Global Macro Monitor

Just a short but  very interesting follow-up video to our last post,  When 50 Percent Of U.S. Households Were Insolvent, which illustrated the stunning and parabolic growth of wealth inequality in the United States.

We feel this post is necessary and very relevant as many dismiss and have no worries about the growing inequality throughout the country.  In fact, we had a conversation with a “not a problem” journalist today.  We couldn’t disagree more.

Much of the growing angst in our society is caused by widening income and wealth gaps.

Even in the investment world, there is ample evidence of conservative investors taking foolish risks with their capital because they see friends and neighbors getting rich — albeit temporary – during asset bubbles.  They feel stupid being left out and suffer anxiety watching their comrades increase their wealth while they sit on the sidelines.  Unfortunately,  they usually succumb and get sucked in right at market tops.

We suspect this is how Issac Newton really discovered the law of gravity through a very costly lesson in the financial markets.

In an updated and annotated text of Benjamin Graham’s classic “The Intelligent Investor,” WSJ’s Jason Zweig included a small anecdote about Newton’s adventures with investing the South Sea Company:

“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘ could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”  — Business Insider

Even Animals Feel The Angst Of Inequality

The following video is based on a widely-cited 2003 paper published in Nature by Sarah Brosnan and Frans de Waal.  They used capuchin monkeys in nearby enclosures to perform an equal task, which they would then be rewarded.  In the equal reward condition, both monkeys received cucumbers. In this case, the monkeys did the task well, cooperated, and formed a well functioning and productive mini-economy.

In the unequal reward task, one monkey got a cucumber, but the other monkey got a grape, which, apparently, is perceived and tastes more valuable in the capuchin kingdom.

Then all hell broke loose.

The angst, or whatever you want to label it, caused by inequality seems innate, does not induce cooperation, and is generally disruptive and unhealthy for societies even in the animal kingdom.

Take the 2 1/2 minutes and watch the video.

Take a few and listen to O., well worth your time. 

Olivier Blanchard, the former IMF chief economist and part of our elite “One Smart Dude Club (OSDC)”, speaks on the ECB’s monetary policy and the tools it has available to fight an economic downturn.   He essentially concludes Germany, which is reluctant to venture into fiscal stimulus but will be hurt the most by the trade wars,  will have to do some backsliding on its frugal ways.

Traders and ‘bots way offsides today, including us (but not short) as we were gone fishing, took a one-two body blow from the Draghi dove and Trump tweet.

It’s all about the Tape  Tweet, folks.

Snoozefest until the FOMC on Wednesday.  Lots of Doji candles reflecting traders don’t wanna do jack all.  Volume running at about 90 percent of the 10-day moving average.

Market expecting no rate cut, though a 20 percent probability is not exactly zero.  It feels to us the market could be set up for some disappointment.  Expectations of three rate cuts by year-end seem excessive with 3.6 percent unemployment and 2 percent off all-time stock market highs.

The market needs a reality check here with respect to expected rate cuts and will be very sensitive to and looking for clues in the FOMC statement.

Key Levels

The S&P is having trouble at the key Fibo, 2900.95.  If that goes, the recent high of 2910.61 then off to new highs at 2954 plus.

On the downside, 2874 is a big number,  the 50-day moving average, and last week’s intraday low.   Going fishing tomorrow.

Are the ‘bots about to start trading Italian mini-BOTs?

Talk of a parallel currency in Rome is spooking some in the analyst community.

A proposal is being kicked around to issue small-denomination bonds — so-called mini-BOTs (short-term treasury bills) —  used by recipients to pay taxes or to buy goods or services from state-owned companies.  If the plan is realized, it could set Rome on the path to a parallel currency and an eventual “Black Wednesday.” where Italy leaves the euro.

Supporters, include Lega, one of Italy’s ruling parties.

Opponents argue it would lead to higher public debt and chaos.

