Morning Notes - 5/10/2022 | Archimedes Methodologies

Good Morning:

The centerpiece of one of Bill Clinton’s Presidential campaigns was the mantra, “it’s the economy, stupid.”
Now, the mantra should be, “it’s the liquidity, stupid.”
We are so easily distracted. Sure, the Fed is doing its thing, making the headlines. But the reality is that they have barely raised rates, and their balance sheet still grew in April.
But here is what is happening – liquidity is evaporating.
The impact on interest rates and nearly everything else is simple. If you want to sell, discount it. If you have to sell, watch out.
Let’s start with the Japanese Yen, previously a somewhat stable currency and haven. Remember the carry trade?

There is no doubt that there are bodies buried under that Yen slide. It is only a matter of time before the bodies float to the surface.
Moreover, Japan may be showing us our roadmap to U.S. sovereign debt perils, not to mention the results of putting an artificial cap on interest rates. Japan is in a doom loop. But for the grace of God, there go we.
And don’t forget that Japan is the single most significant buyer and holder of U.S. Government debt in the world. At least they “were.” Recently, Japan has been a net seller of U.S. Treasuries as their problems continue to mount. How does the story end?
And so, it is no wonder that the U.S. is experiencing spiraling interest rates. Fewer and fewer are buying what we are selling. Why would they?

Look, would you buy our debt? Our country looks like a debt-ridden disaster run by woke, senile octogenarians talking up nuclear war as if it were child’s play. “A Nuclear Strike Might Not Prompt the Reaction You Expect.”
Seriously? And the fact that our government will steal the money if a country doesn’t embrace the “Great Reset” agenda doesn’t help with the sales pitch.
When I was a kid, we took nuclear war so seriously that we used to have to hide under our desks in school as part of periodic atomic drills. I remember the air raid siren tests every Saturday at noon in Tucson, Arizona, where I grew up.
Of course, they also used to show us propaganda films of the former Soviet Union where all the houses and cars looked alike. Have you ever tried to find your rental car in a parking lot without the key fab?
But I digress – the real problem is that there are fewer and fewer buyers for U.S. debt at home and abroad. The banks are full and foreign buyers are few. Rates have to go up to attract the few buyers left at the table.
I shudder to think what U.S. pension funds look like right now with their failed 60/40 “balanced” portfolios. Unfunded pension liabilities are sure to surface as a problem sooner or later.
And without the “War” in Ukraine conveniently scaring the world and driving some funds to seek safety, would U.S. dollars and debt be attractive at all?
Do you see how that works? War is good! In every other Fourth Turning, war distracts everyone from the real problems at hand.
If you think about it, we are only a few nukes away from lower interest rates, depopulation, and the “New World Order.” The Great Reset crowd must be salivating.
I don’t want to go there, but when the U.S. Treasuries don’t sell, even with higher rates, Bernie Madoff, the Federal Reserve is the only buyer left. How does that work, exactly?
Never forget that rational humans value a return “of” their capital more than a return on it.
Back in the 90s, we used to talk about the “triple merit” bull market. The falling interest rates, oil prices, and the U.S. dollar worked together like a fine symphony driving higher equity prices.
So what do we call this bear? How about the “Triple Demerit Bear Market” – a rising dollar, oil prices, and interest rates.
The bottom line is this: if it isn’t liquid, you will have a hard time selling it. Remember the FAANG stocks? The ‘N” stood for Netflix.

And while I would like to believe that a 20% correction is enough in the S&P 500 Index, the evidence would suggest that the selling is just getting started. We have only begun to see retail mutual fund and ETF outflows in the past few weeks.
Sell when you can – not when you have to?
When I owned a bank and trust company back in the 1990s, I had the best stock market indicator in the world. The customers would buy at the top and sell at the bottom. It was an uncanny view into the real world of retail investing and the best market indicator I ever possessed.
And that brings us to this morning. Likely, today will manifest in a turnaround Tuesday. We are coming off the Weekly Expected Move low at 3985 on the S&P 500 Index. There is significant support at 4000, pessimism is reaching for the stars, and the street is extremely short. We are likely close to another rip-your-face-off short-covering rally.
If we are lucky enough to get it, use the opportunity to cull your holdings. We have a rough ride ahead of us.
If history is a guide, most bear markets retrace the final leg of the bull. In our case, it would be the entire stock market rally from the March 2020 lows. My ultimate target continues to be 2500 – close to the March 2020 lows and the price I peg to be the middle of the 100-year channel by the time we arrive there. Call it regression to the long-term mean. See the current BluPrint Thesis for a more detailed discussion.

This is the 100-Year chart of the Dow Jones Industrial Average showing the market's current location three standard deviations above the long-term mean (middle of the price channel). The market has achieved these levels only three times in history: 1929, 2000, and now. The prior two cases did not end well. The market fell from the channel top to the bottom in a 90% crash to resolve the 1929 overvaluation. From the top in 2000, the stock market dropped over 50% twice over a lost decade to resolve the overvaluation.

Our European friends mounted a rescue operation overnight. They tested new lows, but moved back into range. We are slated to open in the upper third of yesterday’s range.
At this writing, we may see a True Gap at the open. If so, Gap Rules will be in play. Remember that whether or not the gap fills is your first sentiment indicator today.
There is a lot of blue sky below 4000 on the S&P 500 Index. We would need parachutes to ride prices lower from there.
For now, I believe that the level will hold, and we should see some short-covering get underway as we approach the mid-week inflation reports.
Did you hear me? Take advantage of any rallies to cull your holdings. Don’t be the last one to turn the lights out.

A.F. Thornton

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Morning Notes – 5/10/2022

Morning Notes – 5/10/2022

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AF Thornton

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Morning Notes – 5/10/2022

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