The Economy: This holiday shortened week has seen few economic releases. The Donald will have the opportunity to appoint a new Fed governor. This may result in a more hawkish Fed stance. In one public appearance, Fed Chair Yellen congratulated herself on a job well done; clearly the age of “Self praise is no praise” is a thing of the past. Increasingly the Fed is indicating that they’re considering “normalizing” their balance sheet. This means shrinking it over time. If and when this occurs, it will have the effect of further tightening in the credit markets. This prudence all sounds well and good. But the Fed has made it crystal clear that they will do whatever it takes to keep the stock market going up. Give Janet and the Boys a 3% market correction and the spigots are opened full blast as the Fed floods markets with free money. To say this will end badly is to sound like Chicken Little screeching about the sky falling. So we won’t bore you with arcane details like market liquidity, counterparty risk or dark pools.
Food for Thought: The Donald suited up as El Cid and smote the Syrians. It was a grand opening to Easter and Passover Week. The aptly named Tomahawks found their mark. Half of those were fired by the USS Porter (DDG-78). The Commanding Officer of Porter is Navy Commander Andria Slough, Naval Academy ’81. Women in every walk of American life should be proud that one of their own proved to be the cream of the crop in a highly competitive, male dominated, uber-macho profession; no glass-ceiling for her. The positive response, to the strike, from both sides of the aisle was deafening. Overnight, Trump-the-simpleton-Russian-spy-and-Putin-Dupe morphed into Trump-The-Decisive-Embodiment-of-American-Leadership. Then he swore Neil Gorsuch in as the newest Supreme Court Justice. Have a great Holiday!
Music of the Week: George Michael’s “Ladies and Gentlemen”
The Economy: The numbers released this week underscore the difficulty in evaluating the economy. Consumer confidence is at all-time highs; as is bullish sentiment. Auto Sales disappointed. ADP Jobs report on Wednesday were blow-out; far above expectations. Yet the very similar NonFarm Payrolls were far below expectations on Friday. Oil has rallied, dipped and rallied back on each OPEC announcement. Fed Minutes were released and showed a more hawkish stance towards raising interest rates. They also contained a comment that stocks may be overvalued. The nuclear option on Gorsuch was exercised without causing a ripple. This is the conundrum of soft versus hard data. Soft data is about how you feel or what you think. Hard data is information that has some basis in statistics. With the manipulation of statistics you now have to frame hard data in terms of what might be fake news. For example, are any numbers provided by the Chinese Communist Party real? For better or worse, they certainly drive the markets. For the U.S. the consensus is that the Trump rally is intact regardless of the healthcare fail, the headwinds of tax reform, a looming trade war with China and as of today, a possible hot war with Syria/Russia. We continue to hear that regardless of the macro picture, bank lending standards remain tight.
Food for Thought: The relentless upward bias of the stock market stumbled Wednesday when the Fed Minutes were released. Two comments were taken as bearish for stocks. First, further interest rate hikes are coming in 2017. Second, the statement that stocks may be overvalued was viewed as a warning. Together, these comments stopped the rally and caused the largest reversal in 15-months. Markets closed down dramatically. But like so many other issues that should have paused this bull market, the reversal was forgotten overnight. Stocks had a positive day as the prospect of a Syrian war and the adage, “buy on the sound of cannons, sell on the sound of trumpets” was heard. Last week Tillerson indicated that Syria was best left to the Syrians. Today, Trump bombed ‘em. U.S. military intervention in Syria. Perhaps it’s the Art of The Deal, but it seems that there’s a lot of U.S. saber rattling going on. We have U.S. troops in Poland, on the Russian border, for the first time in history. We’ve turned-up the anti-Russian volume on Ukraine. We’re threatening North Korea with unilateral action. We’re flashing the sabers at China over the South China Sea. Perhaps the Central Banker stock market, which has morphed into the Trump Bump market will evolve into the global war market. To Infinity and Beyond.
Music of the Week: Billy Idol’s “Charmed Life”
The Economy: We’re the quintessential optimists so it’s with the risk of sounding like Chicken Little, that we again note the economic data is weak to mixed. The manufacturing sector is worrisome. Earnings season has ended with the note that corporate profits declined. Higher sales of cars and trucks are due in part to subprime auto loans. (Yep, subprime loans, the red-headed-bastard-sons of the Financial Crisis and subsequent Great Recession) Compounding this fog of uncertainty is the recent spate of terrorist activities. The Beirut bombing, the Russian airline bombing and the assault on Paris have heightened the sense of worry. The Fed released the minutes from their last meeting today. They were interpreted as being hawkish and in favor of interest rate Liftoff in December. Financial markets were ecstatic. But lost in the excitement is that fact that the minutes are pre-terrorist attacks. So we remain skeptical that we’ll see Liftoff in December. The much anticipated 25 basis point (1/4%) hike shouldn’t have much of an impact. It’s the unanticipated consequences that are causing the willies. After a decade of zero interest rates, no one knows what those consequences will be. Now that France has declared war on ISIS those consequences are more unknowable.
Food for Thought: The Russians have had boots on the ground in Syria for more than 40-years. To say that Putin and Company preempt the U.S. in Syria would be a gross understatement. In the aftermath of the Paris attack, the French are reaching out to Russia as an ally. With this diplomatic caress, Russia is on its way to being rehabilitated. Sanctions will quietly go away. Putin, bare-chested astride his white charger, crossbow in hand shooting whales, is the man of the hour.