Up, down. Up, down
What to make of it?
The stock market is in denial, struggling with the idea, not quite willing to give in…not quite willing to admit that the bull market of 2009–2018 is over.
Of course, we could be wrong. We frequently are. But the big risk you face…is that we’re right.
Strong as an ox
Our confidence spiked yesterday when we looked across the net and saw who was playing on the other side: one of the biggest dopes in the financial world.
Yes, we’re talking about White House trade adviser Peter Navarro. Here’s the report from The Washington Post’s Wonkblog:
‘Top White House adviser Peter Navarro says it’s a good time to buy U.S. stocks. On Monday evening, after the Dow closed down more than 450 points and tech stocks nose-dived, Navarro encouraged Americans to “buy on the dips.”
‘“The smart money is certainly going to buy on the dips here because the economy is as strong as an ox,” Navarro said on CNBC.
‘“The market is reacting in a way which does not comport with the strength, the unbelievable strength of President Trump’s economy,” Navarro said.’
‘Strong as an ox’ sounds like a good thing. But it does not accurately describe the U.S. economy we see.
A strong economy is one in which people earn more money, save it, and invest it in new businesses and new capacity so they can earn even more.
None of that is happening. The savings rate recently fell to 2.5%, about as low as it has ever been.
Consumer spending has come in surprisingly weak for the third month in a row as households can neither borrow more nor earn more.
Final sales — an unvarnished measure of consumer health — are growing at only a third of the rate of the ‘90s.
And real investment in new plant and equipment has been on a downward slope for the last 18 years — it’s now 28% below where it was at the end of the last century.
Many people, including the president, seem to think we are in some kind of boom. But there is no evidence of it. GDP growth rates continue to slow and are in danger of going negative at any time — watch out for the readings from the first quarter: they could be shockingly low.
In other words, as sentimental as we are about animals, we’re beginning to feel sorry for the ox. He has a serious long-term health issue.
And you already know what it is, don’t you, Dear Reader?
The poor beast is carrying $68 trillion of debt. He’s straining to pull all that extra weight while the feds add $100 billion more each month. He doesn’t need any more ‘stimulation’; he needs to shed some pounds.
But the larger problem with the ‘strong as an ox’ hypothesis is that if it were true, Mr. Navarro’s advice — to buy the dips — could be even worse.
The real danger for an economy with so much debt is rising real interest rates. If (when) rates rise, the hapless ox will find himself pulling uphill. A single 1% increase, for example, adds $680 billion to the annual carrying cost.
If the economy was strong, it would mean that businesses and individuals would be borrowing to expand, to drive growth…and take advantage of it.
But with the Fed now having reversed the course of their bond-buying program — quantitative tightening (rolling bonds off their balance sheet) rather than quantitative easing (buying more bonds) — the credit available to the private sector is getting curtailed.
It is as if, in addition to making the ox pull all this weight uphill, they weren’t feeding him either!
Naturally, interest rates will go up as borrowers fight with the feds for the available credit. Stocks will go down. Economist Richard Duncan summarizes:
‘The combination of trillion-dollar-a-year budget deficits and Quantitative Tightening will drive the Liquidity Gauge into record negative territory this year. Next year and the year after, the Liquidity Drain will become even worse. This is creating a toxic environment for investors. Only a trade war could make matters worse.’
Hey, a trade war? Whose idea was that? The aforementioned Peter Navarro’s, of course. Somebody should call the ASPCA.
For Markets & Money