What to expect in this week’s Market Slice:
- A brief rundown of the featured content in our Concierge newsletter about the global markets.
- Goldman trader Bobby Molavi stock market predictions
- Discussion surrounding how the rate of increase in the Fed Funds rate is faster than at any time in history
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And It’s About to Break
Another week, more sideways-to-down action in the market. In Monday’s Concierge letter, we told readers that a calmer week was likely:
With global markets temporarily settled after the British Gilt shock from the previous
week and rumors of Credit Suisse and Deutsche Bank already baked into prices, there
may not a lot of news to move the US equities markets this week.
CPI data comes out on Thursday, but there’s no reason to think any outcome is going to
change the Fed’s outlook. With this market driven almost exclusively by liquidity factors
and the hopes for an end to QT and interest rate hikes, the forces that might drive
another rally, even a weak one, are simply not present.
On the other hand, geopolitical events continue to pose sharp challenges to economic
and political stability. Escalation in Ukraine, a deepening crisis and continued tensions in
China, and more structural damage to Europe because of sanctions against Russia pose
real and lasting threats to world peace, and to the hopes for economic recovery.
The tail risk of all these issues – the relatively unlikely but potentially devastating impact
that would result from any of these flash points exploding – remains the critical factor
impacting traders and investors. Asset protection and hedging against multiple worst-
case scenarios is the prime directive in this market.
It’s those tail risks that smart traders are keeping their eyes on. Goldman trader Bobby Molavi stated that if we just focus on the facts, we will see:
- a stock market down ~25% ytd,
- a bond market experiencing one of its worst performance years in history,
- a housing market that is seeing consistent price falls for first time in a decade,
- a consumer dealing with cost-of-living crisis, a global economy experiencing 2 consecutive quarters of negative GDP
- a slew of central banks that ‘no longer have your back.
Add to that the troubling escalation in Ukraine, continuing tensions with China, and the tectonic shifts taking place in geopolitical alignments worldwide, and it all adds up to a witch’s brew of potential financial disaster.
Gordon Long of MATASII.com offers the idea that something has already broken, and we are now at the point of merely waiting for the other shoe to drop. In an article titled Did Something Just Break, Long lays out his thesis:
I have long espoused that Credit leads, Markets follow!
The credit markets are becoming unglued, so the warnings are as elevated and strong as you get without something breaking! In fact, we suspect that the initial breakage occurred last week.
- CREDIT: Interbank OIS, Credit Default CDX’s And Reverse Repo’s are sending strong warnings.
- CURRENCIES: The Bank of England’s panic reversal to shore up the Gilt and Pound Stirling has sent shock waves around global exchanges.
- BONDS: IG & HY Corporate Bonds are screaming for loosened credit. The equity markets now hang on precariously as these developments begin to wash over the global equity markets.
Risk is as high as it gets before something takes the equity markets down. The question is whether the central banks will respond in anticipation or simply stand aside?
It’s an excellent article, and it’s posted for free on the MATASII site. Well worth reading, though it is long it also includes the following chart:
In case you can’t read it, the text in the lower right says The ‘Something’s Always Breaks’ Line (Fed Forced to Reverse).
Some Things Are Beyond the Fed’s Control
What we saw from the Bank of England a couple weeks ago is that central banks – including the Federal Reserve — are unlikely to stand aside as the bond markets unravel. We addressed this in last week’s Market Slice:
Right now, the Fed appears to be committed to holding the line…fighting inflation is “Job
#1,” and there is no reason to anticipate a near-term pivot, no matter what Mr. Market
thinks. When the rubber meets the road, however – that is, when a major economic or
geopolitical event upsets the status quo apple cart – the Fed is almost certain to follow in
the footsteps of their English cousins.
Keep in mind that the rate of increase in the Fed Funds rate is faster than at any time in history. Remember also that rising interest rates create trailing effects, economic impacts that often take months to show up in the “rear-view mirror” statistics the Fed uses to assess the health of the economy. Here’s how we put it in June:
Imagine trying to steer your car based on what you see when you look in the rear-
view mirror. Well, that’s how the Fed sets monetary policy… and it’s working about as
well as you’d expect.
What we’re seeing currently is the Fed is pursuing a tightening monetary policy. Their
controlled demolition of the stock market is proceeding more or less as planned. As we
suggested in January and again in May, a slow disinflation of the crazy stock market
bubble has been the Fed’s goal since the start of the year.
And as if that wasn’t hard enough, they have to accomplish this without causing a panic
in the bond markets.
Realizing too late they had overheated the markets with a bottomless punch bowl of free
money, Powell et al set the intention of bringing down inflation by slowing the economy,
which they mistakenly equate to the stock market.
Market analyst Michael Pento thinks this rapid increase in the economy’s foundational interest rate is already threatening to break something. He points to the far greater fragility in the economy today due to over-leveraging, which has greatly restricted the Fed’s “wiggle room’:
As a matter of fact, the level of borrowing costs it takes to break the economy has been reduced over time, just as the level of economic fragility has increased. It took a FFR [Fed Funds Rate] of 6.5% to break the NASDAQ bubble in 2000. It was a slightly lower FFR of 5.25% that ended up collapsing the Housing bubble of 2006. In 2018, the FFR inched up to just 2.5% over the course of three years; but that was all it took for the economy and markets to falter.
The facts show that the economic conditions extant in 2018 placed it in a much better position to handle rising borrowing costs than what we see today. What is completely ridiculous is that the Fed has the temerity to bloviate about a soft landing for the economy during this current cycle of monetary tightening, even though the economic scenario is much worse than it was four years ago. And, of course, Wall Street is promulgating the Fed’s soft-landing myth with alacrity.
No Silver Lining
One of the Fed’s refrains as they continue to prattle about this “strong economy” has been the continued gains in consumer spending. However, just like the false positive on employment data we exposed a couple months ago, this data is wildly misleading.
The reality is that Americans are continuing to spend, but that spending is on credit cards, and it’s being used to pay for living expenses we can no longer afford to cover with our inflation-ravaged incomes! According to Michael Maharrey at SchiffGold.com:
Credit card debt continues to spiral higher as consumers struggle with rising prices and
In August, revolving credit increased by a staggering 18.1% as total consumer debt
surged to a record $4.68 trillion, according to the latest consumer credit data from the
Total consumer debt increased by $32.2 billion in August, an 8.3% increase on an
annual basis. That was well above the $24 billion projection.
This is just another of many deep concerns that pose dire threats to investors’ wealth…and that create incredible opportunities for astute traders. Next week, unless some major development intervenes, we’ll turn our attention back to the two mainstays of the economy, energy and housing.