Good morning.

With the this week’s jobs report revealing only 151,000 net jobs were created in in the month of August, stock traders interpreted the expectations shortfall as a green light to buy stocks.  At the close of Jackson Hole, overnight federal funds indicated the market assessed a 36% chance of a Fed rate hike in September.  At the close of Friday’s trade, the market assesses only a 22% chance of a rate hike.

On Friday, the DJIA, S&P500 and NASDAQ closed higher by 0.50%, 0.52% and 0.59%, respectively, with the DJIA and S&P 500 recovering from testing their respective 50-day moving averages, as the NASDAQ closing the closest to an all-time highs.  

After trading between 13 and 13.5 during the week, the disappointing jobs print for August released on Friday emboldened traders again, crashing the VIX on Friday by 1.5 points (-11.13%) back to a close below 12 points (11.98).  The close of 11.98 at the close of the week is the fifth of the past six weeks that the VIX has closed below 12 points.

The standout this was in the price of silver, which soared $0.62, or 3.31%, to close $19.37 per ounce, but failed to close above its 200-week moving average of $19.58.  The gold price was little changed.  

So, bad economic news continued to be good news for stocks.  Why?  Lower and lower interest rates are good for stocks.  If the Fed makes good on its threat to raise interest rates, a lot of market uncertainty suddenly enters into an environment of what has been a multi-year and implicit understanding between the Fed and the market.  

If real earnings are declining and easy money is going away, why would stock traders continue to buy stocks?  They wouldn’t; so the Fed has had to step in since 2008, providing carry trades, bank bailouts and lower and lower interest rates to support stocks.

But the Fed has reached a crossroad.  With interest rates so low and continual mediocre-to-poor job creation reported month after months at this late stage of the business cycle, how low can interest rates go?  Will the Fed be able to continue buttressing stock prices?  

Art Cashin of UBS discusses the Fed’s dilemma in an interview with King World News (KWN), with the audio recording at the bottom of the page.  I recommend listening to this 14 minute and 38 seconds interview:

Cashin said:

If you listen to the Fed and listen carefully to what they say, they’re talking about wanting to raise rates because they need room to cut rates when the next recession comes.  We’re pretty long-in-the-tooth here [in the economic cycle].

What has passed for as a recovery is dismally weak; so this is an Alice-and-Wonderland situation, where the Fed wants to raise rates in order to be able to cut them.

I feel Cashin’s interview with KWN is important to my readers, in that, you’ll be able to drown out the noise from financial media pundits, Fed shills and quacks parading on television to discuss the Fed.  Cashin explains the situation the Fed faces clearly.  So, let’s spend this week’s space with a context that may help you understand Cashin’s take on today’s market.

Full business cycles last approximately eight years (with 2016 as the year of the end of this cycle), with longer mega-cycles lasting approximately 56 years, or seven smaller business cycles within the large one.  A lot of scholarly work in economics demonstrates this particular phenomenon, first introduced by two Dutch economists, Jacob van Gelderen and Samuel de Wolff, in 1913.  But in 1939, Joseph Schumpeter, coined the term “Kondratiev Wave”, or “K-Wave” to name the cycle in honor of Soviet economist, Nikolai Kondratiev, who gained international recognition for his work regarding business cycles in 1925 with his book, The Major Economic Cycles.  So, this work is not new, but Kondratiev’s work aptly applies to today’s economy and stock market.

Kondratiev suggested in his book that the year, 1896, marked the beginning of a next K-Wave.  Adding 56 years takes us to 1952, in the midst of the Korean War and the beginning of Fed independence from the U.S. Treasury via the ‘1951 Accord’.  In 1952, the unencumbered art of manipulation of interest rates by the Fed began in earnest, as inflationary forces (double-digit consumer prices) and an urgent need to raise interest rates at that time (due to the high costs of WWII and the Korean War), compelled the Fed to seek and gain independence from the politically-minded U.S. Treasury.  

The culmination of the Fed’s easy money policies throughout the next 28 years led to a pre-hyperinflation U.S. economy in the late 1970’s along with the need again, this time from the then-Chairman of the Fed, Paul Volker, to raise interest rates, which led to a peak of 23.5% in the prime rate in 1980—exactly 28 years (half-cycle) from 1952.  Interest rates have since steadily declined in cycles from the January 1980 peak.

Then, at the back end of the full K-Wave cycle (1980 – 2008), 28 years later, we had all witnessed the forces of the final stage of the K-Wave cycle with a day of reckoning, in 2008, with the fall of Lehman Brothers in September of that year.  But instead of the post-Lehman collapse and Fed response generating persistent double-digit consumer prices, monetary inflation lifted stock prices.  So, in effect, the Fed has created inflation mostly in stock prices, with a lot less impact on consumer prices than one would expect.

The cycle’s timing is truly uncanny.  

The K-Wave Cycle is very real, according to the great economist of the 20th century, Joseph Schumpeter.  Even former-Fed Chairman Alan Greenspan has referred to the K-Wave Cycle phenomenon in several public forums in his career, giving the theory serious consideration during his discussions.  

