Lines In The Sand

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by: Mark J. Grant

I calculate things in my own fashion. If you are a long time reader of my commentary, "Out of the Box," you may say, "Yes, Mark, we know that." I do not like depending upon others to reach conclusions. I do the work myself.

In terms of Treasury yields, I think the support/resistance lines for the 10 year are 2.03% and then 2.16% and finally 2.32% and that is how I am playing them. We are wavering at 2.16% now and I have gotten cautious. We may break this level and it is something to note. I do not see any major correction, however, and the 2.32% level is one we have seen a number of times before.

For those of you that use "Dynamic Hedging," where you increase your hedges as we approach, or go through, the support/resistance lines, it is time to pay attention. The odds now, given the volume data provided by Bloomberg, are somewhat positive that the 2.16% line may be broken. Something to keep your eye on these days.

I smiled, yesterday, when I heard Mr. Mnuchin's comments concerning the new sanctions on North Korea.

I think we have absolutely moved the needle on China. I think what they agreed to yesterday was historic. I'd also say I put sanctions on a major Chinese bank. That's the first time that's ever been done. And if China doesn't follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system. And that's quite meaningful.

SWIFT is our Dollar system for monetary transfers and the digital backbone of international payments. The dollar, I contend, is light years ahead of the yuan for global use as the transparency, national manipulation and intervention, and the two tiered system for the Chinese currency, which could be re-set at any time by the Chinese government, has no counterpart for the American currency.

Now China, I am quite sure, would scramble to introduce their own monetary transfer system. There is no doubt in my mind about that. However, I believe, that it would be problematical for them as they alter their yuan policy with great frequency, which would cause unexpected price changes in the costs of goods and services. I think SWIFT would easily hold sway and so this particular sanction, if applied to China, would cause great disarray in international trade.

I bring this to your attention this morning because it could have a significant impact on Chinese bonds and equities that are generally traded. You now have to include the possibility of a significant U.S. response to China in your calculations. The "Risk is on" and you should be assessing your Chinese holdings now before our government changes the game.

Head's up!

There has been a lot of talk about what the Fed might do with interest rates. Recently, in my view, some of the Governors have begun to sound more dovish.

We just don't know at this point whether the inflation decline that we've seen is mostly being driven by transient, idiosyncratic factors, or whether it's something more secular, longer-term at play. My view is the jury's out, and I think the data over the next six months is going to be very, very important.

- New York Fed President William Dudley

The Fed Governors and the Press point to inflation and wages and GDP growth but I think the real emphasis might be on our two recent hurricanes. The cost of Harvey and Irma, in my opinion, is going to be quite significant and the favor that the Fed could do for our government's borrowing costs would be to stop projecting higher interest rates. There would be a very positive market reaction, I believe, and the costs of any related Treasury auctions would be lower, which would help the local municipalities as well.

Another "Line in the Sand," for me, is what the central banks are doing globally. They continue to add approximately $300 billion to their balance sheets every month. To consider the Fed, on a stand-alone basis, when making economic decisions is a mistake in my estimation. The Fed is just one, and not even the largest, any longer, in terms of assets, of the global central banks.

I do not see any "major" correction, for either equities or debt, until the central banks, in total, stop adding to their assets and I do not think that day is any time soon. You may have noticed, as I have, that there is a large amount of central bank blather but the reality of their actions is what I pay attention to, always. They say it is "transparency," I say it is "blather." Make your own decision.

All of the markets are driven by Capital and that is what is being provided by the central banks, globally. It is the money, and the creation of it, that moves both equities and debt far more and I mean "far more," than unemployment or the CPI or other pieces of data that float by us each and every day. I point out that even the GDP data is largely a result of what is being pumped into the monetary system by the world's central banks.

No one much watches the money but I do, and I advise you to do the same if you want to get it right.

I am happy to let them listen to the screeching, talk about inconsequential data, and fanaticize about dot plots. I'll watch the money and smile as they sink beneath me.

- The Wizard