This Week in Barrons – 1-31-2016:
“I’m sorry my friend – you are toast!” … Lex Luther in BizarroWorld
Dear. Ms. Yellen:
Many years ago, a uber-comic book collector friend of mine told me of BizarroWorld. It’s a comic book place where all ‘Good was Bad’ and all ‘Bad was Good.’ Lately, I’m seeing more real life introductions of the ‘BizarroWorld’ behavior. For example:
- I recently read where the rules for transgenders playing sports in the Olympics are changing. It seems that ‘pre-operation’ men will be able to compete against females as long as they have acted like a woman and have taken hormone shots for a year. Really?
- Also, the mass influx of immigrants into Europe is causing a spike in crime, very little incarceration, and some major changes in thinking. A German report revealed that a record-breaking 38,000 ‘asylum seekers’ were accused of committing crimes in 2014. German authorities argue that their citizen's sudden interest in acquiring weapons has nothing to do with these statistics; however, there is an indisputable spike in migrant-associated rape, physical assault, stabbing, home invasion and burglary.
And since the focus in this country is about jobs, SF wrote to me pointing out that (over the next 10 years) it is estimated that robots will replace 50% of the American and British workforce. These machines are different, as they have the ability to replace both human hands and brains. Consider the replacement of:
- Cashiers – by a transaction oriented wearable device,
- Marketers – by robots that can mass-personalize every message,
- Customer Service Agents – by robots who can answer questions with the help of technology such as IBM’s Watson,
- Financial Middlemen – by robots who can execute ‘Blockchain’. Blockchain is Bitcoin’s computer program capable of automatically processing transactions and creating perfect, reliable digital records. This would replace most banking, insurance, escrow, and mortgage personnel.
- Journalists – the Associated Press already uses robots to produce hundreds of articles per week, and
- Lawyers (other than litigators) – where robots would perform all repeatable tasks.
These machines would be able to take over mid-skilled level jobs, leaving only the very low skilled or the very high skilled jobs for humans. Now, I understand that we in the U.S. have morphed away from being a manufacturing society into a service based model due to technology and inexpensive, off-shore labor. But the manufacturing countries of Germany and China are going to be greatly impacted.
And think of the upcoming college graduate – currently shouldered with (on average) $30,000 of tuition debt. One graph below shows the ‘underemployment rate’ for college graduates steadily increasing since 2002. The other shows wages for recent college graduates varying dramatically by discipline. The median early career wage for a computer engineer is $60,000 – with a corresponding ‘underemployment rate’ of 19%. While the median early career wage for a sociology major is $33,000 – with an ‘underemployment rate’ of 57%.
You can see BizarroWorld coming. A world over-run with robo cops, robot baristas, sociology majors who are forced to work asking ‘Do you want fries with that’, and not enough computer engineers to totally rethink all of the potential robotic, societal outcomes. I realize that BizarroWorld is strictly for comic book lovers. But I also realize that on more than one occasion – Art HAS imitated Life. To quote Lex Luther: “I’m sorry my friend, you are toast!”
“You can choose to ignore the math, but you can’t avoid it!” As if to add insult to injury with BizarroWorld, on Friday, the Bank of Japan (mimicking Denmark, Sweden and the ECB) cut their interest rate to minus 0.1%. It also added that it is prepared to push the rate even lower if needed. Basically, the move is telling depositors that they will be ‘charged’ to keep their money with the Bank of Japan. Correspondingly the U.S. market jumped 400 points on Friday – on hopes that our FED would delay their upcoming interest rate hikes. Unfortunately, as much as I would love to embrace the headlines - the underlying currents of math and fundamentals move effortlessly forward and eventually the day will come when you just can’t ignore them anymore. Are we there yet, probably not. But it’s ONLY time we’re buying, as we are not changing any fundamental, economic realities.
