Peter Schiff is an economist, financial broker/dealer, author, frequent guest on national news, and host of the Peter Schiff Show. He follows up his daily two-hour show with a weekly, two-hour podcast focusing on weekly economic data analysis and unbiased coverage of financial news, both in the U.S. and global markets. As entertaining as he is informative, Peter packs decades of brilliant insight into every news item. Join the thousands of fans who have benefited from Peter’s commitment to getting the real story out every week. qqawrh5c
The Fed Has Served Government Well, Not America – Ep. 478
See Peter at the Las Vegas Freedom Fest – July 17-20
Save $50 using code SCHIFF
Gold: Six-Year High Overnight
Overnight the price of gold rose to a six-year high. We almost got to $1440. I think the high I saw was maybe $1438 - 39… we were up about $19 at the high point. Then it became a very volatile session overnight into the wee hours of the morning. But I think by the time we got into the New York time zone, gold was still up about $10-$12-$13 dollars on the day and it was up about that amount when the U.S. stock market opened for trading.
Before Today, Gold Stocks Up 20%
Gold stocks initially had a small rally, but nothing big. Then they spent most of the day on the downside. Obviously the gold traders are still very cautious. As I have been saying, this gold breakout, even though we did see pretty big moves in gold stocks, I think the GDX, not counting today's losses, (the GDX was down about 2% today) but not counting today, we were up 20% in the month of June. So, still, a very big rise. But really not nearly as big a rise as it should be, considering, I think, the significance of this gold breakout. Except, of course, if people don't believe it. If they're cautious about it, so they're reluctant to bid up the price of gold stocks.
Investors Still Reluctant on Gold and Silver - Why?
The same thing with silver. In fact, silver never had much of a rally today, and it actually settled down, I think 8 cents on the day, even though gold ended up finishing up $4 - well off the highs. But it didn't close negative. At one point during New York trading, the price of gold was negative on the day, but it managed to bounce back for the close. Silver, I think, ended at 15.33. The gold/silver ratio that I spoke about on the last podcast now, I think is close to 93:1. Again, I think investors are reluctant to buy up silver because they are expecting the price of gold to roll over.
Gold Breaks out but Investors Remain Cautious – Ep. 477
Recorded June 21, 2019
See Peter at the Las Vegas Freedom Fest - July 17-20
Save $50 using code SCHIFF
S&P Record High: Why?
U.S. stock market averages finished an up week on a down note. In fact, the S&P 500, before closing negative on the day made a new all-time record high. The S&P is the only major index that did make a new record high this week, in fact Donald Trump tweeted about the record high in the S&P twice yesterday. As soon as the market gapped open at a record high, Donald Trump tweeted out a reminder that the S&P opened at a record high, and then when it closed at a record high, he sent out a second tweet to remind everybody that the stock market closed at a record high.
Fed's Lower Rates Behind Stock Market Highs
The idea is that he's taking credit for it. The stock market is doing so well because Donald Trump is President, and if anybody else were President, the market would be collapsing. That's the impression that Donald Trump is trying to convey. But, of course, the reality is the opposite. The reason the market made a new high is because investors are relieved that the Fed is going to cut interest rates. So, it's lower interest rates that is behind the record high in the S&P - not anything Donald Trump has done.
Low Interest Rates Needed to Bail out Economy
Now, Donald Trump is saying, "Hey I've been telling the Fed to cut rates!". So maybe he can claim credit for the fact that the Fed is cutting rates because he beat them up so much, but that's really not what he is trying to claim. He's trying to claim that the rising stock market is indicative of how great the economy is under his presidency. But, it's not because the economy is great that the Fed is cutting rates, it's because it's lousy!
Heading for Recession
The Fed is cutting rates because the economy is headed for recession. So if that's the only reason the stock market is going up, that the economy is so bad that the Federal Reserve has to abort their rate-tightening campaign, and they have to come to an emergency rescue mission, they have to try to bail out the economy with rate cuts, is that really something that Donald Trump should be bragging about?
Visit me at the Benzinga Trading Conference, NYC tomorrow
Fed Tweaking Language to Officially Adopt Easing Bias
Keeping with its tradition of having a tendency to act incrementally, the Federal Reserve Open Market Committee today announced that it was leaving interest rates unchanged - which was the consensus. There was an 80% probability that the Fed would leave interest rates unchanged. The other 20% was that they would cut rates. So there was a zero percent probability that the Fed would increase rates. But before delivering an official rate cut, what the Fed wanted to do was to prepare the markets in advance and take one step in that direction, which was to tweak its language to officially adopt a bias toward easing, which is exactly what the Fed did.
