Welcome back to What’s Happening Now, our weekly digest of what’s going on that could impact your portfolio.
A strong November jobs report last week topped the news, which is likely to keep that all-important yet inherently flawed unemployment number low or lower as we head into 2020.
Although we’re less inclined than Wall Street when it comes to extracting a single payroll print too far into the future (jobs always pick up during the X-Mas retail season), the jobs print did lift GDP predications off the floor for Q4 2019.
Bloomberg is now projecting growth at 1.7% for the 4th quarter and the Atlanta Fed has once again flipped, now suddenly raising its projection for Q4 growth to 2%, based largely upon Friday’s employment report.
Between Friday’s jobs report, continuing low unemployment, and abated upward pressure on wages, there is a ‘goldilocks’ feeling among investors as we head into 2020.
Goldilocks is a feel-good concept-a key aspect of that “complacency phase“ we recently discussed that is otherwise so dangerous to the un-informed investor. We also call it a Twilight Zone, where anything can happen.
As we head into 2020, those powerful yet deeply flawed central banks are still winning the day for the markets as the economic facts continue to be largely ignored – namely low growth, high deficits, trade issues, declining manufacturing and exports.
Interest Rates Matter Going into 2020, Globally
For now, the central banks and the goldilocks crowd are winning this tug-of-war, enhancing the melt-up camp.
All we realists (not bears or bulls) can do is track how long the Fed, the European Central Bank (ECB) and Bank of Japan (BOJ) can collectively (and artificially) repress interest rates (e.g. add more refills on their cheap-debt steroid prescriptions).
As we’ve said many times-we may marvel at the stupidity and excess of these steroid-pushing central banks, but we should never under-estimate their power.
Eventually, however, it is the market, rather than the Fed, which will send rates higher. For now, of course, the central banks will fight this natural reality for as long as they can.
Let’s also not forget this – Interest rates are a global thing. Turkey, Brazil and Russia are all expected to continue to cut rates this month, unlike the big boys who have simply agreed to “pause” for now. They certainly won’t raise them…
You see, the U.S. is not the only player in this game. Central banks globally have been doing nothing but cut rates to encourage debt-based growth and to stave off local and regional recessions.
Again, this is a like a rich uncle sending a spoiled nephew a new credit card every Friday to pay all his mounting bills.
Bloomberg reports that global central banks have cut interest rates more than 750 times since 2008. That’s pretty frick’n telling-just more proof of the real wind beneath this bull’s wings…
Waning Monetary Policy-Rising Fiscal Policy?
How long can this go on? Again: we don’t know. But like any steroid, we know that it ends badly for the user, and the best way to track this inevitable over-dose is to track yields on 10-Year sovereign bonds.
As those yields rise, so too do the odds of that overdose-or “uh-oh” moment.
The bad news is that with rates so low and so negative in many regions, monetary policy as a tool is waning as a policy option. Also waning is the impact of buying back our own Treasury debt, but that’s what we’re doing for now-you know: faking it.
It’s kinda like the central banks and the corporations are reading the same playbook. But neither buying back our own government/Treasury debt, nor buying back our own corporate debt or stocks does anything to spark productivity and growth, which is what we desperately need.
Remember when capitalism used to rely on growth rather than debt to feel good?
Instead, rather than economic growth, all we get today is debt-driven growth in stock prices and executive salaries on Wall Street, and, of course, more can-kicking and thus time bought at the governmental level.
But again, that’s not economic growth, it’s just more partying on easy, cheap credit. But as all party animals know, the more the party rages, the dumber/drunker one gets.
Speaking of dumb…On the monetary policy front, there’s this bizarre new belief and steroid shot-glass gaining traction that Modern Monetary Theory (MMT) will save the day-i.e. the notion that a country can borrow and print as much as they want as it’s in their own currency. We’ve reported on MMT already …. Talk about a party-animal gone stupid…
So here we are. We’re moving from a notion of quantitative easing and monetary policy importance to a new normal of “quantitative failure” and “monetary policy impotence.”
With monetary policies (money printing and rate cuts) now reaching their end-game, this means fiscal policy (i.e. tax policies) are the next and last trick up our sleeves.
Stand by for tax cuts, some say.
Really? Cut taxes?
The Problem with Fun Tax Cuts: Rising Rates and Uh-Oh…
Well, if we cut taxes, we’ll also be cutting our country’s inbound revenue.
This will cause our deficits to explode even higher, requiring us to issue more debt (i.e. Treasury bonds) to cover these deficits.
But if we add more bond supply into the markets, bond prices begin to fall, which triggers higher bond yields, which trigger higher interest rates.
This means the Fed has pushed itself into a vicious circle or hard corner-for they are running out of ways to combat the natural forces of supply and demand, which despite Fed hubris and power, is a force and war they ultimately can’t win.
Remember: This whole, record-breaking debt fantasy, Twilight Zone market ends the moment rates rise. Party over.
The central banks will ultimately get screwed by their own artificial policies. I almost feel sorry for them.
Unfortunately, however, it will be investors who get screwed the most when the Fed falls before the awesome and natural power of supply and demand, which is why I don’t feel that sorry for them…
Here’s another vexing twist for central banks as we enter 2020 – the rise of private cyber-currencies, a game-changer for sure that leaves out the central banks. More on that in a later report.
Optimism Fades for 2020
Bottom line: 2020 is going to be an interesting year as this merry-go-round between fiscal and monetary policy slows down and bond yields and rates slowly rise up. Investors, even the most optimistic, are doubting this hated bull market, and so are we.
Stocks are looking expensive. With the stock market outperforming on deteriorating data, strategists are bracing for a correction in 2020, but hoping election-year pressures can postpone reality.
Estimates for the S&P 500 Index next year have indeed been clipped from the normal 10% to 5% (left-hand chart below), while the S&P 500 Index soldiers on – way too far above consensus for our liking (right-hand chart below).
As strategists tame their estimates, take note of this too…that despite all the hoopla as to a great 2019 uptick in the stock market, S&P 500 Financials are merely back to where they were just before plunging 80% in the 2008 crisis.
That’s nice but it’s not really a win when one steps back and looks at charted math rather than headline hype, challenging the idea that we’ve been in a melt-up all this time.
Folks: We’ve been catching up, not melting up.
Standby this week as investors focus on Wednesday’s CPI data and on Friday’s November retail sales report. Consumers have been calming down this last quarter, so the mid-month retail data should provide important clues as to how the holiday shopping season is shaping up, which in turn shapes the issue we started with above – i.e. whether current quarter GDP has a chance of topping 2%.
Enjoy the week and stay safe. We’ll be back soon.
Sincerely, Matt and Tom
2 responses to “What’s Happening Now: Melting Up… or Just Catching Up?”
December 09 2019