Morning Note: The Domain of Policymakers

So what’s got traders hitting the sell button this morning? Is it the delta variant that, per last weekend’s video, we believe has been playing a bit of havoc in non-US markets of late? Is it a weaker-than-expected recovery? Is it the lack of an agreement on infrastructure? Those would be the 3 most cited presumed catalysts by the media this morning.

Could be any or all of the above, or could simply be that the market, as we’ve explored in recent video chart analyses, is “heavy”, and some corrective action is, if not overdue (it is), VERY healthy right here. Also, keep in mind, tis the season for volatility — summer months can be tough.

Suffice to say that two of the three most cited catalysts (infrastructure for certain) are the domain of policymakers whose careers rest on their ability to wrest away the risk of a major market collapse on their watch. The other being a “weaker-than-expected recovery”; which they believe can be remedied lickety-split by the printing press… hmm… Remember, American household net worth is more explained by the stock market today than it’s ever been. Which makes for a very precarious market setup, and, again, for very panicky politicians/policymakers. 

So, bottom line, should we trust that all is well now that there are literally no holds barred when it comes to market intervention? Well, depends on how you define “well”. Short-term, sure, there’s no reason at this juncture to believe that there’s not another buying opportunity potentially in the offing (although I’m talking a 20%, not a 2%, dip). Longer-term, well, the misallocation of resources that result from such top-down “control” of economies and financial markets is a whole different conversation altogether. 

I.e., the combination of massive government spending (to come/continue), the money printing and the suppression of interest rates to facilitate it, along with the other societal/structural/systemic developments we’ve discussed herein, make the prospects for steadily higher inflation (or, alas, stagflation) a greater risk than we’ve seen in several decades. 

Clients, as you know, you’re seriously diversified, although, as I keep reminding you, the first leg of a major selloff is typically a liquidity event (cash is suddenly all anybody wants), and, therefore, even the healthiest of babies get thrown out with the bath water. So, should this morph into something meaningful, indeed, we’ll be there for the first leg.

However, as you know, you’re sitting on a decent chunk of short-term fixed income stuff and, not to mention, gold is one of our highest weightings currently. Plus, there are the SP500 put options that kick in at lower levels that serve as major offsets to major market declines.

Asian equities got battered overnight, with all but 2 of the markets we track closing lower.

Europe’s the same this morning, with markets down (most over 2%) across the board.

U.S. major averages are a mess: Dow down 505 points (1.45%), SP500 down 1.55%, SP500 Equal Weight down 1.68%, Nasdaq 100 down 1.55%, Nasdaq Comp down 1.79%, Russell 2000 down 2.57%.

The VIX (SP500 implied volatility) is up 20.56%. VXN (Nasdaq 100 i.v.) is up 12.74%.

Oil futures are down 0.43%, gold’s up 0.49%, silver’s down 0.09%, copper futures are down 1.24% and the ag complex is down 0.28%.

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

Our only position in the green to start the day is gold (although TIP, silver, gold miners, silver, ag and metals are holding up nicely) — our biggest losers are MP (rare earth miner), base metals miners, solar stocks, Viacom and uranium miners. Our core portfolio is down 1.32% to start the session.

Timely quote from Leon Levy’s excellent book The Mind of Wall Street:

“The message is that mood or investor psychology is as important to markets as is information. It requires tremendous discipline to apply this understanding to one’s behavior.”

Have a great day!

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