Fed to Sustain "Expansion"
The Fed basically acknowledged that the economic data had been weakening and that they wanted to do what was appropriate, or that they were willing to do what was appropriate to sustain the expansion. Now, they didn't come right out and say that the economy is headed for a recession; even though that is exactly what is happening. They said they wanted to see more data before they moved. But after they failed to cut rates, the probability for a rate cut in July, which is the very next time the Fed meets, rose to 100%. So they took the 20% probability for the cut in June, since we didn't get it, the markets added that to the 80% probability of a cut in July.
Looking Toward Negative Data
Which means the markets are convinced that whatever data the Fed sees between now and the July meeting in going to be bad. It's not going to be good (positive) data. Of course, it IS going to be bad data. The data has been bad. The economy has been weakening. We've been seeing a series of weakening economic data. The economy is not just slowing down, it is headed to a recession. That is something that the Fed will never admit.
Recorded June 14, 2019
Gold: Up Today
When I recorded my podcast last Friday, I speculated that the price of gold might gap up the following Monday above $1350/oz., but that didn't happen because over the weekend Donald Trump managed to tweet out a face-saving way in which to not impose the tariffs on Mexican products that may have gone into effect on Monday. The markets breathed a sigh of relief. So, instead of gapping up. the price of gold went the opposite direction and gapped down.
Fourteen Month High
This morning, we got the gap. It was on the last day of the week, not the first day of the week, but gold gapped higher on the day. It was actually trading as high as $1356 or $1357 earlier this morning. That was a 52-week high in the price of gold. In fact, it was a 14-month high. We were actually up even before we got any economic data. I think the high of the day might have been before the U.S stock market opened, when we were up about $15 or so.
The Key is Above $1350
What happened was, at 8:30, prior to the opening of the U.S. market, we got some economic data that was a bit stronger than expected. And that stronger than expected data rained on the gold rally parade, sending the price of gold down on the day. It only closed down about a buck or so, but we did not hold above $1350. Now the key level is not really $1350 - it's a little bit higher up, because the price of gold has been above $1350 twice before, I think, in the last six years, not counting today. But it wasn't able to hold. That's the key. We need to see the price of gold get higher. Maybe close above $1375.
Gold the Favorite Trade for the Next 12-24 Months
There's a lot of noise. That's where all the resistance has been coming in - between $1350 and $1375. But nonetheless, I think, as I said in the last podcast, the more times we knock on this resistance door the more likely it is that the door is going to open. In fact, the buyers continue to come in to the price of gold. I was listening to an interview with Paul Tudor Jones. He was asked what his favorite trade was for the next 12-24 months, and his answer was gold. And a lot of smart people are now coming out and saying that, "Yeah, gold's going higher. Gold's got everything going for it, and they want to be involved. And of course I think if the price of gold does what I think it is going to do, and what some other smart people think it's going to do, well then the price of gold stocks are going to do even better.
Recorded June 10, 2019
Tariffs Off, Gold Gapped Down
On Friday's podcast, I speculated that potentially we could see a gap up in the price of gold, gapping above the $1350 resistance level that has capped every gold rally for the past 6 years. But gold actually gapped in the other direction. It gapped down about $13 and it was down all day - never filled that gap.
Catalyst for Sell-off
The catalyst for the gold sell-off was Donald Trump calling off the tariffs that were supposed to go into effect today. The five percent across the board tariffs on Mexico. That announcement came out on Friday, pretty much right after I finished recording my podcast, we got the news. So I immediately knew that that forecast probably was not going to come to fruition, or that speculation, potentially. Because I knew the markets would react positively to this news. After all, everybody was rightly worried about the negative impacts that those tariffs would have on the U.S. economy, in particular. They weren't as worried about Mexico, at least when it comes to the gold market, but they were worried about how it would impact the U.S. economy.
One Less Thing for the Fed to Worry About
And of course, one of the reasons (of course there are many) that the Fed is talking about cutting rates is because of all the uncertainty that is being created because of tariffs. If there aren't going to be as many tariffs, if the Mexico tariffs aren't going to actually happen, well then that's one less thing to worry about, and maybe that's one less reason for the Fed to cut rates.
Mexican Tariffs are a Sideshow
Of course, cutting rates is part of the reason that people have been buying gold; the reason we had that big 8-day rally, which came to an end today. What's been powering the gold rally is the talk of Fed rate cuts. Now I don't think today's sell-off is going to be significant. It's just one more time we knocked on that resistance door and it didn't open, but it is ultimately going to open. Because at the end of the day, the Mexican tariffs are a sideshow. The main event is that the U.S economy is going into recession anyway, and the rate cuts are coming.
