Tag Archives: #gold

The Doctrine, Donroe

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There once was a time in the past
When Vene-zu-ela was cast
As queen of the ball
With Maduro’s fall
But life around Trump moves so fast
 
He’s already moved to expand
His target to Denmark’s Greenland
The EU’s gone crazy
And called Trump fugazy
While claiming that they’ll take a stand
 
But really, the Doctrine, Donroe
Explains that the US most grow
Its regional strength
And keep at arm’s length
It’s foes from Beijing to Moscow

 

It is truly difficult to keep up with all the things that are ongoing in the world these days as so much is happening so quickly.  It is very easy to understand Lenin’s quote, “there are decades where nothing happens; and there are weeks where decades happen” given recent events.  This is clearly one of the latter weeks.

So, Trump, after successfully taking down Maduro has turned his sights on Greenland, something he has discussed from Day 1 of this administration, but apparently now, there seems to be a willingness to discuss things on the other side.  At the same time, from what I read on X, the city of Abadan in Iran has basically ‘fallen’, at least with respect to the Iranian regime’s control as the police are marching with the protestors now.  The rumors are that the Ayatollah has already made escape plans to Moscow.

From a geopolitical perspective, if Iran sees a regime change, which appears increasingly likely, and if the US throws its support behind the replacement regime, it would appear to be a significant power play against China.  After all, if sanctioned Iranian and Venezuelan oil was no longer being sold on the cheap to China, two places where they receive a significant amount of their daily requirements, (between 20% – 25% according to Grok) it would be a major blow.  

But from our lens in markets, if the Iranian regime falls and sanctions are lifted, suddenly there is much more unsanctioned oil available, and its price is likely to decline further.  This morning, oil (-0.6%) is slipping further after a sharp decline yesterday with Monday’s rally a wispy memory.  I have maintained the trend here remains lower, and that was without government changes in sanctioned nations.  As you can see from the chart below, nothing about this story has changed.

Source: tradingeconomics.com

In the meantime, be prepared for all those who had just shown their new bona fides about Venezuela to be explaining the Greenland story from their newly acquired “deep” knowledge.  This poet certainly doesn’t know enough about Greenland to make any prognostications, but it would not surprise me if within a matter of weeks, we reach an accord with the territory where the US plays a much greater role in its activities while increasing its military presence on the island.  

And to think, we are just finishing the first week of 2026.  Do not be surprised if, as the year progresses, there are more government changes in Europe as the current leadership there has been shown to be weak and ineffective, and an increasing number of people are unhappy with the situation.  While fears over the fall of NATO are rife now, if Germany, France and the UK wind up having snap elections, a distinct possibility at this point, and the new regimes are AfD, RN and Reform UK led, there could well be much greater agreement on the way forward for the alliance.

However, like most of you, I am neither a politician nor geopolitical analyst, I’m just a poet who watches the world and tries to make sense of how it impacts markets.  So, let’s go down that road.

After another strong equity session in the US, where both the DJIA and S&P 500 made new all-time highs, the story in Asia seemed to be one of some early profit-taking after strong rallies.  So, Japan (-1.1%), China (-0.3%) and HK (-0.9%) all slipped during the session with generally less excitement seen overnight than earlier in the week.  India (-0.1%) continues to lag, and while Korea (+0.6%) managed to maintain its upward momentum, the rest of the region was relegated to +/- 0.4% or less in their movement.  

As to Europe, only the DAX (+0.6%) is showing any positivity this morning, mostly on defense names still performing well, while the UK (-0.6%) is lagging after weaker than expected Construction PMI data (40.1 vs. 42.5 exp) and the rest of the continental bourses are little changed overall.  Eurozone inflation was confirmed at 2.0%, cementing the idea that the ECB will remain on hold, so I suspect opportunities here will rely on global trends.  As to US futures, at this hour (7:10) they are mixed, but with movement less than 0.2% in either direction.

In the bond market, yields are sliding around the world, perhaps on the understanding that oil prices are likely to slide given the potential for new, unsanctioned supply hitting the market.  Certainly, there is no indication that government spending anywhere in the world is going to slow down, so that avenue is still closed.  But, recapping, Treasury yields (-3bps) are not declining as much as most of Europe (-4bps to -5bps) or the UK (-8bps after the weak data).  I continue to believe that this year is going to be extremely dull in bond land as central bank support is going to offset additional issuance.

We’ve already discussed oil, but metals, which is where the real action has been, are all lower this morning, very clearly on profit taking activity.  Consider that gold (chart below from tradingeconomics.com) has been the least remarkable and still rallied 4% since the beginning of the year, so slipping -1.2% this morning can be no surprise.

Meanwhile platinum (-6.1%) which is the least liquid of all the precious metals, saw a nearly 20% gain this week prior to today’s decline.  The chart below is not for the faint of heart!

Source: tradingeconmics.com

Silver (-3.1%) is somewhere in between these two, but the story has not changed at all.  There continues to be significant demand for physical metals with paper futures no longer able to control the price action.  One way to follow this is to look at the price on the Shanghai Futures Exchange where it is all delivery settlement and where the price trades at a substantial premium to the COMEX, on the order of $3-$4/oz.

Finally, the dollar is still there, and vs. most of its counterparts, doing very little this morning.  the outlier today is ZAR (-0.5%) which is obviously hurting on the back of gold and platinum’s weakness.  In fact, it is worth looking at the relationship between ZAR and gold, as per the below chart, to help you understand just how closely tied is the price action between the two.

The other currency that has been trending steadily is CNY, with it breaching the 7.00 level at the end of 2025 for the first time since September 2024.  While this trend has been steady for the past year, a look at the longer-term chart shows the renminbi is nowhere near an extreme in either direction. 

Source: tradingeconomics.com

I maintain my view that if China really does create domestic demand for its products, the renminbi will continue this rally and strengthen further.  But we have heard this same story of Chinese government support for the domestic economy for at least a decade, and it hasn’t shown up yet.

On the data front, ADP Employment (exp 47K), JOLTs Job Openings (7.6M), ISM Services (52.3) and Factory Orders (-1.2%, -0.3% ex Transport) are the key releases this morning.  we also get EIA oil inventory data with expectations for a decent build.  There is only one Fed speaker, Governor Bowman, but the Fed just doesn’t seem as important this year as last.

The dollar is not the focus right now, neither are bonds.  Metals remain top of mind with oil a close second.  While recent price action in the former has been extremely volatile, nothing has changed my view that the long-term trend remains higher there.  Similarly for oil, the long-term trend remains lower with recent events simply adding to the weight.

Good luck

Adf

Overrun

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We’ve not even gone through a week
Yet Trump, so much havoc did wreak
This poet will claim
That in this ballgame
It’s top first, one down, so to speak
 
The impact of what has been done
Is widespread and hits everyone
So, please understand
Whatever you’ve planned
May, by events, be overrun

 

Venezuela continues to be the primary discussion point in both the media and the markets.  Mostly along political lines there are calls that the weekend’s action was illegal or not, and as Brent Donnelly, a very good follow on X (@donnelly_brent), explained after reading voluminous material, the raid was either all about the oil or had nothing to do with the oil. I feel like that sums things up pretty well.

While this poet has views on the ongoing issues, they are set from afar with no inside knowledge so keep that in mind.  But ultimately, my take is the opportunity for real change has come to Venezuela, something that did not exist while Maduro was still there.  If nothing else, the ability for the US to exfiltrate him must have made a strong impression on acting president Rodriguez and the generals overseeing the army and police forces there and ought push decision making in a positive direction, at least for a while.  What seems abundantly clear, however, is that most of the population is ecstatic at his removal and have hope for a future, something missing for decades.

As to the oil, it is heavy, sour crude, something Gulf coast refineries are tuned to use, but the infrastructure there is a disaster.  My take is the one thing that is underestimated is just how remarkable the technology of oil exploration and production has become, and its ability to solve problems in efficiency to reduce the cost of extraction.  I will take the under on the time it takes to increase production there, although a key bottleneck is the electric grid which must be addressed as well.  Nonetheless, despite the rise in oil prices during yesterday’s session, I maintain my view that the trend is lower.

Other than domestic political news there seems little else to discuss but market activity, so let’s go there.  A strong session in the US yesterday was followed by plenty of strength in Asia with Japan (+1.3%), China (+1.6%) and HK (+1.4%) all having excellent outcomes.  Too, Korea (+1.7%) and Taiwan (+1.6%) had strong showings with many more gainers than losers in the region.  The one market that has not partaken in the early year rally is India (-0.4%), which I can only ascribe to the fact they may be losing a source of cheap oil.  Or perhaps, more accurately, all the buyers of sanctioned oil may find themselves in more difficult straits, paying full price, as the dark fleet of tankers is suddenly having more trouble making the rounds.

