Economics

On Brexit

June 28, 2016
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On Brexit

What a tumultuous 5 days. The lurching feeling is all the more acute after a period of one-way markets (up) and declining volatility. With polls shifting towards “Remain” last week, the prospect of all-time highs in the S&P 500 held an aura of inevitability. The unexpected Brexit vote, by a solid 4 point margin, tanked stocks for two consecutive sessions, eliminated Fed rate hike expectations for 2016, and catapulted gold. Monday’s continuation of trend points to Brexit being something larger than a one-off event catching market participants all on one side of a trade. The shock to the construct of the EU will impact financial markets through the end of the current cycle, which is already in late stages (7-years old). Perhaps, Brexit will be a tipping point, or...

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Valuing the Yellen Put

April 7, 2016
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Valuing the Yellen Put

The Yellen Put, follows a line of Federal Reserve inspired put options, valuable to market participants of specific Fed Chair eras. The rationale behind the Fed Chair put is simple; with the Federal Reserve so vigilant to support any downtick in the economy and/or markets with interest rate cuts (Greenspan), quantitative easing (Bernanke), and ZIRF (Zero Interest Rates Forever – Yellen) investors receive downside protection from the Fed. Actually paying for downside protection vis-a-vis real put options takes on a ludicrous feel; markets don’t go down much, and if they do, they never stay down. Duh. That markets are increasingly policy driven is a reality of the current investment/economic cycle. 2016 investors are learning (through force) just how valuable the Yellen Put is. Janet Yellen is the most dovish...

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China Slowdown Will Plague Markets For Years

January 31, 2016
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China Slowdown Will Plague Markets For Years

What a start to the year. CJF’s contrarian prediction of 1,860 on the S&P came to be on January 20th. Subsequently, the market rallied strongly on the hint of more quantitative easing out of the ECB, and the adoption of negative interest rates by the Bank of Japan. Any doubts that 2016 will be a volatile, and difficult year, should now be erased. After a tumultuous January for investing, a period when seasonality and investment inflows are supposed to support markets, CJF is stepping back to assess big picture dynamics for the global economy and the overall investment environment. At risk of being overly obvious: Something is not quite right with the global economy In the seventh year of recovery since the financial crisis, Brazil is in recession, Russia...

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The Fed Awakens; Creates Negative Global Market Backdrop

December 21, 2015
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The Fed Awakens; Creates Negative Global Market Backdrop

At the widely anticipated December 16th Fed meeting, the Board of Governors did the expected, and finally raised the US federal funds rate by 25 basis points. The rate-hike failed to surprise markets; the move was telegraphed and written about in advance by Jon Hilsenrath in an article on the front page of the Wall Street Journal, Wednesday morning, before the actual hike. So why did markets soar in anticipation of the hike, soar some more after the hike, and subsequently mini-crash on Thursday and Friday? No good answer on market action from CJF, but the volatility, exaggerated moves, and declining breadth, are all bearish indicators going forward. CJF takes a contrarian view to the initial goldilocks interpretation of the Fed hike; the Fed action is hawkish, creating a major obstacle...

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ISM sinks to post-2009 lows; Industrial Economy Recession a Catch 22 for Fed

December 2, 2015
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ISM sinks to post-2009 lows; Industrial Economy Recession a Catch 22 for Fed

November ISM sank to the lowest level since 2009. Stunning, that the ISM (Institute for Supply Chain Management) survey, formerly known as NAPM (National Association of Purchasing Managers), printed 48.6, the lowest level since the throes of the financial crisis. For perspective, the last time the ISM printed sub-48, in June 2009, the S&P was 900. Today, at 2,100+, the market is a cool 134% higher. The S&P is up by 1,200 handles, after having earned approximately 620, the cumulative EPS for the market from 2010-2015. The market is up at a much faster pace than earnings as the multiple swelled from 12x to 17x. What a 6-years. Awkward that December marks the potential lift-off, delayed that is, of a sea change in Fed policy: the end of ZIRP (zero interest rate...

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Qui n’avance pas, recule

November 16, 2015
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Qui n’avance pas, recule

We all eat at restaurants, go to stadiums, and walk down the street. The tragically successful terrorist attacks in Paris highlight the vulnerability of the human condition at any instant. While this has always been the case, and will continue to be so, civilization, and human progress, over past centuries and decades, reduces the chance of random death from a vulgar, inhumane cause. Radical Islamic terrorism is so deplorable because the aim is to destroy, to undo, to move backwards in time, and to return to a harsher world. The impossibility of the ultimate success of the radical Islamic movement is matched with the fervor of the very small percentage of the world population that supports this movement. To create the scale necessary to carry out such large scale...