Recorded June 7, 2019
Dow Finished the Week with a 4.7% Gain
The Dow Jones soared 263 points today, although at one point the index was up better than 350 points. But it managed to finish the week with a 4.7% gain. That is the best showing for the Dow Jones Industrials in 6 months and in fact we snapped a six-week losing streak this week. All of the major averages had positive weeks. The NASDAQ - the best gainer on the day; up 1.7% - not quite as strong on the week because it took a shellacking on Monday with the FANG stocks leading the way down - but up about 3.7% on the week. Similar gains for the Russell 2000, the Dow Transports, the S&P 500 not quite as strong as the Dow - I think up about 4.2% on the week.
What was the Catalyst?
But why? What was the catalyst for this big move up in the U.S. stock market? Was it better than expected earnings? Not really. Some companies beat estimates. Take a look at some of these recent IPO's like Zoom Video. Zoom Video was up 18% today because it earned 3 cents a share instead of the one cent that Wall Street was expecting. Now, 3 cents per share is not a lot of earnings when you're a $94 stock, but that's where the stock is.
Beyond Meat to Infinity and Beyond
Even more ridiculous is Beyond Meat, which is beyond sanity as it's going to infinity and beyond. Now, Beyond Meat was up almost 40% today, $138.65. The high was $149.46. This stock is already more than tripled its IPO price - or quadrupled, I can't really tell. Now they're still not making money at Beyond Meat, so they still haven't moved beyond losses. The company lost $6.6 million on the quarter; that's 95 cents per share. But it is an improvement, because a year ago, in the same period, they lost 98 cents a share. If you adjust it, if you back out a lot of other stuff, like stock-based compensation and things that nobody likes to count, then they only lost 14 cents per share, which was better than the 15 cents a share loss that Wall Street was expecting. So clearly that's worth an extra 40% on the price of the stock. I forget what this thing is trading; 100+ times revenue. It is a crazy multiple, but at least the stock has a viable product.
ZIRP and QE Are Now Conventional Monetary Policy – Ep. 472
Recorded June 5, 2019
Volatility Led by NASDAQ
There's been a lot of volatility in the stock market since I recorded my last podcast on Friday. In fact, on Monday, the tech stocks in particular got beaten up. The NASDAQ dropped by better than 150 points, led lower by the so-called FANG stocks (Facebook, Amazon, Netflix, Google). Google and Facebook, the biggest drop - I think it was something like 6-8%. Part of that had to do with the Justice Department investigating Google.
Enlisting the Power of Government in the Marketplace
Of course, I don't think that we should be involved at all in anti-trust. Almost all of the companies that have been broken up or that had been put through the ringer by the U.S. government achieved whatever type of market dominance they had based on just being good competitors, delivering the best quality at the lowest price. And government just came in and really what they were doing was advocating for competitors that were having a problem competing. It wasn't because the consumer was getting ripped off; in general the consumer was being rewarded with low prices and high quality. But companies that couldn't compete, since they couldn't win in the marketplace, enlisted the power of government to work for them. So government, really is not about preventing monopolies - they create monopolies. The government comes into a market and legally gives a company a monopoly and uses the power of government to make sure that nobody competes. This is all a bunch of nonsense that we need government to "keep the markets free".
Moving Away from Risk
But, in general, if you look at what was happening to the markets on Monday, there was a huge movement from growth stocks, momentum stocks, speculative stocks, riskier stocks, to defensive stocks - value oriented stocks. The Dow Jones was actually positive on the day - it wasn't up a lot, but it was up, even though you had a 150 point drop in the NASDAQ. I think that is an important key, because this is something that needs to happen and it is long overdue, that investors start to get more defensive in anticipation of a weakening economy.
Dividend-Paying Stocks More Attractive
You have all of these high-multiple stocks, their P/E's are going to have to come down to earth. And, of course, people are looking at a slowing economy, they are looking at lower interest rates - they believe they are going to get lower interest rates, so it makes sense that dividend-paying stocks would be more attractive in a falling-rate environment.
Ep. 471: Mexico Won’t Pay for the Wall or the Tariffs
Sell in May and Go Away
U.S. stocks closed out the week and the month of May with heavy losses; the DJIA down 354.84 points. Pretty much going out near the low of the day. That's a drop of 1.4%. NASDAQ also getting killed - 114.57 down - that was a 1.5% decline on the day. The Russell 2000 continues to melt down. That index falling 20 points - down 1.35% on the day. But the biggest losses continue to be in the Dow Jones Transports. That index was down almost 2% - 1.9% - 188.4 points. This is the worst May for U.S stocks since 2010. The Dow is down about 7% just in the month of May. Remember, "Sell in May and go away"? Well it hasn't worked in a while, but this was a great time to sell May first!