On this note, one other place to watch is Iran, where it appears that the regime may be set to collapse as protests grow and some cities may have been completely taken over by the protesters.  If the theocracy falls, I would expect that, too, will pressure oil prices lower, as sanctions could be swiftly lifted.

Turning to Europe, does anybody really care anymore?  No, seriously, markets there are mixed this morning with France (-0.4%) lagging while the UK (+0.7%) is gaining on the back of BP and Shell and the general euphoria about the oil majors now.  Meanwhile, other major markets have seen modest gains (Italy +0.4%, Spain +0.3%, Germany +0.2%) but there is one outlier, Denmark (+2.1%) which, given all the talk of the US seeking to take control of Greenland, seems odd to me.  I can find no specific news either for the economy or any companies (Novo Nordisk being the only one of note), but something is going on.  As to US futures, at this hour (6:50) they are little changed.

Turning to the bond market, the below chart of the 10-year offers a great picture of what it means when traders say nothing is going on.  Since early September, the bond has been trading within a 20 basis point range despite all the huffing and puffing of the punditry and the FOMC’s rate cuts.

Source: tradingeconomics.com

If bond investors are the “smart” money, I would argue that right now they have no opinion, or perhaps their opinion is that the economy is going to continue to tick along at a decent rate, with limited extra inflationary pressure.  To that last point, an article in the WSJ this morning explained that several recent studies, one by the SF Fed, demonstrated that tariffs have virtually no inflationary impact.  That probably doesn’t help Powell’s talking points.  While I continue to be concerned that inflation will maintain a 3+% level, I also believe the Fed is going to suppress interest rates going forward, net, bonds don’t seem that exciting.  As to the overnight price action, Treasury yields backed up 2bps, while European sovereigns slipped between -1bp and -2bps.  I couldn’t help but also notice that yesterday saw a massive issuance of USD bonds by non-US corporates, over $60 billion, an indication to me, at least, that calls for the death of the dollar are somewhat premature.

Commodities continue to be where all the action is, or perhaps more accurately, metals markets.  After massive rallies yesterday, we are seeing follow through with gold (+0.4%), silver (+2.4%), copper (+1.0%) and platinum (+3.2%) all strong again.  Unlike the bond market, and truly FX, which is also dull and boring, the below chart shows just how much things in the metals space have changed over time. 

Source: tradingeconomics.com

My take is that investors are still trying to figure out the implications of the fact that old relationships like the dollar falling when metals rise, or metals falling when real interest rates rise, are broken and what that implies for the future.  The reality is that other than gold, which is the calmest of them all, these metals are indicating actual shortages for users.  Consider that, according to Grok, the typical catalytic converter uses between 0.1 and 0.25 troy ounces of platinum, so at today’s price, between $230 and $575.  Given the average price of a new car is ~$50K, paying up for platinum is not going to change the equation that much, certainly relative to not having the platinum and therefore not being able to complete and sell the vehicle.  I suspect that metals, while likely to be volatile in their price action, have much further to run higher.

Lastly, the dollar…is still there.  Using the DXY as my proxy this morning, you can look at the chart below for the past year and see, it has basically not moved since it stopped declining in late April 2025.  It is hard to get excited about things right now.  However, I maintain that the US will remain the cleanest dirty shirt and benefit accordingly over time.

Source: tradingeconomics.com

On the data front, Services (exp 52.9) and Composite (53.0) PMI are released this morning with both expected lower than last month, but still in expansion territory.  We also hear from Richmond Fed governor Barkin, but it seems the Fed has taken a back seat to Venezuela lately, at least with respect to what is driving markets.  As of this morning, there is just a 16% probability of a rate cut priced in for the end of the month with a 53% probability priced for the March meeting.  But two more cuts are seen as a certainty by September, although if GDP continues to perform like it has, I imagine that will change.  According to the Atlanta Fed’s GDPNow model, Q4 is forecast at 2.7%.  We shall see how that evolves over time.

Summing it all up, the dollar is an afterthought in markets right now and seems unlikely to move very much in the near term.  Metals remain the place to be, and nothing indicates those trends have ended.

Good luck

Adf

Much Ado

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The market response to the raid
In Vene has so far been staid
The black, sticky goo
Despite much ado
Shows traders have not yet been swayed
 
And frankly, that seems to make sense
‘Cause years will pass ere they commence
To pump much more oil
But that shouldn’t spoil
The truth their reserves are immense

 

As of 9:00 last night, oil futures are essentially unchanged from Friday’s, pre-Venezuelan news, close.  As you can see from the chart below, while there was an early blip higher of about 50¢, that quickly retraced.

Source: tradingeconomics.com

But, stepping back a bit, a look at the chart for the past year shows a very steady decline in the price and at this point, there seems to be little that will change that result.

Source: tradingeconomics.com

I have consistently made the case that oil supply exists all over the world, and that politics has been the chokepoint.  Arguably, a new government in Venezuela has just removed one of those chokepoints, although from everything I can gather, given the decrepit state of the oil infrastructure in Venezuela after nearly 20 years of Socialist neglect, it will take quite a while to hit the market.  But Guyana and Argentina are going to be growing their output considerably going forward, so, a slower rate of production here ought to not matter much.

One other thing I did read was that a key driver of the weekend’s events was growing concern by the US military that the Chinese were going to monopolize rare earth mining and processing from areas of southern Venezuela and that was too great a concern.  Even if the timeline is long, it appears, at this stage, that the future of Venezuela’s oil production should start to trend higher, and that will simply add to pressures on prices.  After all, we know that markets are forward looking.

One last thing to note is that acting president of Venezuela, Delcy Rodriguez, has called for “cooperation” with the US going forward, a very different tone than her initial comments of outrage.  Perhaps she has figured out that this is a sweet deal for her, or perhaps she is simply afraid that she is not safe if she doesn’t cooperate.  Whatever the reason, I suspect that things will progress positively from here.

In the meantime, let us try to turn our attention elsewhere, although it will be difficult as this action will clearly have many widespread, and at this point unforeseeable, impacts on markets other than oil.  But try we must.  With that in mind, let’s review markets overnight and see how the initial price action has evolved, and perhaps what it implies for the future.

Starting with equities, you’re hard pressed to find a market anywhere in the world that is suffering this morning despite the alleged increase in uncertainty.  In fact, it appears that investors are pretty certain that today is a better day than Friday was given the new world order that is developing.  Starting in Asia, the only market that fell overnight was India (-0.4%) seemingly on the idea that one source of their cheap oil may have been stopped.  But elsewhere, Japan (+3.0%), China (+1.9%), Korea (+3.4%) and Taiwan (+2.6%) all had extremely strong sessions with HK, Australia and other smaller exchanges showing little to no gains.  My only surprise here is China, which has invested significantly in Venezuela, lent them large sums of money and also had their advanced radar systems shown to be useless against US military aircraft.  But in the end, fear was not on the agenda in Asia.

What about Europe?  Well, here things are less excitable, with Germany (+0.65%) and Italy (+0.6%) the leaders as defense firms in both nations have performed well this morning.  But otherwise, Europe is a nonevent this morning, which given their increasing global irrelevance, should be no surprise.  The UK, France, and Spain have all barely moved and surprisingly, Switzerland (-0.7%) has fallen, although perhaps neutrality is not such a benefit anymore.  US futures, though, are continuing their ride higher with the NASDAQ (+0.8%) leading the way in a sea of green.    The net result here is, risk is still in vogue.

Turning to the bond market, only JGB yields (+6bps) are rising after PM Takaichi reiterated her call for more spending.  Yes, this is a new 29-year high in 10-year JGB yields, but I suspect they have further to go.  After all, as you can see from the below chart, yield suppression has been the game there for decades, so unwinding it will take some time.

Source: investing.com

But elsewhere in the fixed income world, yields are slipping across the board.  Treasury yields (-3bps) are leading the way with all of Europe seeing declines between -2bps and -3bps.  I might suggest this is a response to the prospect of declining oil and energy prices going forward, even though it will take time to see the increases in production.

As to commodities, as of this morning at 7:30, oil has bumped up 0.5%, although as you can see in the above chart, remains in a longer-term downtrend that shows no signs of breaking soon.  Metals, meanwhile, remain the story of stories with the entire periodic table looking good (Au +1.9%, Ag +3.3%, Cu +2.9%, Pt +2.5%).  I continue to read about reasons as to why this rally in metals is going to end soon, with most focused on the speed of the ascent last year.  But the difference in this market vs. any paper financial market is, physical supplies matter here, and by all accounts, Ag, Cu and Pt are all in short supply for their industrial uses (think catalytic converters for Pt) and as industrial users recognize the shortage, they continue to bid up the price.  While I expect all these markets to remain volatile this year, I suspect that the trend higher has a lot of runway yet.

