EASY TO UNDERTAND US ECON ISSUES
LA
ECON USA ES FACIL DE ENTENDERSE
Con
paciencia y saliva un elefante de comió una hormiga. Aqui es al revés.
Si
te quieres comer el elefante Econ-US,
don’t worry about the 1st chart.
Interesting truth at the end…& beautiful lessons at all
….
"...now, because the outcomes are already
bad, they’re wanting to drive interest rates even lower to deal with the
bad outcomes that these low interest rates have already caused..."
Trump & Powell
Square Off
Let’s start with a simple chart:
$SPX S&P 500
Large Cap Index vs. 50 DMA
This has been an impossible market
to effectively trade as rhetoric between the White House, the Fed, and China,
has reached a fevered pitch.
[ If you are new in Econ start your Reading here:]
On Friday, several things happened which have at least
temporarily significantly heightened market risk.
Jerome Powell disappointed the markets, and the White House,
by sticking with their previous guidance concerning monetary policy actions. To wit:
- We Will Act As Appropriate To Sustain The Expansion (Will cut rates if needed)
- Says Events Since The July Fomc Have Been `Eventful’ (Trade War/Tariffs)
- Carefully Watching Development For Impact On U.S. (China/US Trade)
- Monetary Policy Has No Rulebook For International Trade
- We’ve Seen Further Evidence Of A Global Slowdown (Germany in recession)
- Fitting Trade Policy Into Risk-Management Framework Is a New Challenge
- Fed Faces Heightened Risk of Difficult-to-Escape Periods of Near-Zero Rates (Neg. rates)
- U.S. Economy Has Continued to Perform Well Overall (No rush to cut rates)
- Sees Financial Stability Risks as Moderate, but Will Remain Vigilant
However, this commentary was not a surprise to us. We
have suggested
for several months the Fed should be slow to use what little ammo they
currently have.
“With the markets pushing record highs, recent employment and regional
manufacturing surveys showing improvement, and retail sales rebounding, it certainly
suggests the Fed should remain patient on cutting rates for now at least until more data becomes available. Patience would also seem logical given the
limited room to lower rates before returning to the ‘zero bound.’”
Not surprisingly, Chairman Powell’s comments did not sit
well with President Trump who has frequently pressed the Fed to cut rates
aggressively.
“After Powell’s closely
watched speech in Jackson Hole, Trump tweeted, ‘As After China announced more
import tariffs on U.S. goods early Friday, Trump said he would respond Friday
afternoon. The president
also asked ‘who is our bigger enemy,’ Powell or Chinese President Xi Jinping.” – MarketWatch
By the end of the day on Friday both the U.S. and China had
hiked tariffs on one another.
“China said it would increase
existing tariffs by 5% to 10% on more than
5,000 U.S. products, including soybeans, oil, and aircraft. A 25% duty on
American-made cars would also be reinstituted. The value of these products is
estimated by the Chinese Commerce Ministry to total around $75 billion.
Trump responded after financial markets closed by saying he would raise
current U.S. tariffs. A 10% duty on $300 billion in
Chinese goods will be raised to 15% in September while a 25% tariff on $250
billion in imports would be increased to 30% in October.” – MarketWatch
The
Investing Conundrum
The problem with managing money is that markets are now
trading on “tweets,” and “headlines,” more
than fundamentals. This makes being either long, or short, particularly
difficult.
This is
where we are currently.
Over the past few months we have reiterated the importance
of holding higher levels of cash, being long fixed income, and shifting risk
exposures to more defensive positions. That strategy has continued to work
well.
- With the trade war ramping up, there is little reason to take on additional risk at the current time as our holdings in bonds, precious metals, utilities, staples, and real estate continue to do the heavy lifting.
See Chart:
IVV Shares Core S&P500 ETF NYSE
If you are
being advised to hold all these asset classes for “diversification” reasons,
you should be asking yourself, “why?”
Trade wars, and tariffs, are not friendly to these markets.
With those “taxes” being ramped up by both parties, things will
get worse, before they get better.
Risk management is critically
important to long-term returns, and risk is becoming more elevated
daily. So, if you are
paying for a “buy and hold” portfolio, you may want to
reconsider what you are paying for?
From a technical perspective, the market is back to
oversold, so a bounce next week is possible, but as noted last week, this is “still
a sellable rally.” However, if the
market breaks the current consolidation to the downside, a test of the 200-dma
will be critically important. Any failure at that support will bring the
December lows back into focus.
