Tremors
Posted on Sunday, December 15th, 2019
China talks are going very well – Trump, 12/7/2018
We’re getting into the final laps – Mnuchin, 4/29/19
US has come to substantial trade deal with China – Trump 10/11/19
We are coming down to the short strokes – Kudlow, 11/15/19
We have agreed to a very large Phase One Deal with China- Trump 12/13/19
We will begin negotiations on the Phase Two Deal immediately, – Trump 12/13/19
We felt that given a Phase One trade deal with China the market would react negatively. We will give ourselves a half a point for now as markets did not rally on the news. Over the last year there have been multiple saves of market moves lower by administration officials as noted above. Trump is savvy enough to again lead the markets with his promise that Phase Two starts immediately. The trade war is over. Long live the trade war and the ability to manipulate markets.
This might be a little too inside baseball but the tremors in the REPO market are concerning. The short version is that someone – probably a large bank or likely a hedge fund(s) are in trouble. Perhaps, they have gotten a little too far out over their skis. It is our speculation that the current rules have banks backing away from their support in the REPO market and hedge funds have plugged the gap – and with leverage.
We know from history that given the opportunity and incentive investors will begin to pile on leverage. The REPO problem right now represents a failure in the system. This puts the system itself at risk. At its core finance is a game of confidence. If you have no confidence in a counter party you will not trade with them or lend to them. If no one will trade with them or lend to them they are out of business. That is what happened to Lehman Brothers.
The Fed is pushing money into the system at a rate equal to QE1 when there was a crisis at hand. This process was supposed to be easily reversible. It has proven to be anything but reversible. We cannot even hit the pause button without hurting markets. This problem has now become systemic. The problem is the Fed keeps fostering an environment where moral hazard persists. They keep bailing everyone out. It’s like a spoiled child. Eventually, the child will get into more trouble than you can bail them out of or we get a parent in the room who will eventually teach someone a lesson. The real danger here is that there is not nor does it appear that there will be, anytime soon, a parent in the room who says no. That leaves it up to fate. At some point we will reach the Minsky moment where markets collapse under their own weight.
Central bankers are planning on keeping the money spigot open in the first half of 2020 and that should help assets prices for the next few months. The big question is – will banks and investors lose confidence in the Federal Reserve’s ability to manage the system and levitate markets? The Fed’s money printing should continue to push asset prices higher as long as investors don’t lose confidence.
We continue to look at opportunities outside the United States as Europe and Japan seem to present much better value at this juncture. Gold is looking at resuming its rise and the US Dollar has hit a wall. We continue to be underweight equities but look to make changes in the underlying allocation. While we see markets rising with central bank easing we grow ever more cautious as valuations hit all time high levels here in the US.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.