There are numerous explanations for just what in the heck is going on with the economy. Some are good. Many are bad. Today we’ll do our part to bring clarity to disorder…
Two data series it is worth paying attention to at the moment: the unemployment rate (U3) and initial claims. As the chart at the top shows, when the former makes a low it is time to worry about the economy. Low points in the U3 UE rate slightly lead the beginning of recessions. Claims on the other hand are near coincident indicators of the stock market, this is to say, lows in initial claims tend to happen within a time period of four to six weeks surrounding major stock market peaks (in most cases they lead slightly, but small lags have occasionally occurred as well). Note: neither indicator confirms an imminent turning point as of yet – initial claims would e.g. have to rise to around 300k in order to do so. The same is true of other major recession indicators, their most recent readings do not yet confirm that the business cycle is about to turn down. However, there is a lot of circumstantial evidence that indicates such a downturn may soon be confirmed, including recent market moves (i.e., deteriorating stock prices and rising credit spreads). [PT]
Several backward looking economic fundamentals show all is well. Third quarter gross domestic product increased at an annual rate of 3.5 percent. And the unemployment rate, if you exclude something called discouraged workers, is just 3.7 percent – a near 50 year low. By these metrics, the economy’s never been better.
Still, it doesn’t take much snooping around to uncover what’s really going on. Cracks in the economy’s foundation are transforming from minor hairline fissures to full blown surface fractures at about double the rate that Imperial Valley mud volcanoes are consuming Union Pacific Railroad tracks. These full blown surface fractures will further multiply as the planet approaches the next financial crisis.
Gaia’s pustules… the mud volcanoes of Gobustan, a mysterious moving mud volcano near the Salton Sea and a cold mud pot in Glenblair, California. [PT]
At the moment, for example, the auto manufacturing and housing sectors are breaking down. Last week, General Motors announced they plan to cut 14,000 jobs and close five factories. What in the world is going on?
We suspect that General Motors’ present failings have something to do with the fact that they aren’t very good at making cars. Do you own a General Motors car? Do you know anyone who owns a General Motors car? We don’t either.
An early GM reputation destroyer – the 1971-1977 Chevi Vega. According to Popular Mechanics: “Legend has it that when Chevrolet Division Manager John DeLorean went to the GM Proving Grounds to get his first look at a prototype of the new 1971 Chevrolet Vega, the front of the car literally fell off onto the ground. But that bad omen didn’t keep DeLorean from putting the …read more
Worldwide Liquidity Drought – Money Supply Growth Slows Everywhere
This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China) as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).
Nobody likes a drought. This collage illustrates why.
The liquidity drought is not confined to the US – it is fair to say that it is a global phenomenon, even though money supply growth rates in the euro area and Japan superficially still look fairly brisk. However, they are in the process of slowing down quite rapidly from much higher levels – and this trend seems set to continue.
Euro Area – Money Supply Growth Still High, But Slowing Fast
The chart below shows the euro area’s narrow money supply aggregate M1 (stock) and its year-on-year growth rate. M1 in the euro area is almost equivalent to US TMS-2, which makes it a good enough stand-in (it includes savings deposits that are in practice payable on demand; however, it lacks euro deposits belonging to foreign residents and central government deposits).
It is worth noting that a slowdown to a 0% growth rate triggered crisis conditions in 2008. After a sharp, but short term spike in money supply growth after the ECB made emergency liquidity facilities available to European banks to mitigate the fallout from the US housing bubble implosion, crisis conditions promptly returned when these facilities expired and money supply growth fell to around 1% in 2011.
Euro area, M1 (~TMS-2): Total in millions of EUR (blue line) and y/y rate of change (orange line). We have highlighted the three most recent slowdowns in money supply growth associated with economic crises and declining asset prices. In 2000, a slowdown to 5% annualized growth was sufficient to trigger an economic downturn in concert with a recession in the US after the technology mania ended. It not certain yet where the threshold will be this time, but there are already some indications that it may be at a higher level than in 2008 and 2011. The current growth rate of 6.8% is still quite brisk, but it is down from more than 14% at the peak in 2015 and this downtrend is almost certain to continue.
