Risk On Week

This was most certainly a “risk on” week with the S&P gaining 3.01% to bring it into a positive gain while both gold and Treasuries were hit hard. Dollar strength has put a damper against commodities and 

there can be little doubt there is direct evidence the coronavirus, which is shutting down industrial production a fairly 

large scale in China and greatly curtailing travel and shopping in general in China, is reducing demand for commodities. I’m guessing the relative safe haven o

f the U.S. in general is also driving dollar demand. It may also be that the failed impeachment against President Trump may be bolstering the dollar.

However, the tweet shown on your left from the very astute Lyn Alden may have the best answer for the dollar’s recent strength. The charts on your left tell the story. The recent bottom coincides exactly at the start of January when the Fed stopped expanding its balance sheet.

Underlying the equity market that seems to defy gravity reminds one of the statement made by socialist economist Irving Fisher who believed that if governments tampered in the economy, employing Keynesian socialist economics, there would never need to be any more recessions or stock market crashes. The only problem for Fisher and his reputation was that just prior to the stock market crash in October 1929, he claimed that the stock market had reached “a permanently high plateau.” That kind of mood is most certainly evident at this time, bolstered by the Powell Pivot at the start of 2019 as well as the equity put provided by the three previous Fed chairpersons. Whenever the stock market takes a serious hit, you can count on the Fed starting to expand its balance sheet once again. And if you wore Chairman Powell’s shoes who could blame you if you carried out the same policies? To do otherwise would most certainly bring about a stock market crash and most likely a global depression. We had a whiff of what would happen in the 2008-09 crisis.  

David Rosenberg has been pointing out that the U.S. economy is certainly cooling off, as is the global economy which is given a shove downward by the coronavirus, and that the equity market is in total denial. We are really in an earnings recession but equity markets don’t care as long as the Fed keeps pumping money into the system. David points out that GAAP earnings are now a full 15% below what is being reported by Wall Street. Delusions can feel so good until one’s sins finally find them out. And with regard to that, Michael Oliver had some very interesting things to say about politics and stocks in my show last week. You may want to hear what he had to say in his very unusual commentary, https://www.youtube.com/watch?v=WxHkt9zAN1M.

About Jay Taylor