Finally, the dollar is firmer this morning, despite the rally in metals.  The euro (-0.3%) is the laggard in the G10 space as the EU was shown to be completely powerless, useless and irrelevant over the weekend.  However, they did issue a carefully considered statement to cement the idea that they are powerless, useless and irrelevant as seen below.

I know I feel safer now!  In addition to this demonstration, the timeline for a digital euro seems to be speeding up, a decision that will further undermine the single currency in my view.  Nothing has changed my opinion, except perhaps strengthening it, that the world is going to bifurcate into USD stablecoins and digital CNY over the next few years, with most of Europe opting for USD.  Elsewhere in the G10, movement has been less pronounced, +/-0.2% or less with nothing of note to mention.  In the EMG bloc, most of the currencies here are a bit weaker, -0.3% or so, with two key exceptions, ZAR (+0.1%) and CLP (+0.2%), both benefitting from the large gain in the metals complex.  Interestingly, MXN (-0.35%) is amongst the worst performers as the natural thought process seems to be, is President Sheinbaum next unless she effectively shuts down the cartels.  I keep searching for reasons to understand bearishness on the dollar but have yet to find any that make sense.  One other thing to note, there has been a resurgence in the discussion of how the dollar is losing its traction amongst central banks with respect to reserves held.  Many are highlighting that the percentage of reserves in USD has fallen to its lowest level since the mid 1990’s.  but a look at the chart below shows that while the recent trend has declined, it remains far above its lows, and far below its highs over time.  In fact, one might say it’s right in the middle of the range.

Turning to the data this week, with the government having been back in action for a while, we are back to a full slate of data for the first week of a month.

TodayISM Manufacturing48.3
 ISM Prices Paid59.0
TuesdayPMI Services52.9
 PMI Composite53.0
WednesdayADP Employment45K
 ISM Services52.3
 JOLYs Job Openings7.64M
 Factory Orders-1.2%
 -ex Transport-0.3%
ThursdayInitial Claims216K
 Continuing Claims1851K
 Trade Balance -$58.4B
 Nonfarm Productivity3.0%
 Unit Labor Costs1.0%
 Consumer Credit$10.2B
FridayNonfarm Payrolls55K
 Private Payrolls60K
 Manufacturing Payrolls-5K
 Unemployment Rate4.5%
 Average Weekly Hours34.3
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Participation Rate62.6%
 Housing Starts (Sept)1.31M
 Building Permits (Sept)1.35M
 Michigan Sentiment53.2

Source: tradingeconomics.com

While some data remains stale (housing), the jobs data is December’s and will get a great deal of attention.  One thing to remember here is that if the deportation numbers discussed by the government are correct (~500K actual deportations and ~2.0MM self-deportations), then the economy doesn’t need to create that many new jobs to keep things ticking along.  I have seen estimates of somewhere between 0 and 20K jobs each month being sufficient to keep the Unemployment Rate steady to declining.  I am sure, however, this issue will be the subject of much discussion by the economics community going forward, but as I have said time and again, the models in use today do not seem to reasonably represent the reality today.  Expect a lot of huffing and puffing about this data, largely along political lines.

And that’s really it.  Obviously, Venezuela has changed a lot of calculations about many markets, but in the end, while I remain concerned over an eventual risk-off outcome, I don’t see that as an immediate threat.  Remember, too, the OBBB has taken effect and tax situations are going to be changing now, something that will undoubtedly help the economic data going forward.

Good luck

Adf

A Vision For ‘Twenty-Six

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(With apologies to Clement Clarke Moore)

Tis the first day of trading in Ought Twenty-Six
With too much attention on raw politics
At home, eyes have turned to the mid-term elections
To see if results will force mid-course corrections
In Europe, they’re going all-in on Ukraine
With more billions promised, though that seems insane
Meanwhile, Mr Xi is convinced he can fix
The problems at home with his policy mix
And this, my friends, just skims the surface of things
As pols everywhere suffer arrows and slings
Remember, though, markets are what I’m about
And while I could err, I am never in doubt.

Let’s start at the top with Growth here in the States
Which likely will show more than marginal rates
In fact, Four percent seems a viable goal
As inward investment and tax cuts take hold
Remember, for Trump, if there’s one thing he’s not
It’s timid, and so he’ll demand, “Run it hot!”
Thus, growth will expand, though inflation might gain
And for the elections, that could be a pain
The problem is Jay, and whoever comes next
Have come to believe two percent’s just subtext
The greatest unknown is on government spending
And whether it grows or, at last, starts descending

The punditry’s certain the government fisc
Is going to increase inflation’ry risk
If true, CPI of near Four percent’s apt
If not, then Inflation ‘neath Three, could be capped

And what about elsewhere, in Europe? Japan?
In markets, emerging, do they have a plan?
Will they grow their ‘conomies, drawing investment?
Or will we soon witness a large reassessment?

In Europe, they claim they’ll be building more guns
To help them defend all their daughters and sons
As well, they’re committed to helping Ukraine
Continue to fight, despite so many slain
They’re planning to borrow a cool 90 Bill
But energy costs, these grand plans could well kill
Meanwhile, M Lagarde claims that rates are just right
And given growth there’s One Percent, I won’t fight
So, weak growth and low rates and energy blues
Lead me to believe that come year-end, the news
Will be that the Euro is failing to thrive
Do not be surprised when it hits One oh-Five

In England and Scotland and all the UK
Just like in the EU, they can’t make much hay
The budget’s a wreck yet they want to raise taxes
Though history shows growth will wane ere it waxes
As well, they continue their crack down on speech
While crimping their energy industry’s reach
So, power is costly, and billionaires flee
From here, ‘cross the pond, this is what I foresee
A ‘conomy heading right into stagflation
As long as Kier Starmer is leading the nation
For markets, the Pound will lose all its allure
With One-Ten the Boxing Day screen price du jour

A turn to the East where the Sun Also Rises
Will teach us that, really, there are no surprises
To date you’ve heard much ‘bout the rise in yen rates
With pundits opining the Carry Trades’ fates
This year, so they say, look for much stronger yen
As local investors buy yen bonds again
Thus, all the hedge funds who’ve been funding their trades
By borrowing yen, and they’ve done so in spades,
Will need to buy back all that Japanese Money
The outcome, for yen shorts, will not be so sunny
But what if this idea of yen heading home
Is wrong?  This implies quite a different syndrome

At this point there’s no sign the government there
Is ready, more spending and debt, to forswear
Instead, what seems likely is more of the same
More government spending in all but its name
So, debt will continue to rise without end
And up to One-Eighty the buck will ascend

As well as Japan, in the continent vast
Of Asia, it’s China we come to at last
“Poor” President Xi has a problem at home
Consumption is not in the Chinese genome
For decades, the model’s been, build and export
Which helps explain why local usage falls short
But lately the rest of the world’s of a mind
That Chinese imports are a troublesome kind
So, Xi needs his people to learn how to spend
Else all that production may come to an end
But if they consume, what will that do to growth?
Its rate will decline, something for which Xi’s loath

Thus, GDP 5 means a weaker yuan
Well above Seven you can depend on
But if, against odds, Xi gets Chinese to spend
Six-Fifty is where yuan will be at year end.

Let’s shift our perspective to Treasury debt
A market of critical import, and yet
A market that’s been in a range for a while
So, what must occur for a change in profile?
The popular view is that deficit spending
Will drive an outcome of, high yields, never-ending
But Trump and his team are, quite hard, pushing back
Explaining that policy’s on the right track
Twixt tariffs and growth, tax receipts have been flying
While RIFs in the government are underlying
The idea that deficits soon will be shrinking
In truth, this is not what the punditry’s thinking
But one thing is clear that will keep yields from climbing
QE, which is back, is designed for pump-priming
So, Jay and his heir will keep buying and buying
And 10-Years at Four Percent seems satisfying

It’s not just the government, though, that’s in debt
Those corporates who borrowed at ZIRP, have not yet
Refinanced the trillions they owe, to this day
And now they’re competing with Bessent and Jay
While Scott will find buyers, if not least the Fed
For corporates that path may be flashing bright red
If credit spreads widen will companies fail?
And will that unravel the stock markets’ tale?
Right now, spreads for IG sit near one percent
And Junk’s above eight with investors content
However, the biggest risk this year could be
The absence of corporate debt liquidity
If IG spreads widen 200 bps more
The outcome could be a GFC encore

This takes us to stocks, both at home and abroad
Which last year saw rallies we all did applaud
But will this year bring us some more of the same?
Or have things been altered?  Is there a new game?
If my crystal ball is in any way clear
The outcome could well be a frightening year
Remember, the driver of last year’s returns
Was government spending which lacked all concerns
Thus, Cantillon nailed it with where cash would go
And stocks were the winner, of that much we know
But this year the mountain of debt coming due
Could well force decisions of what will ensue
And too, don’t forget if the deficit shrinks
It’s likely to be a great stock market jinx
So, don’t be surprised if December this year
A 10% fall ‘cross all stocks does appear

