Excuses

If I had a quarter for every time I heard that equities are weak because of the trade war...I'd be able to play a lot of Pacman at the arcade.  Naturally, investors think if there is a trade war deal, the market is free to go higher and higher and forget all that happened in December, like it was a bad dream.

When I think about the trade war excuses, this moment in boxing history keeps popping up.  Roy Jones Jr vs. Antonio Tarver.

You also can't blame it on Jerome Powell.  He wasn't the one fomenting a stock market and corporate debt bubble like Bazooka Ben and Janet Yellen.  Whenever a bubble is allowed to grow to enormous proportions, its only a matter of time before it pops.  Of course, like the 15 minute attention span audience that is the stock investor, they will scapegoat whoever happened to be manning the controls when the bubble pops.  This time it is Powell, and to a much lesser extent, Tariff Trump and PPT Mnuchin.

The bubble popping is not just a US phenomena.  It is happening in China, Australia, Canada, and a few emerging markets that no one really cares about.  It is taking different forms in each country, but the foundation for the bubbles has been super loose monetary policy and a reluctance to tighten even when the economy is running hot and asset prices are going higher.

Starting from last year, the global markets are finally paying the price for front loading demand and overshooting asset prices too high.  It has nothing to do with the trade war, and very little to do with a few 25 bp rate hikes or a few percent decrease in the size of the Fed balance sheet.  It has a lot to do with earnings topping out while stocks were at one of the highest price to book and price to sales ratios of all time.

And don't believe those people telling you stocks are fairly valued.  Yes, if there is a corporate tax cut / income tax cut every few years along with a QE thrown in to monetize the huge supply of Treasuries necessary to fund the fiscal stimulus.  US economic growth has been government debt fueled, just a different form than what China is doing with its economy.  The only major economic zone that isn't doing this is the EU, and the financial markets have punished their stock markets relentlessly for not running giant budget deficits, providing corporate welfare, and doing fiscal stimulus after fiscal stimulus.

They say China is the one that is addicted to debt fueled growth.  So is the US.  It is ridiculous how big the budget deficit is when unemployment rate is at 3.7% and the jobs market is the tightest in nearly 20 years.  When the cycle turns down, $2 trillion budget deficits will be the norm.

We've had a huge rally since Christmas Eve, going further than I expected so quickly.  But SPX 2600 is a hard resistance that won't go down on the first attempt to break through.  Based on the steepness of the December decline, I expect the market to grind higher for a few more weeks, even with earnings bombs coming up.  This is mainly because of the anticipation of the trade war deal (Pavlovian response) and time needed for the market to adjust to the new range around 2350-2650 before finding what is likely to be a lower level in the summer.

Looking for a pullback this week, which probably will get bought, and set up another move higher once the tech earnings are behind us and Powell coos dovishly at the January Fed meeting.  We will need a trade deal for there to be that final euphoric counter trend pop to fade with confidence.  Until then, there will be hopes for a big rally on a trade deal which everybody expects to happen.  It is typical stock investor behavior.  Only looking at the cards that they have and not thinking about what the cards their opponents hold.  There is a lot of first order thinking and very little second order thinking in the markets.

The ironic thing about the stock market is that it is the highest stakes poker game in the world, but the players mostly use only low limit hold'em analysis, not the higher order psychology and analysis employed at the high stakes limits.