Although recent surveys show that lending standards in the euro area have eased considerably, bank lending growth remains quite anemic. Lending to non-financial corporations recently grew at just 1.75% y/y, while lending to households grew at approx. 2.6% y/y. Total bank credit growth (incl. lending to governments and other loans) amounted to 3.5% y/y, which is quite similar to recent bank credit growth in the US (3.4%).
In other words, most of the expansion of the money supply in recent years can be ascribed to QE – and the ECB has halved the size of its asset purchase program again to EUR 15 billion per month as …read more
The Last Thing to be Left Standing – Alas, Not Yet
The price of gold was about unchanged this week, whereas that of silver fell another nine cents. All Serious Right Thinking people agree that the world does not need gold. Indeed our monetary system produces Great Moderations that are totally unlike the incredible volatility of the gold standard era. They wish they could kill all memory of gold as money.
Ben Bernanke, the inventor of the “Great Moderation” fairy tale, somehow felt compelled to explain in 2012 “why the world will never see another gold standard”. One day this will probably turn out to have been an unwise deployment of the word “never” – since is not exactly known for the accuracy of his forecasts, regardless of their time horizon. Although he dismissed gold as an unimportant residual of tradition, the very central planning agency he led at the time for some reason does keep quite a bit of gold under lock and key behind a 140 ton steel door, both for itself and similar agencies domiciled abroad. [PT]
They don’t do this by pushing the price down, but by encouraging people to think of gold as a chip in the Fed’s casino. Something you buy because it’s going up. Or short because it’s going down.
Something that is supposed to go up in response to increases in the quantity of what now passes for money (which is the basis for one of notion of a modern gold standard — just have the Fed target the gold price). When it, of course, doesn’t then people lose that much more faith in the metal.
Somewhere, Emperor Palpatine is chuckling with a dry, mirthless laugh. “Good.” Of course Palpatine is malevolent. Those under his spell, who sell their gold never to touch it again (or so they think) are making a mistake.
It is an apodictic certainty that this smirking tyrant hates gold and funds his empire with the printing press. [PT]
As an aside, there is a curious feature of the monetary debate. We cannot think of any other policy debate which has this feature. The would-be revolutionaries accept the same false beliefs as the court philosophers. Take this idea of the so called great moderation.
It wasn’t great except the amount of debt added, with diminishing return. It wasn’t moderate, if you take your eyes off consumer prices (soft) and asset prices (relentlessly rising). It was an epic collapse in interest rates! Some advocates of the gold standard use the great moderation as an argument, claiming that this was due to a Fed policy that kept the gold price within a range.
Which is it? Is the Great Moderation (so called) an argument for the brilliance and wisdom and efficacy of central planning? Or is it an argument for the gold standard? Or is it a hybrid, an argument for central planning based on one?
One way or the other, gold will come back into use as money. Whether it will …read more
A Plethora of Headaches
We hope the recent market turmoil is not giving our readers too much of a headache. As you are no doubt aware, the events of the last few weeks have made maneuvering around global markets rather difficult.
A less than happy NYSE floor trader [PT]
Photo crdit: Brendan McDermit
The US faces uncertain economic times, as Trump and Xi Jinping remain locked in a bitter trade dispute that is likely to go on for some time, creating uncertainty for the future of economic relations between the world’s two biggest economic powerhouses [ed note: over the weekend news emerged that Trump and Xi agreed on a truce and no further escalation in the dispute should be expected for the time being, but it remains to be seen whether the hatchet will remain buried for good].
On the other side of the Atlantic, Brexit is still not off table – on the contrary, it has proved to be an endless saga which has been in the media spotlight for almost two and a half years now. On top of that, Italy’s budget drama is giving the markets the jitters, as is the latest confrontation between Russia and the Ukraine.