And what of that black, sticky stuff that they drill
Which powers the global economy still
When its price increases, it causes much pain
For most everyone, it can be quite the bane
Consumers, instead, like those prices to sink
But drillers, in that case, cause output to shrink
So, which will it be, will Trump’s mantra come true
Or will, new production, most drillers eschew
I think what is missed is technology’s traction
And how costs per barrel will tend toward contraction
As well, nations worldwide, at last understand
That Carbon Dioxide just cannot be banned
Come Christmas, next, we will see growth in supply
With Fifty per barrel the price we’ll espy

The last place to look is at bright things that shine
Which saw prices move in a vertical line
While gold was the starter, by year end t’was clear
That silver and platinum said, wait, hold my beer
The latter two rising thrice fifty percent
With neither responding to any event
Which brings us to this year, can these trends maintain?
Or are we now set up for infinite pain?
It seems to me that til the summer at least
All three will continue to rise, as with yeast
But when we reach solstice do not be surprised
If views on their future become bastardized
In other words, look for corrections in price
With early year gains given back in a trice
But still, by the end of the year I believe
Five Thousand in Gold is what we will perceive
For Silver, One Hundred could well be the spot
And Platinum, Three Grand, would not be too hot.

To all of my readers and friends, please forgive
My musings if they got too ruminative
This year will see change across many degrees
And some will be painful, while others will please

In sum, I think President Trump can succeed
In changing behavior, though not corporate greed
Reducing the number of government staff
As well as with regs, he can cut those in half
Inward investment will focus on stuff
Instead of on stocks, for the markets that’s rough
Dollars will still be in greater demand
While Treasury yields will be stuck in the sand
IG and Junk are unlikely to win
As rising expenses cut margins quite thin
And still, through it all, precious metals will gain
Though G7 central banks all will abstain
Come Christmas next, nothing will look quite the same
And maybe my views can help you build a frame.

Thank you all for tolerating my punditry and I hope that you all have a wonderful, healthy and successful year ahead.

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Talk of the Town

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Two things have been talk of the town
First, silver ne’er seems to go down
But also, of late
The Dow’s in a state
Where it wears the daily stock crown
 
But if we dig deeper, we find
Industrials, as they’re defined
Don’t build many things
Instead, they pull strings
As finance and tech are combined

 

Before I start, this will be the last poetry of 2025.  I want to thank all my readers for continuing to read and I certainly hope I both amused you and highlighted one view of what is driving the zeitgeist in markets these days.  FX poetry will return on January 5th with my annual long-form poetic prognostications.  Merry Christmas, Happy Chanukkah and Happy New Year to you all.

So, I was reading my friend JJ’s evening wrap up from yesterday and he highlighted the fact that the DJIA (+1.3%) made a new all-time high in trading and it was led by…Goldman Sachs.  

Source: tradingeconomics.com

Now, I have nothing against Goldman Sachs, per se, but it struck me as odd that Goldman Sachs, an investment bank, was a member of the Dow Jones Industrial Average.  It’s not that I wasn’t aware of the fact, but for some reason, this mention stuck out.  So, I thought I might look at the current membership of the Dow and see just how industrial it is.

While you will likely not be surprised that it has several non-industrial, service-based companies in the index, you might be surprised by just how many.  For instance, aside from Goldman, JPMorgan, American Express and Visa are in there as well as United Health and Travelers from the insurance space.  There are major retailers like Walmart, Home Depot, Amazon and McDonalds, along with tech and telecom/media names like Microsoft, Salesforce, Disney and Verizon.  

This is not to say that these are misplaced with respect to their relative importance in the US economy, clearly all are major corporations with long histories of profitability.  But it seems odd to list them as industrial.  I would contend that nothing explains the financialization of the US economy better than the fact that 14 out of the 30 members of the DJIA are service companies rather than producers of stuff.  Maybe they should rename it the Dow Jones Major Corporate Index.

To conclude the equity portion of our discussion, yesterday saw the NASDAQ (-0.25%) decline in the face of a broad overall equity rally as there appears to be a rotation of investors from AI into other things like financials (as hopes of another Fed rate cut spring eternal) and power producers as the power needs of AI keep getting estimated ever higher.  This rally was followed pretty much everywhere around the world as regardless of one’s religion, it appears investors are all counting on Santa to deliver higher prices.  In Asia, Tokyo (+1.4%). HK (+1.75%), China (+0.6%), Australia (+1.2%), Korea (+1.4%) and virtually every other market rallied.  The only data of note here was Japanese IP which came in a tick higher than its preliminary forecast, but to counter that, Nikkei reported that the BOJ, when they meet next week, are definitely going to raise the base rate by 25bps to 0.75%, the highest level since 1994.  That doesn’t seem that bullish, but then, I’m not Japanese.

In Europe, the gains are also universal, albeit less impressive with Spain (+0.5%) and France (+0.5%) leading the way and Germany and the UK both only marginally higher.  The most interesting news here is about the EU’s efforts to confiscatethe Russian assets that have been frozen since they invaded Ukraine, but which are being blocked by Belgium where they reside under SWIFT.  And as I type (7:45) US futures are mixed with the Dow (+0.2%) still in favor while NASDAQ (-0.5%) continues to lag.

But the other story that is getting press, and arguably more press, is precious metals.  Silver (+0.9% today, +10% this week, +122% this year) is the leader and is now trading above $64/oz.  This is the very definition of a parabolic move, which is obvious when you look at the silver chart for the past 5 years.

Source: tradingeconomics.com

Referring back to JJ’s note, it is important to understand he is a commodity trader of long standing (remarkably even longer than my time in FX) and he discussed silver from an insider’s perspective.  The essence of the issue here is that there are quite a few paper short positions that have existed for a long time.  The rumor has long been that JPMorgan has been preventing silver from rising by playing in futures markets.  But now, real demand, between industrial users (solar panels and electronics) and Asian retail demand from both India and China is far higher than new supply or recovery from scrap, to the tune of 120 million oz/year, and those shorts cannot find the metal to deliver.  The last time there was a squeeze, when the Hunt’s tried to corner the market in 1980, people lined up at stores to sell their silver tea services, bringing metal to the market.  But those are all gone.  I’m not sure what will change this in the short run, but it cannot go up forever.  With that in mind, though, I think precious metals have much further to run as the ongoing debasement of fiat currencies simply adds further to demand.  

Silver managed to drag gold (+1.1% today, +3.0% this week, +65% this year) and platinum (+3.6% today, +7.2% this week, +98% this year) along for the ride and I expect this will continue across the board.  Meanwhile oil (0.0%) is unchanged this morning but has fallen -4.0% this week.  The news that the US boarded a Venezuelan oil tanker and took control in an effort to pressure Maduro didn’t seem to concern anyone in the market.  This trend remains clear.  

As to the bond market, this morning yields are higher by 2bps, pretty much across the board of Treasuries and all European sovereigns.  But with that in mind, the 10-year Treasury is still yielding 4.18%, below its worst level immediately following the FOMC meeting, and as I mentioned above, there appears to be a growing belief that Powell’s concern about the labor market will result in more cuts sooner rather than later.  While that is not really playing out in the futures market yet, as you can see below with the next cut priced for April with a 76% probability, that is the narrative that is being promulgated in FinX.  

Source: cmegroup.com

Next week we will get the November NFP report (exp 35K) and all the data we missed in October.  I can assure you if that comes in weak, the idea of a rate cut will explode onto the scene once again.  Too, on Wednesday evening, the WSJpublished an article indicating that Chairman Powell is concerned the employment data is overstating things because of the flaws in the birth/death model.  The point is he may be far more inclined to cut if next Tuesday’s report is weak.

Finally, the dollar is…still here.  It sold off after the Fed, and as I showed yesterday, has fallen back to the middle of its trading range of the past 6 months.  I keep reading how the dollar is the key, but quite frankly, I’m not certain what that key will unlock.  We need out of consensus activities to change the current situation.  After all, the underlying demand for dollars because of the trillions of dollars of debt outstanding outside of the US makes it difficult to get too bearish without a major reason.  If the Fed cut 50bps intermeeting, that would do it, but I’m not holding my breath.

And that’s really it my friends.  There is no data today although we do hear from three Fed speakers.  Given the dissent on the FOMC, I expect that we are going to be need to keep score as to views for a while when these folks speak. 