Russell 2000 and Dow Transports Weakest Indexes
Again, I told everybody that I thought the bear market rally was over based on the Fed not being as dovish as the markets expected, and it's been down hill from there. If you look at the Russell 2000 and the Transports, these two indexes did not make new highs. Remember the Dow and the S&P, the NASDAQ made new highs. Now, they're all down considerably - the Dow is 8% off those highs now. But the Russell 2000 and the Dow Transports did not make new highs, and now they are the weakest index and now the Russell 2000 is down just under 16% from its peak, and the Transports - over 16%. So both of those indexes are about 4% points away from being officially back in bear market territory, which means 20% from the highs. We could easily be there next week, on these stocks.
Debacle du Jour: Gap
Now the other indexes have further to go, I mean the NASDAQ is only down about 9% from its peak. So 1% away from what Wall Street would officially call a "correction". The retailers continue to also be hammered. The Debacle du Jour was Gap, which gapped down by about 15% on the day on weaker than expected sales. The stock managed to rally most of the day, so it only closed down a little over 9%. But still, it closed better than 47% below its 52-week high.
Domestically Focused Stocks Weakest
But, when you have the Russell 2000 and the Transports the weakest part of the market, those are the most domestically focused stocks. Those are the stocks that are the weakest. So everybody who keeps talking about how great the U.S. economy is, if they look at the market, the market is telling you a different story.
Bond Buyers Correct About Recession But Bet Won’t Pay Off – Ep. 470
Recorded May 29, 2019
The End of the Bear Market Rally
Back on May 1, when I did my podcast, I officially called for the end of the bear market rally that so many people had confused for a new bull market, and the impetus for that call was the Fed coming out and not living up to Wall Street's expectations for just how dovish the Fed was. Remember, the market was starting to factor in rate cuts, not just an end to the tightening cycle, but the beginning of the next easing cycle. And Jerome Powell basically threw cold water on that by talking about how low inflation was transitory, and how he expected it to go back up, and all of a sudden the markets were starting to think that the Fed wasn't going to cut rates and the market went down a bit.
The Fed Giveth and the Fed Taketh Away
I thought that given that the rally was built based on the Fed, that what the Fed giveth by being more dovish than the markets expected the Fed had finally taken away by being more hawkish. Even though I didn't believe that the Fed was as hawkish as the markets believed, I believe the Fed is far more dovish than the markets believe. But once Powell dashed those hopes, that was enough, I thought, to take the wind out of the sail of the rally.
Throwing Down the Gauntlet on Trade
And then, of course, Donald Trump, himself, pulled the rug out from under the market when, the following weekend, he basically threw down the gauntlet on the trade war; tweeted out that he was going to be imposing 25% tariffs across the board on Americans who want to buy any Chinese products. And then the markets really started to fall. Although, I said at the time, that if the markets really perceived how great the threat was, they would have been down quite a bit more. But we now have two back-to-back better than 200-point declines in the Dow.
Will Tesla Crash the Corporate Bond Market? – Ep. 469
Recorded May 22, 2019
Low Inflation is Transitory
Today we got the release of the most recent minutes of the Federal Open Market Committee, and I guess it was a bit of a mixed bag for people who were looking for whether the Fed was going to be more hawkish or more dovish with respect to its next move on interest rates. One thing that was revealed in the minutes that the governors still maintain, they are still saying that they feel that this "low inflation" that we've been experiencing is transitory. What that means is that it's temporary and the low inflation is going to go back up toward their 2% target. This is supposedly a hawkish statement, because if the Fed were worried that low inflation was going to persist, then they would do something about it to save us from the horrors of not having the cost of living rise at a fast enough clip.
When It Comes to Inflation Fighting the Fed Is All Bark and No Bite
But, as far as I'm concerned, none of this even matters, because a) they are right, inflation is transitory, and b) it's not even as low as they think because the CPI is not accurate. So inflation is already higher than what the official numbers reveal. But even if it is transitory, which it is, and even if the numbers go north of 2%, which they will, the Fed is going to do nothing. People still don't get it, that when it comes to inflation fighting the Fed is all bark and no bite.
"For Some Time" Means Forever
But then if you look at what the Fed said in the same minutes with regard to their "patience" with respect to the next rate hike, remember, the Fed went from pretty much auto pilot - they were raising rates, they were tightening - to being "patient", and being "appropriate", and now, if you read what they said, they said that it is going to be appropriate to remain patient "for some time". Now what does that mean - "for some time"? Basically, it means forever. What the Fed is basically saying by saying that it is appropriate to be patient for some time, meaning, "you don't have to worry about any rate hikes".
