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Fed Gets The Accounts Out Of Line…Mr. Margin Gets Them In Line

September 21, 2016

Signs of The Times

"Russia, Saudi Arabia Pledge to Stabilize Oil Output"

– FuelFix, September 5.

"Opinion: 'Helicopter Money' May Give Fed the Inflation it Wants"

– MarketWatch, September 6.

"An OPEC Production Freeze Could See Oil Prices Rise to $60"

–, September 6.

"NYC Luxury Real Estate Weakness Spreading As Lower Pricing Tiers Tank"

– Zero Hedge, September 7.

"Libor's Reaching Point of Pain for Companies with Big Debt Loads"

– Bloomberg, September 13.

"China's Debt Soars into Space"

"Astronomical Credit Binge Exceeds 2009"

– Wall Street Journal, September 13.


This week's harvest of headlines records a lot of hope in the crude oil markets as well as remarkably reckless borrowing. Matched, of course, by the equivalent in lending.

All without a regard for how the debt will be serviced. Financial history is at the point where the real power shifts from the Federal Reserve System to Mister Margin. It has many times since 1913 and since the advent of reckless central banking the roles of each side have become very distinct.

The Fed's ambition is to get the accounts fully leveraged or "out of line". This has been impressive. Mr. Margin's job description is to get the accounts "in line" and that will be done.

It could take until November.

Stock Markets

Market dynamics have been outstanding. Outstanding in setting a series of important tops, perhaps adding up to "Peak" for the senior indexes and a big "Rounding Rebound" for the broad market.

Our case has been is that central bank equity buying had to focus upon the big stocks— the "Nifty 500".

With so many central banks buying the popular trades, Long Term Capital Management (LTCM) comes to mind. It was in 1998 and LTCM had an outstanding reputation in theoretical pricing of options. So outstanding, that senior central banks made direct loans to the highly leveraged fund. The Bank of Italy did this and took an equity position as well.

The wager was that with the European Union, credit spreads would narrow. That was the theory. We pointed out that even with the serious discipline of a gold standard spreads did not narrow to a common level.

On a natural turn to widening that summer LTCM was suddenly and irrevocably offside. It lost $4.6 billion in less than four months.

The fund collapsed to effectively less than zero and the distress amongst the central banking community was palpable. This added to the overall panic.

Now there are many central banks that are very long, as we note, the popular trades, including equities.

"Come on in – all the lemmings are doing it!"

In 2000 and 2007, the Street stayed long because the Fed would "cut rates". This is not an option now, so the equivalent mojo is that central banks will "buy more assets".

Rather an interesting evolution of the "Greater Fool" theory.

As with previous market peaks, credit strains are becoming visible and are forcing stock markets down.

How far?

It will take a cyclical bear to clear the financial excesses.

The hot leading sectors accomplished speculative excesses that were noted as they occurred.

The action in Utilities (XLU) climaxed in early July. Base and Precious Metal Miners (XME and HUI) at the end of July. All three are breaking down.

Over in the financials, last week we noted that the action in XLF has registered an Upside Exhaustion as well as a Sequential Sell. Enough technical excess to call for another "Widows & Orphans Short". The last one was in July last year and mainly based upon the action in Wells Fargo.

BKX fell from 80 to 53 in February and has rallied up to 72. The recent technical readings are more comprehensive than last year's.

Transports did not confirm the Dow high and have slipped below the 50-Day moving average at 7854. Now at 7771, through the 200-Day at 7624 would turn the chart down. On the broad market, the NYA did not set new highs and we have been watching the 20- Week ema. This is at 10568 and with the index at 10505 today, the break is significant. The equity wager now is not on a "Fed cut", but that central bank promises to buy assets will be effective.


Once again it is time to review the theory that currency depreciation is the mojo for economic growth. And when that theory is faltering depreciation becomes the preventer of bad things.

Of course, veteran traders have never really gone along with this.

The most glaring thing out there is that the theory has never worked. Now it is becoming more apparent.

The question has always been. When do the Federales learn to doubt?

The next dollar rally may instruct.

Since the first of August, the DX has been in a trading range between 94 and 96.25. The last low was last week at 94.39. At 95.50 now, there is resistance at the 96 level which is between the 50 and 200-Day moving averages.

Technically, the DX needs to get above the 20-Week ema to start the rise. This would be similar to the "launch" in July 2014.

It got slightly above last week and the ema is at 95.61.

Hedge Fund Redemptions

International Treasury Bond Index

  • Sequential Sells were generated going into the top.
  • That was on the 9 and 13-Week readings.
  • The 20-Week ema governed the corrections on the way down into late 2015.
  • The same ema governed on the way up.
  • Taking it out will formally turn the global treasury market down.

Listen to the Bob Hoye Podcast every Friday afternoon at

Bob Hoye is the chief financial strategist of Institutional Advisers.

With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.
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