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Rabobank: “Houston, We Have A Problem – Here Come The Fireworks”
It
s 4 July
and, yes, there are fireworks.
Firstly, US equity markets are at a new record high. Up, up, and up they go into the firmament. At the same time, US bond yields go down, down, and down. In fact, the entire US curve is now inverted, standing below the level of Fed Funds. As such, the Fed MUST act this month, surely. In which case, hooray, stocks can keep going up, up, and up! Indeed,
We
ll get to 30,000 on the Dow if we pass USMCA, we cut interest rates and we move forward with the Trump-growth agenda,
said Trump economic advisor and China hawk Navarro in an interview with Bloomberg Television.
But Houston, we have a problem. Not only is there no point in spending good money on
Dow 27,000!
,
Dow 28,000!
, and
Dow 29,000!
baseball caps if so, missing out on lots of potential production, but WHY are the Fed cutting rates? Does that reason presage something good for corporate earnings vs. multiple extensions and cheaper buybacks? How many times in recent decades have we seen the bond market and the stock market sending these duelling signals? And how many times have stocks been right relative to bonds, with a lag?
But we had more coloured gunpowder to gaze up at in awe. US President Trump warmed up for the big party today by tweeting:
China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!
That
s as open an attempt to jaw-bone the USD lower as one will ever see – and perhaps a threat to do more than jawbone. Yet Houston, we have a dollar problem. The Fed is about to cut rates, showing they don
t know what they are doing. The US fiscal deficit is enormous and growing. The US is insulting trade partners around the world, apparently threatening a boycott of US Treasuries. The president is both publicly belittling the Fed more than I do, openly introducing doves to its board, and speaks of open currency manipulation. There is open chatter of de-dollarization even the mainstream financial media.
AND YET THE DOLLAR IS NOT SLUMPING
Yes, it is off its recent highs vs. AUD, CNH, etc.; yes, some EM have seen some recovery too; and, yes, JPY continues to grind higher. But when you look at the staggering blows the USD is taking, and see that it only takes a half-step back, stop and think what the potential surprise upside movement is should the next phase of the global fireworks kick in.
Zerohedge
ZeroHedge – On a long enough timeline, the survival rate for everyone drops to zero
2019-07-04T15:13:16Z