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The New Hard Look

Political Economy & Markets

Building over-the-horizon ideas since 1984.

The New Hard Look
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1st May, 2024

The latest US Employment Cost Index data suggests there is no let up in the upward pressure since covid

At around the third highest read since covid, this release will be raising eye-brows at the Fed. Higher and sustained wages and employment costs make it extremely difficult for the Federal Reserve to even contemplate cutting rates.

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Stocks down and not over

This was a savage move on the day largely driven by the Wages Cost Index data and the growing realisation that rate cuts may not happen at all. My view all year has been for 1-2 rate cuts at best, and perhaps none at all. That if the market would be forced to price in total frustration for the whole year, then the price impact on stocks could be dramatic.

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BITCOIN is really at the edge now of a potentially savage downturn,

If the moderate support seen at yesterday's low were to be further shattered today, particularly with an NY close below that level, then we are potentially looking at having just seen a multi-month or even multi-year top.

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30th April 2024

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US Secretary of State Blinken treated with disdain by China

In parallel with some rather diplomatically rude announcements by the Secretary of State, where he openly and aggressively threatened China with further sanctions should they continue to support Russia, Secretary of State Blinken was purposefully treated with disdain without the usual diplomatic protocols being followed.

The relationship between China and Russia is one of closest allies. What was Blinken hoping to achieve by such remarks? Except to heighten tensions. He was subsequently treated in kind, though this may have always been the China plan in any case. 

One of the concerns I have around the growing dis-content between China and the USA, is that any even small or managed conflict between the two could lead the US to seize all Chinese held bonds and assets in the USA. This could perhaps be seen by some as an opportunity to dramatically, instantly in the event, reduce US debt. A rather sobering consideration. 

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US bond yields may be peaking for now

We have had the best of runs being bearish US bond prices, bullish yield for a very long time now. This may be the first time in many months I have suggested we may be in for a period of sideways consolidation. This is for the moment, perhaps 2-8 weeks.

The long term view remains solidly that a continuing deterioration, no end in sight, in the fiscal situation in the USA simply means the US has to pay more, higher interest rates, to borrow. Both domestically and from abroad.

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US dollar ultimate tug of war

The US dollar is in a battle here, torn between the ever-worsening fiscal crisis and the arbitrage advantage of high bond yields. In the end, though, it is the on-going sad reality of heightened political risk and a world already at war to a degree not seen since WW2, that is likely to continue to see the US dollar move still higher overall. 

It should be noted that US funds and traders are in the main not able to accurately perceive just how bad their fiscal position is. They simply cannot imagine that their once world leading nation could experience a massive financial implosion at some point. Due to extreme government largesse at every level. And it is only getting worse as politicians continue to see spending ever bigger as a way to win votes and stay in power.

While clearly counter-intuitive, if there is such a phrase, the US dollar looks more likely to appreciate as the fiscal juggernaut rolls on. Leading, in the end, to some strange shift toward a state monopolised economy with a super-strong currency.

It will not end well, but for the moment this is the trajectory the US finds itself on. 

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If still a bull market for stocks, they should rally into and through the Fed meeting?

ver the course of the bull market of the past 6-7 months, before the recent significant top we have just had, the market proved itself capable and highly spin dependent of making the most out of each and every Fed meeting and follow up, in very bullish ways. The pattern has been to rally into the meeting over the preceding days, to have an extremely volatile on the day response, in order to feed the price makers all those lucrative stop loss orders, and then, in the end, to begin again rocketing higher. 

To me, however, on this occasion, I am sensing a very acute tiredness to the market price action in the US500 for instance. In fact, I wonder if the market can actually hang on to these immediate levels today, or will already be falling away as the Fed meets and makes its decision. This is the exact opposite of more recent meetings, and would suggest that it may be sharp downside that follows. Not at all the pattern that had become so previously resilient no matter the actions or words of the Fed.

Such price movement this week, would be a further significant nail in the coffin of that before mentioned multi-month bull market. Remember the Russell2000 is still well down from the highs of more than two years ago. Something to think about when the fund managers seek to convince you of what a great overall bull market this is. Of course, it is not. 

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