Tuesday, October 17, 2017

This Week's Message: North Korea, The Fed, and The Markets in a Nutshell

Our schedule this week requires that we spend less time here on the blog. While we'll certainly step in and offer some perspective should markets demand, for now we expect that the following will be it for the week (save for perhaps the irresistible quick quote or chart here and there).

Now, what to leave you with? We can offer up the results of our yesterday's assessment of market/economic technical and fundamental conditions, but we've been doing that a lot of late and, frankly, not much has changed. That is, the setup remains decidedly bullish for equities.

We can talk about North Korea, but what's there to report on at this juncture? Other than the expectation of continued rhetoric and the occasional missile test (recent satellite imagery shows missile launchers presumably moving into position). Bottom line: Clearly, the stock market has concluded that, for the time being, war is not the endgame for either side. The gold market, on the other hand, may remain more Korea-sensitive.

We can talk about Q3 earnings, but the reporting season is too young yet to judge.

We can talk about the prospects for a Fed rate hike in December. But, other than assessing futures discounting (which suggests a high probability that they'll indeed bump the funds rate up a quarter-point), and economic prospects (which, again, we've done ad nauseam), there's not much to report.

We can talk about the prospects for Janet Yellen keeping her job come next February, but that's still a ways off (although the President says his decision will come relatively soon). We did suggest recently that the then media-dubbed front runner, Kevin Warsh, was an unlikely pick due to his hawkish history. That appears to have been a prescient opinion. 

The latest to impress the President is Stanford's John Taylor. I'm familiar with Mr. Taylor's work and have always found him to be a very good, thoughtful economist. He'd be an interesting pick, in that he was a vocal critic of the Greenspan Fed's methods leading up to the '08-'09 recession. Essentially, he wouldn't have been as accommodative for nearly as long, which comes across hawkish (apt to raise rates first and ask questions later) -- which, I promise you, is not what any sitting president would look for in a Fed chair. 

He's developed his own, and of course untested, rules-based system for setting monetary policy. However, his hawkishness notwithstanding, I skimmed through an analysis this morning that attempted to apply the "Taylor Rule" to present conditions and concluded that rates would not be substantially higher at this juncture. Although the analyst did state that tweaking an input/assumption here or there would have a notable impact on the result. 

Suffice to say that whether or not Mr. Taylor becomes the next Fed head, future monetary policy will always suffer the subjectiveness of the board's voting members. I.e., the Fed chair is not a dictator, and the board -- comprised of other economic heavyweights -- would have to buy into the idea that managing the monetary environment of the largest economy on earth can be relegated to a rule. Well, not a chance! More to come...

What else? We can talk about the dollar, commodities and bonds, but we can nutshell all that by simply offering up our view -- based on our latest assessment of the data -- on each. Which is:  We think odds favor a higher-trending dollar, steady to higher-trending industrial commodities prices, lower-trending precious metals (although, again, there's North Korea) and lower bond prices (higher yields) over the coming weeks and months. These would not be predictions mind you, just what we see as probabilities based on present (always subject to change) circumstances. Which inspires me to close with the following Jesse Livermore quotes:

"I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, "Well, you know this is a bull market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend."

"A man must study general conditions, to seize them so as to be able to anticipate probabilities."

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