As I take a deep dive into the current problems in China, I get a bit excited at first. While our illustrious elites have been trying to convince us that China is ready to overtake us at the global helm, the Chinese are in the process of clamping down on their semi-capitalist economy. That may be a primary reason that the Chinese Evergrande property developer (maybe we should call them “Never Grand”) is choking). President Xi is even donning Mau outfits of late.
The CCP does not want to share power with tech oligarchs or other capitalist Chinese billionaires. They are taking a lesson from Donald Trump’s experience. What do you think would happen if Facebook or its Chinese equivalent “banned” Chairman Xi as they did with the U.S. President? We all know it would never happen. So the CCP and Xi are shoring up their power base.
If Xi is reasserting a more communist form of central economic planning (his), this is good for China’s competitors such as the U.S. and Europe. Central economic planning doesn’t work. Don’t get me wrong, even a communist economy can compete for a time, especially with slave labor. Perhaps that is why our illustrious ruling class here at home has opened our borders to millions of illegal migrants. Our elites like slave labor too.
I say I get excited “at first” about the Chinese crackdown because “stakeholder” capitalism is just as scary a trend here at home. When I put my money in a company, I am seeking profits, not nirvana. Of course, I want the company to follow the law and be a good corporate citizen. But I save the loftier goals for my charitable contributions. And the best thing that could happen to our country right now is decentralization, not central planning.
Some say defund the police. I say defund Washington D.C. We have the central government our founders feared. Like Rome, it is likely to be our undoing. Does anyone believe that we still have a Republic? I certainly don’t.
Of course, these thoughts arise in the context of the Fed announcements today. The Fed is the penultimate exercise in central planning. Think of it as Wall Street’s version of Cocaine. It takes more and more to get high (or higher as it were).
The Dot Com bubble comes along. Dropping interest rates still works to ease the pain. Then the Financial Crisis hits. Decreasing rates to zero isn’t enough. So the Fed started buying bonds and increasing its balance sheet (taking on debt and known as Quantitative Easing). As the latest crisis de jure seems to be passing, the Fed tries to normalize and start shrinking its balance sheet in 2017 and 2018. That does not go so well – as the stock market drops 20%.
Then the Pandemic hits. Some governments drop rates below zero. The real rate in the U.S. is now well below zero with inflation. But that isn’t enough either. So now the Fed has to buy even more bonds (QE III).
The point is that each period of tightening monetary policy is shorter, while each period of easing is longer. Each period of tightening is a lower interest rate than the last until we actually contemplate negative rates, and each round of increasing the balance sheet is at least double the last one. It is no wonder that inflation is becoming a serious problem.
They say it is lonely at the top. Russia no longer owns U.S. Treasuries. They prefer gold. China has substantially reduced its holdings. Japan has reduced its holdings as well. Soon, the only buyer of U.S. Treasuries will be the Fed. We call that a Ponzi scheme when Bernie Madoff does it. How does that work anyway? Can we really sell the debt to ourselves?
We all know that this won’t end well. But you can make a hell of a lot of money in the final stages. A not so unlikely scenario is that we make another “blow-off” run out of the current trough. The rally could literally blow your socks off. If the Fed is Cocaine to the markets, FOMO (Fear of Missing Out) is Cocaine to a “blow-off.”
Imagine you are coming into year-end having been protective of your client’s capital, and then the market decides to put another 15% to 20% on the board. Many a money manager that misses the gain will be fired. So FOMO kicks in, and the protective, sensible managers throw in the towel and jump in with both feet. That is typically how bull markets end. On the charts, the line is parabolic.
Where does that leave us today? Perhaps the only tool politically feasible for the Fed right now is to talk about talking about tapering bond purchases or raising rates. Likely, they cannot and will not do it. Don’t forget, Chairman Powell ostensibly wants to be reappointed in February. He won’t cross Janet Yellen or the Biden administration. That is how it works in the affairs of men and women and the other 98 genders.
Whether it is Congress with the deficit or the Fed with their balance sheet, it is always about kicking the can down the road, until we run out of road. Perhaps the most shocking aspect of this is how much longer it lasts than our instincts tell us it will.
In my chair, I have had this feeling in the pit of my stomach since March. I am sure that I am not alone. It feels like we are defying the laws of gravity.
On the other hand, with China clamping down on their free markets, and assuming our overlords clamp down ours somewhat less, the U.S. can continue to get away with what amounts to monetary murder. Because the only thing that facilitates the insanity is the fact that the U.S. dollar is still the world’s reserve currency. When that status is seriously threatened, Humpty Dumpty will take a great fall. I hope I am on our farm in Kefalonia, Greece on that day.
Today’s Plan
We have achieved the time and price objectives for the nominal 80-day cycle and would expect to move out following the Fed announcement. I don’t normally day trade on Fed announcement days, though I don’t expect anything beyond jawboning today.
We may finally be entering the sideways market I have been expecting for some time. And we could also be heading for a blow-off top from here. Regardless, I will be looking for an Algo buy signal for the Navigator swing trading strategy. But we have to conquer all of our key lines to shift back to a bullish posture. The rally needs to be monitored carefully as the market’s behavior has been weaker of late.
Key levels for day trading today will be 4411.50 which is the top of the recent gap, 4385 which is yesterday’s high and the bottom of the gap, and the swing low at 4293.75. Keep in mind that yesterday’s low at 4329.25 is also the Weekly Expected Move low and should be the worst case for the rest of the week.
I would assume further balance within the confines of yesterday’s regular session range with potential for change above and below. The larger move may easily come later today once the FOMC announces.
This is one of those days when context and news precludes a specific day trading plan, which is why I avoid day trading on such days.
A.F. Thornton