“If Italy goes down that rout, it will in my opinion be a disaster for the country. You are going to have a loss of general confidence in the Italian debt in the markets,” Jacob Kirkegaard of the Peterson Institute for International Economics told CNBC last week.  – CNBC

Contrary to conventional wisdom,  Italy’s debt problem is really rooted in the economy’s inability to grow.

Yet the Italian public finances are in a frightful mess. The ratio of government debt to GDP is now at 132pc. Danger territory is supposed to begin at 90pc. Even so, excluding interest payments, the government actually runs a budget surplus. Indeed, it has done so for 25 of the last 27 years. Italy shouldn’t have to squeeze its budget still further. The fiscal problem derives from a combination of a heavy weight of debt incurred in the past and very sluggish economic growth, continuing into the present.  – Roger Bootle, Telegraph

The adoption of the euro along with an unhealthy banking system, which is saddled with bad loans from the debt crisis, has partly contributed to almost no economic growth since January 1999, the introduction of the common currency.

The real problem is structural, however, rooted in demographics and the lack of productivity growth.  A rigid labor market, bloated public sector, nepotism,  limited investment in human capital and education, and the small size of most companies, are some of the explanations given for the country’s stagnant productivity.

FocusEconomics projects Italy’s GDP growth coming in at just 0.1% in 2019 and 0.6% in 2020.

Talk or even rumors of currency devaluations, much less kicking around proposals for an effective parallel currency risks setting off nonlinear dynamics, which are difficult to predict and control.   These issues are best discussed behind closed doors and in secret, then sprung on markets unexpectedly before panic forces the action.

We sense it is about to get very interesting in Euroland.

Stay tuned.

After rallying 6.66 percent from the bear trap low last Monday to yesterday’s high of 2910.16,  the S&P is now consolidating that big move.  The ‘bots have mastered the art of the bear trap.   F**k wads!

The 50-day moving average held today, which is positive.   The 2900 level seems to be a big number and a key Fibo retracement of this recent 7.63 percent sell-off.  A close above 2900 greatly increases the odds the 2954.13 all-time high will be taken out.

Note, our target for the S&P was 3025 before the Big Dipper sell-off hits but began to doubt that especially after the threat of Mexican tariffs came onto the radar.  The market is conditioned to salivate when the Fed rings the bell of mo monetary stimulus and, as you can see in the table and matrix below, the market prices a higher and higher probability of a Fed rescue as each day passes.

We respect that and don’t fight it but are reducing risk as the market moves higher.  We believe we are in the late or extra innings of this bull market, valuations are at extremes and the tectonic geopolitical and economic plates, which have been the foundation of the secular bull market are rapidly shifting.

You have to feed the seals while they’re barking, folks. Trying to sell into a panic market with no bid is not fun and very unhealthy for your P&L.

It’s 511 days to the 2020 Presidential election and we sense a total disconnect between the movement in the polling data and market expectations of the outcome.  It reminds us of our conversation with a hedge fund manager one month before the midterm who was certain the Republicans would remain in control of the House.

We laid out our “Lavender Wave” scenario of at least a 35 seat pick-up by the Democrats– they eventually gained 40 House seats.  He wasn’t having any of it, however,

“I better check with my pollster.”

We do try and keep our partisan bias out of our political analysis and focus solely on the movement of the polling data in a disciplined analytical framework.  We have won a lot of bets from those who cannot and are out of touch with the data.

In fact, we know of nobody except yours truly that predicted Trump would win the electoral college and Hillary the popular vote in 2016.

We simply looked at the dispersion of the Hispanic vote, which many were betting would determine the outcome on the margin because of Trump’s offensive rhetoric, and found it was mainly concentrated in California and Texas.  We concluded these states would not flip and would cancel each other.  Nevada and New Mexico were the other two states where the Hispanic vote was concentrated enough to have a significant impact on the electoral vote.

2020 Presidential Election

Now Wall Street believes there is a 70 percent chance Trump is reelected.   Have they not looked at the data or is it just wishful thinking?

