Atlanta Fed Numbers:
I think part of this is related to February market volatility with short volatility trades blowing up (a lot of people were doing these) as well as crypto currencies imploding. I was at a cocktail party in December with about a hundred people. Of the 2 dozen I talked to who were interested in the markets, 3 people were in stocks, 17 in bitcoin, litecoin, etc. Money that they would have spent in Q1 was essentially lost in the crypto market. I see this slow down as a blip that will recover.
For the JPM article, I think the economy is rocking on all cylinders and the chances of a recession are low. I think the bigger danger to the markets is inflation ramping up – which ironically is a good thing because it means the economy is doing so well thanks to business confidence in Trump. They are catching up on business expansion and hiring from the Obama years when they would put their ideas on hold due to his uncertain and sometimes hostile attitude towards business. Our own small business, Simpler Trading, has gone from 19 employees to 42 employees since Trump was elected.
Additional notes on inflation:
Fundamentally, consumer confidence is strong and consumers are spending. Jobs are being created, manufacturing is very strong, jobless claims are at a 45 year low, and wages are up. Unemployment has dropped to 4%. The leading index of leading economic indicators keeps hitting new highs. The same is true in other countries. This indicator typically tops out and declines prior to a recession – that is not happening now and it is telling us that there is no recession in sight.
The yield curve also usually inverts prior to a recession. This means the short term interest rates rise above the long term rates. That hasn’t happened either.
New home sales are climbing – so no concerns on that front either. Where I live in Austin, TX it is a tinderbox of economic real estate related activity.
The main concern for the markets right now? Stronger jobs and jumps in interest rates are all signs that inflation is getting triggered, which would then push interest rates up even faster. This in turn would be bad for stocks “further down the road.”
The most important market in the world right now is interest rates. It is very likely that a multi-decade long reversal is taking place in interest rates, something that hasn’t happened since 1981, when the 30 year peaked around 15% and put in a top. Since that time, interest rates have been trending lower. This means a huge bear market in bonds could just be getting started (as interest rates rise, bond prices fall). This move will be exacerbated by any signs of inflation, as bonds and inflation mix like oil and water.
One red flag sign is utilities, which have been rolling over and it has acted as a leading indicator in the past. This is not a sign of the economy but a sign that inflation is kicking up a fuss. Utilities are treated like bonds and the fact that they are selling off so hard shows the market starting to take interest rate rises seriously. The idea that the Fed would “not raise rates due to economic uncertainty” is going away and being replaced with the idea that “the fed will be forced to raise rates to combat inflation.”
China, a huge buyer of US bonds over the years, is saying it will start to slow down purchases, or even stop them, due to trade war tensions. This would also drive up interest rates.
The biggest short term impact will be in mortgage rates – if you are thinking of refinancing, do it now.
WHY IS THIS IMPORTANT? In the past, the Fed could talk hawkish but stay dovish on rate decisions if there was any economic turbulence. If inflation truly kicks in, they won’t have any choice but to raise rates aggressively.
The U.S. wants to keep the dollar weak, as this helps US trade. The US trade deficit is 4% of GDP. The rule of thumb is that any country with a trade deficit of more than 2.5% of GDP is set for a major currency sell off. This is also inflationary.
A weaker dollar makes US exports less expensive and imports more expensive, which is a positive for US business, stock market, economy – and it would reduce the trade deficit which would also fuel inflation which would also fuel interest rates to rise.
All of this points to inflation kicking in and forcing rates hikes. Scary thought? When we had $4T in US debt, we paid $385B in annual interest payments. Now with $24T in US debt, we pay . . . the same $385B in interest payments. What happens as these notes have to be rolled into higher rate instruments and payments start hitting over a trillion a year? Investors need to start thinking about wealth preservation in the face of that outcome.