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9.17.2016 - Financial Intelligence Report Bookmark

Rates, or Japan?
On September 20 and 21, the Federal Open Market committee meets to discuss monetary policy. Billions of gallons of digital ink, and a thousand hothouses worth of hot air has been spoken concerning whether the Fed's will hike rates for just the second time in 10 years.

So we'll know that answer on Wednesday. Naturally, the common thinking is that "no way" will they hike rates, simply because despite an overpriced stock market, the true economy is grinding and groaning itself lower. Between the retail sales, the productivity, the regional Fed reports, etc, it is clear that on a fundamental basis...they can't hike.

But as Mr. Trump has said so eloquently, they've "rigged" it. We have a false market. Fundamentals do NOT apply. All that seems to matter is if they can get free money.
But there's a major twist that we have to consider. I'm not only talking about the idea that maybe the Fed's are being too exposed by Trump and might make a move just to show that somehow they are relevant and in control. I have floated that in the past as a possibility. Let me chat about that for a second, before we get to point two....

Trump has said some nasty things about the Fed. The Fed doesn't like that even a little bit, since Job One at the Fed is to remain in power. Anything that would raise the idea of auditing, or examining their practices must be kept from the public at all cost. Why do you think Clinton pounced on Trump so fast for saying what he said? She knows full well the extent of the Fed's dealings. She's more than happy to keep their nefarious ways hidden.

So there's a chance that the Fed got its little self together and said "hey folks, this Trump guy might pull this off. He's already giving us heat for blowing bubbles and inflating the stock market. Maybe we ought to move rates up a quarter point, just to show we're doing something". That is a possibility. They know the stock market might not like it, but it would have ZERO affect on the true economy. The economy is already shot to hell.

But there's something else to consider.

On September 21, the Bank of Japan is ALSO meeting. This is what Reuters had to say about it...

The BOJ says it has three easing tools: buying more bonds, buying more risky assets and deepening negative rates.

At next week's review, it will likely signal markets that cutting rates would be the more preferred future option as it directly pushes down short- to medium-term rates that have the biggest impact on corporate borrowing costs. The BOJ will also consider reducing purchases of super-long government bonds to give financial institutions such as insurers and pension funds a better environment for earning returns, the sources said.
So here's the question of the day. We know the Fed's are on a bit of a hot seat over Trump. They have to make believe they aren't political and that they'd "never defer a hike because we're supporting Obama". We also know that when it comes to Central banks, they often play "tag, you're it" with each other. In other words when "easing" ...first the ECB might move, then it's the US's turn, then Japan's turn and back to the ECB, etc. We've seen this many times. They work in concert with each other.

Is it insane to think that if the Band of Japan really goes crazy, pushing deeper into negative rates, and expands it's bond and asset buying, that there would be enough "carry trade" between the US and Japan that the Fed's could hike a quarter point, yet there would be no major shake up? Remember folks, the market doesn't care where it gets its free money from. We're in a totally connected global economy. They don't care if it's the ECB or the BOJ, or the FED...as long as someone is pushing down rates and flooding cheap money.

Think back a bit. What did OUR markets do when lunatic Draghi implemented QE? We went up. When he increased QE, we went up. When he balked on more, we faded. See how it works? They don't care which corner of the globe supplies the market heroin. They only care that it keeps coming. So I ask again, is it insane to think the Fed's might bump a quarter point, knowing the Japanese will save the day?

I don't think it is insane at all. If the Fed's know what the Jap's are going to do, and it really is a bigger program than most expected, they could hike rates here, looking like they're doing something...while using the QE push from Japan to keep things propped up.

The common thinking is that the Fed's won't do anything because it might influence the elections by tossing the market into a tizzy. Hey I get all that, been there...done it. And if it was ONLY the Fed's meeting on the 21st, I'd have to absolutely agree that they wouldn't do a thing. The Last thing they want is a spotlight on their activity and if a hike knocked the market down 500 points, people would ask "why did that happen?" They don't want the attention.

But again... with the BOJ still terribly desperate to "make something happen" there's a chance they're going to come out with all manner of new crazy QE/printing/negative rates/etc. The carry trade would offset any damage done by the Fed.

Let me explain. Basically what is a carry trade? In its simplest terms it goes like this... it's a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. This strategy is very common in the foreign exchange market. So if the BOJ were to get their rates even lower, you could see carry traders borrowing cheap Yen, and putting it to work in US equities that pay a strong dividend.

That little trick would accomplish several things. First it would enhance the ILLUSION of US strength. You can hear it already..."hey we must be strong, the rest of the world is cutting and we're hiking rates!!!" Second, it would give the Fed's the chance to look like they're not being Obama's pet. Third it would keep stocks elevated, instead of falling like a rock.
Now for my mea culpa. Is this going to happen? I have no clue. I'm simply showing you that there IS a logical and rational reason why they "could" toss that quarter point hike on us. Whether they do or not is a different question.

Usually I go ahead and make a prediction. For a long long time I had a really good track record of guessing if they would or would not hike or cut rates. But this time is simply too hard. If they don't hike they'll look like tools, tools that were called out by renegade Trump. But again, if they have a wink and nod from the BOJ that they're going to do much more than folks expected, the Feds could do it and there would be no downside.

It's too close to call. I guess the only way to sum it up is... If the BOJ only gives what has already been expected of them, then the Fed's will take a pass and no hike. If the BOJ goes nuts, I think the Fed's will slip one in. One thing is sure...we'll know Wednesday.
The Market...

For 42 sessions in a row the market didn't move more than 1% up or down. It was stuck trading sideways in a "box". Then last Friday hit and since then we've been in an up and down chop that rivals some of the biggest volatility we've ever seen.

After testing 2120 as a low for three days in a row, on Thursday they put in a big fat green day. It looked like they had gotten the momentum they needed to put together a string of up days. But no...Friday came and down we went. While we didn't get down and test 2120 again ( the low of day was 2131) it was a disappointment for the bulls. We ended the day down 8 S&P points and 88 on the DOW.

So after 42 days of doing nothing, the last 6 sessions has brought us some awful big chop. Last Friday we fell 400 DOW points. Then got back 250, then gave back all that, fell more on Wednesday, tried to run on Thursday and got smacked down on Friday. What's with all the new found chop?

As I explained above, there's two things in play. One is the silly Fed debate but I think more importantly is what might be brewing in Japan.

All of that will get resolved this week. The Fed's and the Bank of Japan will announce their new policy decisions on Wednesday. Depending on just what the BOJ does, will probably determine if we're going to run back to the highs, or if 2120 is going to fail and we'll be face planting 2100.

Usually the market moves up strongly on the days ahead of a Fed meeting and frankly I thought they might do that on Friday. But fears about what Japan has planned, kept a lid on their enthusiasm.

They might get brave on Monday and try and get us green, simply because "they can". But I don't think we'll see any really big movement until after we get the facts on Wednesday. All we can do in a market this choppy is look at the bigger picture levels. 2120 on the S&P is the line in the sand that they desperately want to defend. As long as we stay above that, there's a chance for an up side rally on any given day. Given the way this past week went, even if we get a green run, I'd be cautious around the 2160 level. That might act as an upside resistance.

This should end up being an incredibly interesting week folks. Stay tuned!

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