WASHINGTON, Dec. 14, 2015 – Soon ‘twill be Christmas, but all through the house, not a creature is stirring, not even my spouse. Mrs. Maven is sleeping in this morning after spending half the night explaining to the Maven why neither he nor individual investors should commit suicide this week rather than enduring this week’s wretched tale of the trading tape. Or whatever its electronic equivalent is these days on Wall Street.
It’s going to be a hideous week this week, as Monday morning action has already proven. We won’t even try to give you a current read on the numbers, since they’re changing rapidly from green to red and back again in the blink of an eye. However, rest assured that at least as of 11 a.m. EST, the averages all very much want to go down. And down, and down, and down. Although we have yet to experience Friday’s negative excess.
But just wait. This week will witness the epic battle that will go down in history as “The War Against the Machines,” as ETF Digest’s Dave Fry explained in a proprietary column last week, which I’ll excerpt very briefly:
“In the [original Terminator] movie AI [artificial intelligence] advances allow for sophisticated robots and drones to dominate humans who lost control over them.”
Today’s Wall Street AI — read “High-Frequency Trading supercomputers” — will examine this week’s nasty headlines and take over the markets this week, very likely leaving any remaining investors with a lump of Obama-devalued coal in their sooty Christmas stockings.
Here’s a quick lowdown as to what’s going on:
- Oil remains under serious pressure, whether due to oversupply, price manipulation or both. Since oil and fuel-related stocks are a major portion of the indexes, that serious weakness drives the averages down so fast and hard that people (and machines) start dumping stocks no matter what sector they’re in.
- The Federal Reserve has been playing “Hamlet” longer than Shakespeare’s famous play has been available to the public, or so it seems. Where interest rates are concerned, the question is still “To raise or not to raise.” According to an A-section column this morning by the Wall Street Journal’s Jon Hilsenrath—the Fed’s unofficial public mouthpiece—the Fed is frozen in a state of virtual inaction. They will very likely raise interest rates ¼ of 1 percent Wednesday, or at least announce when they’re doing so. But apparently, the Fed’s not sure how long that will stick.
- The dilemma: While the Fed thinks (or imagines) that U.S. unemployment is sitting at a low 5 percent, there is absolutely zero evidence of any kind of inflation in the system, unless you check out the price of beef at the Safeway. As oil continues to plunge, so, too, do prices at the pump, although not nearly as rapidly, of course.
- Institutionally, the Fed remembers the lesson of 1937. Conveniently, after the 1936 elections were out of the way, the Fed at that time, misreading the numbers, decided at that time that the economy was finally looking up (which, feebly, it was) and figured it was time to raise rates. They did so in 1937 and, voilà! The U.S. was back in recession again in very short order. This seriously haunts many in the Fed, as those who don’t learn from history are doomed to repeat it, as we’ve often seen.
- But the Fed has also painted itself into a corner with “Hamlet” act, having stated its intentions since 2014 to raise rates and then backing off at the last second, a bit like Lucy pulling the football away from Charlie Brown as the hapless bald kid is in mid-kick. I.e., if the Fed backs off its latest “threat,” who’s going to believe them anymore, which is a serious moral hazard threat, not to mention perhaps permanently damaging the Fed’s credibility.
- Worse, even though the Fed fixates on that 5 percent unemployment rate (for the sake of the administration’s political situation, which any Fed will usually try to accommodate), they, and particularly Chair Janet Yellen know damn well that the real unemployment rate—the U-6 measure, which is generally not shared with the public—has remained stubbornly over 10.5 percent or so for ages.
- This, along with the Fed’s asset-support strategy, is precisely why the whole game has failed. Without getting at least half those 10.5 percent unemployed back to work, the U.S. economy is robbed not only of consumer power but also of the wide spectrum of taxes those consumers pay. Since the U.S., perhaps foolishly, has been based on consumer spending for God knows how long now, the relative absence of consumer dries up demand which has, ultimately, helped fuel commodity deflation; which means we have, essentially, no inflation. So why raise interest rates?
- Add to the oil mess and the Fed interest rate mess a frightening market phenomenon—an uncommonly and perhaps historically large options expiration trade on Thursday and Friday—and we have the makings of a nasty crash sometime this week. That scenario has been further enhanced by what threatens to be a serial collapse of junk bonds—bonds below investment grade—that are widely held since it’s been damned hard to generate income any other way in a zero-interest rate investment market.
In short, we’re getting a harmonic convergence of WTF moments, and the result might not be very pretty.
Today’s trading tips
We may revise these a bit later, but right now, here’s the deal. We ourselves have been trying to sell the most badly damaged stocks in our portfolio as the occasion warrants, though the occasion doesn’t want to accommodate us very much. We’re reluctant to do this, as markets are so oversold that an oversold bounce of substantial proportions could happen any moment now, as almost happened Monday morning.
That said, the irrational, outside threats to the market this week, including the imminent collapse of junk bonds in the energy sector, present a potential cosmic threat. Add this to the Fed dithering and the oil price collapse and, well, maybe it’s best to be cash-y for a while.
Travel at your own risk. But we would certainly not advise even our worst enemies to buy anything at all right now, even though some kind of oil price bounce could take place any second now. Problem is, that bounce, like everything else, is just too cosmically iffy right now, so it’s best to get out of the way of the HFT machines that are ready to pounce on what’s left of middle class wealth.