Data Will Soon Prove The Curve

I am going to take a victory lap here, because for this entire year I have been consistently bullish on stocks and telling you to fade the fear mongering and the hysteria and the panic. All along, I said that stocks would go to new all-time highs and beyond. So here we are.

This was not difficult for me to call.

What I look at are the fiscal flows (government spending), because that is what drives everything. The fiscal flows have not only been strong, they have been accelerating and are on track to hit a new, single-year high this year (FY ends Sep. 30), surpassing the 2009 stimulus-driven year that currently holds that record. We are on track to surpass that $4.59 trillion in total federal government spending and possibly even go as high as $4.9 trillion.

This is what is driving the rebound in stocks. It’s what’s driving the rebound in gold, commodities, and even emerging markets and emerging market currencies.

Moreover, this fiscal stimulus that I am referring to is not just a phenomenon of the U.S. We now see it in China, where government spending is at a six-year high (that’s why the yuan is falling) and we see it, too, in Japan where a fiscal stimulus was enacted a couple of months ago and where a new round of fiscal stimulus will be implemented in the Fall.

Look at the reaction in the yen since Prime Minister, Shinzo Abe’s election victory a couple of days ago. It’s tanking. That’s because Abe has been promising such measures.

By the way, you may recall that I wrote an article here on Real Money right after the Brexit vote where I said you shouldn’t be a Brexit bear, you should be a yen bear. I advised selling the yen; that trade was a big money maker trade if you listened.

So fiscal stimulus and the expansion of fiscal stimulus (it will come to the EU as well) will continue to drive stocks higher.

The most interesting thing in all of this is that you have the bond market and the Fed pretty much off in La La Land somewhere, thinking that rates have to remain low or even come down. It seems as if Janet Yellen has been swayed by all the irrational Brexit nonsense.

My feeling is that she and her colleagues on the FOMC can only hold on to this fantasy view for so long, because they’re about to run it a slew of data that will show them just how far behind the curve they really are.

You’d think it would be enough of a warning to them that industrial commodity markets like steel and coal and copper and tin and zinc and lead and nickel are all rising (along with sugar, lumber, cotton and more), but they’ll soon get evidence of a different kind. They’re going to see accelerating wage pressures bubbling to the surface, if that hasn’t started already.

When looking at the Daily Treasury Statement last night, I noticed that employment and withholding tax deposits to the Treasury are surging to all-time highs. Moreover, the positive gap over last year is now an astonishing $62 billion. That is the highest year-over-year gap that we have seen and it means that the wage rise cycle is accelerating.

Yet, amazingly, both the Fed and the bond market are still pretty much clueless to this. (Although the former is waking up today.) Bottom line is, Janet Yellen and her crew are in Fantasyland now, but that’s going to change real soon.

I have been saying for some months now that the sleeper trade this year was to short Treasuries. Mind you, I am not one of these bond bubble nuts. You know that I have explained many times that the Fed is the monopolist when it comes to rates (any price, really) and it can keep rates at zero for as long as it wants.

However, the Fed itself declared that it is in rate hike mode and it has been saying that it wants to raise rates. Therefore, I take it at its word. It’s going to happen; it’s just a matter of getting them convinced enough that it’s safe to do so. Janet, if you’re reading this, it’s not only safe to do so, you’re way behind the curve now.

In the next two weeks, the Fed will get a raft of data that is likely to show everything from stronger economic activity to rising wage pressures to higher inflation. A rate hike will be back on the table. And one after that, and one after that, and one after that.

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