Tesla Investor's General Macroeconomic / Market Discussion

[kenliles]

updates on investment funds by sector

tech sector now accounts for 23% of the S&P 500—up from 15% in 2008 and heaviest weighting since tech bubble

 

[kenliles]

for those following the effects from Trump-Russia and are aware of latest threat-ploy to fire Mueller (likely resulting in market reaction);
looks like that is being thwarted by Rosenstein (as many predicted)

 

[FluxCap]

@kenliles and others: any thoughts on how the Fed will unwind its massive balance sheet and whether that could be market-moving? I gather that not even Fed members are sure what will happen, but am curious to hear your theories. Could hear something about it tomorrow.

The Fed Is Getting New Rules of the Road Ready for Balance Sheet Unwind

 

[kenliles]

@kenliles and others: any thoughts on how the Fed will unwind its massive balance sheet and whether that could be market-moving? I gather that not even Fed members are sure what will happen, but am curious to hear your theories. Could hear something about it tomorrow.

The Fed Is Getting New Rules of the Road Ready for Balance Sheet Unwind

It's no question new territory - especially in concert with rising interest rates against somewhat anemic economic growth. Yes- we should hear tomorrow a path plan for accomplishing the massive Unwinding- I hope they use lots of words like gradual--
The unwinding or QT (Quantitative Tightening) is $4T in bonds purchased on the Fed balance sheet; Releasing this supply on the Bond market in theory will cause Yields to rise (less relative demand than supply)- so we can watch for that cause-effect. Hopefully they choose to do this with longer term first maintaining a stronger curve. Either way, it's going to effectually provide a tightening of money. Barron's reports the the expected Fed funds rate is to hit 2.5-2.75% by end of 2018. That's already going to squeeze most of the expected 2-3% GDP - not much more room there for anything but VERY gradual monetary tightening (Unwinding)- so watch for market to react well if lots of gradual wording used, and poorly otherwise, would be my guesstimate
With at least 6 potential headwinds-
Fed raising rates,
QT,
Trump policy failure (either actual or perceived due to non-implementation),
Weak GDP,
High Equity valuations,
High octane Poli-Social unrest ;

This is definitely a Hard Watch caution territory IMO
and much of the reason the Bond market is so currently so Uncorrelated to Equity (Forecasting a more Bearish sentiment to Equity Bullish)
These factors, if they continue on current path, easily produce a potential recessive / market correction by summer/fall.

Here is the historic dilemma the Fed is facing

 

[Waiting4M3]

Showing highly correlated Volatility between Equity and Bond markets to Significant historical events;
concurrently showing Fed Fund rates
to present a picture of where we are currently relative to this historical context

View attachment 230360

Something funny with the bottom plot, it seems to have duplicated data across two timeframes:

 

[kenliles]

Something funny with the bottom plot, it seems to have duplicated data across two timeframes:

View attachment 231184

yeah- great catch W3 - actually looks like 1990-2003 Duplicates 2004-2017 ;
I've gone back to source @biancoresearch and (and my Schwab retweeter) and notified- It's an extremely useful data point- so I hope they respond to my request to correct and republish - thanks for catching !! great work

edit- also sent email direct to Bianco Research

 

[FluxCap]

Excellent writeup - thanks Ken. I agree that this unprecedented unwinding cannot but have *some* effect on markets and your list of headwinds is spot on.

The VIX is currently between 10 and 11 bucks, which is just crazy low. I find it hard to believe there isn't money to be made buying volatility for an expected uptick sometime in the coming year. I mean, September $15 VIX calls are under two bucks. This indicates that the VIX is signaling ridiculously calm waters for months out, in stark contrast to the bond markets as evidenced by the yield curve. Could be a heck of a trade, or a nice hedge in an equities-heavy portfolio.

 

[FluxCap]

Fed hikes interest rates despite declining inflation, sets plan for balance sheet reduction

 

[kenliles]

Fed hikes interest rates despite declining inflation, sets plan for balance sheet reduction

Right on que - from the report
"It's a little bit of a hawkish surprise," said Kathy Jones, senior fixed income strategist at Charles Schwab. "The combination of a rate hike and shrinking the balance sheet equates to a tightening monetary policy at a time when inflation is lower than expected. That points to a flatter yield curve."

We're moving to hawk-land

 

[Muaddid]

Something funny with the bottom plot, it seems to have duplicated data across two timeframes (...)]

Wow that's scarily identical...

 

[kenliles]

Something funny with the bottom plot, it seems to have duplicated data across two timeframes:

View attachment 231184

yeah- great catch W3 - actually looks like 1990-2003 Duplicates 2004-2017 ;
I've gone back to source @biancoresearch and (and my Schwab retweeter) and notified- It's an extremely useful data point- so I hope they respond to my request to correct and republish - thanks for catching !! great work

edit- also sent email direct to Bianco Research

Wow that's scarily identical...