Don't miss the movie, "The Housing Bubble" premiering June 26, 2019
Back in Puerto Rico
I am finally back in Puerto Rico, after having spent 8 long days in Las Vegas for both the SALT conference and The Las Vegas Money Show. I really do enjoy coming back to Puerto Rico, I miss it quite a bit while I'm away. A lot of people who are thinking about making the move to Puerto Rico to take advantage of the tax benefits that exist here… One of the reasons that people are reluctant to come down here is that they don't want to uproot their family and move to a place where they really don't know anybody, they leave their friends, they leave their family members… I'll tell you, for me, personally, probably the best thing about being here, other than the tax breaks and the beautiful weather are the people that you meet when you come down here. It is an incredible group of people that have moved here. I think we're building a great community of quasi-ex-pats here in Puerto Rico. So, if you're worried about not having enough friends and not having enough to do, that's the least of your worries. So I certainly would recommend that more people would consider making the move to Puerto Rico.
Visit Me at the Freedom Fest in Las Vegas July 17-20
But I am also looking forward to going back up to Connecticut, I'm going to be spending most of the summer there. We'll be leaving the weekend of Memorial Day. By the way, if you didn't have an opportunity to come to any of the events in Vegas, I will be back in Vegas again in mid-July for the Freedom Fest.
Appearing at the Premiere of "The Housing Bubble"
I will also be in New York City on June 26 to attend the premier of the movie, "The Housing Bubble" on June 26. You can buy tickets at the website letusdisagree.com. The movie is a documentary about the 2008 housing bubble, but it features a lot of people who were predicting or warning about the bubble before it popped, and warning about the financial crisis. Of course, I am one of those people who was issuing those warnings, but I'm not the only one. It's a very good documentary; I'll be there. I think there's going to be a Q&A period with me and some of the other people who were featured in the movie at the event. So it would be great, if you're in the New York area this summer, June 26, go on letusdisagree.com and buy yourself some tickets.
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 – 15, 2019
As Noted on My Last Podcast…
As I suspected on Friday's podcast, the 400-point reversal that saw the Dow move from down 300 points + to up 100 points on the close was in fact, reversed today, and the Dow Jones actually closed below the Friday low, which is a huge negative, technically for the index. The Dow was down 617 points; that's about 2.4 %. But the real carnage was in the NASDAQ. That was down 3.4%. The Russell 2000 also down better than 3% - 3.2%, showing that domestically focused stocks are actually getting hit harder than the multi-nationals.
Lyft and Uber Still Sinking
More trouble again for the recent IPO's, in particular, the ride-hailing companies Lyft - down again, another 5.8% off the lows of the day - the lowest $47.17, closed at $48.15. The Uber disaster continues. Uber was down almost 11% today. At one point, it was down 12% - the low was $36.08. We closed at 37.10. Remember we came public Friday. This is only the second trading day. Uber came public at $45, and now it is at $37.10, and as I said again on last week's podcast, these types of stocks are going to get particularly hit hard if the market carnage continues, which I think it will.
China: No Deal
I think the bear market rally is over - I've been saying that, "Long live the bear market". The Bear market rally is dead. We are going a lot lower. The catalyst today was also something that I was pointing out on my podcast last week, and that was the fact that we are not going to get a deal with China. I've been saying for a long time, that even if we got a deal, it would be, "buy the rumor, sell the fact". But I also said that it was becoming obvious that Trump had so over-promised the "great deal" that it was almost impossible to have a deal without disappointing the markets. So, I think Trump made a calculated decision that no deal is better than a deal that disappoints, especially since he had already goosed the market up to new highs. So even if we sold off, Trump could say, "Well, this is some short-term pain; it's necessary for the long-term gain." and it may, in fact be the catalyst that causes the Fed to cut interest rates and launch QE, which is what Trump wants.
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 – 15, 2019
Recorded May 10, 2018
Why Escalate Trade War If Negotiations Are Going so Great?
The U.S. stock markets finished off the worst week of the year with a gain despite the fact that, as expected, the trade talks between the United States and China broke down today, and no deal. The new tariffs went into effect at 12:01am this morning. Despite the fact that Trump is now retaliating by escalating the trade war, he still claims that the discussions are going well, that they are making a lot of progress. None of that makes any sense. If things are going well, and you're making progress, you don't escalate the war. That makes no sense. All that is going to do is piss off the Chinese. So, if everything is going so well, you would not want to do that.
Maybe Trump Would Rather Have the Tariffs
This shows that things are breaking down, that there is some desperation and Trump feels he has to turn up the pressure in order to try to force the Chinese into a deal. Although, I am not even sure Trump believes a deal is actually better than the tariffs. First of all, I don't believe that Trump is going to be able to deliver the type of substantive, game-changing great deal that he has been promising. So, from that perspective, if Trump actually believes that tariffs are good for the U.S. economy because it means we're going to get some kind of windfall, that the Chinese are going to be sending us all this money, well then maybe he prefers the tariffs to a deal that does not live up to the hype.
