What Will Fed’s Powell Say This Time ?
INVESTORS first read.com – Daily edge before the open deal
Tuesday, February 26, 2019 8:58 a.m.
“Wait and see,” said Fed Chief Jerome Powell on
Note: I will be changing my format in coming weeks with brief summaries of key topics up front for a quick read, then details below. I plan to address politics in a weekly blog, or more often depending on unravelling events, under the title of “Folly Sci 20/20.”
Fed Chief Jerome Powell will testify before the Senate Banking Committees and House Financial Services Committee at starting at 9:45 today, as the Street braces for what he may say this time, and they have reason to worry.
In October, Powell said the Fed was “a long way” from establishing a neutral fed funds rate, which we now know was misleading. In December, he said the Fed’s unwinding of its bloated balance sheet was on “autopilot.”
Then the Fed did an about-face in policy in January with comments that there was no need for further rate hikes and in February that the unwinding of its balance sheet would end in 2019.
Worse yet, on January 30, Powell characterized the economy as “rosy,” which simply is not true per all the reports that indicate it is struggling.
It’s struggling. A survey by the National Association of Business Economics reveals that 50% of those surveyed see a recession by the end of 2020, 75% by the end of 2021. 10% see it starting this year.
I think it has already started.
December was a disaster for reports on housing manufacturing and retail, January not much better with troubling reports on Existing Home Sales,
Leading Economic Indicators, the PMI Composite, Philly Fed Business Outlook, and the Survey Durable Goods.
Monday the Chicago Fed National Activity Index came in at minus 0.43 from a plus0.27. The Dallas Fed Mfg. Survey’s production index slipped to 10.1 from 14.5.
“KEY” ECONOMIC REPORTS THIS WEEK:
Today – Housing Starts (8:30) – Just reported for December at minus 13.4%, permits up 2.8%; Consumer Confidence (10:00)
Fed Chief Jerome Powell speaks (10:00)
Wednesday – Factory Orders (8:30); Pending Home Sales (10:00)
Thursday – GDP (8:30); Chicago PMI (11:00)
Friday – PMI Mfg. Ix. (9:45); ISM Mfg. Ix. (10:00); Consumer Sentiment (10:00)
These reports were adversely impacted to some extent by the government shutdown, and the economy may gain impetus from the Fed’s policy change.
The Stock Market:
POTENTIAL: The stock market ran into resistance yesterday, which has spilled over to today. The Street is hopeful for a favorable outcome from the U.S./China trade negotiations and Trump’s summit with North Korean’s Kin Jong Un.
– It doesn’t make sense that the market is soaring because Fed did a total about-face on policy because they were scared the country, the world, was on the edge of a recession. What if the Fed is right ?
– Stocks are entering “pricey” levels where the market cannot handle any bad news,
and there is the potential for a lot of it.
-The Street continues to revise earnings for 2019 sharply down
-Recent reports on the economy raise odds a recession (See below)is looming
–Debt (individual, corporate and government) has risen sharply due to years of low interest rates. It not only must be repaid, but additional debt to fund needs is out of the question.
-There is still risk in the successful negotiation of a trade deal with China, as well as progress dealing with North Korea.
-The Trump administration’s ability to govern may be damaged by the findings of the Mueller investigation, the renewed U.S. House investigation and Southern District of New York.
TECHNICAL: The Street is beginning to panic, chasing stocks that are moving up sharply in expectation of a favorable outcome in the U.S./China trade deal and Trump’s summit with North Korea’s Kin Jong Un.
The DJIA and Nasdaq Comp. have retraced all that was lost in the December crunch. The S&P 500 is within striking distance. The market is racing along in high gear, everyone is once again bullish, and therein lies the risk of paying up for stocks.
This is not a time when anyone wants to hear any negatives about buying. They saw their portfolio take a big hit in Q4 and want to recoup those losses and make money again.
Who can blame them. The problem is, they are not open to the risks that are present.
The biggest problem the Street has is it is spoiled rotten by a Fed-managed bull market, assurance that the Fed will step in if the market drops more than 15%.
The Fed can only do so much, as evidenced by 50% plunges in 1973-1974; 2000 – 2002; 2007 – 2009.
The Fed is in PANIC mode – respect that.
The National Bureau of Economic Research (NBER) is the arbiter of recessions drawing on a host of economic and monetary data to track the beginning and end of recessions, rejecting the simple definition that a recession is two straight declines in GDP.
I think we are is the very early stages of a recession, and that a bear market started last October. The dominos are beginning to tumble. One at a time.
However, The Fed’s abrupt change in policy could buy time for the economy and delay the beginning of a recession.
A. Gary Shilling believes we are headed for a recession and noted his reasons December issue, headlining his issue of “INSIGHT“ with “Looming Recession ?” I have tracked Shilling for decades. He nailed the 2007 – 2009 Great Recession/Bear Market before anyone else. For him to suddenly turn negative is a shocker. He details his reasons in a 50-page analysis that is overwhelming in detail and backed up with stats and graphs. No one in my experience has more economic/investing integrity than Shilling.
Shillings reasons for forecasting a recession are:
1. Output exceeds capacity
2. Stocks fall
3. Central banks tighten
4. Yield curve inversion near
5. Junk bond-Treasury yield spread opens
6. Housing activity declines
7. Corporate profits growth falls
8. Consumers are optimistic
9. Global leading indicators drop
10. Commodity prices decline
11. Downward data revisions
12. Emerging-market troubles mount
13. U.S.-China trade war escalation.
THE PRESIDENCY PROBLEM
Special Counsel Robert Mueller is closing in on Trump, et al, and this is going to get ugly. So far, the Street has ignored the issue. Bad news for Trump may not adversely impact stock prices, good news would jettison them, since it raises the odds that Trump would be re-elected in 2020.
There are other issues that can crush the market (debt, fiscal crisis, depression), but extended dysfunction in the highest office in our country has the potential for immeasurable damage to stock prices.
Investors must be prepared for the possibility of this happening. If it doesn’t play out that way, be very grateful.
What No One on Wall Street Wants to Hear
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 116 months, the second longest on record and twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months. The unemployment rate hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 119 months is four times the average of the last 15 bulls going back to 1957
>Nine out of the last 10 recessions have occurred with a Republican in the White House.
> While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. FactSet now sees Q1 this year at minus 2.7% down from minus 0.7%; Q2 at plus 0.7% down from plus 1.6%; Q3 at plus 2.2% down from plus 2.7% and Q4 at plus 8.8% down from plus 9.9%. For the year they see an earnings gain of plus 4.9% down from plus 5.6%. The Street may be looking beyond 2019 to 2020 when it sees a rebound in earnings. That’s sheer insanity. By then, a recession will be underway. When the Street sees its folly, it will slash 2020 earnings like it is slashing this year’s.
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 1945.
>Of the 10 recessions since 1950,the average time between the low point in the unemployment rate and the start of a recession was 3.8 Months.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.
Investor’s first read
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Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.