The Morning Consult tracking poll illustrates the devastating movement in polls since President Trump took office.  In every state that is going to matter in November 2020, there has been a double-digit negative move against the President’s approval ratings even in the reddest of red states.

As of the May polling data,  the President is above water in only 2 of the 17 states,  Texas and Georgia, and just barely.   This contrasts sharply with February 2017, when Trump’s approval rating was higher than his disapproval in 15 of the 17 states.

Stanley Gets Its

One smart dude appears to be looking at the data, however.  Stanley Druckenmiller, the great hedge fund manager,  thinks the President is in “deep, deep, trouble.”

Druckenmiller said he believed President Donald Trump will lose his reelection bid thanks to discontent in key swing states. He said the Republican president got lucky in 2016 and could lose if Democrats run a more centrist candidate. The problem, he said, would be if a “crazy” Democrat beats him.

“I personally think it’s going to depend on the Democratic candidate, but he drew an inside straight: He won seven out of seven states by less than half a percent,” Druckenmiller said this week. “If you go county by county in Pennsylvania, Michigan and Wisconsin, he is in deep, deep, deep trouble. And that was with the economy growing at 3%.”  – CNBC, June 7th

One Day Is An Eternity In Politics

Much can happen in the next 500 days and the world may be a totally different place.  Moreover, the Democrats are more than a year out before officially nominating President Trump’s opponent.

In the 1988 presidential campaign,  Massachusetts Governor Michael Dukakis held a 17-point lead over Vice President George Bush coming out of the Democratic convention at the end of July only to lose the general by almost 8 percent of the popular vote and an electoral landslide of 426-111.  Gary Hart, a much stronger candidate than Dukakis, and the clear front runner to take the nomination blew up early in the nominating process over allegations of extramarital affairs.   Monkey Business.

It doesn’t seem that President Trump will have the ability to turn the vote as Bush #41 did unless the Democrats nominate a very, very weak candidate, which is not a zero probability, by the way.

Our analysis leads us to conclude Trump will not be able to move women, who make up 52 percent of the electorate and more likely to vote than men, or the younger voters no matter the level of the Dow or the GDP growth.   His numbers are very ugly and pretty much set in stone.    The latest poll, today’s Quinnipiac, shows Trump 25 points underwater with women and 30 points underwater with 18-34-year-olds.

Unless President Trump reinvents himself into a kinder, gentler metrosexual and completely reverses his views and policies on global warming  — how will that play with the base — it is game over for his presidency if women and the younger voters show up in November 2020.

The Lefties Are Coming 

Wall Street is also going to have to come to grips with the politics of the younger generations.   We have been writing about this for years.

But it’s hard to look at the generational data and not see long-term disaster for Republicans. Some people think generations get more conservative as they age, but that is not borne out by the evidence. Moreover, today’s generation gap is not based just on temporary intellectual postures. It is based on concrete, lived experience that is never going to go away.  – Davod Brooks, NY Times, June 3rd

Once again, we find ourselves betting against the conventional wisdom of the Street.

The Russians Are Coming? 

Finally, the Russians really have their work cut out for them in the November 2020 election.  Expect the unexpected, folks.

Nothing surprises us anymore and most don’t seem to care.

The Russian government interfered in the 2016 presidential election in sweeping and  systematic fashion…

The presidential campaign of Donald J. Trump (“Trump Campaign” or “Campaign”) showed interest in WikiLeaks ‘s releases of documents and welcomed their potential to damage candidate Clinton…

The social media campaign and the GRU hacking operations coincided with a series of contacts between Trump Campaign officials and individuals with ties to the Russian government.  – Mueller Report 

As always, we reserve the right to change as the facts change.

We will try to post this on a daily basis showing the expected value of the Federal Funds rate (lower band) at each of the FOMC meetings over the next year and recent changes in the market expectations.

The data illustrate no change expected in Fed Funds at next week’s FOMC;  25 bps cut at July meeting;  decent odds of another cut in September;  two rate cuts by the October meeting; and three cuts by January.

We will add the probability matrix in the next post.