So, here’s my point:

Since 2008, the Fed has been propping up stock and bond prices with ever-lower interest rates to fight the needed pain experienced at the end to the K-Wave Cycle, the result of which, today, has culminated into an estimated $24 trillion of global sovereign paper yielding less than 0% interest!  That’s an amount too large to unwind, and I anticipate this monetary experiment of negative interest rates may continue in some form or another for as long as the Fed is able to control expectations (which it is now losing).  

In short, the Fed cannot burden the U.S. Treasury’s huge indebtedness with higher interest rates while asset prices decline.  The double-whammy of lower tax receipts and bulging interest payments may easily lead to hyperinflation.  That’s everyone’s fear.  Therefore, the Fed continues to “extend and pretend” as long as possible.

My suggestion to readers of the Long Term Weekly report: expect more bizarre policies coming out of central banks in the coming months.  I predict, at some point, the Fed will end up following the Bank of Japan (BOJ) and Swiss National Bank (SNB), and now, maybe in the near future, the European Central Bank (ECB), with stock-buying programs.  If so, U.S. stocks may continue to rise under this scenario, as Warren Buffett had intimated earlier this year.  But, I don’t see the Fed creating a stock market calamity by way of its own policies; the market must take over from the Fed.

Back to Cashin, who ended the first segment of the interview with King with:

What has passed for as a recovery [Fed propaganda] is dismally weak; so this is an Alice-and-Wonderland situation, where the Fed wants to raise rates in order to be able to cut them.  And no one has sat them down and said: what will you do if the very act of rising rates fulfills your prophecy and causes a recession to start.  So, they’re in very, very difficult straits.

Note the italicized text I added to Cashin’s statement.  That’s what we’re all facing now.  A downturn has been in progress since the summer of 2015, but the Fed has had no ammunition to buffer the decline—a decline that has become harder to hide by the day.  As I see it, we are at either a point of hyper-deflation or hyperinflation; which way we go depends upon what the Fed does and how violently (or not) the market reacts.  

So, will the Fed attempt to continue the rate-hiking cycle it started in December 2015?  Maybe it will, but after the election, if the Fed ever does raise rates.  In the meantime, caution is warranted.  Either the Fed breaks something or the market breaks something, but something will eventually break.  We just don’t know when that break will come.

This Week’s JBP Stock Ideas

As I stated in my email to subscribers on August 31, I sold EURN at $8.73 for a small $300 loss.  The West Texas Intermediate Crude (WTIC) price had fallen through its 50-day moving average on Wednesday, so I pulled the trigger on the EURN sell order.  With a falling oil price, EURN’s attempt to breakout above its 50-day moving average would be quite difficult without a catalyst—a catalyst that would have to come from out of the blue.  And I don’t gamble, so hoping for an out-of-the-blue catalyst to propel EURN through its 50-day moving average is not what professional traders hang their hat on and stay in business very long.

In addition to selling EURN, I sold GLUU at $2.32 for an approximate $1,000 profit.  The stock just wasn’t acting as if traders agreed wholeheartedly with my particular view of the stock, so I dump it for now and banked the gain.  Making 5% within a few weeks is good for business, so I’m happy with my GLUU trade.

Now for my honey trade: Liquidmetal (LQMT).  As I alerted on Tuesday previous to this week, I bought 200,000 shares at $0.137.  The stock closed on Friday at $0.174, up 27% in a blink of an eye.  So, I’m up a cool $7,400 in trading eight days.

When I took out a long position in LQMT, I didn’t expect an almost-immediate explosion higher in the price of the stock.  Sure, the company is truly ripe for a big announcement regarding a big player who may be interested in taking a big stake in the company.  

I’m sure that, when word got out to institutional investors of Professor Yeung Tak Lugee Li’s interest in the company for his own buddy empire, fund managers and private investors would begin snooping around to see what they may be missing.  Liquidmetal is an obscure company with arcane technologies (unsexy), so, naturally, big investors want to hear more about why Li is making deals with Liquidmetal.

Well, on Tuesday, Liquidmetal announced it was invited to present at The 5th Annual Gateway Conference in San Francisco, an invitation-only conference, where lots of investors will be able to snoop and be sold on Liquidmetal with a presentation of the company’s next-generation metal technologies.  

The conference is sponsored, in part, by NASDAQ.  The dates for presentations are September 7th and 8th.  If you Google to see who else is attending the conference, you’ll be able to compile an impressive list of leading-edge technology companies scheduled to present.  More than 500 buy and sell-side institutions, including portfolio managers, research analysts and brokers will be attending.

And remember, Apple Computer has already made deals with Liquidmetal, so the association that deal implies goes a long way with enticing institutional money.  But don’t expect the notoriously secretive Apple to be blabbing about its plans for Liquidmetal’s technologies to investors; institutional investors will have to figure out the worth of Liquidmetals’ technologies on their own.

Following the announcement of Liquidmetals’ invitation to present at The 5th Annual Gateway Conference, that bit of good news now gives me two shots at a favorable announcement from the company regarding a deal for a private placement, acquisition or contract.  So, we’ll see if my set-up for even more profits comes to pass in the coming weeks.  But in the meantime, I may have to protect my big gain if I see enthusiasm for the stock wane.  However, what I stand to gain is a possible and sudden two-bagger from a favorable announcement by Liquidmetals following the conference.  I let you know.

Trade Green!

Jason Bond