say that China’s EV manufacturers are planning to share technology with European producers and invest more in EU. In return, the EU reportedly plans to cut duties and instead impose a minimum price for the cars.

  16. Reply
    Finster says:

    Bloomberg just ran an interview with an economics professor, Justin Wolfers, who pointed out that the size of the tariffs isn’t enough to explain the market action we’re seeing. There must be something else going on, he says. Bingo!

    But then he blames the helter-skelter way the administration has implemented tariff policy. No question the volatile, impulsive and convulsive rollout has contributed, but like virtually all media analysis these days, the coverage suffers from a lack of memory any deeper than a few days. You would think an econ prof would understand the implications of yield curve inversion, credit market stress, tight money, etc.

    I still think that if this goes on, especially if the bond market rout continues, the Fed will step in. That would finally get to the root of it.

    1. Reply
      Finster says:

      Much better analysis here at Kitco:

      This is a historic unwind …

      ”When the market goes down, the value of cash gets much more valuable,”

      More at The Daily Reckoning:

      9.0 Magnitude “Bondquake”

      “Not 1 in 100,000 Americans have a clue about what’s really going on under the surface of the financial markets this week … They see tariff headlines, talking heads, Trump tweets, whipsaw markets …”

      At Gold Eagle:

      Tariff Needle + Debt Balloon = Era-Ending Liquidity Crisis

      “Navigating such market stress … requires a far more balanced assessment than just “blame it all on the tariffs.” …
      … a liquidity crisis is the cause of EVERY market implosion from time immemorial.”

      Financology last December:

      Bear Market Watch

      “… deep and extended treasury yield curve inversion … a bear market in stocks.”

  21. Reply
    mega says:

    Remember back on Itulip when that bloke said Gold (then $1000 ish) was going to crash to $400?

    Mike

    1. Reply
      Finster says:

      Don’t remember that one but do remember another whose initials are F saying it would never trade in three digits again-:)

    1. Reply
      Finster says:

      That’s on top of a preexisting 20%, too, bringing the grand total to an eye-watering 145%.

      According to CNBC:

      Here are the U.S. tariffs currently in place:

      • 145% duty on all goods from China
      • 25% tariffs targeting aluminum, autos and goods from Canada and Mexico not under the United States-Mexico-Canada Agreement
      • 10% levy on all other imports

      IMO two misses and a hit. We could all get along just fine on 10% across the board. The rest is just asking for trouble.

      Trump really needs to drop the monomaniacal obsession with China and turn his attention to other matters. For instance the “9.0 Magnitude “Bondquake”” that’s kiting interest rates. He’s got the bully pulpit and should be using it to embarrass the $#!+ out of any hedge fund raping the system with 50X leverage.

      Meanwhile where’s the Fed in all this? It couldn’t wait to cut rates before the election when inflation was stalling too high, and now that it’s coming down fast and recession looms, Powell fiddles while markets burn.

  23. Reply
    mega says:

    Oooo kay
    So, are all Car imports (eg from EU/Blighty) still 25% or is that on hold?
    British parliament recalled to discuss state buying of British Steel plant now that it looks like China has walked away.
    Mike

    1. Reply
      Finster says:

      I don’t know for sure … it’s a waste of mind share to commit to memory stuff that could change the next minute. But IIUC those are in the 90 day hold category.

      Another negative. Besides the actual tariffs in effect, there are the others hanging out there to be either implemented or changed. I agree with Milton … enough dorking around. First carefully consider, then set it and forget it. At least for a while. Time to move on.

      FWIW I hope that state steel plant deal is temporary custody. Government ownership of the means of production is communism. Brits worked too hard to free themselves of the EUSSR to regrow it at home. US is already treading some questionable lines with talk about a “sovereign wealth” fund.

      And as long as I’m volunteering unsolicited opinions, I also part ways with Trump on vilifying China for the trade imbalance. US traded enduring capital for goods it wears out and burns up. US left itself open and China took advantage. It was imported by China but Made in the USA.

      Gold continues to awe. I’ve seen and heard many explanations, but this may be the best yet:

      Gold’s Historic Race to Reclaim Role as Preeminent Reserve Currency

    1. Reply
      Finster says:

      It’s hard to say how much of that is gold’s goodness and how much is fiat’s badness. America is losing its exorbitant privilege because it’s abusing it.

      It closed the gold window in 1971 because it was getting in the way of its inflationary cheating. With the exception of the Reagan-Volcker years, ever since it’s gotten worse. The Fed reached a low under Yellen’s continuing to maintain crisis era ease even though the crisis was years past. It’s only modestly improved under Powell; he failed to renounce Bernanke’s craven “2% inflation” target, continues to confuse inflation with increasing consumer prices, and kowtows to Wall Street even as he gives lip service to the burden his inflating puts on the average American.

      On top of that, add the abuse of sanctions. The Biden admin hardly let a day go by when it didn’t escalate over the Ukraine war, often using the dollar based financial system as a weapon. The last straw was when it actually confiscated Russia’s reserves. The hypocrisy of touting the rule of law while flagrantly flouting it didn’t pass unnoticed. It’s hard to imagine how you could hand the world a more compelling set of incentives to find alternatives to your currency.

      Trump appears to realize this but his “solution” so far appears to boil down to threatening other countries if they cut back using the dollar. That hardly gets to the root of the problem. At the same time, no other fiat issuer is exactly a model of integrity either.

      No wonder gold is retaking the throne.
      All the competition is abdicating.

  26. Reply
    mega says:

    MEGA’s Dispatch from England:- Return to the 70’s
    Oh Rejoice those of a certain age, remember the summer of Love, lots British Bands & Napalm. How as the War in South East Asia ran down, America FAILING to secure European interests with America Gold & Blood?

    Remember Nixon & that……er “Temporally” business with Gold?
    Massive inflation, shortages of EVERYTHING, Crappy poor quality goods & services?
    Strikes, Garbage piles, rats etc?

    Well its ALL coming back baby.
    The new BIG buzz word is “Nationalisation”……..or Mega being forced to bail out badly run company or Industry. We just heard that our “Dear Leader” is to recall Parliament over the Weekend using anti-terror laws & by Sunday night Mega will be the owner of a Steel mill!

    & that’s just the start, suddenly Scottish government wants to “Nationalise” an oil refinery.
    Yes, lots of “Dead on their feet” firms whom should have gone to their graves (with a little help from “Net Zero”) are suddenly being given the kiss of life by the government.

    Be assured that EVERY Motherf……..i mean well deserving case will now be rushing to HM Government for a Covid/2-big-2-fail bailout..with Mega’s money…….

    Here we go.
    Mike

    1. Reply
      Finster says:

      Don’t blame you a bit for not wanting to take on unprofitable businesses as dependents. Here in the US the last regime of grifters tried to make us take on people who borrowed too much to make losing investments in higher indoctrination.

      Mr Trump thanks them very much.

  27. Reply
    mega says:

    One of America’s biggest carmakers will temporarily stop production at a van factory in Ontario as Donald Trump’s trade tariffs wrack the auto sector.

    General Motors will make short-term layoffs on Monday, with plans to bring workers back for “limited production” in May, before production is shut down until October, according to a press release from Unifor, which represents workers at the factory.

    The union expects the measures will result in the indefinite layoff of nearly 500 workers.

    This is the second auto assembly factory shutdown announced this month, after the US President hit the car sector with 25pc tariffs.

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