Hurts so Good

The masochist screams out "Please hurt me! I deserve it!" The sadist replies "No."

Such was the outcome from last week's G20 meeting between the U.S. and China. The outcome was true to form for a sadistic President Trump when faced with a masochistically bearish market.

The pyrrhic "victory" Trump is claiming from his trade strategy is suspect to say the least. In backing down from the nuclear option twice in a week, (the other: calling an audible on a retaliatory Iranian attack), Trump is showing his true colours now. He badly wants to get re-elected.

Prez Cheeto's craving for validation from his preferred yardstick, an ever-rising stock market, was too powerful to ignore. As predicted by a top Tues@11 analyst, (pictured below doing in-depth research), the POTUS capitulated and backed off on his previously threatened tariff escalation. He also threw out a conciliatory Huawei bone for the market to chew on.

Instant karma! Rising market! Falling Vix! Two points in the polls!

Haven bids in defensives, bitcoin and gold (see last week's "Gold Top" blog for a full discussion) disappeared almost as quickly as they came. The U.S. banks responded well to the now watered-down stress tests. A merger-Monday takeover binge helped. The S&P 500 reached at an all-time high. All is right with the world I guess?

Not so fast, raging perma-bulls.

The chart below is damning evidence of the lack of confidence in the global economy. Despite the possible positives of a trade truce, copper had a bearish 'outside day' reversal yesterday. The failure to hold the morning highs followed by a break below the previous day's low is hugely troubling. Oil is similarly failing to hold the recent bounce to $60, despite the best efforts of OPEC+. Not a good sign either, as demand worries have resurfaced.

Copper Price

There is a disconnect between a seemingly positive economic development from the G20 truce and falling copper, nickel and oil prices. Meanwhile, economic data just isn't getting better, as evidenced by recent weak releases. Residual effects of the uncertainties stemming from the trade war are still flowing through into weakening global PMI readings. The rotation to cyclical value has been stymied yet again. Yesterday, deep cyclicals universally reversed their tentative June bounce.

And the inter-market signals from bonds aren't any help either. You would think the positive vibe from the Osaka kumbaya would have hit yields a bit harder. But the tepid roll-over in the bond market hints that other forces are still at work, keeping yields suppressed. Maybe the fact that Italy 10's just traded through the U.S. is to blame. I mean, we all know they're a better credit than the U.S. Treasury, right?

So the playbook for the next year and a half leading up to the election is set. Lots of sound and fury, signifying nothing of substance. Confused investors, reduced to cowering on the sidelines by the confidence-sapping rhetoric of politicians, are timidly nibbling at their favourite stocks, Apple, Facebook and Amazon. These stocks accounted for much of yesterday's gains, showing the leadership of mega-cap non-cyclicals to be fully intact.

Pre-earnings and post-G20, the market is now stuck in a rut. We may still get three rate cuts after all given the weakening data. But we also shouldn't expect monetary policy to completely offset the negative demographic and fiscal policy headwinds that are causing the global economic slowdown.

But, as we are seeing, low rates can certainly keep stock markets elevated, hence the lack of a definitive bear market in risk assets.

You can't properly price risk with central bankers as your competitors. Your trades will always be out-sized by the other side. Mistakes (over-leverage) are now being made, compounded by artificial ultra low rates. When central banks lower the cost of capital below the proper price of risk, mistakes are inevitable. Reverse Yankees (bonds issued by U.S. corporations in Euro) are coming at 50 bps!

But who can blame corporations for continuing issuing expensive paper until they collapse like a spent marathon runner?

Oh, yah, ... meanwhile don't forget to increase your stock buy-back.

CFOs keep on leveraging because the bid just won't quit. I just don't know when all this individual masochistic behaviour turns 'systemically sadistic'.

But it will - it always does.

Risk Model: 3/5 - Risk On

Investor Sentiment and Copper/Gold are stuck in the 'off 'position while investors and commodity traders sit out the rally that has been prompted by a plethora of dovish monetary signals. Looks like the 'real' world is sitting this one out.

The model has been whip-sawed recently by the rapidly changing vix readings. Not surprising when the news flow is so unpredictable. Using short term derivatives to gauge longer term sentiment shifts is highly problematic the weakness in any modelling of market behaviour.

If there was ever better proof that stock prices are a purely a monetary phenomenon I haven't seen in 40 years of watching. Low discount rates have eliminated risk pricing to a scary degree. Stock prices are being elevated by policy makers who have 2008-itis.

The resulting over-leveraging of corporate and sovereign balance sheets make Apple stock seem risk-free, compared to most credits. Asset purchases by the ECB are banishing credit risk analysts to the scrap heap. Hence the conundrum facing most investors, invest or be gone!