That's All Folks

In late September, I turned 80. According to Wall Street lore, this counts as a life well lived for
an investment guy. The most important thing I've learned so far about being 80 is the you have
to become more inventive if you want get around decently well. But learning the fine art of
compensating for advanced age is a time consuming endeavor as I am finding out. So it seems
to me like a good time to step out of the capital markets milieu. And, there is the view I have
that both bond and stock prices are bloated and now not interesting. I also think that the vast
gulf between the folks who are financially loaded and the rest of mankind is unsustainable
over time at least here  in the US. If I was a betting man, I would say that the bloats we now
see in the markets and in wealth disparity are going to be corrected over time, at least here in
the US. I hope these evening out processes are not born out of economic, financial and social
disaster, but my guess is they are on their way over the next couple of decades come what may.
I wish all the many readers of this blog so long and good luck.

Easy Does It

Confronted by weakening PMI data and tightening liquidity in the financial markets, the Fed has
reverted to another QE effort. It will buy substantial amounts of 3 month T-bills at least for the
intermediate term. As the Fed again expands its balance sheet, some funds will invariably leak
into the money supply, likely further adding the growth of the real money supply. This is a plus for
the stock market as is the Trump team's effort not to intensify the trade war with China. These
developments will help the economy although the timing in the shorter run is necessarily
imprecise give the continued deterioration in the US economy, especially in the industrial sector.
The return of QE adds significantly to inflation potential if the economy re-accelerates in growth
in the months ahead.

The 2020 national election is still more than a year away. The House seems ever more likely to
impeach Trump as soon as it can plausibly do so, but the Democrats still must settle on a
candidate and a platform to put in opposition. As of now, investors appear to favor a moderate.
Trump is presently expected to survive an impeachment trial in the Senate but could still crash
and burn by election day anyway. So, even if the economy revives somewhat, there still may
be some heavy clouds for pundits to grapple with even so.

SPX Update

My liquidity and economic indicators suggest a very modest rebound in economic performance
in the months ahead. The profit indicators call for SPX net per share to remain flattish at $160.
through year end 2019. Inflation pressure gauges suggest a continuation of quite mild acceleration
in the CPI. The short term interest rate directional is consistent with further downward pressure on
the 3 mo. T-bill rate. The SPX remains very over extended viewed long term and is still in over-
valued territory. The risk / reward profile is improving slightly as the danger of imminent recession
has eased somewhat. Longer term economic potential is still down - trending as it has been since
early 2018. China vs US trade issues may well continue to command attention in the months ahead.
It is still too early for the 2020 national election to sharply influence market behavior but it may
add significantly to market volatility next year. I have current fair value still at SPX 2650.

The SPX is still in a long running cyclical bull market. Looking a little shorter term, it has broken
the original uptrend from the late 2018 and is presently adrift. The market is not overbought, but
momentum has been fading, and failure of the MACD improve in the next few weeks would be
disconcerting. For right now, let's call it a "Ferdinand" bull.  SPX Weekly

Long Treasury Bond

To gauge direction of the long guy's yield, I watch the momentum of industrial production and the
trend of sensitive materials prices. Both have been falling over the past year in a softening world
economy, and the bond yield has followed suit. The long Treasury price is very overbought
short run, but until there is evidence that the manufacturing side of the economy is firming up on a
sustainable basis, high quality bond yields may stay distressed. My weekly fundamental cyclical
indicator remains modestly weak measured yr/yr reflecting the significant slowing of growth and
the fact that basic industrial materials prices are down sharply over the past twelve months.

I have not been interested in the bond market for quite a while as I think yield premiums for such
factors as long term inflation expectations, duration, and future supply have all been whittled
away over the course of  the very long bull market for bonds. Back in late 1980 and 1981 the
group I led was a major buyer of Treasuries. We even got several calls from the Fed inquiring
about our health. Back then, Treasuries were yielding nearly 14% and BBB utilities were up at
about  19.75%. US dollar pay CDs of Canadian subsidiaries of large US banks offered 21.5%.
I thought that was all crazy. I could buy high quality bonds that yielded more than many companies
could earn on book equity. Some Wall Street bond gurus had yields on Treasuries going to 25%!!
Well, I think we are at the other extreme now, what with the new generation of gurus calling for
zero coupon long Treasuries if the US economy weakens into recession. Lots of luck with all
that . For me, it's sayonara to bonds.

