Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

MACRO

MONETARY & FISCAL POLICY

 

TOO MANY TO SAVE?

The current market mentality is that the massive and unprecedented Monetary & Fiscal intervention measures are going to work. Many investors firmly believe in the proven market adage of: “Don’t Fight the Fed!”. It worked (on the surface) during the 2008 Financial Crisis didn’t it? 
 
The problem during the last Financial Crisis was a specific sector (Mortgage Market) cascading into a Banking Crisis where the bailout issues were about players being “Too Big To Fail”. Today the problem is not yet the banks but rather the bailout issues encompassing almost every business sector both domestically and globally. This crisis started as a Health Crisis but has now impacted the Financial, Economic and Political spheres on a Global Basis. 
 
The problem will soon be recognized this time as being about “Too Many To Save”! 
  • SMART MONEY: While everyone is demanding “Bailouts”, the Smart Money is “Bailing”!  Smart Money and Institutions are quickly realizing that “Bailing” only works for certain size boats. No competent Captain would command the crew and passengers to begin “Bailing” in an attempt to try to arrest the ‘Titanic’ from sinking?
  • Who isn’t asking for a Bailout, Loan, Debt Forgiveness or some form of Government assistance? Are governments actually capable of supplying this level of relief without destroying a fragile and unbalanced global financial system? 
  • What are the longer term consequences of attempting or succeeding in meeting the expectations and demands of society?
  • MONETARY POLICY: Is attempting through a litany of ‘Facilities’ employed during the last Financial Crisis, along with never previously used policy initiative for DOLLAR SWAPS, BOND BUYING and OUTRIGHT LENDING to keep markets liquid and prevent insolvencies from occurring.  Corporate Bonds of both IG and HY, Small Business Loans, Currency Swaps to almost all Global Banks are just some areas of the expanding reach of the Federal Reserve, in a doubling of its Balance Sheet.  These are discussed in this months UnderTheLens Video 
  • FISCAL POLICY: Nearly $3 Trillion of Fiscal spending is presently being distributed in some amount (without repayment clauses) to almost every Citizen and Business in America. 
CLASSIC MODEL OF THE STAGES OF A  BUBBLE
 
A Bull Trap may likely be the consequence of a failed initial attempt by Monetary & Fiscal Policy to stop the financial fallout from the CoronaVirus triggered market crash. The size of bailouts required on a global basis will soon become evident and the markets will react accordingly.
 

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S&P 500 MODEL OF THE STAGES OF A  BUBBLE
 
 
POTENTIAL “BULL TRAP”
 
In a recent Newsletter we pointed out that 5 stocks referred to as the FANGS are solely driving the equity markets. Microsoft, Google, Amazon, Apple and Facebook as a group have achieved their historic high again, while the overall S&P 500 is trading at its 50 DMA and noticeably below its 200 DMA. Even at these lower levels for the S&P 500 it is taking a Forward Earnings PE in excess of 20 to maintain this level! At the markets peak earlier this years forward PE’s approached but were not as high.  
  • There is certainly no guarantee, based on the amount of liquidity currently being pumped into the system by central banks and government deficit spending, that market can’t be manipulated higher. However, an almost total collapse in Employment, Earnings and GDP Globally doesn’t bode well for equities going forward.
  • Market Momentum is decreasing, while lending standards are tightening, credit ratings are being slashed, bankruptcies and business distress incidents are increasing. It is becoming increasingly evident that the process of getting economies back to work is going to take longer and be more phased than originally anticipated.
  •  As the Weekly S&P 500 chart below shows, the 20 WMA is about to cross the 40 WMA to the downside as price attempts to reach the longer term 80 WMA. 
  • The 200 DMA and 80 WMA appear to be strong indicators of overhead resistance. The degree of massive relief and liquidity injections undertaken should be showing stronger results according to our analysis.
  • Economies around the world are not taking as aggressive actions as the US. With companies today typically depending on more than 50% of their revenues being generated from International operations it raises questions as to whether the US efforts will be sufficient.
  • The problem may well be far larger than sovereign budgets and currencies can surmount. As we have pointed out in prior videos we worry about a $600 Trillion Interest and Currency SWAP market now in disarray due to the historic Oil debacle. 
  • The question is whether the global GDP approximating only $80T is actually sufficient to handle the severe disruptions occurring in the unregulated, off-balance sheet, OTC Swap’s market???   
WEEKLY S&P 500 MOVING AVERAGES
 
 
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DAILY S&P 500 MOVING AVERAGES

 

 
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