The First Espresso after a Long Hangover
Let me start today by saying for the first time in 7 years, I am hopeful. I know, I know, it is hard for you to hear, but it is true. I am genuinely hopeful. What happened on November 8
will be talked about and studied for centuries. It is not Donald Trump that makes me hopeful, it is who he will surround himself with and the fact that the American people have removed the potential for partisan gridlock in congress, they want something done that will improve their circumstances and they want it now! Washington better not blow this opportunity.
We need to embrace the fact that what just happend in the US election has opened up the possibility for abrupt, positive change. What we face now is a realistic chance for less regulation, a simplified tax code with much lower rates, infrastructure spending, a fix on poor immigration policies, and a replacement to the disaster known as Obamacare. I mean, if half this stuff becomes our reality, I will go from hopeful to giddy because it means a drastic improvement in our economy and the standard of living of those who have been struggling to make ends meet.
Markets have quickly started to price in these potential benefits to the US economy. That means higher prices on everything. One of the most reliable measures of future economic gains is copper. Copper has moved up over 18% in the last couple of weeks.
We need to keep things in perspective however. As impressive as this move is, copper is still down 39% over the last 5 years.
We find a similar situation in the global bond markets. Bond yields have moved sharply higher in response to the improved economic prospects for not only the US, but the globe. This is basically giving the Fed permission to hike rates at its December meeting. There is a better than 81% chance of a hike in December now. We have to remember, this is like having that first espresso after a long, tough hangover. We are experiencing that euphoric feeling from the initial rush of caffeine.
It is important here to let things settle down before we talk about a change in plans for the future. Once this rush starts to fade, markets will be in wait and see mode until March of 2017. The Trump administration (I can’t believe I just said that) then needs to begin to capitalize on its promises for the euphoria to continue. Remember, the markets may have begun the process of pricing in faster growth but it will take time (2018) for you and me to actually see/feel it. I will be watching carefull how things unfold because this could change our future discussions on the future path of interest rates. I am very happy to feel this hopeful so I will leave it at that.
11/10/2016 07:56:19 AM
In Case You hadn't Already Heard
Obamacare continues to collapse under its own weight. It is growing more likely that it will become a complete failure sometime late in 2017. I could go on and on but I will spare you.
10/24/2016 02:37:41 PM
When Magic Fairies Really Aren't
The sheer lunacy that dominates the United States right now is mind-boggling! We have been invaded by self-proclaimed magic fairies who call themselves politicians, regulators and Janet Yellen. Unfortunately, their fairy dust is not so magical. Alright! Alright! I am o.k. now; I just took another blood pressure pill. You want proof…alright, read on.
I pointed out to you in my July 29
post that regardless of how much fairy dust they have sprinkled, this is still the worst economic expansion in recent modern times. You would think the self-proclaimed elites that prescribe to watch over our country and economy would be frantically trying to reverse this. HUH! In fact, it seems that Janet Yellen and politicians are about to make things worse. The Fed has been spouting the message that the US economy is running so well that we may need another rate hike and it would seem the markets are buying that message. After all, oil prices have doubled, commodity prices have stabilized, the unemployment rate is low, jobless claims are at record lows, wage and inflation pressures are rising, and corporate earnings are less negative (remember, two negatives make a positive ha ha). I mean, heck, I almost just talked myself into drinking the Kool-Aid! Well, here is a little dose of reality. The chart below shows the real-time GDP estimate for Q3 and you can see it has been plunging recently. This is supposed to be the best quarter of growth this year and it is barely hanging on to 2% growth.
Even with that, according to the chart below, the market appears to still be full of that Kool-Aid because it shows that markets are pricing in roughly a 64% probability of a Fed rate hike in December. This is all fine-and-dandy but let’s look under the hood for the economy’s real message.
My Corporate Health Index is anything but healthy. This index says that corporations are in some decent trouble when we look at things like cash flows and earnings. The reason this is important is because once they get into too much trouble, they start to reduce expenses (i.e. lay off people). The chart below clearly shows this relationship.
Because of the lack of profitability in corporate America, federal tax receipts are down, in fact, they are below the level they were at this time last year. As you can see in the chart below, this is usually a recessionary trait.
Not only are tax receipts lower, but because of the stress on corporations, real gross private domestic investment are in dire straits through the first half of 2016. This usually points to future labor problems. As you can see, the correlation between these two data sets is undeniable.
If we run a probit model against this relationship, it puts the odds of employment growth turning negative within the next two quarters at better than 70%. Not quite panic time, but man, I am starting to sweat a little!
Because of the very fragile nature of the US economy, I still believe that any tightening by the Fed will be a mistake. I realize they have backed themselves into a corner. It appears that their reputation may be at stake if they don’t hike in December. But they have to see the data I am presenting to you. After all, I didn’t go to Harvard, Yale or Fairy School (wink wink) and even little ol’ me can still see this underlying economic weakness. This leads me to believe that any future hike will only serve two purposes, and neither of them is economic. First, it will prove the Fed is not all talk and would help to restore a bit of their credibility, and second, it will give them more room to lower rates when the
economy eventually hits the skids. Remember, we just learned from Japan that NIRP (negative interest rate policy) isn’t very effective. This leads me to believe that with rates still near zero, Fed members aren’t sleeping very well these days.
I am happy to finish this off by saying that the banking sector is doing relatively well right now and the banking cycle runs about four quarters behind the business cycle.
10/19/2016 01:00:02 PM