Division Bells
This week, just a few thoughts from the market sidelines.
"A house divided against itself cannot stand." Words popularized by Abraham Lincoln, but cribbed from the Bible, are more true now than ever.
There is no denying that many divides exist in today's world. Political, economic and social extremes have pushed the World into opposing corners like two wary boxers itching for a fight. Those differences, in economic terms, have created a financial market sorting process that is still ongoing.
Socialist and capitalist forces are in a fight for legitimacy. The Eu Parliament, the U.S. Congress, and UK Parliament are all highly dysfunctional, with a populist backlash paralyzing the normal course of lawmaking. Politicians are too busy fighting for the high ground to actually do the hard work of creating legislation. The consequent lack of positive pro-growth policy production has thwarted the efforts of central bankers to create a robust, durable and self-sustaining global growth cycle.
Notwithstanding the existential threats to the system presented by the failure of the great monetary experiment from central banks, markets are actually being held up by those very policies. When yields are so compressed, the residual bid to equities keeps markets from further decline. There still is no alternative. Stock prices are being given a bond market 'put'.
Admittedly, the global economy is still growing, although slowing and unevenly. But demographic differences are becoming more and more decisive in delineating winners and losers. European prospects look especially weak in that regard. Japan has been dealing with this for 25 years.
Capital is flowing to its highest and best use and technology has garnered the most attention, especially from a commercial standpoint. The reality of an aging population has creating a need for health care and wealth management solutions, replacing autos and housing as the dominant driver of consumer demand.
Divided markets create opportunities for alpha generation that are unavailable to the top-down macro strategists. Correlations are dropping, reflecting this environment of winner-take-all disruption. I can offer little of value in this type of environment. Call your stockbroker who is doing the bottom-up heavy lifting of finding winners.
The macro environment is stuck in neutral. I'm gonna be Mr. "No VA" today.
I guess when it comes to financial markets, it's divide and conquer.
Risk Model: 3/5 - Risk On
The positives for the model are derived from the market itself. The XIU has refused to meaningfully sell down causing both the RSI and 200 DMA signals to remain positive. I suppose they market didn't get the memo about the tariff tiff. Or it doesn't matter when the FED is on hold.
On the negative side Copper markets are at the lows of last year, barely holding on. AAII sentiment collapsed, dropping to six month lows as the 'home gamers' headed for cover after reading the news coming out of Washington and Beijing. This indicator is a lagging variable though and should rebound with the market this week.
Cooler heads are prevailing this week as the 'art of the deal' gamesmanship plays out. The $VXV, the three month volatility gauge, has faded from the panic highs set during Trump's latest tweet-storm.
As I have said before, when interest rates are so low, the force-fed imperative to stay long is hard to ignore. I'm staying out for now. Let's see if there is any fall-out from the inverted curve. It seems that pushing on a string didn't work, judging from the housing slow-down.
Being a stubborn old guy like me, it doesn't sit well to be force fed anything - but beer!
To that end I have just invested some of my stock market gains in a craft brewery in Port Credit. If it doesn't work out financially, at least I can take my dividends in growlers.
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