The USD is rallying strongly against this backdrop, which is contrary to its typical behavior at this time of the year. What should one make of this development? Will the US dollar continue to appreciate, or will its usual pattern of a seasonal decline at the end of the year prevail?
The Euro Typically Rallies at the End of the Year and Falls Again Immediately Thereafter
The chart below illustrates the seasonal trend of the euro relative to the US dollar. It is not the type of price chart one usually encounters. Rather, the seasonal chart depicts the average trend in the euro in the course of a calendar year.
The horizontal axis shows the time of the year, the vertical axis the average percentage move in in the exchange rate over the past 43 years. In this way the seasonal trends of the euro can be discerned at a glance.
Euro vs. US dollar, seasonal trend over the past 43 years. A strong seasonal uptrend in the euro is in evidence at the end of the year.
The period of seasonal strength in the euro at year-end is highlighted in blue. This phase begins on November 27 and ends on December 31.
Thereafter the euro typically declines again. If you look closely at the chart, you will notice that the change in trend occurs precisely at the turn of the year. This is quite conspicuous and there has to be a reason for it – more on this further below.
Strength in the Euro at the End of the Year is no Coincidence
The average gain in the seasonally strong period between November 27 and December 31 amounts to 1.24 percentage points – quite a sizable amount, as currencies tend to be far less volatile than e.g. stocks.
The following bar …read more
Yosemite Sam Gets Worried About Federal Debt
In a talk which garnered little attention, one of the Deep State’s prime operatives, National Security Advisor John Bolton, cautioned of the enormous and escalating US debt.
Deep State operative John Bolton, a.k.a. Yosemite Sam [PT]
Photo credit: Mark Wilson / Getty Images
Speaking before the Alexander Hamilton Society, Bolton warned that current US debt levels and public obligations posed an “economic threat” to the nation’s security:
“It is a fact that when your national debt gets to the level ours is, that it constitutes an economic threat to the society. And that kind of threat ultimately has a national security consequence for it.”*
Annual federal surplus/deficit and total federal debt. Things have clearly gotten a bit out of control in recent years. [PT]
What was most surprising about Bolton’s talk was that there has been little reaction to it from the financial press, the markets themselves, or political commentators. While the equity markets have been in the midst of a sell-off, it has not been due (as of yet) to US deficits, currently in excess of $1 trillion annually. Instead, the slide has been the result of fears over increase in interest rates and the continued trade tensions with China.
Interventionism is Expensive
While Bolton’s warning about the debt is self-serving, it is accurate in the sense that the US Empire which, in part, he directs is ultimately dependent on the strength of the economy.
“National security” is not threatened by a debt crisis which would mean a compromised dollar, but such an event would limit what the US could do globally. Real national security is defense of the homeland and border control – not intervention abroad.
War mongers like Bolton are fearful that a debt crisis would necessitate a decline in US power overseas. America is fast approaching what took place with the British Empire after its insane involvement in the two World Wars and its own creation of a domestic welfare state which exhausted the nation and led to the displacement of the British pound as the “world’s reserve currency.”
The US-led wars in the Middle East have been estimated by a recent Brown University study to have cost in the neighborhood of $4 trillion.** Despite this squandering of national treasure and candidate Trump calling the Iraq War a “disaster,” as president, Trump increased “defense” spending for FY 2019 to $716 billion.***
US military bases around the world. Note that these numbers fluctuate from year to year, and to some extent also from source to source, but this map shows a fairly credible approximation. [PT]
Wily Enemies and the Coming Crisis
Profligate US spending and debt creation has, no doubt, been noticed by those outside of the Empire. It is probably why Russian President Vladimir Putin has been so hesitant to take any serious action against the numerous provocations that the US has taken around the globe and against Russian interests directly.
The wily Putin probably figures that an implosion of US …read more
How to Blow $9 Billion
The life cycle of capital follows a wide-ranging succession. It is imagined, produced, consumed, and destroyed. How exactly this all takes place involves varying and infinite undulations.
