David Rosenberg Muses On Yesterday's Market "Watershed" Event, Discusses The Chairman's Lies Under Oath
Rosie's latest letter looks at yesterday's events in the market and calls it the 'watershed' event. Alas, where Rosenberg sees a deflationary-driven event precipitating the move in gold lower, we see merely exchange intervention. Aside from that, Rosie's skepticism is of course justified. More importantly, the Gluskin Sheff strategist focuses on the topic we pointed out a few days ago, namely that Dick Fisher has now opened up the door to Bernanke's impeachment by confirming that the Fed is doing precisely what the Chairman swore under oath he would never do, i.e., monetize.
THE ANTI-QE MARKET
Yesterday’s manic performance in many asset classes may well have been a watershed event.
The U.S. dollar reversed course and rallied and all the program trading risk-on trades are correlated with the greenback. It could well be that some folks are beginning to pay more attention to what is happening in Europe where sovereign default risks and bond spreads within the periphery are blowing out again.
The stock market has not had two losing days in a row in two months. There were divergences at the recent highs, sentiment is overly bullish and the market is overbought. Cramer said yesterday that the charts are our friend to the bulls but we would beg to differ after what happened in yesterday’s session. The market is struggling at the April highs much like it was at the faulty peak in October 2007 as it failed to build on the prior July highs. The fact is that in both October 2007 and again in November 2010, the test of the highs was not confirmed by the financials. Remember that.
Bonds are supposedly the transmission mechanism for the Fed to deliver its QE-induced wealth effect. Well, at yesterday’s close of 2.66% on the 10-year Treasury note, it is now all the way back to where it was when Bernanke first hinted at QE2 back at Jackson Hole on August 27th. The yield on the 5-year Treasury note soared 13bps to 1.25% yesterday and that is where the Fed is supposedly doing the most buying. If you’re Ben Bernanke, something is backfiring.
We are long-term bond bulls but some technical damage has been done. It looks like a complete reversal can take the 10-year note yield to 3%. The long bond reached a key technical juncture yesterday breaking above the 200-day moving average, at 4.24%, which could take the long bond to a 4.6-4.8% and the stock market will have a good dose of trouble with that. But what a buying opportunity that would be for the long end of the curve, which is cheap, cheap, cheap, especially relative to where the cost of carry is.
Gold turned in a stunning reversal — is that a reflationary signpost? The yellow metal got as high as $1,424.60/oz, was as low as $1,382.80/oz, and closed at $1,392.90/oz.
So, the long bond broke the 200 day m.a., gold finished the day below $1,400/oz and the S&P 500 is now back below the April highs. Mr. Cramer — if this was a failed re-test accomplished by an exhaustion rally last week, then sorry, with any follow through to this reversal, the charts are not your friend at all.
As we said last week, the markets are not trading on fundamentals. They are trading off the U.S. dollar. Yesterday may have marked a shift — not that anything is happening in the U.S.A. to cause any excitement, but rather, the fiscal problems in Europe are back on the front burner.
According to the latest Ceridian-UCLA Pulse of Commerce Index, the holiday shopping season could potentially be disappointing versus current market expectations
Some may claim that Obama sending strong hints of a compromise allowing for the extension of the Bush tax cuts is a big catalyst. It is quite a sad commentary that the economy is in such dire shape that it can’t withstand a tax increase that has been advertised for a decade. And, what’s even sadder is that the public purse can hardly handle another $4 trillion of debt. Come on — if the cuts get extended, there will never be a good time to end them.
And on what will most certainly be the topic of the first Ron Paul - Ben Bernanke tete-a-tete:
SO WHO IS TELLING THE TRUTH?
We thought it was intriguing to see how Fed Chairman Ben Bernanke said for the record, just over a year ago, that the Fed had no intention of monetizing the debt. Chairman Ben Bernanke, in response to a question during his June 3, 2009 testimony to the House Budget Committee, said, “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation…The Federal Reserve will not monetize the debt.”
Just the other day, Dallas Fed President Fisher stated (more like lamented as he knows this is an exercise in futility) that this is exactly what the Fed has chosen to do. The U.S. does not suffer from a lack of low interest rates. Nor does it suffer from a lack of liquidity. What it suffers from is a lack of policy credibility.
Dallas Federal Reserve President Fisher, in his November 8, 2010, speech titled Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity, said, “For the next eight months, the nation’s central bank will be monetizing the federal debt.”
From Gluskin Sheff
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