I was able to successfully get the data source to Correct the plot and send me the republish version (thanks for catching @Waiting4M3):

 

[TMSE]

Right on que - from the report
"It's a little bit of a hawkish surprise," said Kathy Jones, senior fixed income strategist at Charles Schwab. "The combination of a rate hike and shrinking the balance sheet equates to a tightening monetary policy at a time when inflation is lower than expected. That points to a flatter yield curve."

We're moving to hawk-land

This may not lead to a flatter yield curve as Kathy expected since most of balance sheet contains longer duration bonds, 10+ years. In fact, selling off these long duration bonds from the balance sheet should lead to a steeper yield curve.

Edit: Here is the link to AIG CIO making this point
AIG on Fed's impact on insurance companies
AIG on Fed's impact on insurance companies

 

[GoTslaGo]

This may not lead to a flatter yield curve as Kathy expected since most of balance sheet contains longer duration bonds, 10+ years. In fact, selling off these long duration bonds from the balance sheet should lead to a steeper yield curve.

I was thinking the same. It would be steeper if the short term rates weren't raised at the same time.

 

[RobStark]

for those following the effects from Trump-Russia and are aware of latest threat-ploy to fire Mueller (likely resulting in market reaction);
looks like that is being thwarted by Rosenstein (as many predicted)

View attachment 231137

100% executive authority is vested in POTUS. Not 95% nor 99%.

POTUS can fire anybody in the executive branch. Read Article II of the Constitution.

The House of Representatives can determine what Presidential misconduct constitutes "treason,bribery and other high crimes and misdemeanors." And can impeach if so inclined.

 

[kenliles]

This may not lead to a flatter yield curve as Kathy expected since most of balance sheet contains longer duration bonds, 10+ years.

Depending on rates increases etc. But yes, that's what I'm hoping. Although regardless it will tighten monetary across the board. It's a big unknown, but I agree with you, if done gradually it may not excaberate the yield curve. It looks like the plan is moderately gradual, that was encouraging.

 

[kenliles]

POTUS can fire anybody in the executive branch. Read Article II of the Constitution

That's true, for the FBI director-
Mueller as a Special Prosecutor is not part of the Executive Branch, although reports to the Justice Dept which is. So requires the firing to be done by a willing head of the Justice Dept.

Regardless, Mueller has checkmated that event, exposing that Trump himself is now under Obstruction of Justice investigation. And Trump's lawyer has now fallen into the trap and effectively acknowledged same.

Given Rosenstein's under oath testimony of 'no cause' for firing of Special Council and he would not obey any unlawful Presidential order to do so, and now Trump/Public knowledge of active Obstruction investigation,
any attempt to have the Justice Dept. Head fire him, would be another Obstruction nail in the coffin. Further, W-Post sources are saying that the Trump obstruction investigation was begun prior to and adopted by Mueller, therefore approved by Rosenstein. It appears they have effectively blocked against further firings, especially of the Special Prosecutor.

 

[GoTslaGo]

So @FluxCap 's article about the inflation rate got me asking why do we have an 2% inflation target:

http://www.economist.com/blogs/economist-explains/2015/09/economist-explains-7

The Fed - FAQs

So just FYI.

 

[kenliles]

So @FluxCap 's article about the inflation rate got me asking why do we have an 2% inflation target:

http://www.economist.com/blogs/economist-explains/2015/09/economist-explains-7

The Fed - FAQs

So just FYI.

Also, the Fed coordinates with CBO on projections, which is for a 2% GDP
Based on that, they target inflation to be limited by that

It's important for investors to understand IMO. By ALL accounts we are in for a very low growth future (across the economy), which forces the Fed into a limited position when seeking hawkish policy (higher rates and QT). This in turn, when excercised, will most assuredly pressure the markets to correct at least- especially when positioned with high P/Es (and none of that overlays the Socio-Political aspects)

 

[kenliles]

Real-estate values pumped now beyond crash;
Offering a note here though- the levels don't appear produced solely from Bank lending fraud fiasco as before (although contributing). So I'm not inferring here a parallel to that event, but I think some rollover and flattening on this is clearly at risk. Again, this kind of trend is not sustainable.

 

[TMSE]

Real-estate values pumped now beyond crash;
Offering a note here though- the levels don't appear produced solely from Bank lending fraud fiasco as before (although contributing). So I'm not inferring here a parallel to that event, but I think some rollover and flattening on this is clearly at risk. Again, this kind of trend is not sustainable. View attachment 231366

Great points! Thanks

I think the real bubble right now is in bonds and Real-estate. Majority of mainstream investors got burned twice, in 2000 and 2008. Both the intensity and the closeness of these two events made them stock risk averse. If any, we are likely to see crash in bond market or RE than in equities.