Tariffs Are Simply Another Tax on the American People
But, of course, Trump is wrong if that's what he believes. The tariffs simply represent taxes on the American consumer. They are just one type of tax. You can have a sales tax, you can have an income tax, you can have a tariff. All the taxes are paid by American people. It doesn't matter what you call them or how you want to levy them, that's where the money is coming from. So, if you think lower taxes are good, then you can't think tariffs are good. Unless you're going to offset the tariffs by cutting taxes someplace else and say, "We're going to fund government through tariffs as opposed to funding government through another source. But the tariffs in and of themselves do not deliver a benefit to Americans. They simply make products that are subject to the tariffs more expensive to buy. So Americans have a choice: pay the higher price or don't buy the product.
Did Trump Tank Stocks to Force Rate Cut? – Ep. 465
See Peter at the SALT Conference at the Bellagio, Las Vegas May 7-10, 2019
I just arrived in Las Vegas, where I will be spending the next 8 days - I actually have 2 conferences heres; I have the SALT Conference (SkyBridge Alternative Asset Conference) that really kicks off tomorrow, though there is a welcome reception tonight, and then I do the Las Vegas Money Show, which kicks off on Monday. So I'm here for quite some time. I haven't even unpacked my bags, though. I wanted to record a short podcast to comment mainly on the market volatility.
Buyers Bought Dip on Monday
The stock market was way down on Monday morning. Of course, the selloff started in the futures market on Sunday night, where the Dow futures was down over 500 points at one time. But by the time we opened, the Dow was only off about 450 and the dip buyers came in, and they bought the market all day, and we closed near the highs. It couldn't close positive - I think the Dow was only off about 70 points. So the buyers came in as they are trained to do. They bought the dip.
Trump's Tariff Tweets
What caused the initial selloff was a pair of tweets; the two tweets were related. A lot of times, when Donald Trump sends out a tweet, he has a lot of stuff in there. or he will send out 2 tweets to make the same message. And, what happened is he basically said that he was going to impose more tariffs on China. He tweeted that, by this Friday, he is going to "up" the 10% tariffs to 25%. So Americans who are now being taxed 10% for buying some Chinese goods, if they buy those Chinese goods starting on Friday, they will have to pay a 25% tariff on those goods.
New Additional 25% Tariffs
He also tweeted that he was going to apply the 25% tariff to goods that right now aren't paying any tariffs. So there are still a lot of Chinese goods that Americans could buy without being subject to tariffs, but now Trump is saying that now that is going to go away. At the end of this week, he's going to hit those goods. So Americans buying pretty much any Chinese products are going to have to pay a 25% tariff.
Additional Tax on American Consumers
Now, of course, Donald Trump thinks these tariffs are great, because he believes the Chinese pay them, which, of course, is not true. The tariffs are added on here in the United States, so it is the American consumers who pay those tariffs. Now, it can hurt China because if the higher prices cause fewer Americans to buy Chinese goods because they don't want to pay the higher price, then China doesn't sell its goods in America.
Recorded May 3, 2019
See Peter at the SALT Conference at the Bellagio, Las Vegas May 7-10, 2019
Jobs Surge in April, Unemployment Rate Falls
Today is Jobs Friday; the first Friday of the month, that we get the nonfarm payroll number. I don't know if the markets anticipated more or Donald Trump, because of course he's ready to send out a tweet when we get a better than expected number. That's what happened today; we got another number that was better than expected. Certainly the headline number - they were looking for an increase of 180,00 jobs, which would have been a bit of a reduction over last month's 196,000 jobs - which was revised down slightly to 189,000. We ended up getting 263,000 jobs, so another number with a 2-handle - a much bigger number than had been anticipated, and the unemployment number, also surprisingly dropped. Two tenths, from 3.8% to 3.6%. Hispanic unemployment actually hit an all-time record low. I expected Donald Trump to tweet about that, because obviously he's being accused of being a racist. Clearly, if he can show that, "Well, look, Hispanic unemployment is at an all-time record low, how are my policies racist, if we have a record low in unemployment among Hispanics?" He did tweet about the jobs numbers and the low unemployment numbers.
Which Numbers are Fraudulent Now?
