Morning Note: Knee-jerk reactions, economic cycles, and crony capitalism at its worst…

The Dow future contract went from down ~200 points a little while ago to slightly positive just after news hit that the U.S. producer price index actually declined last month versus expectations of a slight increase. The other major averages went from notably red to green as well.

The market’s knee-jerk reaction (assuming that was indeed the catalyst) was interesting, in that lower prices not only denote what is already painfully apparent (economy’s very weak), but that thus far the only thing the Fed’s been able to inflate (oh they’re trying*) is stock prices — further widening the divide between equities and economic reality. (*That — Fed failure on inflation — pointed out, I do, frankly, see the stars finally aligning in a way that indeed points to inflation going forward. However, alas, that particular alignment threatens the unsavory variety we call stagflation.) 

Note, before I continue the above thought, stocks retreated back into the red a little while later, then news (legitimately good news!) that Remdesivir is actually saving lives was met with a move back into the green…

Allow me to add, however, that the real economy (reflected by this morning’s PPI) acting like, well, a real economy is ultimately a good thing. You see, falling prices — while the Fed and economists at large view them as essentially “bad” things — are natural phenomena amid falling economies. Serving the all-important purpose of providing stuff to consumers on the cheap at a time when consumers themselves are suffering recession reality. It’s called a cycle: Demand falls/price falls — Price falls/production falls and (because stuff’s cheaper) demand ultimately rises — Demand rises/price rises — Price rises/production rises — Production rises/jobs rise — Jobs rise/demand rises — Demand rises/price rises — Price rises/production rises… On and on until over-confidence/over-indebtedness (bloatedness) force a correcting process called recession… 

Of course recessions are always painful, and painfully inconvenient for the politician and the policymaker with the misfortune of finding his/her career rising during the declining phase of the cycle. Hence they forever effort to keep the economic sun shining as long as artificially possible. In the process, alas, weakening the economy’s immune system to the point where each ensuing downturn ends up being more severe than the last… 

Now, all of my rambling above aside, make no mistake, I’m 100% all in on the government aggressively helping out the consumer during this “COVID crisis”. I’m 100% NOT all in, however, on the Fed aggressively buying up the corporate debt/bonds that private equity firms and hedge funds carelessly loaded up on over the past few years. Make no mistake, while the Fed says different, that — averting the natural consequences of, frankly, stupidity on behalf of those who should know better and having the taxpayer suffer them (call it privatizing gains and socializing losses) — is REALLY REALLY BAD for market function, and, ultimately, and most importantly, for the consumer in the long-run.

Me getting a bit carried away above has taken us a half-hour into the session. As I type the Dow’s down 24 points, the S&P 500 is off .35%, the Nasdaq is off .75% and the Russell 2000 is flat. 

Asia had a rough night last night, no doubt following the U.S. lower. Plus, Chinese and Hong Kong equities gave back a bit as it looks like the state (state-financed buyers) took a break and, thus, inspired a bit of profit taking among the ranks. European equities are net green this morning with 12 of the 19 markets we track trading higher.

Oil’s up .8%, gold’s up $6, silver’s up .5%, copper’s up 1.6% and ag’s mixed this morning.

The VIX (S&P 500 volatility) is up .65% at, let’s call it a dangerous 29.45, while VXN (Nasdaq vol continues its steady march higher (of late) to the tune of 3.7% as I type. The latter (VXN’s steady march higher) amid a rising Nasdaq index is, historically-speaking, a serious warning sign. Time will tell…

The dollar’s down .2%…

Next up (today, or sometime this weekend) our weekly macro update.

Happy Friday!


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