In the meantime, as I said above, have a wonderful holiday all

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A Latent Grim Reaper

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The zeitgeist, of late, has been leaning
Toward welcoming gov intervening
Because costs have soared
So, folks once abhorred
Like Socialists, seem more well-meaning
 
Perhaps, though, the story’s much deeper
And points to a latent grim reaper
Elites on one side
Claim Trump’s only lied
While Populists serve as gatekeeper

 

Quite frankly, I feel like markets have become very secondary to an understanding of what is happening in the economy, and while there is intrigue over who may be the next Fed Chair, and correspondingly, if Mr Powell will resign from the FOMC when his chairmanship is up, I believe that pales in comparison to much larger macroeconomic issues with which we all have to deal on a daily basis.  Once again, my weekend reading has highlighted two key pieces that I believe do an excellent job of explaining much of what is going on, not just in the economy, but in the streets.

Last week, I highlighted Michael Green’s piece regarding a new estimate of what the poverty line looks like, putting paid to the idea that the official government level of $31,500 is appropriate, and that in suburban NJ (Caldwell to be exact) it is more like $140K.  Now, you will not be surprised that his piece garnered a great deal of attention given its premise, but I will not go into that.  However, he did write a follow-up piece which is worth reading and where he discusses the reaction.  In brief, whatever number is correct, it is clear that $31.5K is laughably low.   Ultimately, I believe this work has quantified the concept of the “vibecession” which has been making the rounds for a while.  People are allegedly making a decent living and yet are living paycheck to paycheck because the cost of living (not inflation) has risen so remarkably over time and priced many folks out of previously ordinary levels of attainment.

Which brings me to the second key piece I read this weekend, this from Dr Pippa Malmgren, which does a remarkable job explaining how the nation (and not just in the US, but we are more familiar here) has (d)evolved into two groups; Elites and Populists.  The former are the old guard politicians (both Democrats and Republicans), the global organizations like the World Bank, IMF, UN and WEF, and more perniciously in my mind, the so-called deep state.  The latter are personified by President Trump, but include NYC Mayor-elect Mamdani, AfD in Germany, Marine LePen in France and Victor Orban in Hungary, and their followers, to name a few.

The frightening conclusion Dr Malmgren drew was that there is no ability for a nation to continue to operate successfully if the population is split in this manner, and that eventually, one side is going to wind up victorious.  I would say this is the very definition of the 4th Turning and we are living through it.

So, we must ask, what are the potential ramifications from a financial markets perspective with this backdrop?  I have repeatedly highlighted that the Trump administration is going to “run it hot” going forward, meaning the goal will be to increase nominal GDP fast enough to outweigh the inevitable rise in prices.  The idea is if incomes rise quickly enough, people will be able to tolerate rising prices more easily.  

But the one thing of which I am increasingly confident is that prices and their rate of change are going to rise under this scenario.  As central banks leave policy easy, or ease further in an effort to support their respective economies, that is going to be the outcome.  A look at the chart below from the FRED data base of the St Louis Fed shows there is a very strong relationship between CPI and nominal GDP.  In fact, I ran the numbers and the correlation for the past 75 years has been 0.975!  Prices are going to rise friends, alongside M2.

What does this mean?  It means that the debasement of fiat currency is going to continue apace and so commodities, notably precious metals, but also base metals and property are going to be recognized as better stores of wealth.  If you wonder why gold (+0.9%) and silver (+2.2%) are continuing to rocket higher, look no further than this.  What about equities?  For now, I expect they will continue to perform well as all that liquidity will be looking for a home although this morning, not so much as US futures are lower by -0.5% across the board.  Bonds?  This is a tougher call, and I suspect that the yield curve will steepen further as central banks press short rates lower, but inflation undermines long duration fixed income assets.  Finally, the dollar remains, in my view, one of the best of the fiat currencies, but like all of them, will continue to degrade vs. gold and hard assets.

Keeping that in mind, there are two other stories of note this morning, only one of which is impacting markets.  The non-impactful one is that apparently President Trump has selected Kevin Hassett, currently the White House Economic Council Director, as the man to succeed Jay Powell in the chair.  He is a long-time political operative with deep ties in Washington and I presume will get through the vetting and be confirmed on a timely basis.  As I wrote above, it is not clear to me the Fed matters as much as other things in the current environment, although we will continue to hear about it.  In this light, the Fed funds futures market is currently pricing an 87.5% probability of a 25bp cut next week and is back to a 58% probability of a total of 100bps of cuts by the end of 2026 as per the below from the CME.

The other story of note, this one definitely impacting markets, is the news that Ueda-san hinted more definitively at a Japanese rate hike later this month, with Japanese swaps market raising the probability of that hike to 80% from about 60% last week.  The knock-on effects were that 10-year JGB yields jumped 7bps, to 1.86%, their highest level since 2008 and as you can see from the chart below, continue to trend strongly higher.  Of course, given that inflation in Japan remains well above target, it is not that surprising that yields are climbing.  

Too, the other outcome here has been the yen (+0.7%) gaining a little ground, as per the below chart from tradingeconomics.com, and perhaps we have seen a short-term low in the currency.  Certainly, the increasing probability of US rate cuts is weighing on the dollar overall, so that is part of the story, but it remains to be seen if there are going to be wholesale changes in investment allocations that would be necessary to completely reverse the yen’s remarkable weakness over the past nearly four years.

The move in JGB yields has been blamed for the rise in yields around the world with Treasury and European Sovereign yields uniformly higher by 3bps this morning while some other regional Asian yields climbed between 4bps and 6bps.  In the end, inflation remains a problem almost everywhere in the world and I think that is what we are witnessing here.

As well, the JGB move was seen as the cause for Japanese equities’ (-1.9%) very weak performance which also dragged down some other regional markets (Taiwan, Australia, Philippines) but was not enough to undermine the rest of the region.  The flip side of that weakness was China (+1.1%) and HK (+0.7%) where it appears that hopes for a Fed rate cut more than offset weaker than forecast PMI data from China.  Another interesting story from the mainland was that the monthly Housing price data that was compiled by two key private companies was squashed by the Chinese government after China Vanke, one of the largest Chinese property companies, explained they would be late on an interest rate payment.  One can only imagine what that data looked like!

Meanwhile, in Europe, red is the color led by Germany’s DAX (-1.5%) although with weakness across the board (CAC -0.8%, IBEX -0.6%, FTSE MIB -0.9%).  Apparently, the story that progress has been made regarding peace talks in Ukraine is not seen as a positive there.  After all, if there is peace, will European governments still be so keen to build out their military, spending billions of euros at local defense and manufacturing firms?  It seems after a very strong close to the month in November, there is a bit of profit taking underway this morning.

In the commodity space, oil (+1.3%) is bouncing back to its trend line after OPEC confirmed it will not be increasing production in Q1 next year at a meeting yesterday.  I would expect that a real peace deal would be negative for this market as some part of that would be the relaxation of sanctions, I would assume.  But maybe I’m wrong there.  However, I continue to believe the trend is modestly lower going forward as there is far more supply available.  As to the other metals, both copper (+0.6%) and platinum (+1.5%) are continuing their runs higher with no end currently in sight.

Finally, the dollar is softer overall this morning, and while the yen (+0.7%) is the leader, the euro (+0.3%), SEK (+0.3%) and CHF (+0.25%) are also nicely up on the day with the rest of the G10 little changed.  The real movement, though, has been in the EMG bloc with CZK (+0.75%), HUF (+0.5%), PLN (+0.5%), and CLP (+0.4%) all benefitting from the Fed rate cut story as well as Chile’s benefits from copper’s rally.  While a cut seems highly likely, I suspect the real dollar story will be about the dot plot and SEP as well as Powell’s presser next week.

I’ve already run too long so will just mention that ISM Manufacturing (exp 48.9) is due this morning and I will review the week’s data expectations tomorrow.  

The world is changing and I expect that we will continue to see volatility across markets as investors come to grips with those changes, whether simple central bank rate decisions or more complex social movements and electoral outcomes that lead to major policy changes.  Be careful out there.

Good luck

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The Whisperer’s Roar

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Most focus is still on the Fed
And what every Fed speaker said
But do not ignore
The Whisperer’s roar
That Jay’s got the votes, rates to shred
 
And this is why markets are soaring
While bond vigilantes are snoring
But, too, it’s why gold
Is bought and not sold
The question is, whose ox Jay’s goring?

 

One thing that is very clear right now, the demand for lower interest rates is extremely widespread, regardless of one’s political persuasion.  People may despise everything that President Trump has done or claims he will do, but those same folks are desperate for him to be able to force the Fed to cut rates further.  At least that’s my observation.  

But putting that aside, the narrative around next month’s FOMC meeting seems to be coming to a clearer point; a cut is in the cards, but a potentially long delay in the next move will follow.  While there were no Fed speakers on the calendar, at least the calendar I use, yesterday, we did hear from two more, the presidents of San Francisco and Boston, and though the former, renowned dove Mary Daly, was far more forthright in her views a cut was appropriate, the latter, centrist Susan Collins, clearly was amenable to the idea, though not forcefully so.  But we know that Chair Powell cares since the Fed Whisperer, Nick Timiraos, got top billing in this morning’s WSJ with the following article, “Fed Chair Powell’s Allies Provide Opening for December Rate Cut.”  

