The Markets Didn’t Get What They Wanted From The Fed…

A Pfennig For Your Thoughts

May 2, 2019

* The Fed says the U.S. economy is “solid”… Really?
* Chuck talks economics, and brings Hy Minsky into the conversation today!

Good Day and a Tub Thumpin’ Thursday to you! I had a nice evening as son, Andrew stopped by to return something to me, and asked if I wanted to go get a bite to eat… We proceeded to run into some neighborhood friends, and there was lively chatter… My beloved Cardinals found a way to get to Max Scherzer last night, and won again… They just finished April with a franchise best record for April… That’s all good, but the season is 6 months long… But as I always say… “Games you win in April, are games you don’t HAVE to win in September”… In other words, they’re just as important to win! Faces greets me this morning with their song: Ooh La Laa… I wish I knew what I know now, when I was younger…

Well, the BIG Hoopla yesterday was the FOMC’s press conference following their two days of playing board games… The Fed surprised the markets, not by keeping rates unchanged, but by talking about how inflation had fallen below their target rate, but… The central bank’s statement walked back its March view that the economy had “slowed” from the end of last 2018, noting that recent developments show that economic activity “rose at a solid rate.”

See what massaging a GDP report will do for you? Just when you thought the Fed would give the markets the wink and nod that a rate cut was coming this year, that rogue GDP revision changes things… Not to worry though… The Fed Heads will rue the day they didn’t jump at the chance to breath life into the economy that they believe is “solid”… They’ll be proven wrong once again… But no one will hold their feet to the fire… President Trump tried to put some pressure on the Fed Heads by saying they needed to cut rates by 1 full percentage point, and begin bond buying again…

Love him or hate him, it matters not to me, but… at least he’s seeing the economy for what it’s becoming, and sure doesn’t want to see a full blown economic recession while he’s campaigning for 2020…

So, the currencies lost ground they had gained earlier this week after the Fed’s statement… Gold didn’t move and everyone was quite shocked by the Fed’s announcement that the economy is “solid”… I am surprised though that the selling of the euro and other currencies didn’t got as deep as usual, and to me, it appears the Currency Traders are hemming and hawing about what direction they want to take the dollar now, and from what I can see in the markets this morning, it’s downward…

The Bank of England (BOE) met this morning already, and left rates unchanged and cited BREXIT problems to the economy as their reason for keeping rates unchanged. The pound got sold on this news, but then it’s all kind of mixed up as the reason for the weakness, was it the BOE news, or was it the Fed news?

Well, yesterday, I told you how China’s Manufacturing index was hovering just over the line in the sand that marks whether a manufacturing sector is contracting (below 50) or expanding (50 and above)… And told you that the both the Markit version of U.S. manufacturing and the Gov’t’s version of it, called ISM, would print on Wednesday… And they did, and guess what? They are slip, sliding away, slip sliding away… The Markit print was 52.6, and the ISM was 52.8, but that was down from 55.3 in March… I told you all that the trade war would hurt both economies, and then eventually hurt all economies, didn’t I!

In addition, the U.S. Data Cupboard yesterday had April Construction spending, which went negative by -0.9%, and in March it was a positive 0.9%… So that’s a 2 point negative move in a month folks… No wonder the Atlanta Fed is forecasting a very weak, 2nd QTR GDP… Yes, the Atlanta Fed’s GDP Now system has 2nd QTR GDP at 1.2%… Of course that’s before all the massaging by the BLS gets done!

And let’s not forget that I’m still buzzing mad about the revision to QTR1 GDP… But economist Paul Rosenberg tried to explain some of it by showing that Business Inventories and Gov’t spending made up a huge portion of it… So… let’s dive further into those things… Business Inventories according to Kudlow was autos… But he told us not to worry, because consumers would be opening up their wallets soon…. And the Gov’t spending was mostly on highways and bridges… Hmmm, you can’t build a bridge or highway twice can you (unless you screwed it up the first time!)? Well, no, so, that’s why we’re in a world of hurt, folks… But the window dressing isn’t saying that, and that’s too bad, because stocks keep going higher, and people keep getting sucked in…

OK… Longtime readers know all about what I’m about to say about me, and my background and who formed the foundation of my economic theories, but there are new readers, and so I thought today would be a good day to go through some of this… Have you ever heard of Hyman Minsky? Well if you are a longtime reader of this letter, his name has come up a few times though the years, right? Well, the late great, Hy Minsky, was the catalyst behind my wanting to learn about economics… He was well known in his time, as someone that new how the markets worked… So, today, let’s highlight Hy Minsky…

First of all let me set the table here… Minsky spent his life, as an economist, on the margins of economics, but after the 2007-2008 financial meltdown, to many, it seemed to offer one of the best explanations as to why it had happened… And Minsky died in 1996! His book, Stabilizing an Unstable Economy was in high demand after 2008… Imagine that! So, here is Hyman Minsky’s idea about the three stages of debt…

There Are 3 Stages of Debt… Minsky believed in a theory called: “financial instability hypothesis” which says that lending goes through three distinct stages. He called them: The Hedge, The Speculative, and the Ponzi stages. You won’t believe how similar this is to now… for the first stage, after the crisis, banks and borrowers are cautious. Loans are made in modest amounts and amounts that the borrower is known to be able to repay both the principal and interest.

