Last week was crazy in the markets, and this one will likely be no less so – if not crazier.
When you add up all the irrationality out there, and whimsical behaviors on the part of investors, we’re definitely in a twilight zone of monstrous proportions.
Last week, the equity markets showed both their sane and insane sides: sane for dipping on sagging macroeconomics and insane by rallying at week’s end on a bet (frankly, a guarantee) that the Fed will lower rates again this month, and then again and again…
But it’s these low rates (now negative in Japan and Europe) that got us into this pickle in the first place.
Sure, in the near-term, low rates buy time and a rationale for dip-buying.
Longer-term, however, the debt bomb they create will eventually explode and money will burn.
When will the insane get sane? That is, when will markets stop rising on bad news?
Again, we saw a smidgeon of that last week, until the insane reappeared, almost on cue.
Here’s the Deal
You’ll recall that famous T.V. series, The Twilight Zone, introduced by Emmy Award-winner Rod Serling back in 1959.
It served up a strange mix of horror, science fiction, drama, comedy, and superstition – all in, a pretty good description of where we are today.
Here’s the horror: Global debt is now (2019) greater than $250 trillion, across financial and non-financial corporates, governments, and households.
Here’s the science fiction: Reported CPI inflation Y/Y of 1.7% is actually closer to 10%.
Here’s the drama:The top 1% are ridding a rigged market high, while most of Main Street America doesn’t have $1,000 bucks in their savings account.
Here’s the comedy:The Fed tells us everything is fine, despite emergency-mode desperation in the rate markets and over $1 trillion in printed money to bail out our recently dried-up repo markets.
And here’s the superstition: The Fed has your back despite a 0 in 9 record for recession forecasting.
Roll it all up, and that’s where we are now.
In the near-term, the Fed can continue to drop rates and print money all day, week, or year long to keep investors seduced.
At least until it can’t or they are no longer…
And on that score, it sure looks like we’ll get some more Fed steroids this October in the form of a third rate-cut, with more by year-end given the way things are not going. That is, the worse the news, the more “accommodative” the rate cuts:
The Fed rate cuts this time will be targeted to solve the mounting problems in the service and manufacturing industries, charted below. Hiring is down:
The key here going forward as labor pains mount, is whether household income will hold up enough to keep the consumer spending, for without that trusty consumer, growth will slow. And we all know what that means… it means demand slides off the rails.
But then again, who needs rising demand at all in a Twilight Zone where the Fed trumps reality?
Let’s think about that, deeply. Is a third, 25-basis point rate reduction going to encourage weakening jobholders to spend more, or borrow, or spend more to save our economy? We don’t think so.
What we do know is that weak hiring is the normal precursor to rising unemployment, and when unemployment begins rising (off alleged, yet nevertheless reported record lows), that’s historically been a bad sign:
So, what bucket do we put this in – the idea that a Fed rate cut will somehow rescue the slowdown in hiring, keep folks employed, buoy demand, and therefore growth just in the nick of time?
Would you put this line of reasoning in the (1) horror, (2) science fiction, (3) drama, (4) comedy, or (5) superstition bucket?
These are all valid choices.
Introducing the “Twilight Zone Poll”
We’d like your view. Please take a moment to pick and place in the Comment Box below just one of these five bucket labels, or a sixth – “none of the above.”
We’re calling this the “Twilight Zone Poll.” There’ll be more like this, so please chime in. We’ll post poll results in next Monday’s What’s Happening Now.
Back to Basics
Let’s just remember the basics as we charge ahead into Q4 2019. Stocks are up, thanks to questionably unethical stock buybacks and tumbling interest rates, which Wall Street loves, because it brings cheaper leverage to the casino and more debt-driven “earnings” to the c-suite.
A little inflation would be helpful, too, but it seems not to be in the cards with wage gains abating.
Then again, we already know that inflation, as reported by the labor department, is far more fictional than even the best Twilight Zone episode. After all, if inflation were honestly reported (at 10%), who would buy U.S. Treasuries with negative 8% real (i.e. inflation-adjusted) returns?
Update on Storm Tracker and Déjà Vu
Heading into the final quarter of 2019, Storm Tracker (which tracks nearly 100 leading indicators for stormy weather ahead) has remained consistently in the 45%-47% range for several months now.
While individual indicators within our defined groups of indicators (GDP, yield curves, trend, and other leading indicators) have moved around a bit, the total score has remained consistently high – 46 knots of wind off our bow.
The one worrisome change though is in the Déjà Vu indicator, the spread between equities and interest rates.
Remember Déjà Vu?
Thanks to recent market activity, the Déjà Vu spread (i.e. its “jaw”) is beginning to close, pictured below. And to remind, Déjà Vu is our timing indicator for stormy weather ahead and carries a 20% weight within Storm Tracker.
See that red circle in the upper right corner of the graph below, enlarged beneath?
That circle highlights a closing spread between the S&P 500 Index interest rates. The sloping white line within the circle marks support.
And that’s where Déjà Vu is at the moment – at key support. If it breaks through that supportive trendline, the oncoming storm we are predicting is likely to gather steam.
On the other hand, remember… we’re in the Twilight Zone. Nothing is as it seems or as it used to be, thanks to markets driven by Fed action rather than natural price action – i.e. actual market forces of human supply and demand.
If the trendline holds and the spread widens in the days and weeks ahead (as it has three times since late 2017), then we’ll get a little more borrowed time… and we mean “borrowed” because it will be payback time when Déjà Vu breaks trend and hits zero.
In other words, a melt-up from here would put us deeper into a fictional Twilight Zone of risk once natural market forces get the last dark laugh over Fed manipulation, which is slowly losing its prior punch with each interest-rate cut.
In short, the Fed and Wall Street should be careful what they ask for; once they get to zero rates (or below), who will buy our bonds?
Entering October, Déjà Vu has traveled 15% of the way to the critical support line. Once it breaks through, look out below…
It’s a busy week ahead. Be on the lookout for gobs of the inflation-related “data” headed your way this week, namely producer, consumer, and import prices – along with inflation expectations.
Inflation is key… and we’ll need more of it soon, as continued deflation would put us in the “horror zone.” But no immediate fears there, as the fiction writers at the Bureau of Labor Statistics (BLS) can conjure up a little inflation whenever needed.
The BLS is a master at making 2+2 = whatever they want, and whenever an emergency so requires it.
More Fed speak this week as well and more on China trade talks, a resolution of which would immediately send markets out of the Twilight Zone.
Small business sentiment and jobless claims are also on the docket.
As for politics and political risk, well that’s an entirely different topic, one we’ll have to address once the partisan war in D.C. sends a clear signal.
As for now, stay careful, stay patient, and stay informed.
17 responses to “You’re Now Entering the “Twilight Zone” – Here’s What to Watch Out For”
October 07 2019