Rock, Paper, Scissors

In the ancient game of 'shoushiling', thought to have originated in China during the Han Dynasty, two players compete for superiority using one of three gestures to "throw" at one another. Each gesture is alternately superior or inferior one of the other two.

The game is random as to its outcome, but players can sometimes gain advantage by guessing the tendencies of the opponent. We now know this game as 'Rock, Paper, Scissors".

Ever since the bright white light of systemic financial melt-down burned into the retinas of central bankers back in 2008, they have been engaged in a similar game, desperate to keep the global economy afloat. This financial version of the game has guided policymakers and generated the currently elevated state of financial markets.They have been playing successfully since the March 2009 bottom and do not seem ready to quit anytime soon.

Markets, in their herd-mentality wisdom, are similarly engaged, gleefully placing bets on the outcomes. Investors are seemingly happy to place bets based simply on how the bankers will 'throw' next. Despite multiplying signs of global economic deceleration, markets have rallied to new highs. The guessing game as to the nature and scope of the next round of monetary accommodation has begun.

For the U.S. Fed and the various other sycophantic governors from countries like Australia, Canada and the U.K., the currently preferred method of easing is a cut to administered discount rates.

- Scissors.

For the Eurozone, rate cuts have generally failed to promote growth. They are now considering re-starting quantitative easing - direct purchases bonds - in order to create easier financial conditions.

- Paper.

In Turkey, Venezuela other rouge states or Kleptocratic dictatorships, they just fire the central bankers and crush any opposition to the control of the Treasury.

- Rock

Like most games, when you're having fun, it's hard to quit playing. Despite the fact that you are fatigued and prone to mistakes, you just keep on playing. You tend to get sloppy at this stage.

Supremely sure of itself, the market has once again 'priced in' the successful propping-up of the financial economy. And I say the financial economy, because the more cyclical, economically-sensitive areas have, ominously, sat out the rally. As usual, the P-E Ratio has done all the heavy lifting in this recent bounce, slavishly responding to lower risk-free rates.

But earnings still matter. This morning a leading global cyclical, BASF, guided substantially lower, causing a 5% drop in its stock price. Economically sensitive companies that dominate the 'value' indicies are still in contraction mode. The bifurcation of this market has reached justifiable new extremes. At risk of becoming a broken record, I have included a chart of the relative performance between Growth and Value - just in case anyone still cares. (below)

Russell 1000: Value vs Growth

But this is the only chart that matters for many portfolio managers. Steeped in the conventional wisdom that value wins out over growth, the last few years have been a nightmare for 'value' players.

The hedge fund community, lagging the broad averages again this year, have similarly been fighting a losing battle. Long volatility trades are now the widowmaker of hedgies, no matter what the asset class. Central Banks have squeezed panic out of the system. Hedge fund managers have had their volatility 'rocks' covered by central bank 'paper'.

America's 'Dear Leader', Donald Trump, has recently announced "the Fed doesn't have a clue". I wonder how long before he sees an opening to fire the head of the bank, Jerome Powell. He's been trying to stack the board by nominating tin-foil hat candidates for over a year now. The latest doozie is a gold bug.

Trouble is, I kinda like gold right now, but not for the reasons that Judy Shelton does.

Should Chair Powell not play ball and he fails to provide an insurance cut like both the market and Trump want, expect a tirade from both the White House and Wall Street. Markets this morning are sitting back, patiently waiting for the man with the scissors to testify before congress tomorrow and Thursday. He'd better have sharpened those bad boys recently, expectations are high.

If he wavers, however briefly, Trump's threatened rock could easily crush Powell's scissors and no amount of paper could cover up that mess.

Risk Model: 3/5 - Risk On

Despite a positive signal from the model, I'm just not placing any bets either way. Some have pointed to the high proportion of bearish sentiment and defensive positioning as a reason to be a 'contrarian' bull. Actually, the latest AAII Sentiment Survey is a perfect rock, paper, scissors game.

Bulls 33.2%

Bears 34.5%

Neutral 32.4%

Throw down if you want, I'm not playing.