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Takeaway: The policy punch bowl is the size of a swimming pool and neither policy makers nor politicians have the internal fortitude to take it away.

This guest commentary was written by Mike O'Rourke of JonesTrading

A House Built On Sand - z32

When Apple reported earnings a year ago the company’s shares had settled that day at $169.10.  Following today’s earnings release the company’s shares were trading above $211, more than 24% higher. The increase in market capitalization is $160 Billion or 19%. The amount of the gain equates to the approximate market capitalization of Citigroup. Apple’s guidance for the upcoming quarter a year ago, was for revenues of $52.5 Billion and Gross Margins of 38.25%. The guidance given today for the upcoming quarter was for revenues of $53.5 Billion and Gross Margins of 37.5%. In Apple’s fiscal Q3 (calendar Q2) of 2018 Apple earned $2.34 per share on revenues of $53.3 Billion. The company is on pace for flat to down revenues and profits year over year this quarter. The other key difference between today and a year ago, is that a year ago the revenues and earnings were trending higher, today they are trending lower. 

Paying more for less has been the hallmark of this bull market, apparently there is no reason to expect that to change today. 

Fed  Chairman Jay Powell had established a fair bit of credibility for himself  in 2018, but that has quickly faded.  The Federal Reserve has made a serial habit of dovish surprises in  2019.  It does not help that the White House calls for rates cuts on a near daily basis – despite record stock market highs, 3% GDP growth, near record low Unemployment and perpetually easy financial conditions.

The President tweeted today:

"China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. 

We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!” 

There should be little doubt in anyone’s mind that the President would love to replace Chairman Powell with Larry Kudlow. That tweet highlights the President’s obsession with superficial measures of success. The President would approve of the proverbial house built on sand as long as it is the biggest grandest house ever, and has Trump on the front of it.  

It would appear that at best, the President is promoting asset inflation and at worst, he is advocating the nation monetize its debt.  The Treasury market ignored the President as the asset-bubble era has turned bond market vigilantes into bond market sycophants. James Carvel should update his reincarnation preference from the “bond market” to Central Banker. 

More importantly, if the President’s policies were generating sustainable real growth there would be no need for monetary policy ploys to fuel markets.  As the fiscal stimulus wears off, the President wants the Federal Reserve to take the baton and resume inflating assets through the election. It appears the Administration’s latest sacrifice for superficial success is halting China’s commercial cyber theft, which is set be watered down in the upcoming trade deal.

When political, fiscal and monetary policies have historically strayed so far off course, functioning markets respond to these excesses and force corrections, as Carvel’s bond market was  known for doing. Today, the policy punch bowl is the size of a swimming pool and neither policy makers nor politicians have the internal fortitude to take it away.  

Abraham Lincoln once said,

"Nearly all men can stand adversity, but if you want to test a man's character, give him power.”

Regrettably, because of the weakness of those in power today the American people will encounter a  great deal of adversity in the years to come. 


This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.