Morning Note: “Can the Fed Circumvent Human Nature?”

Clearly, judging by the latest price action, traders/investors anticipate great things from the great amount of continued government stimulus to come…. Plus, and this is a big plus, it’s going to be so great that they see it ultimately sparking a not-small amount of inflation in the process.

As clients and regular readers know, we do see inflation as a not-small “risk” going forward.

Now, why do I say “risk” when, clearly, that’s what the Fed’s after — at least that (that the Fed desires inflation) is the prevailing narrative.

Well, in theory, rising prices inspire rising production, which creates jobs. And rising prices engender fear of further rising prices and, to a point, inspire people (who can afford to) to buy stuff now. 

Ah, but what else does inflation inspire? Yep, higher interest rates. And what do higher interest rates do to the market when Wall Street swears that stocks at record nosebleed valuations are A-Okay because interest rates are so low? Well……..

Of course it seems foolhardy to anticipate a market meltdown amid the promise of never-ending stimulus, so let’s not, but let’s nevertheless hedge a bit just in case. For, meltdowns, by definition, don’t come when they’re most expected, at least not by the masses…

I was away from the office, with limited connectivity, yesterday and was unable to do the morning note. So just FYI, on the day the Dow was up 0.76%, the S&P was up 0.74%, and our core portfolio was up 0.76%.

As for this morning:

Asian equities kept it going last night, with 10 of the 16 markets we track closing higher.

Europe’s catching a breather this morning, with 12 of the 19 bourses we follow trading lower as I type.

U.S. major averages are mixed to start the day: Dow down 54 points (0.18%), SP500 down 0.06%, SP500 Equal Weight down 0.25%, Nasdaq up 0.29%, Russell 2000 down 0.08%.

The VIX (SP500 implied volatility) is up (for a 2nd straight day?!?) 3.30%. VXN (Nasdaq i.v.) is up 1.49%.

Oil futures are off 0.57%, gold’s up 0.72%, silver’s up 0.41%, copper futures are up 1.22% and the ag complex is up 0.27%.

The 10-year treasury is up (yield down) and the dollar is down 0.39%.

Led by base metals, gold, miners, silver and ag commodities, our core portfolio is up 0.11% to start the session. Yesterday’s winners, all things energy, are today’s biggest laggards…

Make no mistake, and keep this forever in mind, the powers-that-be (the Federal Reserve in particular) in their minds exist to make linear that which, by its nature, is cyclical. Their past efforts to circumvent the economic cycle have resulted in a debt-ridden setup that has them resorting to… well…. there’s I suspect virtually nothing that they can conjure up at this point that will be deemed off limits…

Ah, but can they circumvent the cycles of human nature?

Here’s from L. Ahamed’s excellent, educational, enlightening volume The Lords of Finance:

Emphasis mine…

“…bubbles and crises seem to be deep-rooted in human nature and inherent to the capitalist system. By one count there have been sixty different crises since the early seventeenth century—the first documented bank panic can, however, be dated to A.D. 33 when the Emperor Tiberius had to inject one million gold pieces of public money into the Roman financial system to keep it from collapsing.

Each of these episodes differed in detail. Some originated in the stock market, some in the credit market, some in the foreign exchange market, occasionally even in the world of commodities. Sometimes they affected a single country, sometimes a group of countries, very occasionally the whole world. All, however, shared a common pattern: an eerily similar cycle from greed to fear.”

Have a nice day!



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