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Midsummer Issues Persist; Divergent Global Central Bank Actions Create Challenges

November 10, 2015
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Midsummer Issues Persist; Divergent Global Central Bank Actions Create Challenges

The market moves fast. Thankfully, in the rest of the world, trends of all kinds, generally move at a measured pace. The market overreacts to events and day-to-day happenings based on crowd think and behavioral issues. A change in trend will often start with a subtle data point or indicator, which in hindsight, ignites a big, and sustained move in the market. Now is not one of those times. Late summer fears of China slowdown and EM collapse look to have been overblown, and the severity of the selloff too harsh. But the rally of the past two months also contains elements of overreaction; the underlying drivers and risks from the summer aren’t resolved. The world is fundamentally caught in a new dynamic. Credit expansion reached limits in every...

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Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

October 10, 2015
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Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

The September 16-17th FOMC minutes were released Thursday afternoon, continuing the market’s Beast Mode reaction to Fed dovishness. The S&P 500 completed the best week of the year, barely down-ticking from 1,893 to 2,015. The market rallied 7% from the lows after the September Employment report to the highs yesterday. The 122 handle rally takes the market multiple up one turn (from 15x to 16x multiple). Despite the euphoria of a quick fix, there are a number of reasons for caution after scrutiny of the Fed’s minutes. Yes, the Fed minutes were dovish. Full stop. The Fed awaits more data on improving labor markets despite a 5.1% unemployment rate, and inflation is expected to remain below 2% for some time. All the voting members, other than Lacker, voted against a hike....

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Super Dovish Fed Persists

September 18, 2015
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Super Dovish Fed Persists

The Fed’s lack of policy response, and subsequent press conference, evokes memories of a scene in Bronx Tale… What’s going on here?  Now you can’t leave.  I will never forget the look on their faces.  All eight of them.Their faces dropped.  All their courage and strength was drained from their bodies.  They had a reputation for breaking up bars.  But they knew that instant they made a fatal mistake.  This time, they walked into the wrong bar. An opportunity for the Yellen Fed to exit ZIRP came and passed yesterday. Possibly, it will be more convenient to start a rate hike cycle in October/December or possibly, in 2016. But if China enters a recession, and financial markets remain stressed, it is also possible that the Fed will be unable to raise rates during the...

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Employment Report & Markets; Forcing a Fed Rate Hike

September 9, 2015
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Employment Report & Markets; Forcing a Fed Rate Hike

While the odds on a Fed rate hike are still vacillating, the strong jobs report, and recent market action are now forcing the Fed’s hand. The Fed needs extreme market conditions to justify not hiking. The point has arrived where stock and bond markets are strong enough, even with the prospects of a hike, that diminished Fed credibility should outweigh any benefits of pausing. Stanley Fischer clearly outlined the need to hike ahead of not only inflation, but inflationary expectations. The August Employment Report was a key data set before the Fed meeting. The headline jobs number was soft at +173k jobs but all other aspects of the report were notably strong: July payrolls were revised +30k higher (to 245k) June payrolls were revised ++14k higher (to 245k) The unemployment rate fell to...

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China in Recession; Yuan Depreciation Imminent

September 3, 2015
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China in Recession; Yuan Depreciation Imminent

China is at the end-game of its great economic transformation. Multiple iterations of 5-year plans, and flawed central economic planning, created a massive build-up in debt that can no longer be continued. China’s debt fueled growth is understood, but the impact of the deleveraging phase is becoming evident in real time. Various estimates of China debt exist, but given the proliferation of shadow banking, and state involvement in the corporate sector, China’s total debt is a nebulous subject. Using estimates, China debt rose from $1 trillion in 2001 to $30 trillion today. China GDP is approximately 10x larger during a period in which debt rose 30x. McKinsey Global Institute estimates China debt-GDP at 282% in 2014. China’s economic problem is straightforward. Party rulers believed steadfast in the ability to...

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Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

September 1, 2015
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Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

This weekend’s Jackson Hole speeches, and subsequent commentary, outlined the guideposts for a Fed rate hike, potentially in September. The explosion in crude, if it holds for two more weeks, will pressure the Fed to hike. The Fed clearly highlighted the USD, employment, and oil, as drivers of inflation. The fast 10-point in rally in oil, from sub-$40, to near-$50, unwinds 2-months worth of decline. With the Fed keying off energy price declines as “temporary”, the failure to hike, in the face of the above mentioned factors swinging more inflationary, risks a credibility issue. With stronger crude (again if it holds), the August Employment Report looms very large, and will likely be the final determinant of a September rate-hike, aside from a potential market crash. On the topic of market crashes… funny...

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