Chart for the long Treasury yield. TYX weekly

Key Economic Factors For The Markets

The growth of monetary liquidity has been shrinking until recently. The shrinkage was severe
enough to force the US economy to rely on private sector funding to underwrite growth. Recently,
the Fed has backed away from its policy of strong liquidity tightening, which was adopted to
reduce the mammoth increase in the size of the Fed's balance sheet (Fed Credit) and the flip side
swelling of excess bank reserves. Fed Credit is still so large as to represent a major long term
inflation threat, but with the economy slowing down to a crawl, the Fed has decided to relent for
now. Liquidity growth is improving, but only mildly so, and is not yet nearly strong enough to
support more than a very mild resumption of economic and profits growth. Faster monetary
liquidity growth now seems inadequate to fund both improved economic growth and sustainable
rallies in the capital markets.

The Fed is clearly leaning toward reducing short term interest rates before too long, but take
note that Wall Street is particularly bad at guessing Fed intent. If the Fed moves to cut rates
in the weeks and months ahead, there could be an additional shot of liquidity to the system as
as the Fed moves to assure an orderly transition to a lower rate structure. In this event, stocks
could receive an additional mild positive jolt.

On the other parched palm, if the Fed opts to toss caution to the wind and run with a more
liberal policy, the US Dollar will sink in value and the long dormant commodities market will
likely perk up. The gold price would receive a nice boost while the bond market could weaken
sharply, leading to a return to a distinctly positive yield curve that would no doubt surprise
folks.

The performance of the US economy in 2019 has been dicey and it is not clear now whether
an easing of the monetary reins will be sufficient to assure that the US economy will firm up
enough to satisfy expectations built in to the new, lofty level of share prices. Such may well
be the case if the Fed keeps liquidity growth mild and does not open the tap as it might if a
full fledged recession needed to be tackled.

SPX -- Mid - Year, 2019

The SPX has reached an interesting point at present and from several perspectives. My forward
looking economic indicators have been signaling a slowdown in real growth was in prospect for
well over a year (confirmed). The business profits indicators have been warning of a flattening
of profits over much of the same period, and with a trend of weakening pricing power, profits for
the second half of the year could dip lower. On the flip side, the Fed has backed off further from
major quantitative tightening of excess system reserves and this has led to an improvement in the
growth of monetary liquidity. Moreover, the Fed and other major central banks have indicated
they may be prepared to cut short term interest rates, especially if trade disputes continue to
suppress economic growth. The improvement in the trend of monetary liquidity is a market
positive for sure, but the timing of such a turn as a a market support and booster is hard to gauge.

From my perspective, as the SPX approaches the 3000 level, it is becoming increasingly over-
valued and is overbought against its 40 wk m/a, which by the way, has yet to turn up in a
meaningful way. To top it off, the SPX is threatening to reverse positively on its very important
longer term MACD measure (bottom panel of the chart).  SPX Weekly

Market players are arguing briskly about prospects for the remainder of 2019 and for good
reason.

Gold Price

Gold made a significant low around the end of 2015. By my pro-inflation indicators, the gold price
gain reflects partial recoveries in the price of oil and other industrial commodities. The US dollar
has weakened slightly in value over this time frame. As gold cycled along. it has scored steadily
higher lows, but has not experienced a sharp price breakout until recently.  Gold Price

The global economy has slowed in growth over the past year, and inflation has actually de-
celerated. It appears  then that the recent sharp rise in the gold price reflects a multi-cushion
billiard shot. As the economy has slowed and as US-China trade war tensions have continued,
major central banks are signaling they are prepared to ease monetary and credit conditions as
may be needed to keep the global economic expansion intact if even at a more moderate pace.
There is a geopolitical issue as well that could have major consequences for economies and
inflation too. I naturally refer to the stand-off between the US and Iran, with Iran now
suffering economic decline as a result of formidable sanctions imposed on the Its economy with
special focus on oil sales, Its cash inflow lifeline. Iran has rebuffed talking about how to get
sanctions relief and has grown belligerent instead. The US and Iran have have experienced
skirmishes before, but now we have strong economic sanctions in play coupled with Iran's
strengthened military capabilities. Iran can now make big time trouble not only in the Gulf
but across the Middle East as well. Rising tensions not only reflect Trump "reality TV"
bluster but an Iran that is being seriously squeezed economically with no visible off-ramp it
could easily tolerate. There are several ways this issue might be resolved short of military
action, but rash behavior in the Gulf area could easily touch off an incident where tension
could quickly turn into a fire fight. Many interested parties will be at G-20 this weekend in
Osaka this and the US v. Iran has been forced on to the docket.

There are some prospects for higher inflation ahead, but since visibility of said process is
currently zilch, gold players have to be careful not to get carried away with enthusiasm just
riding the current hype and keep eyes peeled on the fundamentals as they unfold.

Note that the chart shows the strongest weekly RSI for gold in several years. It is overbought.