If You Give Investors a Cookie…

mouseIf you give a mouse a cookie, he’s going to ask for a glass of milk. When you give him the milk, he’ll probably ask you for a straw. When he’s finished, he’ll ask you for a napkin. Then he’ll want to look in a mirror to make sure he doesn’t have a milk mustache.”

And, the familiar children’s classic goes on from there – one amusing unintended consequence after another.

One parallel in the investment world is oil.  If you ramp up oil futures in order to convince investors that demand and profitability are coming back, you run the risk of those higher prices showing up in some unfortunate places — such as PPI.

And, if PPI rises, say, the most in three years, investors will come to fear higher interest rates from central banks.  And, if they fear higher interest rates, they’ll start dumping bonds — which are bid up to impossibly high levels by those same central banks. If investors start dumping bonds, you will get those higher interest rates of which they were afraid.

If governments can’t sell bonds at 0-2%, then their budgets — which have been balanced on the back of zero interest rate policy — go belly up.  And, if government budgets go belly up, we might just have a financial crisis that spirals out of control.

Wouldn’t that be an amusing unintended consequence?

Crude light is up 37% since its March lows — largely to mask the fact that the all-important yen carry trade is faltering.

2015-06-12 CL v ES daily 0630The yen carry trade is faltering because the yen basically squatted at 120 for over 5 months.  USDJPY finally broke out at the end of May, only to be talked back down two days ago by Kuroda himself [see: Did Kuroda Just Kill the Bull Market?]

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come.”

2015-06-12 USDJPY v SPX daily 0630In a “market” that has thrived on zero interest rates, investor complacency and central bank manipulation, we have to wonder how much longer the free lunch can last?

Yesterday, SPX slightly overshot our upside target (2112, later revised to 2115 in the member section.)  Our downside targets remain in place.  But, watch out for those Greece rumors, which can send prices soaring or plunging regardless of their veracity.

continued for members


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