Wednesday, August 1, 2018

"Why Markets Should Beware the Dog Days of August"

"Why Markets Should Beware the Dog Days of August"
by Brian Maher

"Today the calendar rolled to August... The “dog star” Sirius is prominent in the predawn sky. And the canine days of summer are upon us. In 'The Iliad,' Homer depicts the rise of Sirius as an omen of war… disaster… “a sign of evil that brings on the great fever for unfortunate mortals." Ancient Rome associated the dog star with catastrophe. The great fire of Rome erupted in A.D. 64 - on the very day Sirius rose.

What do the dog days of summer portend for markets in A.D. 2018?Today we direct our gaze heavenward and hunt for signs. At once we detect an ill star… Stretching back to 1950, we discover the Dow Jones has fallen an average 0.2% in August. And since 1987 - that annus horribilis - the index has turned in an average August loss of 1.1%. Thus August has been the Dow’s worst month for the past 30 years, says Jeff Hirsch, editor of the 'Stock Trader’s Almanac.'

But what about the S&;P? Another worrisome portent falls into view... Since 1945, the S&P has also lost 0.2% in August - on average. And when the S&P is negative in August, it is negative in grand style. Since 1980, when the index is negative for August, it drops an average 4.5% - its steepest decline for any month of the twelve. That according to data from 'LPL Financial.' The S&P, incidentally, began August in a shallow hole - down three points today.

Come now to the Nasdaq… Does August curse the Nasdaq as well? The record is plus and minus - for the past 45 years the index has eked an average 0.1% August gain. August remains, nonetheless, the Nasdaq’s second-worst month on the calendar. Only September - next month - rates worse.

In summary: August is often a lean month for the stock market. But what’s this we see - another sinister omen hung upon the stars? 2018 happens to be a year of midterm elections. And history is especially unkind to August in years of midterm elections. All three major indexes suffer measurably worse than in normal years.

'MarketWatch': The picture turns decisively more negative in years in which there are midterm elections, however. In such Augusts, the Nasdaq typically falls 1.8%, a far steeper decline than is seen in the other benchmarks. The Dow typically falls 0.7% in midterm Augusts (compared with a 0.2% drop otherwise) while the S&P is down 0.4% (compared with a negative 0.1% move).

Why do the stars frown most upon these Augusts? Goldman Sachs fastens upon the answer: "November midterms represent “yet another source of policy risk and volatility.” Markets average 12% volatility in average years, Goldman finds. But in midterm election years that figure swells to 15%. And this year’s midterm elections deviate far from custom.

Has the opposition party ever been so hot for the scalp of a sitting president? If Democrats retake the House in November, depend on it: They will proceed against Trump with every device of the political arts, aimed above the belt and below. Investigations. Subpoenas. Leaks. Hearings. Hearings into hearings. “What you'll have is absolute gridlock," bemoans House Speaker Paul Ryan, adding: "You'll have subpoenas, you'll have just the system shutting down." “Subpoenas would be flying from Capitol Hill toward the White House as fast as they can print them out,” affirms Democratic strategist Brad Bannon. “Democrats would put the pedal to the metal on the Russian investigation,” he adds - with understatement.

Then we come to impeachment itself. Maxine Waters has claimed that 70% of Democrats wish to impeach President Trump. Impeachment proceedings begin in the House. The possibility of impeachment, therefore, cannot be dismissed if Democrats seize the chamber. But the House can only initiate impeachment. The Senate votes to convict.

If Republicans maintain Senate control this election, we can only conclude Trump’s position is secure. What do the oddsmakers currently prognosticate? Democrats stand a roughly 70% chance of winning the House. But a less than 40% chance of collaring the Senate. Of course, 40% is not 30%... is not 20%... is not 10%... is far from 0%. The upcoming show promises to a circus in a dozen rings, incomparably grand theater.

But November is three months distant. In the meantime. Let us hope markets can withstand the dog days of August, for their history is cruel. In what way is Trump similar to Richard Nixon? Below, Nomi Prins shows you the answer. Hint: it has to do with the Federal Reserve. Read on."
"Trump Takes a Page From Nixon’s Playbook"
By Nomi Prins

"Historically, presidents have refrained from publicly commenting on the Federal Reserve’s policy. This allows the Fed to maintain its veneer of independence. However, it is clear that this White House is very different. President Trump is not one to keep his opinions quiet. Trump has publicly expressed frustration with the Fed, believing its rate hikes could negate the impact of the tax cuts impact growth.

During a recent interview with CNBC Squawk Box host, Joe Kernen, Trump said, “I’m not thrilled” about the rate hikes. Why not? The president continued: "Because we go up and every time you go up they want to raise rates again. I don't really - I am not happy about it. I don’t like all of this work that we’re putting into the economy and then I see rates going up."

As further indication of how different Trump is from previous presidents, he added these remarks about commenting on Fed policy: "Now I’m just saying the same thing that I would have said as a private citizen. So somebody would say, ‘Oh, maybe you shouldn’t say that as president.' I couldn’t care less what they say, because my views haven’t changed."

