Ignore Turkey. Something Else Is Skewing the Markets Here

Stocks fell sharply on Wednesday – then they gained it all back, and even rose a little further, on Thursday.

Ostensibly, that was because the Turkey crisis deepened on Wednesday and was resolved on Thursday.

The market’s gyrations are enough to make your head spin.

And so are the changing stories.

But I don’t buy them.

Instead, I have a theory on what is actually driving these market movements, and I want to share it with you today…

Excess Borrowing Has Moved These Markets More Than Current Affairs

Ultimately, the only thing that matters is whether the liquidity is there to drive prices higher.

In the modern era, say for the past 15 minutes or so, that’s been a function of central banks – adding money to the system. And they did it almost constantly from 2009 to 2014.

Then the big 3 central banks (Fed, BoJ, and ECB) started taking turns. The Fed stopped QE in late 2014, and went into reverse, draining money from the system in increasing amounts, starting last October. But the ECB and BoJ kept printing. This year they have been tapering, and the ECB will end its QE completely in December.

History tells us that when the central banks stop printing money stock prices fall. Pundits like to call it “pulling the punchbowl.” However, the idea of central banks actually pulling money out of the system, as the Fed is now doing with its program of balance sheet “normalization,” is a new one.

I thought that the effect of this process would be catastrophic.

I thought that the decline would start in mid-July. Here it is mid-August and we’re still bumping our head on the ceiling. The decline needs to start soon or I’ll have a hard time wiping the egg off my face.

That catastrophe hasn’t happened yet apparently because, as I have illustrated in past reports, dealers and big investment funds decided that it would be a great idea to just borrow more and more money to support stock prices at the highs. They think that’s a good idea. I think it’s a bad idea.

Janet Yellen told us that the Fed would continue to tighten until there’s a “material adverse event” in the financial system or markets.

And tough guy Jerome Jerry Jay Powell seems bent on following that dictate. The market hasn’t really tested him yet – but neither a cooked Turkey, nor a collapse in other emerging markets, will deter him. Until the US markets suffer that “material adverse event,” he’ll stay on course pulling cash out of the system.

“Strong” US Economic Data Will Keep the Fed Tightening…

Unfortunately for the markets, Powell seems to believe the headlines, which simply parrot the apparently strong US economic data. This will keep him on course in tightening, despite the fact that that narrative isn’t accurate.

On Wednesday, the Wall Street Journal told us, “Retail Sales and Manufacturing Are Powering U.S. Growth This Summer.”

That was after the Census Bureau’s monthly retail sales release claimed 0.5% month to month gain in US retail sales, based on a tiny sample survey of retail establishments taken early in the month.

In fact, while the Commerce Department told us that retail sales (including the inflation component) had risen by 0.5% after seasonal finagling, it also adjusted the June gain down from the same gain, 0.5%, to just 0.2%.

Oops. That’s less than the CPI rate which is now approaching 0.25% per month on average. Ergo, real retail sales were actually flat, or maybe down a hair in June.

Surprised, we weren’t – because I had warned that the real time federal tax collection data from the daily Treasury Statement had told us that something other than Turkey was afoul with the economic data.

The tax data has been indicating that the US economy was only flat at best, as I reported here.

Furthermore, when we peel the retail sales onion all the way back, the picture is even worse.

This Stripped-Down Chart Reveals Why We Should Ignore Headlines and Avoid the Market

Let’s cut to the chase and get rid of the economists’ seasonal hocus pocus.  And let’s strip out CPI inflation and gasoline sales, which have soared since last year, not because drivers are buying more gas, but because gas prices have soared. And for good measure, we’ll normalize for population growth to see just how much more we the people are spending on average.

The chart shows us several things.

One, the year to year increase was 1%, which is hardly the 6% annual rate implied by the headline number.

Two, recovery actually stalled in 2015.

Three, despite the massive tax cut enacted in February, the minuscule gain this year is no faster than it was a year ago.

And four, real sales per capita have yet to exceed the level reached in 2005 despite 9 years of recovery.

This is essentially what the tax data for July had told us, but nobody looks at the truth. The Fed and everybody else are looking at the headline numbers, not the facts.

The market can’t handle the truth. So the big speculators borrow money to support high stock prices.

Eventually the truth will out, and the market will react with shock.

Can I pinpoint when that will be? Apparently not. But I’m still recommending staying out of the market.

I’d buy a few calls to hedge and participate in any upside, with limited risk, if the market breaks through 2850.

I would go the other way and buy puts to take advantage of the downside when the market breaks down below 2800.

Sincerely,

Lee Adler

3 Responses to “Ignore Turkey. Something Else Is Skewing the Markets Here”

  1. Excellent review and perspective. My perspective from your experience has been from a different angle and with the same outcome. With all the politics surrounding a “Global Initiative” that would have occurred sooner with Hillary as President as we well know certain nations have the finances and power to bring about their objective. Will cryptocurrency have an impact? Will currency manipulation? The revaluing of our own dollar? All nations have a large debt and will one day be the major force in the new financial system, will these also bring in a different type of investing program, not set on the stock market but through an AI technology currently underway? Who will be prepared for such a drastic change? In the book of Revelation the number 666 plays a very interesting prophetic event in our system to buy and sell. Do we have a complete understanding of this new system? Will it be Global? Who will be part of it? Will it actually happen?

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