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The Calm Before The Storm?
Submitted by Joseph Y Calhoun via Alhambra Investment Partners,
Stocks rallied again last week, up a bit less than 1% as weak economic data pushed out – again – expectations for the first Fed rate hike to March of next year. I suspect this won’t be the last week that sees that time line extended although whether that translates to higher stock prices is more questionable. In looking through the data released last week one is hard pressed to find a report that was unambiguously positive outside of jobless claims which hit a low last seen in the early 1970s. The rest of the data ranged from uninspiring (retail sales) to awful (Empire State and Philly Fed surveys) to deflating (CPI and PPI) to blamed on exports (Industrial production) to recessionary (Inventory/sales ratio), to a bit surprising (JOLTS report which showed a drop in job openings).
The idea that an economy that performs so poorly that it keeps the Fed on the sidelines is good for stocks is one that can only be based on recent history, one that starts after the 2008 crisis. For if one looks even a bit further back it becomes pretty obvious that if the economy is headed for recession there isn’t an interest rate low enough to prevent it. The Fed was cutting rates furiously as we entered both of the last two recessions and the only thing that will prevent that from being true at the beginning of the next recession is that the Fed has wasted their chance to get off the zero bound. The fact that the market has now pushed the Fed’s first rate hike out to March of next year is not, contrary to recent market action, good news for investors.
At some point bad news will be bad news for stocks again but the rest of the markets are already reacting to the bad news as if it were exactly that. It is more than passing curious that while stocks took all that bad economic news as a reason to be bullish, other parts of the market were not as sanguine. Bonds rallied all week, Treasuries leading the pack with the 10 year Treasury at one point dipping below 2% again. The Fed may think rates need to be higher but the market disagrees vehemently. Bonds at the long end of the Treasury curve were up more than the S&P 500 – in a good week for stocks – while high yield bonds managed only a token gain. Bond investors aren’t buying the stock rally, refusing to take on additional risk in the face of weak data.
Or it could be that bond investors are merely suffering from indigestion as corporate debt may have finally reached the saturation point. The spate of M&A deals announced early last week will all require major commitments from bond investors – and banks – and supply concerns may well keep a lid on corporate bond prices. The surge of deals is historically worrying too, coming near the end of bull runs in the past. The Dell/EMC deal in particular looks like a bit of a desperation move by Michael Dell as his debt laden company struggles, losing $768 million in the last year according to one source. This often happens near the end of a cycle when profit growth is hard to find, although the Dell deal may say more about the PC industry than the general economy. One wonders if Dell just needs EMC’s cash flow or really likes the company. Storage isn’t exactly a growth industry these days.
Meanwhile, corporate profit margins appear to have peaked and debt incurred for previous stock buybacks is starting to bite, two not entirely unrelated events. Interest expense is eating into profits at the same time revenue growth is harder and harder to come by. And after so many years of low rates, refinancing just doesn’t get companies the jolt to earnings it once did. Companies have spent the last 7 years cutting costs – through layoffs, reluctant hiring, more offshoring and by refinancing higher cost debt at today’s low rates. All of those trends appear to have run their course leaving company profit growth at the mercy of top line growth, something conspicuous only by its absence the last couple of years.
Another emerging trend that doesn’t bode well for those recent stock buyers is the recent rise in gold. Treasuries outperformed stocks last week but gold outperformed both by a pretty wide margin. Gold has outperformed stocks for the last six months now and long term momentum now favors gold over stocks, something that hasn’t been true since gold peaked back in 2011. The trend is certainly young and could yet reverse but it is one that should be watched very closely. Investors don’t generally favor gold over stocks when they are comfortable with the outlook for growth. It may be that gold is already starting to anticipate the next Fed move which I suspect, contrary to most expectations, to be some form of easing rather than a hiking of interest rates. In other words, gold is confirming the negative trend in the economic data.
The Fed has worked overtime since the 2008 crisis to produce a stability, a sense of normalcy in the economy and markets. The stability encouraged companies, credit worthy and some not so much, to go on a debt binge of epic proportions to fund mostly financial engineering projects – stock buybacks and takeovers – while ignoring investments in real, productivity enhancing projects. It also encouraged – forced according to many – investors to take on more risk than they probably should or even know. The Fed’s forced stability has produced an economy that struggles to grow at the new normal, secular stagnation rate of about 2% per year but also one more vulnerable to shocks. It is a stable equilibrium now but almost any minor shock could change that dynamic for the worse and quickly.
I have no idea what that shock – minor or major – might be that pushes the economy over the edge into contraction. I also have no idea when that might happen; it could be weeks, months or years but as we’re seven years into this expansion, it seems more likely it is one of the former than the latter. Widening credit spreads, Treasuries and gold outperforming stocks indicate that some parts of the market are already preparing for the storm. Stocks are about the only asset yet to batten down the hatches. If this is the calm before the storm, stock investors are about to get swept overboard.
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We already are in a category 5 financial hurricane, with the eye passing overhead.
I don't think the heavy stuff is going to come down for quite a while.
https://www.youtube.com/watch?v=t3lshY4PwI4
We have plenty of time. Until the Fed loses control of the bond market -- this can go on much longer than anticipated.
That's why they come when least expected.