As this story was coming into view yesterday, we saw equity markets rise sharply in the US, or at least the tech portion (the DJIA managed only a 0.4% gain compared to the NASDAQ’s 2.7% jump).  We also have seen the Fed funds futures market up the pricing of a rate cut to 81% as of this morning, with the concerns last week about Powell’s hawkishness quickly forgotten.  One other thing of note was the strong rally in precious metals, with gold (0.0% this morning, +1.8% yesterday) and silver (-0.3% this morning, +2.6% yesterday) responding to the imminent further debasement of the dollar.  While both remain somewhat below their October highs, nothing indicates that their trends higher have ended.

Source: tradingeconomics.com

There continues to be a lot of discussion on two fronts, the state of the economy and the rationale for further equity market gains, and interestingly, they are completely independent discussions.  For the former, the dribs and drabs of data that have been released since the end of the government shutdown have been inconclusive as to what is going on, at least officially.  Yesterday brought nothing new, although this morning we are due to see September data on Retail Sales (exp 0.3%, 0.3% ex autos), PPI (2.7% for both headline and core) and House Prices (+1.4% Case Shiller) along with November Consumer Confidence (93.5, down slightly from last month).  It hardly seems this will change any views

But the market conversation is completely different.  Between talk of a Santa rally, the popping of the AI bubble (assuming there is such a thing) and growing certainty that a Fed cut will help goose the stock market, that economic uncertainty means nothing.  There remains a large swath of investors who are certain the Fed will not allow equity markets to fall in any meaningful fashion and who are prepared to continue to buy the dip.  

Interestingly, the place where these two issues meet, earnings forecasts, shows that while fixed income investors may feel uncertain about the economy’s future, 2026 earnings estimates of 14% growth have equity investors in a very different place.  While I don’t know which side is correct, I suspect that the ‘run it hot’ philosophy which has been driving everything this administration does will favor equities over bonds.  While a correction is still likely in my mind, there is still nothing to stop this train!  

Ok, let’s turn to market performance overnight.  Japan (+0.1%) didn’t love the US tech story, which is somewhat surprising, although that may be because there continues to be growing concern regarding the JGB market and the spat with China.  China (+1.0%) and HK (+0.7%) however, both rallied on the US rate cut plus tech rally story.  Taiwan (+1.5%) and Thailand (+1.3%) also liked that story, but the rest of Asia was nonplussed, and more exchanges saw weakness than strength.  As to Europe, nobody there has a strong view this morning with every major bourse +/- 0.15% or less.  The only data was German GDP, which rose to…0.0% for Q3 and clocked in at +0.3% Y/Y! Look at the history of German economic activity over the past 3 years below and ask yourself if this is the powerhouse of Europe, why would anyone want to own any European assets?

Source: tradingeconomics.com

As well, the increased focus on a potential peace in Ukraine may be a negative for the continent.  While it has the potential to help them on the energy side, much of the rally seen across these nations was predicated on the military buildup that was coming.  However, if there is peace, I sense it will be difficult for a group of nations that are massively in debt to convince their populations to borrow more to defend themselves since the threat has abated.  After all, I’m willing to wager there isn’t a single person in the EU who if given the choice between defense spending for a potential future threat or an increased pension will opt for the former.  As to US futures, at this hour (7:25) they are unchanged.

In the bond market, Treasury yields are unchanged this morning after slipping another few basis points yesterday and are sitting at 4.03%.  Either the market is sanguine about the ongoing federal deficit spending or…everybody assumes the Fed is going to restart QE in some form or another if things start to deteriorate.  European sovereign yields are slipping this morning, down between -1bp and -3bps, with the UK on the larger end despite (because of?) tomorrow’s Budget announcement.  

While you may think the US has a fiscal problem, and it does, at least it has the global reserve currency and with it, the ability to live beyond its means for a long time.  The UK, however, simply has the first part, a fiscal problem, which they have exacerbated by adopting the most idiotic energy policies in the world (who would ever have thought that solar power made sense in the UK given the fact it rains, on average, 50% of the days in the year.)  It is unclear to me what the UK can do to right the ship with the current government and its stated priorities.  I suppose that we will see new regulations requiring UK financial institutions to hold more Gilts as otherwise nobody will buy them.  Before I leave this asset class, I cannot ignore the JGB market where back-end yields continue to climb.  As you can see from the below chart, the 10-, 30-, and 40-year yields are all at record highs and show no signs of stopping their multi-year rise.

Source: tradingeconomics.com

I had a long conversation with Charlie Garcia on Substack, someone you should all follow as he has very sharp ideas, on the causes, ramifications and potential outcomes of this unprecedented rise in yields there.  Needless to say, the end game will not be very good for anyone, but the timing remains in question.  As Keynes warned us all, markets can remain wrong longer than you can remain solvent.  But Japan has its own, unique fiscal problems along with every other nation in the world.

Turning to commodities, oil (-0.3%) continues to be the least interesting thing around, drifting slowly lower, but at an increasingly leisurely pace.  The glut narrative has calmed down, but I think there is more concern over the weakening economic story.  Hard for me to say from the outside, but lower is the direction of travel here.  The opposite is true for NatGas (-3.3%) which despite today’s decline is up 55% since October 16th!

Finally, the dollar is under modest pressure today with both the euro and pound stronger by 0.2%, a move that describes almost the entire G10.  One outlier here is NOK (-0.2%) which is clearly suffering on oil’s ongoing weakness.  In the EMG bloc, though, there has been more substantial movement with KRW (+0.7%) rising as traders position for the BOK to remain on hold while the Fed gets ready to cut, thus reversing some of the recent 7% decline in the won over the past quarter.  The CE3 have also rallied nicely, on the order of 0.5%, as they continue to demonstrate their excessive beta with the euro and even CNY (+0.3%) is moving this morning on the back of a potential thaw in relations between the US and China after Presidents Xi and Trump spoke by phone yesterday.  While my long-term perspective on the dollar remains positive, if the Fed does get aggressive, the greenback can certainly come under short-term pressure.

And that’s really all there is today.  With Thanksgiving coming, I expect that volumes will begin to decline so keep that in mind when trying to execute any trades.

Good luck

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Basically Fictive

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For Fedniks it must be addictive
To say rates are “somewhat restrictive”
It seems like a show
As how can they know
Since R-star is basically fictive
 
Investors, though, lap up this stuff
In fact, they just can’t get enough
Of comments that hint
There is a blueprint
For policy, though that’s a bluff

 

Yesterday, both Richmond Fed president Barkin and Governor Jefferson explained that current Fed policy is “somewhat restrictive”.  This takes to seven the number of FOMC members who have used this phrase with Powell, Kugler, Hammack, Schmid and Collins all having used it before, as did Jefferson two weeks ago.  And they are all referring to the concept of R-star, the mythical rate at which policy is neither restrictive nor accommodative.  In fact, R-star has become the Fed’s north star, with the key difference being, we can actually see the north star while R-star, even they will admit, is unobservable.  Of course, that hasn’t stopped them from basing policy decisions on the variable.

I highlight this because the tone of virtually every one of these speeches has been one of caution, with the implication being they are very close to their nirvana so the last steps will be small.  However, we cannot forget that though the last steps may be small, there is still confidence amongst the entire body that the direction of travel is toward lower rates. certainly, as you can see from the aggregated meeting probabilities from the Fed funds futures market below, there is zero expectation that rates will rise anytime during the next two years and a decent chance of another 100bps of cuts over that time.

Source: cmegroup.com

I might contend that is a pretty negative outlook on the US economy by the Fed.  Given the Fed’s models assume that a key to lower inflation is slowing economic growth, the idea that rates are going to fall implies slower growth to help them achieve the inflation portion of their mandate.  But that seems out of step with both the Atlanta Fed’s GDPNow forecast shown below and currently sitting at 4.1% annualized for Q3 and with earnings forecasts in the equity markets.

Asking Grok, the average current earnings growth forecasts for 2026 for the S&P 500 is somewhere in the 13% – 14% range with revenue growth running at ~6.9%, which is typically in line with nominal GDP growth.  (I understand that current forward PE ratios are extremely high at 23x, so be careful that companies hit their targets while their share prices fall anyway.)  But if nominal GDP is going to run at nearly 7%, and let’s assume inflation is at 3.5%, which I think is a reasonable possibility, then the math tells us that GDP is growing at 3.5% on a real basis.  With Fed funds currently at 4.0%, why would they need to decline further?

Looking back at the Fed’s September Summary of Economic Projections, it appears that the Fed sees a very different economy than the markets see.  In fact, you can see that they believe nominal GDP in the long run is going to average <4.0% (sum of longer run GDP and PCE in the table below).  

