Normalization "Like Watching Grass Grow"- Oh Really?
https://www.zerohedge.com/news/2018-02-05/normalization-watching-grass-grow-oh-really
Intro
This post questions the concept of "normalization" as the Fed calls it. First, by saying that they admit that there is nothing normal or safe about what they did the last 8 years. Second, it shows they don't know (or cannot publicly admit knowing) the difference between normal and normative. There is no normal anymore. The Fed made sure of that. Markets are broken and a generation of flow traders will now be front running the unwind if it ever gets to happen in full. What should markets do now? We know what they should do given a pre 2008 normative environment. We know what they should do in 2018 under the Fed as backstop regime. But which "normal" is the paradigm to follow? We don't know what they, the academic hot house flowers of the Fed will do except foist their mistakes in policy on the backs of the tax base.
So to the stock bears out there: one scenario that could go down next week in rather simplistic terms is:
Funds puke and stocks slide hard.
Buffet, Icahn, et al buy the lows magically.
Global Central Bankers decide they can’t cut the cord so quickly and a rescue happens.
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Mixed metaphors aside: don’t be surprised if we swoon on Monday only to be up on the week by Friday. Or in the least, the CB team tries it’s hardest to put on the brakes of this first failed test of “normalcy”.
<UPDATE: This was written Sunday afternoon, well before the markets opened Sunday night.The intent was to handicap action in a deepening market rout. We at least know that the Fed won't rescue the S&P at 2680 yet. We hope readers find it still relevant>
Here is the autopsy of Monday's activity
pic via finviz
We Like Gold, We Wish Someone Else Would As Well
Gold got hammered along with stocks on Friday. At some point that correlation will decouple, but we do not pretend to be able to time this. For now we believe that as much as the Fed will talk tough about its mission to take away the equity punch bowl, it will be interesting to see how they handle a meltdown if one were to occur next week. And as a corollary, what should Gold be doing during all this? And what will it actually do in the short and longer terms of a QE unwind? Anyone who tells you they know is full of it. But a patient person will do well if the unwind of QE is less sanitized as its implementation and just rebalances his currency exposure form time to time.
Friday’s Ebb Tide Sank All Boats – Some Unfairly
Gold is not a hedge against stocks per-se. It is a hedge against FIAT buying power debasement. And Gold sold off on Friday as the world went to cash. Bonds, Stocks, and Gold were sold to raise dollars. Gold was down in USD terms simply because it is denominated in dollars.
The Culprit? QE unwind combined with hawkish talk on the short end = more debt and less money with which to buy stocks
Roy Sebag, Founder of Goldmoney (TSX:XAU) on the Unwind
As pointed out by @FGMR , here is why markets dropped this week. The Fed sold just $22B of $4.4 Trillion "assets" it bought over the last 9 years. It's largest one week sale since this experiment began with QE1/TARP. Watching "paint dry" Yellen told us..
What are the directional possibilities this week market-wise as well as potential rescue (and pausing "normalization") by Global Central Bankers?
For this exercise, let’s assume the worst for stocks, a continuation of the blood bath catalyze by a hawkish sounding Fed bent on executing the “normalization” process they and their fiscal brethren are embarking upon. First, a biased synopsis of this government's proposed balance sheet normalization.
There Can Be no Return to “Normal” Without Pain
For those unfamiliar, normalization is code for unwinding the massive balance sheet of bonds the treasury had accumulated during QE to “sanitize” its simultaneous money printing.
The Fed believes it is now safe to unwind this position by re-selling those bonds while sopping up excess liquidity by raising rates. A seemingly simple reversal of what they had done with QEs 1 through 4. A failure to reduce money supply would result in lower bond prices; while a fed that raises rates too aggressively will reignite the deflationary pressures it had worked to mitigate for years now.
The Government is now engaged in a massive balancing act to sell those Bonds it has on its balance sheet back out (increasing supply) while keeping Bond rates low (not lowering price). Their primary tool will be to use monetary policy on the short end to reduce money supply while selling those aforementioned bonds.
Basically they will prop the USD on the short end to make the deluge of bonds about to be offloaded more palatable (less painful?) to buyers. This is not a science.
Using short term rates to influence long term bonds is in the least going to play havoc with the yield curve term structure, which in turn can greatly effect the economy.
But let’s return to the concept of “normalization” as the Fed calls its plan.
Normal is Expectation Related
There’s a problem with that. So many investors are now addicted to the “fed as backstop” policy that it’s just not going to be easy to unwind this. So, as much as the Fed and their global partners want to think they can control the withdrawal from easy money; It wouldn’t be the first time they underestimated market forces. It took 10 years to stop deflation.
Back to our assumption that stocks will continue their slide Monday(This was written Sunday afternoon):
Stocks and Gold to Zero…
If you think the Fed is going to normalize to the point where it must destroy a generation of retiring baby-boomers’ wealth, then you should be long USD and short Gold. You should hedge your short gold position by selling stock short as well. If Friday’s activity were to continue ad infinitum as a real reflection of our economy, one would be well served to believe there will be a deflationary depression like we’ve never seen coming.
