While we are trying to be consistent in our narrative on the ever changing and opposing forces in the economy, one thing that is not talked much in the media or by major market analysts are the Feds move to “Zero” reserve requirement. This incentivizes and mandates banks to make loans. What does this do to the supply of money? At a zero-reserve requirement ratio, the stock of money could increase infinitely.
Tomorrow will mark three-full-months since the Fed responded to the government stay at home orders with unprecedented polices that they have not introduced before in its almost 107-year history.
While the stocks are being fueled by this sea of liquidity from the Fed, what is not being addressed is that many of these emergency measures that the government has introduced will disappear soon. If the government does not introduce a second package to time it with the first one’s expiry the effects will soon be reflected in the stock markets too.
What were these measures? Let’s get to specifics. 1) Evictions by landlords had been temporarily waved off. That runs out on July 25th. 2) banks were supposed to give a six months break on mortgage payments if requested. It will run out by end of Oct. 3) student loan payments have been put on hold. It will run out by beginning of Oct. 4) Government sent out nearly 159 million payments of $1200. 5) Another 20 million became eligible for $600 per week for unemployment benefits. This will also run out by end of July.
April this year was the single most household increase income increase ever on records which was at 10.5%. This was also the month where millions of online accounts were opened at brokerage houses like Robinhood. Previous months rise in personal income have been much less than 1% or even negative as it was in March. At the same time, consumer spending plunged by 13.6% the highest ever in six decades. Have a look at the charts if you can for the last six years. The consumer spending and personal income run together like two entangled snakes and all of a sudden in April it diverges in the most dramatic fashion you can imagine.
Currently, the markets are at the mercy of how the second wave of pandemic is affecting the economy and how the injection of this liquidity on steroids by the Fed is playing out.
As I formulate this report, there are conflicting reports from Peter Navarro the chief negotiator in trade deals with China. It is not looking good. US intelligence officials grow increasingly confident that the coronavirus pandemic originated in a Wuhan laboratory.
Navarro added that the November election will boil down to three key issues “jobs, China, and law & order”. Now to the markets.
EQUITIES
The repeated sub-divisions in the wave structure is pointing to one thing. The corrective up move should end soon and the big move down move can start as early as today or tomorrow.
The Nasdaq has been an exception making new closing highs. The divergence with the other two major indexes is further evidence that the top is almost in sight.
BONDS
In bonds too we are caught up in corrective subdivisions. A move below the 05 June low at lower 170 should give more clarity to our bearish outlook.
EURO
Trend followers are heavily long the euro through futures and options. They are large speculators comprising of major hedge funds. Their strategy is to increase their positions as the markets increase or decrease their positions when markets fall or even go net short.
When these positions get to an extreme relative to their historic norm the trend is normally in its last stages before a reversal. This is not a short-term timing tool but provides good indication to our existing bearish view.
GOLD
Gold made a high of 1763.50 yesterday. While it did not make a new high the risks are aligned to making a new high around 1800 that we have mentioned many times through this report.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.
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