That is a really big difference, one that is the type that can lead to massive policy errors.  Now, if those 17 people cloistered in the Marriner Eccles building have a better handle on the economy than everybody else, I can understand why they believe rates need to fall further.  But is that the case?  

Here’s something else to ponder, I asked Grok about the relationship between nominal GDP and Fed funds and the below table is what it produced:

It is patently obvious how the Fed has developed its models and because of that, why they have been so wrong.  In fact, look at the SEP above and compare it to the period from 2001 – 2019, they are essentially identical.  But I would argue, and I’m not alone, that the economy from the dot.com crash up to the pandemic is no longer the reality on the ground.  The Fed’s backward-looking models seem set to make yet more errors going forward.

And with those cheery thoughts, let’s look at what happened overnight.  Yesterday’s continuation of the US stock decline seems to be finding a bottom, at least temporarily as Asian markets were mixed (Nikkei -0.3%, Hang Seng -0.4%, CSI 300 +0.4%) with the rest of the region showing a similar mixture of gainers (India, Malaysia, Indonesia, Philippines) and losers (Korea, Taiwan, Australia) as it appears the entire world is awaiting Nvidia’s earnings after the US close today.

Similarly, European bourses are edging higher this morning with the rout seemingly over for now.  This morning Spain (+0.5%) is leading the way higher followed by Germany (+0.3%) with the rest of the markets little changed overall, although leaning higher.  As to US futures, at this hour (7:30) they are pushing higher by about 0.4%.

In the bond market, Treasury yields are unchanged this morning, still sitting right around that 4.10% level while European sovereigns have seen demand with yields slipping -2bps to -3bps across the continent.  The UK is the outlier here, with yields unchanged after releasing inflation data that was bang on expectations, and below last month’s readings, though remains well above their 2.0% target.  I guess if I look at the chart below, I might be able to make the case that core UK CPI is trending lower, but similarly to the Fed, the last time they were at their target was July 2021.

Source: tradingeconomics.com

I would be remiss if I didn’t mention that JGB yields have moved higher by 3bps, pushing their decade long highs further along as concerns grow over the Japanese fiscal situation.

Oil prices (-2.4%) are falling this morning, slipping to the low side of $60/bbl after API inventories showed a surprise build of 4.4 million barrels.  However, I would contend that there is very little new here.  Perhaps the dinner last night where President Trump hosted Saudi Prince MbS has some thinking OPEC will increase production more aggressively going forward.  In the metals markets, they are all shining this morning led by silver (+3.1%) and platinum (+3.0%) with gold (+1.3%) and copper (+1.3%) lagging, although remember the latter two are much larger markets so need more interest to rise as quickly.

Finally, the dollar continues to find support, despite the precious metals gains, and this morning we see the DXY (+0.15%) pushing back toward that psychological 100.00 level.  JPY (-0.5%) has traded through 156 and certainly seems like it wants to push back to its YTYD highs of 158.80.  Interestingly, there was no Japanese commentary of note last night, but I presume if this continues, the MOF will be out warning of potential future action.  Another interesting fact is that while the dollar is firmer against virtually all G10 currencies, the EMG bloc is holding its own this morning led by HUF (+0.6%), PLN (+0.25%) and ZAR (+0.15%) with the rand obviously benefitting from gold’s rally.  The forint has benefitted from the central bank maintaining policy on hold at 6.5%, one of the highest available rates in Europe and that has helped drag the zloty along for the ride.

On the data front, this morning we see the August Trade Balance (exp -$61.0B) and then the EIA oil inventories where a small draw is expected.  We also get the FOMC Minutes at 2:00pm and hear from NY Fed president Williams this afternoon.

I cannot help but look at the difference between the Fed’s very clear view and the markets expectations and feel like the Fed is on the wrong side of the trade.  It is for this reason I fear higher inflation and ultimately, a much lower likelihood of further rate cuts.  If that is the case, the dollar will find even more support.  Interesting times.

Good luck

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Doesn’t Make Sense

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In England they call it the pence
But now it just doesn’t make sense
While pennies will still
Live in the cash till
We’ll speak of them in the past tense
 
And as to the shutdown, Trump signed
The CR to leave it behind
While this is good news
It won’t change the views
Of those who are not Trump aligned

 

For 230 years, the penny was a staple of the US currency system with more than 300 billion currently in circulation.  Of course, I don’t know that I would call them in circulation as they are generally sitting next to the cashier in a dish to be used since most folks don’t want to deal with them, or in a jar in the bedroom where they remain as people cannot throw out something valuable, but don’t want to bother with them either.  Let’s say they are in existence.  But given the rise in the price of copper, as well as the rise in general inflation, the Treasury estimates that it costs about 3.7 cents to mint each one, obviously a losing trade.  While they will remain legal tender, be prepared for everything to be rounded to the nearest nickel soon.  I guess there is no better description of inflation than the fact that the penny has outlived its useful life.  An interesting tidbit, the last coin discontinued by the Mint was the half-penny, which ended in 1857.

On to more important things, last night, President Trump signed the CR and ended the government shutdown.  It strikes me this was a whole lot of politics with no substantive changes to anything.  But it, too, is now history and we move on.  It was interesting to me that there was not a broad “sell the news” outcome as the equity rally early in the week appeared to be based on the prospects that this would occur.  Perhaps that will be today’s trade, although the futures at this hour (7:00) are little changed.  But no matter, there appear to be an increasing number of cracks in the façade of ever higher asset prices.  While the DJIA did set another record yesterday, the NASDAQ slipped.  I don’t foresee a smooth path ahead for risk assets, especially with havens continuing to perform well.

The last thing of note this morning was Chinese monetary data which was released last night.  Remember yesterday’s story about the ‘phantom’ loans?  Well, apparently, that has not been enough to keep the flywheel turning on the mainland as New Bank Loans fell to CNY220 billion, down more than CNY 1 trillion from September and well below last year’s October data of CNY 500 billion as per the chart below from tradingecomomics.com.  There is huge seasonality in this data, with every January showing massive growth, but looking at the past three years of data, my eye tells me things are slowing regularly despite their alleged 5% GDP growth.

Despite the 4th Plenum declaring they would be focusing on increasing domestic economic activity, President Xi continues to have a difficult time growing the economy organically.  The ongoing GDP targets warp investment decisions which result in overproduction of goods and massive infrastructure spending which drives up debt issuance.  The problem with this cycle is the lack of domestic consumption means that the returns on that infrastructure are terrible, likely negative, and so while building the stuff increases GDP, having it sit there idle doesn’t do anything once its built.  For now, investors continue to believe in the growth story, and I’m confident that Xi Jinping will never allow economic data to be released that would counter that narrative, but trouble is brewing there in my mind.  Just not today!

And that’s really the news this morning, at least from what I’ve seen, so let’s look at markets overnight.  The official end of the government shutdown was widely lauded in Asia with Tokyo (+0.4%), HK (+0.6%) and China (+1.2%) all closing higher in the session.  Korea (+0.5%) also rallied but elsewhere in Asia, things were less satisfactory with Australia, New Zealand and Taiwan all under modest pressure while India was unchanged.  

In Europe, the FTSE 100 (-0.6%) is slipping after weaker than expected GDP data with the Y/Y number slipping to 1.1% while IP fell -2.5%.  It is difficult to look at the chart of GDP below and get the sense that the UK economy is in very good shape.

Source: tradingeconomics.com

All this is with the backdrop of the Starmer government getting set to release its latest budget in just under two weeks and expectations they are going to be raising income taxes yet again as revenues cannot keep up with their welfare state promises.  The problem they have is the pound is not the global reserve currency nor are Gilts the global reserve asset, so it appears the Gilt vigilantes are alive and well although the bond vigilantes remain in hibernation.  As to the continent, the DAX (-0.6%) is also suffering despite no data releases while the CAC (+0.4%) is managing to rally.  The rest of the bourses are generally little changed with all eyes focused on the UK to see how they handle their problems.  Of course, virtually every country on the continent has the same problems!

In the bond market, after sliding -4bps yesterday, 10-year Treasury yields have backed up 2bps this morning.  we are seeing similar price action on the continent with virtually all sovereign debt showing rises of between 1bp (France) and 3bps (Germany, Netherlands), once again mostly tracking the Treasury market.

In the commodity space, oil (+0.7%) is bouncing after a disastrous session yesterday where it fell nearly $2/bbl on news that the IEA increased its supply forecasts (2.5 MM bbl/day) significantly more than its demand forecasts (780K bbl/day).  Certainly, this is aligned with my longer-term bearish view on oil and a look at the chart below shows the trend over the past year remains firmly downward.  Do not be surprised if we get to $50/bbl next year.

