Happy Monday. We have an exciting set of deliverables coming soon (wink, wink), so keep an eye on your inbox.

But, as always, let’s start the week with a brief look over our shoulder at what happened last week and highlight the critical issues we foresee for the week ahead.

Last Week

Highlight… Labor Weakening

Last week revealed troubling data on the U.S. employment front. Jobs data unmasked a slowing economy as the U.S. added only 75,000 non-farm jobs in May, compared to a much higher estimate of 175,000 for the month and plus 263,000 jobs for April. No surprise here, as manufacturing activity last month grew by the slowest pace in two years.

It gets worse…

Check this out – filings for unemployment benefits climbed to a five-week high last week as initial jobless claims continued a steady climb up from the April lows. This is the third straight month job growth missed on all estimates, a key indicator that the economy is slowing.

 

And worse yet…

The San Francisco Fed released a disturbing indicator last week that heightens the probability that the all-important – albeit fictional – U.S. unemployment rate is poised to increase. Makes sense, as we saw filings for unemployment benefits are rising.

What’s this indicator? The SFO Fed sums up indicators like initial jobless claims, capacity utilization, and ISM manufacturing data, which, along with others, signal future uptrends in the unemployment rate.

In the chart below, you can see that the Index bottomed last September and has been rising ever since, indicating that a cyclical turning point in the labor market is going to hit a portfolio near you soon.

Why? Because in the chart below, this indicator has reliably forecast an increase in the U-3 unemployment rate, and a rising U-3 unemployment rate has reliably pointed to next recessions!

Alas, the unemployment rate is actually higher, but as anyone who has read our report on the dying middle class or the facts behind the official unemployment lie, this is nothing new. But now, not even the creative writing teams in D.C. can hide all of the bad news. That said, they are hardly even scratching the surface…


Source: San Francisco Federal Reserve Bank, Bloomberg
 

Plus, there was this Doom & Gloom report from Morgan Stanley last week…

Speaking of recessions, even Morgan Stanley seems to be catching up with our Storm Tracker. Morgan Stanley reported that its Business Conditions Index (below, which captures turning points in the economy) fell by 32 points in June, to a level of 13, down from 45 in May.

Morgan Stanley economists noted in a release to CNBC that the decline represented a sharp deterioration in sentiment that was broad-based across sectors – in fact, the largest one-month Index decline on record.

In fact, every sub-index of their Business Conditions Composite fell in June, except for credit conditions (imagine that?). Have a look…


Source: Morgan Stanley, CNBC
 

Storm Tracker Holds at 45 Knots

As you know from our Five-Part Series on Storm Tracker, we monitor these same indicators and nearly 100 more in Storm Tracker. Components within three of our five Storm Tracker categories shifted around last week (in our Trend, Leading Indicators, and Déjà Vu tools), but net/net, there was no overall change in the Storm Tracker reading.

Storm Tracker continues to clock at 45 knots of recessionary wind speed (out of 100 knots, considered catastrophic).

Think of it this way. If you were to walk out your front door and get blasted with a 45-knot wind, could you stand up? Probably not. Would a fully invested portfolio hold up? Probably not, which is why Storm Tracker is suggesting a portfolio cash allocation of just that… 45%.

This Week

Highlights…

  • Fed and BOJ meetings… expect talk on interest rate cuts
  • Heightened trade tensions… U.S./China
  • Mounting geopolitical concerns… Iran/the Middle East
  • U.S. budget/debt ceiling… focus mounts

Focus on the U.S. Fed…

This week will be sharply focused on the ever-desperate and increasingly experimental U.S. Fed. Our double-speaking Fed Reserve Chair, Jerome Powell, will likely confirm again on Wednesday that he is ready to “accommodate” on the rate front if… well, if stocks go down…

As we all know by now, our central bank has centralized control over our so-called “free market.” Normal forces of supply and demand-driven price discovery left the building years ago.

We now have a Fed that bows to Wall Street’s addicted cry for low rates and hence more debt binging (and hence more stock buyback-driven “growth.”)

In short, our geniuses in D.C. have no choice but to solve our astronomical debt problem with more debt. This can-kicking “solution” lasts until it doesn’t. And in the entire history of markets, it never lasts without a catastrophe in the end. Never. Not once.

Markets thus see a rate cut as soon as July (and no later than September), based on slower job gains, lower inflation, tariff threats, an inverting yield curve and tumbling indicators like the U.S. ISM manufacturing Purchasing Manager Index (PMI) which has slumped to the lowest level since 2016.

The hope this week is that the Fed will lower interest rates on Wednesday… that’s already priced in.

The fear this week is that they will not… and thus dim the darkening light shining through our otherwise rigged markets. But that’s where we are today: everything hinges on the Fed rather than reality.

Focus on U.S. Budget Deficits and Debt Ceiling Caps

Looking beyond next week to the months to come, here’s something else to keep your eye on. The U.S. Government is about to run out of cash and borrowing authority. Sound familiar?

Yep… here we go again. Congressional approval for FY20 budget deficits and debt ceiling caps are back on the table. FY19 closes out on August 31, just over two months from now, and Congress is far from agreement on what’s to be funded, let alone how much more will need to be borrowed. (U.S. fiscal years run from October-to-September.)

But as for debt-ceilings, they effectively no longer exist. In the end, debt will continue to rise and hence the size of our meltdown to come will simply grow larger.

For now, we’re running on a $22 trillion U.S. borrowing limit – which is totally unrealistic with spending and deficits continuing to widen demonstrably. Will border-wall funding be back in play? Another government shutdown?

Federal debt as a percentage of GDP is projected to mount sharply, as is interest on the mounting debt, portrayed below …


Source: Wall Street Journal, Office of Management & Budget, St. Louis Federal Reserve Bank

The whole negotiation process should be well underway… but no, it’s off to a slow start and could inflict another blow to the markets, prompting an uptick in the Storm Tracker.

Economic Releases…

We’re expecting another busy week of economic releases this week, including manufacturing and housing data (Monday), housing starts and building permits (Tuesday), an all-important FOMC interest rate decision (Wednesday), more on initial jobless claims (Thursday), and key purchasing manager indexes (Friday).

Buckle up… and make sure you have an ample cash allocation with the storm approaching. In the interim, and as always, stay informed and invest as such.

Matt Piepenburg


Comments

5 responses to “What’s Happening Now”

  1. Matt, was wondering if the introduction of foreign capital into our economy might sway the winds on your storm tracker? The logic being as we’re the best economy on the face of the globe, it would be where everybody would want to be. Sure we have our problems, but we usually come up with innovative and redeeming solutions. What are your thoughts?

  2. Matt,

    I like your writing and communication style. straight forward and BS. Keep it up.

  3. DID A major bridge collapse in China last week?—is US in that same posture with decaying public fixtures??…Entice private funding–put name like Walton, etc on the fixture–add a toll charge for use-to pay that private source back–over time–Americans invest in America–pd. back with toll fees..might interest a Buffett or Koch–Dell–Microsoft–Re-invent the WPA-homeless and out of work back to work–paid with toll fees??

  4. In 1913 the fed was created to “prevent recessions and depressions.” So how has that worked out. Since the fed started our dollar has declined to nothing. And of course it is a national bank in violation of our Constitution. President John Kennedy wanted to get rid of the fed because it was detrimental to our country. President Trump would also like to get rid of the fed but, unfortunately it will never happen because the deep state would never allow it.

  5. I’m not worried. Our lord and savior (Trump) will save us. He said he was very rich and would never let us down. So what if he is a con man. He tells it like it is. Changing his mind every 5 minutes. He said he is ahead in every pole so the people must like him.

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