I'm was thinking Draghi could be the guy that falls off the back and hits the propeller on the way down.
that visual, makes me happy "down there"....
The image is lusciously juicy. Wet that propeller, Draghi, and give us a good show on your way to Hell!
when did the fed's losing control of the bond market presage recession?
(wiki) "From the trough of the recession of 1945 to the late-2000s recession, there have been eleven periods of expansion, lasting an average of fifty-nine months."
this one is at 72 months. the last one was 73 months. the previous two were considerably above these.
as was said in another context, was it six shots or was it only five? ... you'll have to decide if you feel lucky. well, do you?
Ize gotz ta know.
Rat shit!!!!!!
At some point stock-buybacks work against you for those companies with a lot of debt.
Fantasyland economics is finite.
<<<At some point...
<<<On along enough timeline...
Which is true? Which is fantasy?
Pick a swan, any swan.
http://finance.yahoo.com/news/lew-worry-could-debt-limit-110558741.html#
So where are you putting your money, Joe?
If you say gold.....we're gonna kick your ass!
best line imo, although unbolded: The Fed was cutting rates furiously as we entered both of the last two recessions and the only thing that will prevent that from being true at the beginning of the next recession is that the Fed has wasted their chance to get off the zero bound.
that should birth some fears when the greed disappears.
The Fed has worked overtime since the 2008 crisis to produce a stability, a sense of normalcy in the economy and markets.
Bullshit! They have been working tirelessly to transfer wealth from working people to gangster bankers and provide money for pure speculation by the 1%ers
The sentence could be modified:
The Fed has worked overtime since the 2008 crisis to produce a stability, a sense of normalcy in the economy and markets while working tirelessly to transfer wealth from working people to gangster bankers and provide money for pure speculation by the 1%ers. This would be quite an achievement.
Wizard. Ever look at the charter for the Fed...guess who gets the Feds losses from their balance sheet when they lose ? One hint..it ain't old man Rothschild.
Could you just tell us please? Thank you.
You are too lazy to look it up.
Could be modified more. tsnt the 1%......its the .1% that made out.
Well, yeah.
But you can't say that if your business is suckering suckers.
Makes em nervous.
"The stability encouraged companies, credit worthy and some not so much, to go on a debt binge of epic proportions to fund mostly financial engineering projects"
it almost sounds as if the author is questioning the wisdom of responding to a crisis caused by excessive bad debt with tacking a zero onto the amount of said bad debt?
he's a witch! burn him!
What about the political component? The FED does what the current administration wan't it too, no?
So, the FED can't raise rates and crash the economy giving the opposing party a boost. If the FED is influenced by the current administration, then the FED will wait until after the election.
I guess it doesn't matter. Either way, the financial sysmte is going to collapse with the rate hike or not. The lift off will only make it happen faster. So, the current political party in the White House is going to be blamed whether they like it or not.
Not that I care either way. Nearly all politicians are liars and only care about themselves.
This whole idea you can prevent recessions from occurring is just like pissing in the wind. While the stream is strong you seem like you're winning and you're the master of the universe, then the stream weakens or the wind picks up and you just end looking like a winner at the special olympics. So Keynesians decided getting everyone in the world to take a piss together while downing beer results in a boost to collective stream force sufficient to overcome a hurricane. They are going to be the most special winners EVER!
My only hope is that their mouths are open when this storm hits... so the Keynesian cycle of spending will finally be a closed loop system.
Beware the Ides of October (23rd)
"The Fed has worked overtime since the 2008 crisis to produce a stability, a sense of normalcy in the economy and markets."
lol wut?
Fed quiz : What is the difference between the Bernanke put and the Yellen put ?
Answer:
The Bernanke put is out of the money the Yellen put is at the money.
The difference between the situation now and pre-2008 is that the Fed is currently active within the actual market place almost every single day. Pre 2008 it was the PPT in coordinated action to add liquidity only the rare event of a crash. But since 2008, these coordinated "saves" happen all the time and are exacerbated by their use of HFT computers. And given the fact that these "saves" always come in market selloffs after poor data, the marketplace has been trained to BTFD in anticipation of this Fed activism, thus morphing into the market meme of bad data = good price action.
Yep. And that 'pattern' of fraud will be successfully used when the class-action lawsuits against the 'Fed' begins in earnest. Its gonna be a great show!
Well, "There's no business like show business". Don't forget to smile when you are low.
This will go on for quite some time. Nothing to see here, please move on.
Trite.
blah, blah, blah... When the fed and cb's can create an infinite amount of fiat with a couple of keystrokes, in theory, they can "buy" everything for nothing, so this manipulation is going to continue. I predict a new all-time high before the end of November. I"ve been burned way too much betting against sociopaths. I lost a boat load on QQQ puts this month and last - nothing but bad news and rising QQQ. They can all kiss my arse. Rope and a tall tree are too good for these people.
Best ANYTHING since 1977...SERIOUSLY??? 94+MILLION not working. and we are hitting record low jobless claim numbers. I am sensing some shifting sands here....
stable equilibrium? only in the Fed's dream world as the economy contiues to cycle towards collapse. Too much debt and low growth or even negative growth means eventual default and collapse unless some form of debt write off is implemented.
https://www.youtube.com/watch?v=-HHJ3q2TxEQ