Source: tradingeconomics.com

Turning to the metals markets, the rally continues across base and precious this morning and this steady climb after a sharp pullback a few weeks ago seems to have real legs.  This morning, we see gold (+1.0%), silver (+1.3% and pushing its recent ATH), copper (+0.9% despite the loss of penny demand) and platinum (+1.2%).  When governments run it hot, precious metals benefit.

Finally, the dollar is softer this morning with the DXY (-0.25%) slipping back to the middle of its narrowing trading range as per the below chart.

Source: tradingeconomics.com

The weakness is universal, though with G10 and EMG currencies stronger across the board.  ZAR (+0.6%) is the leader today as the dollar has fallen back below 17.00 for the first time since January 2023 as it continues to benefit from the rally in gold and platinum.

Source: tradingeconomics.com

It strikes me that if one were so inclined to play a long-term trend in currencies, long ZAR vs. short NOK might be a very interesting way to play the dichotomy between oil’s ongoing decline and gold’s ongoing rally.  But everything is firmer vs. the dollar with the pound (+0.3%), euro (+0.2%) and AUD (+0.3%) highlighting the G10.  In the EMG bloc, CLP (+0.5%) is benefitting from copper’s rally while the CE4 are all higher by 0.3% to 0.4%, mirroring the euro’s rise.  Even CNY (+0.25%) is higher despite the weak monetary data.  Not to be outdone, both MXN (+0.2%) and BRL (+0.3%) are in thrall to a weaker dollar.

While the government is open now, given the closure, no data has been collected so it is not yet clear when we will be seeing the next set of numbers.  Yesterday’s Fedspeak showed caution the watchword regarding more cuts which has led the futures market to reduce the probability of a December cut to just 54% this morning and a definite change in flavor for the curve overall.  It is somewhat surprising that the dollar is not performing better given this adjustment in views. 

Equity prices feel extended and the fear and greed index continues to sit in extreme fear despite the seemingly daily record highs.  I am uncomfortable with stocks overall here and believe they are due for a reckoning, or at least a correction.  But metals have nowhere to go but up.

Good luck

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Quelling the Strains

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The government shutdown remains
In place, as the House is at pains
To summon the will
For them to fulfill
Their mandate, while quelling the strains
 
Meanwhile, banks in China are lending
Out cash, though in fact, they’re pretending
But quotas from Xi
Mean he wants to see
More loans to encourage more spending

 

While the Senate has passed a CR that will fund government completely through January 30th and includes full year funding for Veterans Affairs, the Department of Agriculture and legislative activities (they paid themselves), with the rest yet to be completed, the House is meeting today to vote on the measure, at which point, assuming it passes, it will then be sent to President Trump for his signature.  It should be completed today, but this being Congress, with numerous members seeking to preen to their TikTok viewers, until it is done, we cannot be certain.

Now, get ready to hear a lot about how much the shutdown cost as we will get many estimates from various economists and analysts, and you can be sure that they will reflect the political bias of the estimator.  I have seen estimates ranging from 0.2% of GDP to 0.6% of GDP for the quarter, with appropriate annualizations.  My personal view is the damage will be lesser, not greater, as all federal employees will be receiving back wages and most spending will have been delayed rather than destroyed.  We shall see.

Regarding the US economy, as we missed the first reading of Q3 GDP due to the shutdown, it seems we will be getting our first look at the end of this month.  Now, the Atlanta Fed did not stop working and their GDPNow estimate for Q3 remains quite robust at 4.0% as per the below chart from their website, atlantafed.org, but the damage, of course, will fall in Q4, so we won’t really know until sometime in January with the first look at that data.

However, it is important to understand that an increasing number of analysts are explaining that the economy is slowing rapidly.  Their latest ‘proof’ is from yesterday’s ADP weekly data, an entirely new statistic with a track record of exactly…2 weeks, but which showed that 11,250 jobs were lost last week.  I am no econometrician (thankfully), but it seems to me that building your case on a statistic with 2 data points is weak sauce.  Ultimately, I think the main reason that there is so much uncertainty amongst analysts is the concept of the K-shaped economy, where the wealthy are doing fine, basking in the glow of their equity returns, while those less well-off are struggling with ongoing inflation and a less robust job market.

In fact, the Fed is having the same problem, looking at the economy with no consistency as there appears to be a pretty significant rift between the hawks and doves right now.  We got further proof of this (as if the two dissents at the last meeting, one for a bigger cut and one for no move wasn’t enough proof) in this morning’s WSJ where the Fed whisperer, Nick Timiraos, published an article explaining exactly that.  There are two camps, one focused on weakening employment and wanting to cut and one still focused on inflation (allegedly) and wanting to pause.  The Fed funds futures market has reduced the probability of a December cut to 65% as of this morning, but is a lock for that cut by January with a small probability of two more cuts by then.

Nothing has changed my view that they cut next month because I believe that they are essentially unconcerned about inflation at this point, believing 3% is close enough to 2% for government work, and remain entirely focused on the job market.

Turning to the most fascinating international story, it appears that Chinese banks have started to make “phantom” loans, or at least that’s what they are being called, as President Xi is very keen to goose economic activity and the large, state-owned banks have quotas to reach.  So, apparently, what they are doing is going to their best customers, begging them to take out a loan they don’t need, and then having the loans repaid within one month.  The banks are even going so far as to pay the interest so there is no actual impact on anything other than bank loan volume.  Of course, that is the quota being met, so I imagine this will continue.

But it makes you wonder, exactly how bad are things in China that banks are resorting to these games?  Perusing the Chinese data from the past month, things are clearly slowing as per the below from tradingeconomics.com:

Too, the PMI data was soft and Foreign Direct Investment is collapsing, falling -10.4% in September. Again, if you want to understand why President Xi was willing to agree a deal with President Trump, the answer is that the Chinese economy remains under intense pressure, and while the currency doesn’t reflect anything about the economy, the fact that Chinese yields are amongst the lowest in the world is a strong signal that things are not great.

Ok, let’s turn to the overnight activity and see how things behaved.  While the US had a mixed performance (NASDAQ fell although the other indices rallied), we continue to see more positive than negative outcomes in Asia on the back of the ongoing tech rally and the end of the shutdown.  Thus, Japan (+0.4%), HK (+0.8%), Korea (+1.1%), India (+0.7% despite a terrorist attack) and Taiwan (+0.6%) all continued their recent rallies.  China (-0.1%) had a much less impressive day. But these markets continue to benefit from the tech story, and I expect that to continue if the tech story continues to be positive.  As to Europe, bourses there are also benefitting from the imminent end of the US shutdown with gains across the board on the continent (DAX +1.2%, CAC +1.1%, IBEX +1.1%) although the UK (-0.15%) is struggling as concerns grow over the nation’s ability to come up with a viable budget that pays for services without raising taxes to a crippling rate.  As to US futures this morning, at this hour (7:30), they are nicely higher, 0.5% or more.

In the bond market, Treasury yields have slipped -4bps, ostensibly on that weak ADP number which has more investors expecting a much weaker economy here.  Europe though, has seen yields tick higher by 1bp across the board, with the UK the exception (+3bps) as concerns over UK finances continue apace.

In the commodity markets, oil (-1.1%) which rallied yesterday on growing concerns over the latest US sanctions on Lukoil and Rosneft, have given back those gains and are once again hovering around $60/bbl.  The IEA released their report on the future of energy use, specifically fossil fuels, and in another sign the climate crisis is ending (or at least that it is no longer a concern), they explained that fossil fuel use would now peak in 2050 under current policies, rather than prior to the end of this decade under stated policies.  The FT was kind enough to put together a little graphic showing the two different views, but we all know that stated policies are wishful thinking.

In a nutshell, more oil demand will drive more oil supply, count on it!  Turning to metals, the rally continues this morning with gold (+0.2%) and silver (+1.1%) pushing back toward the highs seen on October 20th.  I strongly believe these markets will continue to rally as the ‘run it hot’ philosophy will be enacted in as many places around the world as can get away with it.  

Finally, the dollar is a touch firmer this morning, with DXY (+0.1%) on the back of continued weakness in the pound (-0.3%) and the yen (-0.4%).  Elsewhere, the picture is mixed with the euro little changed while the rand (+0.5%) continues to benefit from the gold rally.  Otherwise, the dollar remains a back burner issue for most investors right now, although I have read that people are talking about the carry trade again, funding investments with short yen positions.  Certainly, the yen has been quite weak overall as evidenced by its trend over the past six months below.

Source: tradingeconomics.com

There is no data this morning although we will get bombarded with five Fed speakers, three of whom are confirmed doves (Miran, Williams and Waller) while the other two seem more middle of the road (Bostic, Paulson).  At this point, there is no consensus on the economy’s strength or direction and that is evident at the Fed as well as in the analyst community.  The only consensus seems to be that stocks and gold should both continue to rally.  As to the buck, what’s not to like?

Good luck

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