Economic Concerns

My friend John Rubino published an excellent article noting that there are some indications that the economy isn’t nearly as good as it’s cracked up to be. Here is an article at he published that I think is worth reading and pondering and perhaps getting ready for some big problems throughout 2019.

“Remember, the Fed Hasn’t Actually Done Anything Yet”

When the financial markets got, um, choppy towards the end of 2018, the Fed caved almost instantly. But only rhetorically.

Fed Chair Powell promised to stop raising interest rates and shrinking the money supply, and the financial markets—trained to salivate at the sound of Fed happy talk—immediately morphed from “risk-off” to “risk-on.” Stocks are now approaching last year’s all-time highs, bond prices are way up (which is to say long-term interest rates are way down), and the financial press is back to celebrating the “Goldilocks economy.”

But remember that as far as actual monetary policy goes, nothing has changed. Last year’s Fed funds rate increases are still in place, while the Fed’s balance sheet remains diminished (which is to say, the cash drained from the economy as the bonds in the Fed’s account were retired remains out of action). So, the damage has not been undone, and it’s starting to bite. Some examples:

And as the following two charts demonstrate, U.S. manufacturing orders are lackluster to weak, and Corporate earnings are so weak that analysts are talking about an earnings recession.

And the slowdown is global. Here is German GDP growth that suggests Germany, the driver of European growth, is already in a recession.

What does all this mean? Mainly that despite the recent bounce in US financial asset prices, the Fed didn’t succeed in stabilizing the real economy. With the major countries pretty much all slowing down, corporate profits will likely fall this year. Falling corporate profits tend not so support record-high share prices. And the longer the slowdown continues the bigger the risk that stock investors will catch on and panic, taking us back to the flash bear market of late 2018.

Then it gets interesting. Realizing that words have failed, the Fed will be forced to stop promising and start delivering. So the second act of this play will be not just a pause but a reversal of last year’s tightening.

But this won’t work either. A modest reduction in interest rate cuts and slight increase in asset purchases will buy, at most, another two-month pop in share prices, followed by another realization that the economy is still weakening, followed by yet another, probably much bigger stock market plunge.

Eventually, we’ll settle into a permanent state of ever-increasing QE, zero-to-negative interest rates and every imaginable kind of fiscal stimulus. A simple way to gauge our place on this path is the price of gold. When Act Two (gradually falling interest rates, modest QE) is implemented, gold should bounce back up to around $2,000/oz. Once Act Three (massive, permanent QE, NIRP, bailouts for bankrupt states and cities) is in full swing, gold should pass $5,000 on its way to infinity. 

What I would suggest is that you take a glance at the gold price chart and Michael Oliver’s momentum chart (lower left) for some guidance. Don’t let the recent gold price decline get you down, because, as the momentum chart illustrates, gold has entered a bona-fide bull market even though from a price chart perspective we are not there yet.

Enough price technicians are looking at the price chart and betting that that red line cannot be taken out. But Michael reminded us that the late great Joe Granville once said, “If it’s obvious, it’s obviously wrong.” Michael opined that “We suspect current sellers are amateurs who don’t realize the nature of the beast they’re toying with. This nearly flat-lined structure should not have been approached again. If it were a bear line for gold, then last summer’s drop should have waved goodbye and produced new bear lows. We’re now back facing that line, which shouldn’t be happening if gold is a bear. Feel lucky, bears?”