The Never-Ending Story

Despite all the rhetoric, the political class is not in control. They are just the “front” for the true masters of the universe; big money. Money directly installs the politicians (of both stripes), so who’s best interest are they going to look after? It is a laughable illusion that there is a “one man, one vote” system; it is “one dollar, one vote”. No, the political class is not in control, they are merely the enactors of the laws that benefit their benefactors.

We have been fed the virtues of trickle-down economics for 35-years and still, despite all the evidence to the contrary, we continue to swallow this BS. Why? Because it benefits the class that owns the law makers and we are too dim-witted, or intellectually lazy to understand that we are being manipulated to go against our own best interest.

Politicians receive criticism (mostly fair) from all sides, but especially from “average Joe the plumber” salt-of-the-earth types who have stopped voting because of their frustration. The Donald tapped into this and used the fact that he had no experience in politics to cast himself as “not a politician” and not part of the establishment. He also made repeated noises about not being beholden to big money because he had his own money. Of course, there is a certain level of truth to this, but that is what makes it dangerous.

Average Joe’s dislike of politicians comes partly (or mostly) from the belief that politicians lie and are beholden to the moneyed class. That, of course, is reasonable. What isn’t reasonable, is the assumption that because the Donald has no experience in politics and has his own money, he doesn’t lie and isn’t beholden to money. As we now know, his political inexperience in no-way impedes his ability to lie, and he is so beholden to his family’s money that many of his political moves make sense only when viewed through this lens (he did not put tariffs on textiles from China because his daughter’s business involves textiles sales in China).

Some of you might recall New York city in 1975. The city was broke, and the banks, smelling blood, conspired not to bid on the city’s bonds, forcing the elected politicians to relinquish administrative control of the city to the banks themselves, in order to stave off bankruptcy. The banks then enacted austerity on the city (remember they were not elected), firing police, teachers, fire fighters and other municipal workers, accusing the unions of being greedy, while they themselves went home with tens of millions of dollars that the austerity provided. There wasn’t even a pretense of who was in control.

Meanwhile, the Donald, who was still making money the same old way his father had, by building housing using municipal grants (and skimming the grants, like his father did, who was investigated by a U.S. Senate committee for wartime profiteering in 1954), realized that the city no longer had any grant money for him to use. He also realized that the city was “over a barrel”, so to speak, making it possible for him to purchase great swaths of land and building projects, for peanuts. The peanuts, by-the-way, came from the very bankers who had just extorted the municipal workers. And everybody lived happily ever-after. The end.

No, just kidding, it isn’t the end. The Donald got himself installed to the top position where he could do many, many “wonderful things” with simply his signature. Who benefits from all these wonderful things? That’s right, the Trump family first and foremost. It’s the never-ending story. Nothing has changed.

Luckily, the market couldn’t care less, at least for now. However, if this trade war gets out of hand, then the sentiment may change along with the earnings reports, and suddenly we’ll find the market caring a lot.

Equities
Sentiment

The AAII survey made a big move to the bullish side (table below).

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The CNN Fear & Greed Index has risen to neutral which is expected as the recovery proceeds.

Higher average bull sentiment is what we saw in 2000 as the market worked its way through the late-stage rally R4 (chart below).

Today, a similar pattern continues to develop with the bull sentiment rising as the SPX rallies (chart below).

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The put-to-call ratio has turned down to form an up-spike in the 8-week MA which always results in a rally (chart below).

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Technical

The long-term technical picture continues to strengthen:

• The 8-month MA remains above the 12-month MA.
• The RSI is rising.
• The S&P 500 has bounced off the 8-month MA.
• The MACD continues to avoid a bear cross-over.
• The ADX +DI has started to turn back up, and the -DI has started to turn back down.
• The stochastic has turned up.

This pattern is similar to what happened during the 1998–2000 trading period (pink rectangles on the chart below). The only worry we have is that the ADX trend strength (black curve) has reached the down-sloping trend-line (dashed blue-line) which has acted as a turning point for the trend strength in the past. This indicator can, however, continue to rise above the blue dashed-line like it did in 1998 (chart below).

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Fundamentals
The earnings continue to come in strong and the business cycle continues to expand. The tariff-war that Trump is insisting on seems to be ignored by the market at the moment, but if it continues, it could provide the excuse for the next downturn when the market sentiment is ready. For now, it seems to be providing the necessary fear to keep the bull market charging. Ironically, the tariff-war may be fueling this late-stage bull.

The 10-year minus the 2-year Treasury rate differential continues to march lower at a constant slope. At this pace, inversion would happen before the end of the year. Inversions lead recessions by between 6-and-18-months, making the earliest likely start date for a bear market Spring of 2019 (chart below).

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Gold

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Fundamentally, gold continues to trade inversely to the USD and the USD/JPY FOREX pairing. The latter is over-extended, but it can remain in that state for some time, so more downside is still possible (chart below).

The dollar is key. If the dollar continues to strengthen, gold can continue to drop (chart below).

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