FTX is still dominating the news in both MSM and FinTwtit.
Unfortunately, I have some pretty bad news to share. Last week Ikigai was caught up in the FTX collapse. We had a large majority of the hedge fund’s total assets on FTX. By the time we went to withdraw Monday mrng, we got very little out. We’re now stuck alongside everyone else.
There will be volatility from the crypto space into the TradFi stocks and shares, as the contagion spreads from those exposed to the FTX mess. We may get a Crypto bounce if Binance comes to the rescue, but a lot of damage has been done in this space.
On Monday, the Nasdaq and other major US indices fell! But I am not worried at the beginning of this glorious week, and neither should you be (for now).
The news headlines at the start of the week focused on layoffs and slower hiring at two major tech companies. Which follow the well-publicised dismissals from Meta and Twitter and a host of other major tech-focused firms.
Apple: APPLE CEO TIM COOK SAYS CO HAS SLOWED DOWN SOME HIRING - INTERVIEW TO CBS MORNINGS
Amazon: The job cuts of approximately 10,000, which would start as soon as this week, would focus on the company’s devices organization, retail division and human resources.
Following last week's US midterm elections, geopolitics entered the picture. According to Biden, Xi was direct and straightforward during his recent meeting with him, which is a tautological mess, but a direct quote from the world's most powerful man. According to Biden, there would be no Chinese invasion of Taiwan, and Blinken should visit China and keep the trade dialogue going.
There have also been talks between the US and Russia, and Biden doesn't expect WW3 to happen anytime soon. Is there really anything to worry about? The prospect of a nuclear holocaust should put everything into perspective.
In terms of the Nasdaq, I imagine the price would accelerate a bit higher as the stops trigger somewhere around a previous level of resistance. We have a potential Inverse Head & Shoulders pattern, which a lot of traders will be looking at. The media narrative that everything is going to hell is at odds with my target of around 14,400 based on the IHS playing out. I see things improving in the world or at least showing signs of reversing in the fundamentals, so using technicals for timing and targets is okay with me.
Inflation
Nasdaq stocks did not reprice after the USA went to vote in the elections, nor did they reprice after the recent NFP report. A big shock for the market was the headline CPI data, which was UNDER expectations. According to economists, we should focus on the Mean and Trimmed CPI, which show no sign of slowing. As a result, we should brace ourselves for further inflationary pressures in the coming months. Nevertheless, a falling headline CPI is good news for everyone.
Here is an example of the difference between the CPI data from the Cleveland Fed.
Description: We calculate the median CPI and the 16 percent trimmed-mean CPI based on data released in the Bureau of Labor Statistics’ monthly CPI report.
Median CPI is the one-month inflation rate of the component whose expenditure weight is in the 50th percentile of price changes.
16 percent trimmed-mean CPI is a weighted average of one-month inflation rates of components whose expenditure weights fall below the 92nd percentile and above the 8th percentile of price changes.
Benefits: By omitting outliers (small and large price changes) and focusing on the interior of the distribution of price changes, the median CPI and the 16 percent trimmed-mean CPI can provide a better signal of the underlying inflation trend than either the all-items CPI or the CPI excluding food and energy (also known as core CPI).
Monday 14th November WTI Oil drops 3% to Session-Low, as inflation and economic worries persist. A recession could kill oil demand, but so could a continued strengthening of the US dollar. Fed officials are working to prevent a recession by engineering a soft landing. But slowing down the market with fear tactics and higher interest rates is only having an effect when the price of Oil comes down too.
A reduction in inflationary pressures might be possible sooner if they (FOMC) stopped raising rates. But that goes against the monetarist's way of thinking. For me, raising interest rates raises the cost of credit which is reflected in the price of all goods and services. Meaning if you put the interest rate up on a loan, companies will add the extra they paid to the price of whatever it is they're selling. House prices have started to fall as people pull out of deals due to mortgages becoming more expensive, but rents will go up as landlords cover new costs.
World #oil supply rose to 101.5mb/d in Oct., now > than #OPEC's lowered 4Q22 demand forecast 101.25mb/d. OECD 3Q22 oil inventories continue to rise thanks to floating components implying $80 Brent Px. Premium. Oil could come lower on this increased supply, but the OPEC numbers have been lower than the targets they set out for a while.