But again, I reminded Trump (not that he actually ever reads my tweets, he gets so many) that when he brags about how low the unemployment rate is, the official rate, I always remind him, "Wait a minute, you are the person who accused these numbers of being fraudulent, fakes, phonies, a scam - Donald Trump as a candidate was very critical of Barack Obama's phony recovery mainly because Obama was hiding behind (what Trump said were) fraudulent statistics. Well, these are the same statistics that Donald Trump is embracing - the same statistics that he criticized. So, I guess the President no longer about all of the discouraged workers who are no longer looking for work, he doesn't care about all the people who are working part time, but would prefer to work full time, but they can't find a full time job, so they settle for a part time jobs. These are the people who are not included in that 3.6% unemployment rate. The President cared about those people when he was a candidate.
The Fed Is Far More Dovish Than It Admits – Ep. 463
Recorded May 1, 2019
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Market Looking for Validation of Expectations
Today was the conclusion of the FOMC meeting in which the Federal Reserve left interest rates unchanged, and that is exactly what the market was expecting. Nobody expected the Fed to hike, and nobody expected the Fed to cut. But apparently, a lot of people expected the Fed to be more dovish with respect to its outlook for a potential future rate cut. Remember, the Fed Fund futures are showing that the next move is likely to be a cut and that maybe the Fed will cut by 50 basis points by the end of the year, so the markets are probably looking for some reassurance from the Fed that the market's expectations of lower interest rates are valid, and that's not what they got today from Chairman Powell.
Inflation Below 2%. Who Cares?
'In fact, he was actually asked, point blank, by CNBC's Steve Liesman - it was one of the first questions asked, maybe it was the first - whether or not the Federal Reserve was going to do something about persistently low inflation, because, after all, the official inflation rate is slightly below their target. I mean, if the target is 2%, we're at 1.7%, 1.8%… Who cares? But somehow this is an emergency, this is a disaster - we're not hitting our 2% target, even though we're pretty damn close. But, is the Fed going to do something about it? And instead of saying, "Oh, yes, we're going to do something about it, we're going to cut rates to make sure that we have 2% inflation", what Powell said was, "Well, yes, we acknowledge that inflation is lower than we would like and its lower than our goal, but we're not worried, because we expect it to be transitory." In other words, we're not worried about inflation being too low, because we believe the inflation rate is going to rise, and so there's nothing to worry about. In fact, what Powell said was that the Fed will be patient, but as of right now, they can't see a reason why they should hike or they don't see a reason why they should cut.
Q1 Likely the Strongest Quarter of the Year – Ep. 462
Recorded April 26, 2019
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Q1 GDP Expected at 2.3%
Today we finally got the first estimate for the U.S. GDP in the first quarter of 2019, and typically the first quarter of the year has been rather weak. That has been the experience pretty much going back through the Barack Obama administration. And the consensus was for a 2.3% rise in Q1 GDP, that would have been just a slight improvement over the 2.2% number that we got for the 4th quarter of 2018.
Expectations Were Low
If you remember, way back, a couple of months ago, everybody was really low. You had a lot of people who were looking for Q1 GDP to come out with a zero handle. But they had been ratcheting up those expectations now to a consensus of 2.3%. A lot of it had to do with the fact that the trade deficits had come in a lot smaller than people thought. I think the reason for that is because the trade deficit really ramped up in the last couple of quarters, probably because businesses were trying to front-run the tariffs that were supposed to come in at the end of last year. That might have caused extra imports to try to get things in under the gun before they were subjected to the tariffs. So because we pulled all that forward, imports weren't as much in the first quarter, so they did not subtract as much from the GDP.
Inventories Continued to Build
Also, the inventories continue to build, but most importantly, because they weren't selling. Goods weren't selling as much - inventories were building. That ended up helping. We ended up getting a number that was much bigger than consensus. We actually got 3.2% GDP growth for Q1.
Delaying the Day of Reckoning
Now, before you get all excited, "Aha, Peter, you were totally wrong on this, you were looking for a weak number…" - first of all, a lot of people were looking for a weak number. It wasn't just me. But I do believe that we simply delayed the day of reckoning by a quarter. I think this time, it's going to be the second quarter that will be a big disaster.
Raise the Voting Age, Not the Smoking Age – Ep. 461
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Easter and Passover
I hope everybody enjoyed their Easter holiday, in fact, today is Easter Monday, so many parts of the world are still celebrating, including here in Puerto Rico. We are still in the holiday of Passover, so hopefully everybody who celebrates Passover, myself included, is still enjoying that holiday. In fact, this year, the first night of Passover coincided with Good Friday; a rare occasion that unites the two religions. We generally end up celebrating both.
