Welcome back to What’s Happening Now, your weekly guide to what’s going on right now and why it matters to you – and your money.

In last Tuesday’s issue, we discussed the 800-point drop in the Dow Jones Index and urged you to expect more volatility to come. Well… it didn’t take long.

By Friday, the Dow Jones tumbled again, this time by 623 points, as rising global trade tensions here and abroad converged upon the Fed’s not-so-peaceful retreat in Jackson Hole.

Equities in the Asia-Pacific region opened this Monday down another 1.4%, with the Hong Kong Hang Seng Index down 1.9% on trade and as anti-government protests flared up again in Hong Kong, turning violent.

But by the time the U.S. markets opened at 9:30 a.m. this morning, the potential for a continuing market selloff was averted as a more conciliatory tone on trade developed just prior at the continuing G7 meetings that wrap up today.

The takeaway on all this volatility is that it doesn’t matter when it’s up or down. High volatility portends a risky investing environment, never mind the direction.

In short, the fall season, as predicted, is seeing lots of falling, and we are not talking about autumn foliage.

No one really wins a trade war. When one combines the inevitable market declines and disruptions that follow a PMI-killing trade war with the heightened dangers of globally compressed sovereign yields, the subsequent market volatility (of which we’ve openly warned), increases with little surprise.

What to do? Let’s discuss…

The Complex Part – Double Jeopardy

Events last week (and weekend) at the Fed Symposium in Jackson Hole, followed by the G7 meeting in Biarritz, France, were a complex load of mixed messaging for markets and investors alike to digest.

The Fed, for example, closed its Jackson Hole meeting reluctant to commit to aggressively lowering interest rates in September, which disappointed but did not rattle markets too much… on its own.

All of that changed within an hour of the Fed meeting on Friday as China, followed in tow by the U.S., escalated the trade war to a notch higher with further tariff arrows being shot across the globe.

As markets continue to fall in this tense backdrop, we can expect the Fed to re-tune its game plan accordingly, and thus we anticipate a bigger rate cut in September if this trade war doesn’t come to an immediate calm.

In short, the Fed is now under further pressure from policies and events originating at the White House.

Of course, setting trade policy is not the normal business of the Fed; their focus is ostensibly on employment and inflation, neither of which have been handled so well once one looks under the hood.

But in rigged to fail markets, central banks touch and concern just about everything these days, including trade…

Tariffs are inflationary, so therefore the Fed’s involved. Falling global commerce and GDP figures, in turn, are deflationary, so the Fed’s involved there as well.

As Jean-Paul Sartre’s play No Exit reminds, the Fed “has no exit here” as it now struggles to adjust inflation and deflation with its magical wands of Fed-speak and interest rate suppression.

The impact of all these rising and converging tensions is causing alarm indicators in our Storm Tracker to rise as well.

Just as there is no precedent for central banks keeping interest rates this low for this long, there is equally no recent precedent for central banks to address trade wars. But given the weakening conditions here and abroad, they will and they must.

As we’ve said many times, today’s stock and bond markets are essentially just “Fed markets.”

That puts us deeper, once again, into uncharted territory – a sad scenario of double jeopardy. Either the Fed does nothing and markets continue to gyrate and fall; or the Fed cranks rates down even further and faster than expected, thus signaling alarm bells to the world that markets are indeed in far graver danger than the Fed would otherwise want to admit.

After all, psychology impacts market direction, and the Fed wants to manage the cognitive map to keep market bubbles floating, not popping. This is getting harder to pull off in these dangerous times.

Dangerous indeed. But this danger is nothing new for 2019. We’ve been tracking flashing red indicators ever since the Q1 Powel Pivot to stem the bleeding from the disastrous market selloffs that opened the year.

Since then, we’ve seen further volatility spikes in May and August – which are obvious danger signs.

Last week was no less dangerous.

Here’s What’s Happening

Last week, the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite Index each closed out with their fourth straight weekly loss, matching last May’s stretch of weekly declines. Take a look at the chart below.

May’s downside in equities (left red box) was offset by gains in the ensuing months of June and July. But these red boxes are popping up more often now. The red trendline we added in the chart below highlights a downside volatility that is increasing in both frequency and depth.

