We are heading into the last trading week of the year and it’s setting up to be volatile, to say the least. The FED is in motion. Equity investors are harvesting profits from a long-run bull market. Bond markets are uncertain as how to react to the end of QE since the central banks are now beginning to shrink global reserves (at least the Fed is). Commodity prices are struggling due to the fear of a global economic slowdown. And the political backdrop adds great uncertainty as the Trump administration never misses an opportunity to open its mouth and detract from any policy success it may experience. China, Russia, Turkey, Iran and even Saudi Arabia are watching the Western Democracies to see how they respond to Trump’s efforts to disrupt the current trading system and, more importantly, the rollback of PAX AMERICANA.

There are many concerns occupying all burners as we enter 2019. As it stands, the world lacks the leadership to constructively deal with the many issues that have the market’s attention. Remember, it takes a single spark to start a prairie fire. For those new to Notes From Underground, I will offer up my views about the greatest threats and opportunities in the realm of macro global finance at the beginning of the year.

But already 2019 is providing far too many to list at the moment but I will continue on my concept of this: Be fearful of U.S. debt for the problem remains that we are running a TRILLION plus deficit in a time of FULL EMPLOYMENT, as defined by the mainstream economists. The last time we were at this level of UNEMPLOYMENT during the Clinton administration, the U.S. had surplus budgets and Greenspan was fretting about the end of the U.S. Treasury bond Market. This is the dissonance that hangs over the economic outlook for the United States. As I have frequently opined, real estate is location, location, location while finance is debt, debt, debt.

Many are joining the chorus of warnings about DEBT. Ben Hunt of Epsilon Theory wrote a piece on December 7 titled, “The Dog That Didn’t Bark.” The title is taken from Arthur Conan Doyle’s Sherlock Holmes story, “The Adventure of Silver Blaze.” Ben cites the importance of deficits but raises the concern in typical Hunt fashion. He said, “There is ZERO narrative today around U.S. budget deficits or deficit spending.” By measuring the amount of media references to the trillion-dollar deficit investors are nudged into paying attention to other factors affecting the financial environment. This is the dog that will more than wag its tail next year.

***A warning to the White House: There are many stories this weekend about President Trump desiring wanting to fire Federal Reserve Chairman Jay Powell. On Saturday, Treasury Secretary Mnuchin said “Donald Trump never suggested firing” Powell. Also, “Trump told Mnuchin he did not believe he had the right to fire Powell.” These are all efforts to prevent a major market selloff on Monday. IF DONALD TRUMP AND HIS WEAK SECRETARY OF TREASURY (yes he lacks depth of global finance) WISH TO CRASH THE US EQUITY AND BOND MARKETS THEN CALL TO QUESTION THE INSTITUTION REQUIRED TO SAFEGUARD ITS FIAT CURRENCY. Many pundits are saying such a power grab by Trump would hurt the markets. I will take this one step further.

The BONDS WOULD NOT BE A SAFE HAVEN as the entire question of U.S. credibility would be called. This is a holiday liquidity-plagued market and the damage would be breathtaking upon any such White House action. Think of the enormous positions held by the risk parity trade: long equities, long bonds and possibly short volatility. President Trump, you had better be more forceful than using Mnuchin as an emissary of credibility and financial fortitude. The Department of the Treasury has the task of preserving the integrity of the DOLLAR. It takes more than having the MNUCHIN signature on our currency. In addition, as my daughter Alexandra Harris (and Bloomberg reporter) wrote over the weekend, investors are looking at $131 billion of coupon-bearing debt auctions to close out 2018. This ought to be enough on our holiday plates.
***A joyous holiday season to all and a Merry Christmas to those who celebrate. A Healthy and Happy New Year to all my readers and listeners. I am going to take some time off to visit with my newest grandson, who was born December 20, but while I am enjoying please go back and read previous BLOG posts from early in the year. Dear readers, please leave in the comments your favorites from 2018. Mine is from October 4. Be well.