The Stroh Brewery in Detroit. The company provided an example of how wealth that has been accumulated over generations can be completely destroyed due to just a handful of really bad decisions. [PT]
One generation may produce wealth, while the next generation burns through it. Various facets of a person’s capabilities, understanding, industry, and character can determine if they are producers or consumers. The most determinant facet of this, however, is how one approaches their unique circumstances.
The July 21, 2014, edition of Forbes Magazine documented the Stroh family’s methodical rise and swift disappearance from the beer brewing business. The print edition of the article titled, How to Blow $9 Billion, began with the following summary:
“It took the Stroh family over a century to build the largest private beer fortune in America. And it took just a few bad decisions to lose the entire thing.”
What worked for the Stroh family was taking a long time horizon. Wealth was built by incrementally acquiring and growing a loyal and devoted regional customer base. What didn’t work for the Stroh family was its debt financed acquisitions of Schaefer and Schlitz, and the costly bid to become a national brand.
The Shaefer brewery in Brooklyn, built in 1849. The Shaefer brothers established the business in 1842 after immigrating to the US from Germany. They brought with them the recipe for Lager beer, which was unknown in the US at the time. Not surprisingly it was a big hit. [PT]
By the 1980s, Stroh had gotten too big for his britches. One early morning, with little marketing budget left over after servicing debt and operating costs, a valuable insight came to CEO Peter Stroh: Acquiring national customers is expensive. What’s more, unlike regional customers, national customers are fickle.
Within a decade the 150 year old Stroh family beer business was sold off at fire sale prices. We mention the capital life-cycle of Stroh, as an example. Our interest today is not the experience of Stroh, per se. Rather, we’re interested in wealth.
Where does it comes from? How is it accumulated? And how it is destroyed? Here at the Economic Prism we like to keep things real simple. Thus, what follows, is an attempt to simplify things for our own elementary edification…
How Wealth is Produced, Accumulated, and Destroyed
As we understand it, when a depositor makes a deposit he is, in essence, lending money to the bank. But what does the money represent? If the deposit is earned money, it represents something of equal value produced by the depositor’s labors. The deposit also represents something the depositor would rather save than consume.
For example, the deposit could represent a coffee table. In this regard, there are only a few things to do with a surplus coffee table. You could store it for your own future use. You could trade it with a neighbor for …read more
US Money Supply and Credit Growth Continue to Slow Down
Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell’s speech was regarded as dovish. If it actually was, then it was a really bad idea to buy stocks because of it.
Jerome Powell: a new species of US central banker – a seemingly normal human being in public that transforms into the dollar-dissolving vampire bat Ptenochirus Iagori Powelli when it believes it is unobserved.
We say this for two reasons: for one thing, the Fed is reactive and when it moves from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.
In this case it seems more likely that Mr. Powell has tempered his views on tightening after contemplating the complaints piling up in his inbox and looking at a recent chart of 5-year inflation breakevens. After all, there is no evidence of an imminent recession yet, even though a few noteworthy pockets of economic weakness have recently emerged (weakness in the housing sector is particularly glaring).
Recall that the last easing cycle began with a rate cut in August 2007. This first rate cut was book-ended by a double top in the SPX in July and October. Thereafter the stock market collapsed in the second-worst bear market of the past century – while the Fed concurrently cut rates all the way to zero (and eventually beyond, in the form of QE).
For another thing, regardless of what Mr. Powell says, quantitative tightening continues at full blast for now. There is little to offset it, as growth in inflationary bank credit remains anemic. Mind, we do not see this as a negative development, on the contrary. It will hasten structural improvement of the economy by discouraging further malinvestment of scarce capital. Nevertheless, it is definitely bad news for overvalued “risk assets” and existing malinvestments.
Our friend Michael Pollaro has provided us with the table shown below, which tracks outstanding Fed credit and the components contributing to changes in the total. It shows that QT has really grown some teeth in recent months; as expected, the year-on-year decline in net Fed credit is accelerating of late. It is bound to accelerate even further in coming months, as several difficult y/y comparisons are directly ahead.
