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Weekly Memorandum 5/11/2020

Stocks are coming off another week of gains, but are down early this morning in pre-market trading. The previous week made it seem like stocks were poised to pull back, but they displayed their resiliency once again. We have another big test this week, and just yesterday, a new Mercator Letter was sent out to subscribers outlining important support and resistance levels in the market. As always, we let price guide our actions instead of sentiment or the news. This is why we have been able to initiate several long positions in the last few weeks.

The U.S. Dollar has our attention specifically this week. It has consolidated its gains in recent weeks, and we are looking towards its emergence from this sideways pattern. Our upside bias remains on this currency, as it continues to be the main-driver behind all global macro trends. A stronger dollar will likely lead to American asset out-performance, but would be a headwind for commodities like Crude Oil. In other words, the deflationary, or even hyperdeflationary, pressures in the market and economy are not gone yet.

One topic we covered in this past weekend's Mercator Letter is the increasing potential for a total disconnect between the real economy and financial markets. Below is an excerpt from our latest publication:

"People comparing this situation to the Great Depression have not done all their homework. Yes, interest rates dropped to zero during the Great Depression, but Quantitative Easing didn’t exist back then. This is a totally new ballgame, and for the time between 2008 and 2013, the largest equity drawdown was around 20% in 2011. The Fed began to taper its QE program in 2013, but for those 5 years, markets did well overall. Note that QE began in November 2008, and the Great Recession bottom occurred in March 2009, so it took some time for markets to figure out the “new normal.” QE lasted until October 2014, and equities nearly tripled in value from their March 2009 lows. As the Fed came out of QE, it actually raised interest rates for a few years from 2015-2019, and even during that time period, stocks still did well overall. Worth noting is that volatility was wider when QE was not present, as we saw multiple +20% declines during that time, including the recent corona-crash. But now that QE is back, are we set to enter a period of low equity volatility again? Not many seem to believe so."

History doesn't repeat, it rhymes. The financialization of the economy has consequences, and we could see the wealth gap widen even further. Think about it, if someone isn't working and contributing to their retirement plan, and the market skyrockets higher, then they really are left behind.

Crude Oil is up nicely this morning, but precious metals are flat. Cryptocurrencies gave back some of their recent gains over the weekend, but we continue to consider the crypto asset class as a "must-own" for anybody looking for capital appreciation in the 2020s. T-Notes appear poised for new highs too, bring on the NIRP!

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