USD & Fed Rates
The FOMC meeting in December is very unlikely to hold rates where they are. The current probabilities are skewed in favour of a 50bps rate hike. Federal Reserve Vice Chair Lael Brainard said:
"the central bank should soon moderate the size of its interest-rate increases, signaling she favors slowing to a half-point hike as early as next month. “It will probably be appropriate soon to move to a slower pace of increases,”
quote from a fireside-chat event at Bloomberg’s Washington bureau, yesterday. (Bloomberg)
A slower pace of rate hikes could cause a drop in the US dollar index after the US dollar soared as traders looked for favorable interest rate differential against the Japanese yen and similar currency pairs. During the past few weeks, the DXY has broken through some market structures and returned to the previous imbalance zone. We ought to know if there are any buyers left soon enough. The next stop lower would aim for a swing low and the stops below it, should the drop in rate hike magnitude occur.
I wouldn't be surprised if DXY gets back above $110 again. There is a lot of talk about a dollar shortage and a lot of countries and corporations have debt denominated in USD.
My idea of the DXY continuing higher is based not only on the Fed raising rates again in December but also because of the relationship between the Fitted Fwd Rate and the Market Yield in 2-year US Treasuries, which haven't flipped to being bearish yet.
In the past, these two metrics have signaled that the EFFR would come down next. The reason for this is that the Fed can only really affect the near-term treasury market.
NY FED: EXPECTED INFLATION ONE YEAR FROM NOW RISES TO 5.9% IN OCTOBER VS SEPT 5.4%
The effective federal reserve rate is still pushing a lot higher and when we get a cross-over in the FFR and yield on 2-year USTs this should be a warning that the US dollar party is over.
The offshore US dollar (eurodollar) rate dropped as well, but the steepening inversion is enough of a red flag to urge diligence/nimbleness and willingness to be wrong. Volatility is inevitable.
FTX wasn't the cause of a further market crash but it is showing how fragile some markets really are. There is still a lot of pricing in this highly sophisticated and deep market coming in the coming months for higher rates. It's just not as much as before.
GDP
Spending is a key factor in the US GDP equation and the US fiscal flows have held up.
The US GDP Now estimate from the Atlanta Fed is up to a healthy 4%. We have a decent commercial and consumer purchasing trend through the use of Credit and Loans.
And couple that line of money creation, with the US government spending, and we have a decent reason for why the GDPNow estimate is up. There is a lot of money flowing into the US economy.
WHITE HOUSE PREPARING TO ASK FOR $10 BILLION IN PUBLIC HEALTH FUNDS - WASHINGTON POST
The military-industrial complex along with the medical funding is going to increase in the coming years. Along with the Social Security bill as boomers come out of the workplace and get on to the golf course.
The Biden administration has successfully taken the excess money out of the savings of ordinary people and companies and has successfully pushed the same people to rely on credit lines. It is likely that fiscal spending in the economy will continue to rise as it has for the past few years. New infrastructure or medical aid becomes a partisan political football at times but there is never a problem justifying an increase in spending on weapons and war.
The above graph shows the decline in 10 Daily Moving Average totals of Withheld Income tax. This is good news for the US stock market as less taxation means more cash to put into the markets.
The drop off in the rate of taxation has been slow and the amount of yearly taxation in the USA has been steadily rising since the dip in 2009-2010. But 2022 saw an acceleration in the amount of tax & this goes a long way to explain the massive correction in the stock markets as the support just wasn't there for several months. Thankfully the decline in taxation and continued fiscal support has returned the USA to a deficit and more money is going into the markets than being taxed out.
The 10-day moving average of the US fiscal flows is also moderating, with the last quarter coming off quite a bit. But flows are still high.
The Department of Labour statistics shows that the number of Unemployment Benefits is slightly above pre-pandemic levels but only just. This is to be expected when the Fed is talking up a recession via crushing demand.
Elon Musk pointed out in an interview that the GDP is limited to how much output the workforce can produce. If his dream of automation and robots comes to fruition there would be potentially no limit to the amount the US GDP could reach. This would show up dramatically in a drop in Labor Force participation rates, which are currently still at the mid-1970s levels after the pandemic.
Overall the figures look positive but we have to keep an eye on the fiscal flows versus taxation and how the market reacts to the next readings of CPI and rate decisions from the Federal Reserve.