As confidence grows, banks begin to make loans in which the borrower can only afford to pay the interest. And the collateral on the loan is usually an asset that’s rising in value. And then when the memory of the past crisis is faded, and forgotten…

The Ponzi stage begins. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. And this is done under the idea that the asset that’s used as collateral will continue to rise in value. But when the asset held as collateral doesn’t continue to rise… The loan is called, and begins a very bad circle of foreclosures, failures, and bailouts.

This begins the Ponzi stage… And that’s where I believe we are now… Can you believe that Minsky’s thoughts on debt, were written many years ago? Shoot Rudy, he’s been gone since 1996! And once again I’ll say that if you don’t know about history, or learn about history, it’s going to come back and bite you in the you know what! And all those young energetic traders on Wall Street have no idea who Hy Minsky was… And they are about to learn, the hard way!

OK… enough of that today… I dedicated an entire article on the Minsky Moment when I was writing weekly articles for the Dow Theory Letters, on January 24, 2018… I was a good article, I hope you had the opportunity to read it, for you would have a better understanding of where I come from with my thoughts… Of course there are others that have helped shape my economics background… Frank Trotter is a key, so is Ed Bonawitz, and Roy Fischer, along with guys like Bill Bonner, Doug Casey, David Rosenberg, etc. It takes a village to teach a country bumpkin like me! HA!

Gold lost nearly $7 bucks yesterday, and all of the loss came after the Fed announcement, as someone (you can guess who) showed up at the COMEX with an armful of short Gold contracts… How in the world can the Fed Heads be fooled by the head fake upward revised GDP report? That’s all it was in my opinion was a head fake… And the Fed Heads went for it and came up with air, as the economy runs past them to the other end zone that is for team recession…

Today’s Data Cupboard here in the U.S. will have some conflicting data prints… One of those will be Factory Orders for March… I say conflicting because, apparently March was a blip on the radar screen for stronger growth… So the negative Factory orders for Jan and Feb will be forgotten by the markets when today’s positive number prints… In addition, today we’ll see 1st QTR reports for Productivity and Unit Labor Costs… Should be interesting…
To recap… The Fed left rates unchanged and talked about how inflation was no longer their concern, but… then they changed horses in the middle of the stream, and talked about how the economy was “solid”…. The currencies and Gold got sold on the news, for it wasn’t what the markets were expecting to hear… Recall, they, in the least, wanted a wink and nod that rates will be going lower soon, and they didn’t get that at all! Chuck talks economics and even brings Hy Minsky into the conversation today…

For What It’s Worth… Well, I spent a good portion of today’s letter talking about debt… And guess what the lawmakers in D.C. did yesterday? The Senate passed a Huge Deficit / spending bill, and sent it to the House… I found this in my email box this morning and it can be found here: https://www.washingtonpost.com/powerpost/house-leaders-scramble-to-win-support-for-budget-deal-ahead-of-midnight-deadline/2018/02/08/4812e996-0cd9-11e8-8b0d-891602206fb7_story.html?utm_term=.49c7b81a5a2d&wpisrc=al_news__alert-politics–alert-national&wpmk=1

Or, here’s your snippet: “The Senate passed a sweeping bipartisan spending bill Friday morning, but not before the federal government shut down when Sen. Rand Paul (R-Ky.) delayed the vote past midnight to complain about the budget deficit. It was the second government shutdown in less than three weeks.

The spending legislation passed 71-28, with wide bipartisan support. The bill would reopen the government while showering hundreds of billions of dollars on defense and domestic priorities, speeding disaster aid to hurricane-hit regions, and lifting the federal borrowing limit for a year. But first it must pass the House, where opposition from the left and the right made the outcome uncertain.
House votes were expected later Friday morning.
The shutdown was so unanticipated that the Office of Management and Budget didn’t tell federal agencies to prepare for it until Thursday evening.”

Chuck again… wait! What? The OMB didn’t tell anyone that the Gov’t could shutdown until last night, and that it could happen starting today? What the heck is going on in D.C.? But more importantly, more debt folks… When will it stop?

Currencies today 5/2/19 American Style: A$.7020, kiwi .6626, C$ .7440, euro 1.1205, sterling 1.3047, Swiss $.9814, European Style: rand 14.4570, krone 8.6896, SEK 9.5297, forint 289.12, zloty 3.8185, koruna 22.8770, RUB 64.63, yen 111.50, sing 1.3610, HKD 7.8444, INR 69.43, China 6.7339, peso 18.95, BRL 3.9187, Dollar Index 97.62, Oil $62.76, 10-year 2.52%, Silver $14.67, Platinum $860.98, Palladium $1,357.42, and Gold… $1,271.14

That’s it for today… I’m late, I’m late, to a very important date! I guess that’s what I get for attempting to stay up to watch our Blues last night… Our Blues were attempting to go undefeated on the road this year, but ran into a buzz saw last night, and lost… The series is tied 2-2… Back to St. Louis for Friday night… Let’s Go Blues! Well, I have more doctor things to do tomorrow and Saturday morning… Hopefully I’ll be finished on Saturday morning in time to go to the water polo game at the high school to watch my son’s team in the state playoffs… OK… the great Johnny Rivers takes us to the finish line today with his song: Secret Agent Man… Now there’s an oldie! I hope you have a Tub Thumpin’ Thursday, and well Be Good To Yourself!

Chuck Butler
Creator & Editor of:
A Pfennig For Your Thoughts