Wednesday, October 4, 2017

Black Friday Boom

Could this coming Friday be our economy's Black Friday? No, not Thanksgiving's Black Friday when all companies finally make a profit for the year. 
S&P Index Futures show a peak being formed
Instead, is this Friday going to become the top of the equities and bond bubbles artificially created by the Federal Reserve?
Surely I am not talking about bubbles that made things better for all of us. The recent highs in the equities market have demonstrated that while Wall Street can be joyfully celebrating, 'main street' can continue to suffer all along from a post-recessionary hangover.
During Obama's term, the cost of money for large organizations went so low that many CEO's decided to mortgage their company's future by padding their own bank accounts with lots of options on shares bought back from the market on borrowed money.
Stock Buybacks
This was a clear misallocation of resources; of the kind that central governments often incentivize. The cheap money allowed CEO's to buy back shares, thus improving the per share profit performance. This in turn made CEO's look so good that their job-well-done was rewarded with stock options. In a way, cheap Fed money allowed a transfer of wealth from investors to CEO's. Let's also remember that in a few years, all the current CEO's will be gone and not held to account any more. Yet, all company loans will have to be repaid with the future profits that would otherwise go to investors. You got to love the way the game is played. The stock market's optimistic booming picture disproportionally benefits company leaders more than any other stakeholder group.
Meanwhile, Obama also brought us a drying of the otherwise available capital that was needed for small business growth. For eight years, the cost of borrowing sky rocketed for small businesses regardless of where the Fed set their rates. But how could this happen? Well, it all resulted of the so-called economic stimulus by the Fed.
When the government bought so many of their own bonds, through transactions between the Fed and Treasury, most low risk assets were drained out of the market. This pressed low risk-tolerance lenders to compete for higher risk corporate bonds. The greater number of lenders competing for the same number of bonds pushed prices (interests) down. At the same time, this left lender portfolios with a higher risk profile than would normally be preferred. So, they then had to increase the price (interest) for small business loans to bring their risk profile back into shape. In a nutshell, next time the government tells you they are trying to help you, the small business owner, run for the exits. No matter how many PhD's work at our central bank, their actions will continue to result in big failures similar to those from Mao Tse Tung's great leap forward where 45 million people died after their government tried to help them.
Corporate Bond Cycle
For thirty years, the Fed has pushed interests lower and lower. Always with the goal of 'helping' the economy. Today, we are at the very end of one of those cycles that reverses about every 30 years. But whether the Fed actually prices interest rates higher or not, let's remember that bond prices are no more than a gauge of trust. If capital holders trust the environment, money flows into markets. When trust is lost, prices of bonds go sky high and capital drains out of markets. Interestingly, the same trust is what holds the price of stocks high. So, it is not unreasonable to think that we could face a pivotal change in the cost of money and a pivotal change on the cost of stocks, both at the same time. While bond charts show no more signs of peaking other than their cycle's maturity, equity markets are screaming 'top" like never before.
Elliot Wave Analysis of S&P 500
First, there is the fact that most large traders set price levels using the same technical analysis that shows that we are at a point where several longterm Fibonacci studies converge as tops.
Second, many more large traders look at what is called 'Elliot Wave' which is now calling for an end of an eight year move.
Finally, it's October. You know, all bad things in the stock market happen in October.
So, whether the bond and equity tops happen this Friday or the next, it seems clear that the difference is academic at best. The end of the current run seems upon us.
But, is it possible that I could be wrong; after all, there have been many calls for the top in recent years? Well, yes. I could be wrong.
Still, this week's relentless push upwards has the characteristic price action of a top. This week's price movement seems to be creating a Doji, a well known top formation used by 'Japanese Candle Sticks' chart readers. Yes, I know it all sounds funny and surreal. Still, these people make millions of dollars every year from looking at these studies that go back centuries.
In any case, I believe that, as a leader, one must be aware of any potential change in market sentiment. If a recession starts this month, it would last at least a year and a half. During such time, loans would be called back everywhere as lenders will try to reduce their risk profile. Capital will probably dry up. In extreme cases even trust between banks could create international commerce seizures due to an absence of international letters of credit. For a single day during the last recession, this same picture became a reality and all global commerce almost came to a halt. The risks are simply too high to ignore.
You have been forewarned. Let's hope I am wrong.

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