A Jackson Hole Party Pooper

There are many reasons to party at the gathering of central bankers at Jackson Hole, one of which culminated by the market closing at an all-time high this week on talk of a breakthrough in Nafta trade negotiations – almost mirroring its January peak.

Surely – this is a fitting time to proclaim what is going right and what has worked well for the Fed – the tune of a low inflation environment thanks to manageable interest rates; under the attention and pressure from President Trump; and the economic impact of Rockstar companies such as Amazon and Apple.

So, after 145 days ‘treading water’ the market suddenly has woken up from a gentle stupor and bounded up by hitting the highest note ever – just perfectly in time for the new Fed Chairman Jerome Powell to showcase the so-called economic gains under the stewardship of Trump. At least that is what they want everybody to believe.

That the “trade war with China” is almost over….

Wrong. In fact the trade dispute with China is about to get uglier. Bloomberg reports that both the US and Chinese governments “have failed to make progress in two days of talks”. Trump’s hawks in Washington are prepared to unleash a new offensive.

That the economy remains buoyant and strong…

Wrong. In the worldview of Jerome Powell, keeping inflation at near 2% and most people finding jobs spells economic stability. However, real inflation when you look at average household deals is pegged at 5%. Policy actions have done little for the labour markets but have greatly benefitted those in Washington and Wall Street.

That the markets are alive and kicking….

Wrong. Traders point out that even as the market’s reach an all-time high, it was also ‘by far the slowest volume trading days of the year, not including the half day of July 3rd’. Not only does it hit an all-time high, but it also makes it the longest bull market in history. An ironic pronouncement given that this is against the backdrop of the weakest economic expansion of all time as well. Thanks to the long arms of the central banks, we see plenty of liquidity sloshing around with cheap money buying expensive equities. It’s just a matter of time before this pulls back.

While Jerome Powell continues to charm fellow Central Bankers and Money Managers at Jackson Hole, our own prognosis on where these bulls are heading are less than amazing, but not quite the abattoir. Here are some of those risks and threats why we feel that the bulls will soon cower to bear territory sometime soon:

  • Technical Deviations. Obviously need to slow down anytime soon.
  • Emerging Market Debt. Venezuela. Turkey. Italy. Spain. Remember all you need is 1 to take the whole market down.
  • US Dollar Strength. A strong Dollar means you are losing the trade wars.
  • Oil Prices (below US$60). Overproduction leads to prices going lower. Moreover, so does oil revenues.
  • Interest Rates. Now this is seen inclined to go higher. Inflationary push. Goodbye bull market. More expensive to buy equities on credit.
  • Geopolitical Risk. Of course there is China, Russia and North Korea. Nothing has been resolved there. No thanks to Trump and twitter.

Again, all it takes is one trigger for the dominoes to fall. That trigger could be any one of the above risks and threats, or indeed a ‘Black Swan’ event.

Sorry to burst your bubble Jerome Powell. But this bull market does not hold any water.


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