Developments in outstanding net Fed credit (as of 01 November). A year ago Fed credit was still growing at 8.9% q/q and 4.6% y/y, despite QT already being underway. The decline in securities held outright was primarily offset by the rundown of reverse repos with domestic banks. These are …read more
Battles for Civilization
A major theme of my work — and raison d’etre of Monetary Metals — is fighting to prevent collapse. Civilization is under assault on all fronts.
Battling the barbarians at the gate… [PT]
There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travelers to provide the password to their phones so the government can go through all your data, presumably including your gmail, Onedrive, Evernote, and WhatsApp.
China is now developing a “social credit” system, to centrally plan the economy and control citizen behavior. Canada has made it a crime to call someone by the wrong gender pronoun. Even in the US, whose First Amendment has (mostly) stood as a bulwark against censorship now has a president who threatens antitrust action against Amazon, because its CEO Jeff Bezos owns the Washington Post, which prints things he does not like.
On college campuses, professors are harassed if they say one thing that the professional sensitives are sensitive to. If a controversial speaker is invited, he risks an angry mob coming to disrupt his talk (or worse).
Sacrifices on the road to Utopia. [PT]
Then, there is the nearly-over war against patients’ rights to purchase health care services from the provider of their own choosing, and health care professionals’ right to sell services to patients at a price they prefer. In the US, insurance companies are still forced (as under Obamacare) to provide insurance to anyone who applies, even those who have pre-existing conditions. This would be like forcing home insurance companies to issue policies to people whose houses are currently on fire. It is not insurance, but an unfunded welfare program.
The use of practical energy sources is in the battle for its life. Germany and Japan are de-nuclearizing. Other countries flirt with taxes designed, not to raise revenue, but to reduce the use of fossil fuels. While many may go along with this, thinking it is OK to pay another 50 cents a gallon for gasoline, this will not be nearly enough to force large numbers of people to do without. Gasoline for driving to work and oil for heating homes has a highly inelastic demand.
The price would have to rise enough to force people to change their lifestyles, abandoning their spacious houses in the suburbs to crowd into tiny urban apartments. In Europe this month, I saw petrol around $8 a gallon. And they use so much fossil fuels that more taxes are demanded to reduce carbon dioxide much further.
Saying hello to European gas prices… [PT]
Few Want a Free Market in Money
And don’t even get us started on money. Even otherwise-free-market economists, and even wealthy entrepreneurs and business leaders, are for a properly managed irredeemable currency. One prominent person who is all of the above recently declared that if the Fed adopted GDP targeting …read more
Political Correctness Indoctrination
[ed note: we are posting this belatedly as it was originally supposed to be published on Thanksgiving Day. Unfortunately your editor was out of commission… but MN Gordon’s article is still worth reading. – PT]
Ordinary ideals of Americana range as far and wide as the North American continent. The valued conviction of one American vastly differs from that of another. For example, someone from the Mid-Atlantic may have little connection with someone from the Midwest. Their connection with Cascadia may be even less.
Socrates thinking at students and tourists in front of the Academy of Athens [PT]
Next door neighbors often find their similarities to be sparse. One may celebrate adventures in mysticisms. Another may find inspiration sitting in a college football grandstand. While a third struggles to free himself of the orthodox hobgoblins that suffocate his soul.
In the midst of this, the fake news media recites the story of the national struggle with delicate and excruciating regularity. They frame all happenings from the locus of the two party political system… any diverging views are carefully sifted out. What’s reported is only what the story script editors allow to pass through their single micron particulate filters.
We are told a never ending Marxian tale of the evil rich exploiting the noble poor. We’re offered story after story with arduous focus applied to gradations of skin color, fractions of ethnicity, and the virtues of non-binary gender designations. Political correctness condescends any exceptions with forceful rigor.