Not a good sign…

This we know as well: Purchasing Manager Indexes are tumbling globally with China, the Eurozone (Germany especially), and the U.S. now in negative territory – a telling (dangerous) sign of economic contraction.

But this didn’t start yesterday either. In fact, it started in late 2017, which means the problem is thus becoming increasingly global and increasingly systemic…

When we add Brexit risks and rising political tensions in Hong Kong and Italy to this mix of tumbling PMIs, conditions are deteriorating and our Storm Tracker is reacting in kind.

Storm Tracker

No wonder Storm Tracker ticked up a notch last week as investors continued to flock to the perceived (but potentially misguided) “safety” of historically low yielding bonds and away from stocks, commodities, and even the U.S. dollar.

The Simple Part – What to Do

Here’s the simple part. All you need to know is this: As Storm Tracker rises, so do the odds of a recession. Virtually every macro variable, from tanking GDP data, worsening consensus views, yield curve inversions, and declining trend lines to Déjà Vu stress signals are all tracked by Storm Tracker.

Storm Tracker is your one-stop indicator for taking action. In addition to signaling a 47% cash allocation, it’s also telling us to lighten up investments in both stocks and bonds.

For now, here’s what’s working so far for Q3 2019: select bonds, precious metals like gold, and specific currencies like the Japanese Yen, among others we will describe in subsequent issues of Critical Signals Report.

Reader Questions

As always, we like to use these Monday reports to address reader questions.

Following our recent report on the rising importance of gold as a key asset for the coming years, Greg O. asked about our thoughts on silver as well. Greg, the short answer is that we like silver, too, and feel its moves will mirror gold over time. We addressed silver in a prior report here.

Carl R. commented that a combination of massive infrastructure initiatives and advanced technology could help spur growth here in the U.S. and hence make us more competitive globally and over the long-term. He asked our views on this.

Well, we agree that growth of national productivity and the type of measures you proposed are a far better approach to competing internationally than precarious trade wars or taking on yet more debt. In the long run, productivity, rather than debt, is the only real direction that is viable for our economy – or any economy.

But at $72 trillion (and rising) of combined corporate, household, and government debt, we feel a debt Rubicon has already been passed from which a recession is no longer avoidable, even if such growth policies were now put in place.

Based on increasing Fed desperation and U.S. market vulnerabilities, rates will go to zero (or below) before they reach 5% again, which tells us that the U.S. is running out of short-term bullets to defend itself against the increasingly ominous signs of another recession ahead.

Week Ahead

All these converging danger signs portend a Fed policy recalibration larger than that originally anticipated/implied at the Fed’s recent getaway in Jackson Hole.

Renewed risk aversion, slower growth, and the ongoing intensification of trade tensions, have all combined to drive up the price (and hence crush the yield) of perceived safe-haven securities like the U.S. Treasury, still the best sovereign bond horse in the global glue factory.

The perceived strength and higher yields of U.S. Treasures relative to other, negative-yielding sovereign bonds are likely to see a bullish tailwind for the U.S. 10-year Treasury. But rising bond prices are not always a healthy sign in our already dangerously over-priced bond market, as risk of a yield-curve inversion rises in such a scenario.

That is, as yields on the long end of yield curve fall, we can therefore expect the Fed to cut rates more aggressively on the lower end of the curve to avoid a sustained inversion of the same. After all, inverted yield curves scream “recession ahead,” and the Fed is getting nervous.

There is more Fed Speak scheduled this Wednesday as Fed Presidents Thomas Barkin (Richmond) and Mary Daly (San Francisco) speak publicly. Wednesday, too, Japan’s removal of South Korea from a list of trusted trade partners takes effect, making global trade matters incrementally worse. Then there’s a second print of Q2 2019 GDP on Thursday. Expect a downward revision, and hence a potential downward move in the markets.

Take heed as we move into autumn of more falling and volatile markets. It’s just around the corner.

What’s Happening Now is a moving target, as the now seems to change moment-to-moment. A long Labor Day Holiday Weekend will push our next column to Tuesday next week, September 3.

Until then, be safe and be prepared. We’ll be back with you soon.

Sincerely,

Matt Piepenburg


Comments

2 responses to “Volatility Returns: What That Means For Your Money”

  1. Superb analysis as always
    KUDOS!
    The American investor NEEDS this level of plain talk information and investment advice

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