So what is a Central Banker to do if stocks slide next week? Rescue them; that’s what they’ll do. They’ll worry about Gold later.
…Or The Fed Rescues Its Own 401K Accounts
But if you think, as we do, the Fed is dipping its toe in the water of how much rate hike magical elixir is appropriate to offset the reissued Bonds coming; and that this is just a test by a bunch of academics who experience no personal consequence to their missteps – then you should be looking to buy Gold after the initial puke is over.
This because we believe that the Fed will not be able to abandon its role as market back-stop so easily.
Their priority is in not deflating the stock bubbles too quickly. After all, foreign Central Banks are now massive holders of US equities. Therefore if the Fed acts to rescue any incipient washout next week, we believe the unintended consequences of higher Gold prices may return aggressively. We just do not see how the government does not simply monetize our debt longer term to avoid killing a generation of people about to retire’s wealth.
And so it isn’t crazy to expect diminished returns from a Fed that caves to rescue a plummeting market, while increasingly creating bigger unintended consequences i.e. inflation in goods instead of stocks.
What Does Gold Actually Hedge?
Gold and other commodities will move counter equities for prolonged periods of time. This is a function of inflation eating into corporate profit margins as it did in the 1970s and 1980s. One would have to look no further back than 2 years ago when the British pound was getting destroyed. The FTSE however was one of the best performing indices in the world when priced in Pounds.
Here is a slice of what we are talking about when we say a strong stock market is a consolation prize for a weak currency.
pic courtesy of Press Association
The example above was a Brexit related crisis event. It should be noted that in an orderly (normal?) market, stocks frequently rally before inflation as they discount a weakening currency like in the 1960’s before the inflation of the 70s. More typically, stocks rally before inflation rears its ugly head in things consumed. Then, they are more apt to chop or move sideways as the “bad” inflation hits us.
This is all part of the cycle of paper vs. real asset rotations. Right now, real assets are at an almost all time low vs. financial assets. Here is a chart from 2015. We don’t see it being much different now given the stock market’s performance since then. Do note the change from the 1960s to the1970s (capping in 1980 even before Gold made its previous all time highs) to our point about stocks rallying before “bad” inflation hits.
The New Norm isn’t Normal at All
Given last week’s stock market behavior we think the piece below is relevant not just to stock market investors, but to Gold longs given Friday’s behavior. Next week can’t be a comfortable one for equity or bond longs. First, they have to be thinking that the Fed will continue to aggressively raise rates in an attempt to counter the fiscal side “normalization” process about to start. There is a difference between Normal and Normative. Normal doesn’t exist. Normative describes behavior is most popularly accepted and expected by the public in both causation and correlation. Normative these days is a propped up market by Fed back-stop policies.
Watch How Gold Reacts to a Central Banker Rescue
Gold will take a tumble along with stocks as well if Friday is any indication. At least at first. Then if the Fed steps in, we can watch to see which asset does better: the stock market, or the “Evil” gold market as an unintended consequence and as a product of diminishing returns of fed policies.
This is just a test. But it may be a harbinger of things to come. If the fed steps in next week, note which asset benefits most: the intended one, or the yellow doorstop.
We think the cyclical bull market in real(ity) is beginning.
Author: Staff Writer for Gold in America
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Profile picture for user aqualech
aqualech Feb 5, 2018 9:51 PM Permalink
Dude....do you get your market expertise from listening to Bloomberg on the drive home?
You write as if there was price discovery in the PMs.
Did you even hear about the $2B paper gold dump on Friday morning?
I thought not.
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Profile picture for user Kamehameha
Kamehameha aqualech Feb 6, 2018 12:09 AM Permalink
HODL!
In reply to Dude....do you get your… by aqualech
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Profile picture for user NumbersUsa
NumbersUsa Feb 6, 2018 12:04 AM Permalink
Meanwhile over in so-called israel they built the wall & now:
"TEL AVIV (Reuters) - Israel has started handing out notices to 20,000 male African migrants giving them two months to leave the country or risk being thrown in jail.
Prime Minister Benjamin Netanyahu's government is offering the migrants, most of whom are from Sudan and Eritrea, $3,500 and a plane ticket to what it says is a safe destination in another country in sub-Saharan Africa."
The dual citizen israeli jew supremacists in the U.S. scream & hiss if we want to build a wall & remove illegal aliens, but in so-called israel the wall has already been built and the kick-out is in full swing.
Flush out all the dual citizen israelis out of all our federal, state & local governments- NOW !
Prosecute & shut down all foreign agent jew supremacist organizations (Aipac, Adl, Aclu, Splc, Jwc, Zoa, Cfr, Jdl,) in America- NOW !