Even worse, we are told the individual must submit to the greater good of the collective. That what is yours is theirs, and that what is theirs is not yours. On top of that, the goal of hard work and paying one’s way in life has been reduced to a game for suckers.
What You Make of It
Nonetheless, we find the popular drivel to be miserably altered from the America we see and experience when we step down our front stoop each morning. We also find the abundance of thought polluting newspeak and commonsense destroying political correctness to be insulting and intolerable.
We are confident that, despite being told what to think, people are capable of figuring things out on their own. They don’t need a government website to tell them to bite an aspirin and call 911 if their heart jumps out of their chest. From our observations, people can accomplish remarkable things without the promises of Washington.
When it comes down to it, the American experience is for each individual to make of it what they will. Along the way, and despite their best efforts, no one escapes from getting kicked in the face every now and then. But even in the worst of times, there’s always something to be grateful for when pause is given for reflection.
The Turkey police have no time to rest on Thanksgiving Day. [PT]
Perhaps that’s what makes Thanksgiving Day unique in American culture. It doesn’t matter if you bow down before the God …read more
The “Risk Asset” Dip Not Worth Buying is on its Way
The prices of the metals rose, gold by +$11 and silver by +$0.25. The question on everyone’s mind (including ours) is: what will cause a change in the gold price trend, or what will make gold go up in a large and durable way? And that leads to another way of looking at this question.
Here is a very good technical reason to adopt a constructive attitude toward gold despite the fact that its nominal price in USD terms is seemingly not going anywhere of late. By remaining fairly stable in recent weeks, gold is rising relative to the S&P 500 index (SPX). In other words, the purchasing power of gold is increasing – and not only relative to the stock market. Similar trend changes can be observed elsewhere (e.g. in gold vs. industrial commodities). We will soon discuss this in greater detail. [PT]
Price is set at the margin. We have covered several times Warren Buffet’s pointed (and disingenuous) comment that gold has no utility. It just sits, and there is a cost for it to sit. And an opportunity cost.
So why do people buy something which has no utility and no return? One, which we discuss a lot, is speculation. They buy whatever is going up, in an attempt to cash in on the rise. So let’s not dwell on this.
A second reason is fear of counterparty default. Third, is gold is a non-expiring hedge for monetary collapse and/or a currency regime change. This is a broader version of simple counterparty default.
Right now, General Electric is in the news. Its investment grade rated bonds are trading like junk bonds. This is like an echo from the past. Bear Sterns retained its investment-grade rating until just before its demise.
GE has about $115 billion in debt. If it defaults, that could put fear into a lot of investors. They will certainly buy Treasury bonds (which are defined as risk free). Will they buy gold, which is the only financial asset which is truly free of default risk? Maybe.
Cost of insuring against a default of GE bonds (5-year CDS spread) compared to an investment grade 5-year CDS index. This strongly indicates that the markets no longer regard GE worthy of an investment-grade rating. Naturally, the markets may err; in fact, based on the sum of its parts, an outright default of GE appears quite unlikely at the moment. GE has assets whose value and profitability compares favorably to its admittedly large debt hoard (which it is busy reducing via non-core asset sales). Of course the markets are actually not saying “GE will default” – what they are saying is that the risk of a default down the road has increased. Hence the qualifier “at the moment” above: we have to at least assume ceteris paribus conditions – but conditions are certain to change in the future and may well become challenging (e.g. a recession could strike). …read more
Precious Metals Patterns
Prices in financial and commodity markets exhibit seasonal trends. We have for example shown you how stocks of pharmaceutical companies tend to rise in winter due to higher demand, or the end-of-year rally phenomenon (last issue), which can be observed almost every year. Gold, silver, platinum and palladium are subject to seasonal trends as well.
Although gold and silver are generally perceived to trend in the same direction, there are actually big differences in their seasonal trends [PT]
Seasonal Analysis with our Web App
We have used our Web App (app.seasonax.com) to show you the seasonal trends in prices for precious metals. The chart below depicts the seasonal pattern of the gold price. It shows prices over a specific time period, in the form of the average performance of prices over many years in the course of one calendar year.
