Start of March the love affair between USDJPY and WTI have departed from US Equities. Why does this matter? USDJPY/ YEN provide liquidity to US Markets in the form of FX Carries. WTI strong correlation is due to thinking- “if oil goes up the industry is getting better”.
FX Carry & Liquidity
We examined 2 popular FX Carries YEN and EURO.Recently, USD as had advancement arrested primary due to the collusion of central banks during the Shanghi Accord. The unintended consequences of a central bank agreeing to such pacts was an appreciation of their at a time where most central banks are easing. YEN and EURO FX carries add tremendous liquidity to global markets. We are now seeing an unwind in such carries due to appreciation. Here is a comparison of SPX liquidity and the 2 popular FX carries.
Snap Shot of Auto Industry
The Auto Industry was never cleared of excess in the prior recession, but merely bailed out. The FED, along with the gov’t used a form of helicopter drop called cash for clunker in 2009. This program was to clear used cars from the total population, and force citizens to buy new. We see the spike in the 2009, which generated the baseline growth for the bull cycle. Coming into question is the sudden drop off of sales testing baseline growth. Either its a hard lead-in or a major reversion in sales is upon us. Just recently, auto loans hit a 20YR high in unpaid subprime car loans.
Domestic auto producers cap out production at 2008 double top, as baseline growth for the bull cycle was violated to the downside after QE ended. Producers have bleak outlook??
Continued capped at 3.0 20 year ceiling
Total Vehicle Sales downside break of baseline growth
Consumers in retreat in total loan size
We’ve seen this before.
Yes, we have..
The Battle of the K Wave
K Waves in Commodities and Corporate Profits are attempting reversions to baseline growths present day. The baseline growth glide path was contributed by the FED in lowering the interest rate from 19% in the earlier 1980’s to present day Zero Lower Bound. The baseline growth was artificial in nature due to cheap monies. Fast forward today, and growth is anemic with a crashed commodity complex as the interest rate sits on the ZLB. Next attempt in spuring growth was NIRP. The ECB and BOJ have been experimenting with such policies to only find unintended consequences much different from academia.
Yellen entered the US Economy into a tightening cycle mimicking the dual mandate of 1999/2000 FED of the Dotcom era. She’s preparing the US Economy for a mean reversion via reduced inflation and unemployment before the economic shock. Cracks in the system are already evident as an earnings recession is nearing the 4th consecutive Q Y/Y, which would be the worst since the great recession. On the subject of earnings recession, the word recession means a deviation from a glide path, but reverts in an intermediate timeframe. This time around a much larger cycle known as a K wave could transition the earnings recession of current date into a more prolonged timeframe. We’re merely seeing signs of mean reversions. Prepare wisely.
What are K-Waves?
Corporate Profits vs. Interest Rates
Commodities vs. Interest Rates
Bubble Patrol: MCD
MCD total Revenue has violated baseline growth since the early 1990s. The market has built an elliot wave guide path with 3 up and 2 down. Currently, the 5th wave is in construction with total revenue negative diverging breaking multi decade ascending baseline. The $20 billion stock buyback program is perhaps whats giving this dying breed its last final breadths. Our unfair high ceiling is to be called at 1.272-1.618 extensions. Time vs. Price cannot be maintained and we expect the 5th wave to be completed before 2021 to then start the great migration to 1/1. MCD has to innovate otherwise other food trends will come and go taking market share away from this giant, but there is a silver lining. American’s are getting poorer and the middle class is falling apart. Welcome to America’s Restaurant feeding the poor and perhaps the middle class due in partly to the FED, and their policies which have destroyed financial markets.
Google Keyword: Earnings Recession
The dissemination glide path of generating a narrative in a developing pattern, as depicted below in a SYM triangle. Then comes the distribution phase of such narratives to ripple through the audience.
Then distributed to the masses
How it works on an S curve