WASHINGTON, Dec. 9, 2015 – We’re posting our column late today, given our utter inability to parse Wednesday’s bizarre market action. After a healthy initial rally, led by a kick upwards in the price of crude oil, oil suddenly resumed its slide and most of the market tanked along with it.
Obviously, markets are increasingly fearful that the oil glut, which long ago spread to nearly all commodities, has been leading to a deflationary spiral in this area, the bottom of which has not yet been discerned.
But at the same time, financials—mostly banks and insurance companies—were also taking it in the ear, this despite traders’ virtual certainty that the U.S. Federal Reserve will announce a hike in interest rates next week, albeit a barely discernable one. Up to about a week ago, financials seemed ready to party hearty as an eventually normalized interest rate environment will lead to greater lending activities and profitability for these interest-rate-needy companies.
Likewise, utilities in particular, along with REITs, are also sustaining serious damage, something that usually happens only when capital gains seem to be the way for investors to go, not stability of yield. That’s another mystery as, increasingly, no one but the short-sellers is making any money at all.
It occurs to use that “they”—those mysterious, rich investors and firms with an inside track on government thinking—know something very important that we don’t know. And here’s what the Prudent Man thinks it is.
For the last several weeks, weird rumors have been spreading that a fearful Fed—wanting and needing to start raising interest rates to achieve normalcy—actually knows we’re trapped in a deflationary spiral. And—so the rumor goes—the Fed has decided on a novel approach: the nation’s central bank plans to simultaneously raise interest rates a fraction; but at the same time, the bankers plan to initiate another round of QE. In other words, while raising interest rates, they’re going to restart the monetary printing presses again.
If this really transpires, it would be an astonishing development. And we’re hard-pressed to know why the feds think this strategy will work. If this alleged QE is like all the other QEs, traders will go back to bidding markets up based on thin air, while companies will go back to buying back their own shares with the free money, lowering their PE ratios, “enhancing shareholder” (and corporate insider) value, and making zero investments in the future. Salaries for the worker bees will continue to stagnate, as will employment figures, and all will remain the same in the unreal Wonderland we’ve been inhabiting since circa 2009.
Whether the rumor is true or not, look at the evidence in the markets. Commodities and materials continue to sink because nobody is growing and nobody wants them. The dollar, which has been on a tear for much of 2015, helping to depress oil prices which are dollar-denominated, have suddenly been crushed by the euro over the last few days, closing today at around $1.10 after sinking as low as $1.04 and change just last week. And financials, which briefly caught a fierce bid early this month, have begun to stage a slow but massive retreat.
Except for oil, which is actually influenced more by the current Saudi-generated glut than it is by the dollar, the remaining indicators strongly suggest that big investors, hedge funds and HFTs are strongly getting on board with the notion that interest rate hike plus QE is what the Fed will announce next week.
Hence, the mass liquidation we’ve seen in utilities and REITs, the resumption of dumping in the financials, and the sudden weakness of the dollar, even in the face of the eurozone’s own ongoing QE game, which was designed, remember, to weaken their common currency.
So why did the “sinking” euro suddenly gain six whole cents on the dollar in just a few trading days? For those who follow currencies, that’s a huge move over such a short period of time. It’s clear that “they” either think they know or actually do know that the Fed has a new interest rate hike plus QE card to play next week and are adjusting portfolios accordingly.
On top of all this, U.S. markets are now so oversold that we can expect a short squeeze to occur at any moment.
For now, we have to forget the DOA Santa Claus Rally. What we are looking for instead over the next week to 10 days is more akin to the scariest roller coaster ride the financial world has ever seen.