Stocks, markets and the dollar fell on his remarks. Sticking with tradition, the Fed did not comment on them. But here’s what Powell has on his mind: As geopolitical tensions rise, trade wars mount, currency wars spawn and volatility continues to build, it’s clear the economy faces increasing pressure that could spiral into recession or worse. Powell met with senior officials at the Fed recently to consider monetary policy in the wake of Trump’s comments (and though he didn’t say it, the markets). After the interview aired, the White House issued a statement in which it “emphasized that Trump did not mean to influence the Fed’s decision-making process.”

But that’s just typical spin. While Powell wants to portray his independence, the fact remains he was still appointed by Trump. That’s political influence in the making. President Trump’s indirect pressuring of the Federal Reserve not to raise rates is not unprecedented. He took a page out of another Republican president’s playbook – Richard Nixon. When the Fed began raising interest rates during Nixon’s term, he also raised objections, although not in public like the current president.

Back then, the U.S. had been in the throes of a recession in the beginning of the 1970s. The Fed had cut rates by half to stimulate the economy. There was no quantitative easing (QE) program during that period. That’s because it wasn’t a banking crisis preceding that recession, so the level of Fed support wasn’t anywhere near as expansive as it has been this past decade. Fed Chairman Arthur Burns believed that “awful problems” could occur if the Fed didn’t raise rates in tandem with the growing economy. On a somewhat lesser scale, that’s the position of Jerome Powell today. He wants to head off what he perceives as inflationary pressures before they jeopardize the current recovery. He doesn’t want to play catch-up and have to drastically reverse course down the road.

But Nixon didn’t want to risk cooling it off before his 1972 election. As White House audio tapes recorded, Nixon told Burns on March 19, 1971, “We’ve really got to think of goosing it… late summer and fall of this year and next year.” Subsequent conversations led to a reversal of rate hikes during the fall of 1971. But importantly, what President Trump should know is that Nixon’s intervention into the Fed’s policies didn’t end well. Burns’ reversal inevitably led to one of the highest inflationary periods in U.S. history. And of course the term “stagflation” entered the language during the ‘70s, with their high inflation and limited growth. I remember the gas lines very well.

But the fact is, we live in different times now. America was just beginning to move off the gold standard in those days, so the spending restraints it engendered still exerted force. And even with the Vietnam War and the recently initiated Great Society to pay for, the U.S. debt-to-GDP ratio was only about 35% in 1971. It’s now about 105%. The last vestiges of the gold standard are long gone. Most importantly, it was a time before central banks had so much influence over markets. Central banks like the Fed were fixated on macroeconomic stability, not the performance of the stock market.

We live in a completely new monetary and fiscal world today, especially after the 2008 financial crisis. The Fed’s balance book went from about $800 billion pre-crisis to a gargantuan $4.5 trillion. That type of move was completely unprecedented. Now the Fed is raising interest rates and reducing its balance sheet in order to return to “normal.” So far, the Fed has raised rates seven times since December 2015. Under Jerome Powell, it has raised rates twice.

Now, the Fed forecasts another two rate hikes by the end of the year, once in September and then December. While it’s likely the second one is much lower than the first, the fact is that both are in play. Markets are currently wondering if there will be a “Powell put.” During Alan Greenspan’s reign at the Federal Reserve, a phenomenon dubbed the “Greenspan put” prevailed. Wall Street’s expectation was that if the stock market wobbled, the Fed would save the day by cutting rates (creating money and the need for speculators to then get returns from the stock rather than the bond market).

The Fed has largely played by a similar “put” playbook for the past decade, with low rates and a $4.5 trillion book of assets courtesy of QE. The mainstream media is slow to recognize this. Only now are they beginning to wonder whether the Fed will do what’s needed to lift the markets when it becomes necessary.

But, as a recent Bloomberg suggests, Powell is facing the same pressure to have his own put, “except this time it would be tied to the bond market.” Now, policy makers are increasingly concerned about the possibility of an inverted yield curve - where short-term rates are higher than long-term ones. If that happens, policy makers and Wall Street would want the Fed to cut rates. An inverted yield curve is probably the most reliable recession indicator out there, with a proven record going back to the 1950s.

The other dynamic at hand is that winning trade wars requires a weaker dollar and a slower pace of rate hikes. That’s exactly what Powell alluded to in recent testimony before Congress. If Powell adheres to Trump’s wishes, it’ll be because the economy isn’t growing as fast as predicted and because banks remain addicted to cheap central bank credit, which I refer to as dark money. That means more central bank credit to support markets when they hit a rough patch.

The market will continue to enjoy an upside from dark money policy that continues the status quo. Dark money could remain on course until the end of year, which would lift non-trade war associated stocks and weaken the dollar. The bubble will eventually burst, but I don’t foresee that happening just yet. The bottom line is, dark money is the key to understanding today’s rigged and artificial markets."

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