Gold Price in USD, seasonal trend over 34 years
The price of gold typically rises from early August until February
Gold prices tend to exhibit a seasonal rally in the second half of the year, with the bulk of the advance beginning in early August. Looking at the following year, one can observe that the rally continues throughout January. The area with the slightly darker blue background highlights the positive seasonal trend in the chart above.
The Gold Price has Increased 23 out of 33 Times in the Positive Seasonal Time Period
The positive seasonal period between August 7 and February 1 of the following year has been characterized by rising gold prices in 23 out of 33 cases. The average profit in rising years was 8.87%, while losses averaging 5.22% were posted in declining years.
The bar chart below depicts gold price returns over the positive seasonal time period for every year since 1971. Years in which gains were recorded are represented by blue bars, years in which losses were recorded by red bars.
Gains (blue) have been recorded more often than losses (red).
It can be clearly seen that gold tends to rise more often than decline in this time period and that the advances are stronger than the declines – the green bars depicting positive returns are both more frequent and larger than the red bars. It is also evident that even this positive seasonal time period for gold failed to generate large returns between 1980 and the late 1990s – which is not surprising, as the gold price was mired in a large-scale bear market over these years.
The Festive Season is More than Just Christmas
The main reasons for the positive seasonal gold price performance between early August to late January are various festivities. After all, gold is not only an investment asset and an industrial metal. Around two thirds of annual gold production are used in jewelry. Not surprisingly, jewelry fabrication therefore affects prices. The festivities in turn are taking place at specific times of the year – and the associated gold purchases are following a …read more
Investment Grade Junk
All is now bustle and hubbub in the late months of the year. This goes for the stock market too. If you recall, on September 22nd the S&P 500 hit an all-time high of 2,940. This was nearly 100 points above the prior high of 2,847, which was notched on January 26th. For a brief moment, it appeared the stock market had resumed its near decade long upward trend.
We actually did not believe in the validity of the September breakout attempt: the extremely large divergence between the broad market and the narrow big cap leadership was one of many signs that an internal breakdown in the stock market was well underway. It is probably legitimate to refer to the January 2018 high as the “orthodox” stock market peak – the point at which most stocks topped out. [PT]
Chartists witnessed the take out of the January high and affirmed all was clear for the S&P 500 to continue its ascent. They called it a text book confirmation that the bull market was still intact. Now, just two months later, a great breakdown may be transpiring.
Obviously, this certain fate will be revealed in good time. Still, as we wait for confirmation, one very important fact is clear. The Federal Reserve is currently executing the rug yank phase of its monetary policy. As the Fed simultaneously raises the federal funds rate and reduces its balance sheet, credit markets are slipping and tripping all over themselves.
This week, for example, seven-year investment grade bonds issued by GE Capital International traded with a spread of 2.47 percent. For perspective, this is equivalent to the spread of BB rated junk bonds. In other words, the credit market doesn’t consider GE bonds to be investment grade, regardless of whether compromised credit rating agencies say they are.
Spread of 7-year GE bond over mid-swaps – this bond retains an investment grade rating for now. We have discussed the problem posed by the proliferation of bonds rated in the lowest investment grade category in detail previously – see: “Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk” [PT]
But it’s not just GE debt that’s in question. Per a tweet by Scott Minerd, Global Chief Investment Officer at Guggenheim Partners:
“The selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun.”
The fact is, there’s now around $3 trillion of bonds rated BBB, the lowest rating bracket above junk. How much of this debt – like General Electric bonds – should be rated junk that isn’t? We suspect the next liquidity event will clarify the answer to this question.
The real question, however, is how did $3 trillion of questionable debt pile up to such a perilous level to begin with? What follows is an attempt at an answer…
How Fake Capitalism Works
One popular delusion is that America operates under an economic framework of capitalism. One where businesses, and …read more