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Dry Spell


I'm having a bit of writers block this morning. A dry spell has hit me just as things are getting interesting. It seems odd to talk about dryness, given the cold wet spring we have been enduring. But despite the news flow, markets just don't interest me today. I'm staying out.

Doubts about the sustainability of the economic expansion pervade the sentiment of traders and investors, but markets continue moving up. Central Bankers are conspiring to prop up the aging economic cycle, while politicians blithely go about their jobs, desperately trying to get re-elected despite the intellectual bankruptcy of their policies. Investment advisors continue advising bullish strategies, blinded by the light of ever lower discount rates.

I just don't care.

I can't help but long for the "good old days". When the risks posed by random events kept everyone cautious. Rate scares were mostly on the upside and bond markets sent inflationary messages every now and then.

The collapsing risk free rate has changed everything. Now everything is a one way bet on lower rates. Risk assets should be down, based on the slowing global growth data. But they aren't.

The bears have, seemingly, been trying to push a beach ball under water. But as long as stocks yield more than bonds, check your cautious attitude at the door.

Lowering the opportunity cost of holding long dated assets is covering up the deficiencies of risky, bad investments. It's called 'papering over the cracks'. Our risk appetite is being force-fed yet again.

How else can one make sense of the low volatility expectations now expressed in the options markets. The thinking is: "The Fed will have our back!" Once-bitten twice-shy monetary policymakers seem loathe to incur the wrath of a falling stock market. Memories of last year's December free-fall is keeping them perma-dovish.

The easing signals emanating from the ECB have backed the Fed into a corner. Globally, longer dated bond rates are being dragged down by extreme "unconventional" monetary policy, led by the ECB and Japan. Consequently, the Fed has lost control of the yield curve. They continue to set policy based on a hopelessly outdated domestic data based model.They are being forced cut to stave off the risk of a deflationary inversion.

Like a broken record I am still waiting for a reflation trade to develop. No sign of that yet. Powell and Company are usually slow to act. Meanwhile, people would much rather buy Beyond Meat than the real thing.

Enjoy the ride. It usually ends with a bit of a crash.

Risk Model: 3/5 - Risk On

The RSI, 200 DMA and VIX components - trend following as they are - have stayed positive. The negative elements, AAII Sentiment and Copper/Gold are very oversold and trying to bottom. We will see tomorrow if the Federal Reserve can be a catalyst for a rally into quarter-end. The shorts started to cover last week and are at it again today.


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