- December durable goods orders fell over 5%,
- The Dallas FED reported a negative 34.6 growth number – even lower than last month’s negative 21,
- 4th quarter GDP fell to 0.7% (one tenth lower than expectations),
- Richard Fisher (the X-Dallas FED chair) is out saying that the inflation models the FED is focused on could be WRONG,
- California home prices fell for the 2nd straight month,
- The Baltic Dry Index set another record low,
- Apple reported SLOWING sales growth,
- Two Italian banks were halted from trading due to a limit down exception,
- And other than Facebook’s earnings this past week – the best argument you can make thus far about earnings is one supporting ‘stagnation’ as opposed to ‘growth’.
Japan’s NIRP (Negative Interest Rate Policy) caught everyone by surprise – because just last week Japan’s Kuroda publicly stated (on Reuters) that they were not thinking about negative interest rates. The overall effect of course was that asset prices around the world jumped higher. But is cutting rates to negative, really a reason for stocks to move higher? Not really. Negative interest rates are completely unnatural, and will hurt the Japanese citizens. In fact, it will tend to create capital flight, as people refuse to put money in their local banks. AND it will cause the Yen to fall, and (after all) this is a currency war. Japan wants the Yen to fall to boost exports. That's fine, but what do you think China is going to do? The race to the bottom is in full bloom.
Make no mistake, the outcome of this is NOT good. All across the globe nations are desperate to do anything they can to avoid depression, and if that means abusing their currency to screw your neighbor – well, so be it. This is a desperation move where we don't know the ultimate results because it has never been done before. I suspect history will not look kindly upon it.
I often laugh, because any time I tell someone that I’m a ‘gold bug’ they laugh at me. They tell me that gold is a relic, it gives me no return, and it just sort of sits there. Yeah, well right now an ounce of gold returning zero has a better Return on Investment than bonds in Sweden, Denmark, Switzerland, Japan and the ECB. All of THEM charge you to own their lousy paper.
Anyway, Japan’s Yen did fall against other currencies. That makes their exports more attractive; however, it makes the dollar even stronger against the Yen. Wall Street is thinking that Japan's move will put our FED’s rate hike decisions on hold. In fact, some were thinking that the FED may take back their December increase.
Are they right? Don't bet on it. The MOST that will happen is that the FED may reduce the number of scheduled hikes. Originally they said there would be 4 rate hikes this year. I actually thought that 4 was a bit much – simply because it is an election year, and that takes the ‘end of the year’ out of the equation.
But nothing was going to stop Friday's rally as often the largest ‘up-days’ come in oversold bear markets. Friday was one of those vicious snap back rallies that take your breath away. This is NOT the start of a new leg higher in a bull market, but rather a powerful bounce in a market staring into the face of a Global recession. The only question is, how high does it go?
We ended Friday right at resistance on the S&P. For example, we closed on Jan 12 at 1938 – opened the next day at 1940 and fell like a rock. Last Friday we closed at 1940. We could test some intra day highs at 1950, but after that it would be a struggle to get to 1988. But I suspect Friday was a bit too much, and I'm looking for a bit of selling on Monday. If that happens, it will be very interesting to see how far the slide goes. If the slide can NOT hold the 1921 level, then I would expect to see us right back at 1900 on the S&P again soon.
- Remember: Congressman Hank Johnson (D) predicting that Guam would tip over if too many people were on it. https://youtu.be/cesSRfXqS1Q
- If you ONLY bought the S&P on the night before a two-day Fed meeting, and then sold it the next day after the Fed's decision – you would realize 60% of the S&P's upward movement for a whole year.
INDU 16,000 Selling pressure resumes, and a drop to 15,600 is in the cards. Replace long-term investing with hedging and trading.
NDX 4100 Should assume it’s slow grind downward thanks to Apple and Amazon.
SPX 1900 We could get a dead cat bounce and hit 1950 or even 2000. The rally is short-lived due it being based on Fed action and not fundamentals.
RUT 1000 It was July of 2013 that we last saw the broad based index this low. The Russell has no ‘safe-guards’ and is the most pure form of order flow into the general equity markets. Currently the outflows have stopped and we are seeing consolidation. Use the Russell to gauge how best to move forward.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
- Long an oil supplier: REN @ $0.56, and
- Sold SPX – Mar – Call Credit Spread – 2025 / 2030.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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