Melt Up Redux

We got a great peak at what hedge fund legend Paul Tudor Jones is up to in an interview with CNBC last week. The publicity shy manager does not often give interviews and is most well known for calling the 1987 crash to the day. In his latest interview he is calling for a melt up in the markets as fiscal and monetary policy are creating too much stimulation for the economy. What may be great for the economy is not necessarily good for the market because, at some point, the Federal Reserve will have to put a clamp on the economy and inflation. But for now, that is not the case as Jones points out that rates are way too low for this point in the cycle while also having late cycle stimulative fiscal policy. He points to 1987, 1999 and 1989 Japan as analogous periods.

“we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up.”

I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the Fed to shut it off. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

Jones was asked what he sees occurring next in the markets. At first he expects a summer lull but then he expects fireworks in the third and fourth quarters of 2018.

I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you ask me to kind of think of some analogy, I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 1999 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

Here is a link to the full interview on CNBC if you have the time.

Crazy to the upside. We see the Federal Reserve as being behind the curve on rates. They will continue to raise rates slowly and consistently until something breaks. However, real rates are so low that they may be raising rates for some time as the economy (and inflation) roar. This could catch investors off guard as they lower the risk in their portfolios based on the Fed tightening. If markets continue to rise, in spite of the Fed tightening, this would force professional investors to chase the market as they chase performance. We called the melt up in stocks in the post Trump election period and then a 1987 style crash. Markets have adjusted to their new levels so a massive downside from here is increasingly out of the cards. Could we have another melt up in the post midterm election period? Jones is calling for one and we are starting to lean in that direction as well.

We have been telling you to keep an eye on Bitcoin as an indicator of risk. It was a tough week for bitcoin as it fell just over 15% from where we last marked it to a current level of $6475.We have been watching the $6777 level as an important level of support and that appears to have broken. Let’s see how it performs next week. As a reminder we are not trading bitcoin nor have much interest in it beyond using it as a temperature gauge for risk sentiment and how that may apply to the stock and bond markets. Bitcoin will begin to interest us when it falls 90% from its high of $19,200. Then we might take a look.

The S&P closed the week at 2779. Funny, that’s what we said last week. That’s right one of the biggest weeks of the year for the market with tons of market moving news and nothing happened. S&P consolidated its run from the last few weeks and that is healthy. The World Cup is on for the next month and that usually leads to some pretty quiet days. Europe will be dead quiet and then they go on vacation in August. Never short a dull market.  Happy Father’s Day Dad and to all of you dads out there!!

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.