See Charts:
As we have continued to note over the last few weeks, the
ongoing deterioration of small and mid-capitalization companies continues to
suggest the overall backdrop of the markets is not healthy.
Negative
Yields Everywhere
As I noted last week in “Pavlov’s
Dogs & The Ringing Of The Bell:”
“The ‘ringing of the bell’ over the last decade has trained
investors to rush into equity-related risk.”
With Powell disappointing traders, and Trump retaliating
with additional tariffs, the initial response was to flee to “safety,” or
rather should I say ”
bonds.”
While retail investors continue to cling onto stocks hoping
for a resurgence of the “bull
market,” institutions are piling into bonds
as the tidal wave of data continues to warn something is “broken.”
(You
don’t have $17 Trillion in negative-yielding sovereign debt if there is
economic and fiscal stability.)
See Chart
Global
Volume of Bonds Trading with Negative Yields
The message that negative yields are sending coincides with
weaker growth rates in:
- Corporate profits
- Employment
- CapEx
- Personal Consumption Expenditures
- Real Retail Sales
- GDP
You can see this visually in the
6-panel chart from last
week’s missive
See Charts:
Personal Income, Employmt, Industrial Produc., Real Consumer Expend, Real
Wages, Real GDP
Yes, the
data is not negative which is why we aren’t in a recession…yet, (However, the data is subject to substantial
negative revisions, and as we showed last week, the month before
the last recession started all the data was positive as well.)
This is
also the reason the Fed stopped hiking rates.
Since that is a lot of “Fed speak,” let me translate:
“Listen, as a member of the Fed, I can’t tell you the economy has weakened significantly, and
the threat of a recession has risen markedly. If I did say that, the
market would crash, consumer confidence would crash, and we would immediately
be in a recession.
The reality is that we needed to get rates off
of zero percent, and we were hoping to get rates closer to 4%, to give us some
room to support the economy during the next recession. Unfortunately, we actually ‘over tightened’
which led to the market disruption last year. The rate
cut in July was to be supportive of the economy short-term, but we need to hold as much ‘ammo’ as
possible in reserve for when the recession hits.”
Here is a chart of the Effective Fed
Funds Rate versus the Neutral Rate (Real
GDP):
See Chart:
Why The
Fed Won’t Go Negative?
They won’t go “negative” on rates.
Daniel
LaCalle summed
it up well:
“The paper ignores the collapse in net income
margin and ROE and even dismisses ROTE (return on tangible equity) to try to defend the idea that banks earnings have not
suffered from negative rates.
The worrying part is that these statements
ignore the fact that one of the main reasons why banks’ bottom line has not
fallen more is they have almost stopped making provisions on bad loans.“
His point is
critically important.
Negative rates have irreparably damaged
European banks, which only can be resolved through a massive debt revulsion.
Wolf
Richter also had some
excellent points in this regard:
“Negative interest rates drive banks to chase
yield to make some kind of profit. So they do things that are way too risky and
come with inadequate returns. For example, to get some return, banks buy
Collateralized Loan Obligations backed by corporate junk-rated leveraged loans.
In other words, they load up on speculative financial risks. And as this drags
on, banks get more precarious and unstable.
This is not a secret. The ECB and the Bank of
Japan and even the Swiss National Bank have admitted that negative interest
rates weaken banks. The ECB has even been talking about a strategy to
‘mitigate’ the destructive effects its policies have on the banks.
So that’s the issue with negative interest
rates and banks. They crush banks.”
Don’t forget.
Why did
the Fed launch Q.E., and cut rates to zero, to begin with?
To bail out the member banks of the Federal Reserve, or should I just say, “Wall Street.”
Interest rates are a function of economic growth. Globally, despite massive levels of QE, and low interest
rates, economic growth is
faltering, not strengthening.
The Fed does understand this.
Unfortunately, the Fed is still misdiagnosing what ails the
economy, and monetary policy is unlikely to change the outcome in the U.S.,
just as it failed in Japan. The reason is simple. You can’t cure a debt problem with more debt.
Therefore, monetary interventions, and government spending, does not create
organic, sustainable, economic growth.
If rates
ever do rise, it’s game over as borrowing costs surge, deficits balloon,
housing falls, revenues weaken, and consumer demand wanes. It is the worst thing that can happen to an slow
growing economy that is dependent of further debt expansion just to sustain
current growth.
As Wolf noted, lower rates are
not the solution, they are the problem.
“So far, the outcomes are already bad, and
now, because the outcomes are already bad, they’re wanting to drive interest
rates even lower to deal with the bad outcomes that these low interest rates
have already caused.”
….
Read the full article at:
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