Removal of Sanction Exemptions Drives Oil Prices Up
The markets have been quiet around the holidays. The big story today in the markets was the price of crude oil - up about $1.60/barrel. We're now at $65.71 per barrel. This is a new high for the year. Today, the catalyst was the Trump administration announcing that they would be withdrawing the exemptions that allow certain countries such as Japan, India, China - a number of countries currently buying oil from Ira. Now we're saying no more exemptions. They're saying, if you buy oil from Iran, then you're going to get sanctioned. Generally, what that means is the U.S. is going to shut you out of access to the dollar-based financial system - wiring and using the resources of the Fed. Considering that most of the world still transacts internationally in U.S. dollars is a very very serious punishment that the U.S. is able to dole out to any nation that does not do its bidding.
Effect on our Trading Partners?
Now, of course, this angers our trading partners who do not like being dictated to by the United States, they do not like the United States being able to tell them who they can and cannot do business with, and to punish them if they do not do what the United States says. Of course, this is all a function of the U.S. dollar being the reserve currency, which certainly gives nations like China, or like Russia or any other nation an incentive to try to move away from the U.S. dollar as a reserve currency.
Recorded April 16, 2019
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Yesterday was April 15th - Tax Day, or as my father, Irwin Schiff used to say, "April Fool's Day". My father thought it was April Fool's Day because he believed that that was the day on which Americans basically voluntarily paid a tax that no law required them to pay and voluntarily filed a 1040 tax form that no law required them to file. Of course, my father ultimately went to jail and died and jail because of those beliefs. I have been paying my taxes, although now that I live in Puerto Rico it's not nearly as painful as it used to be when I lived in Connecticut.
A lot of people don't realize that April 15 was not always Tax Day; a little bit of trivia. When the income tax first passed, or reared its ugly head in 1913 - although that's not the first time we had an income tax. We had an income tax during the civil war. The North imposed the tax and when the war ended, the income tax went away. It came back again, and it was declared unconstitutional, correctly, by the Supreme Court in the Pollock Decision. Then they resurrected it with the 16th Amendment, and following the 16th Amendment in 1913, the original Tax Day was March 1.
Why is that? Because the income tax is a tax on your income for an entire year. So, we are now in 2019 and we're paying our income taxes for 2018. But you don't know what your income is in 2018 until the year is over. You may have earned a lot of money early in the year - you could lose it all back on the last day of the year and end up with no income at all - end up with a loss. So the idea was, if you're going to tax your income, then we have to wait until the end of the year, and then we have to give you some time to add up your income and figure out what you owe and then pay the tax.
Recorded April 10, 2019
VISIT PETER AT THE LAS VEGAS MONEY SHOW May 13 - 15, 2019
I began yesterday's podcast by pointing out the weakness in shares of the recent IPO of Lyft. In fact, I mentioned that Friday's close above the IPO price (the first time it closed above that price since the day of the IPO) the fact that it couldn't hold on to that rally, I thought that meant the stock looked even weaker, technically. And we got a big follow through today. Lyft sank about 11%, it closed near the lows of the day, 60.12. In fact, we did trade as low as 59.75 on the closing minutes of trading. We're now down about 32% from the opening print, after it went IPO on that day. We're 17-18% below the IPO price. If you happen to get the IPO price and you still have the stock, you're almost in a bear market from that purchase price.
Catalyst: Uber News
The catalyst today was the news that it looks like the Uber IPO is going to happen sooner than everybody thought. Maybe they will be filing as early as this week, and the IPO is going to be bigger than people initially thought, as far as how much stock they're looking to unload on investors. Although, they're taking the valuation down from maybe $90 to $100 billion. I think initially they were talking $110-120 billion, and they're going to look to unload about 10% of the company - $10 billion. Now, you would think, "Wait a minute, if Lyft is doing so poorly, what is the rush to bring Uber to the market? Doesn't it seem like a bad time?" But if you think about it, I think what Wall Street is worried about, is if they wait even longer, the price of Lyft will sink even further. So it's a mad dash to get this thing out there before it really hits the fan, because this is showtime for all of these unicorns.
VERY IMPORTANT PODCAST! Please share with everyone you care about. Ray Dalio: Please start at 29:52
Extreme Inequality Is Not a Function of Capitalism
I agree that wealth inequality is a problem, but it is a problem that is created by government - created by the Federal Reserve. I was warning years ago, when the Federal Reserve first launched Quantitative Easing, that this was going to happen! This policy would only benefit assets at the expense of the overall economy. I've been warning about this for years. The government is doing this, not the market. So, yes, I want the government to do something about wealth inequality by getting out of the way. I want Capitalism to do something about inequality. Now, of course, there's always going to be inequality - that's part of capitalism. People are not going to be equal, because peoples' contributions are not equal. What is not normal right now is the extent of the disparity. That extreme inequality is not a function of Capitalism. if we enjoyed Capitalism, there would be less inequality.
We Need to Embrace and Re-Discover Capitalism
Ray Dalio recently replied to a recent Tweet of mine, referring to his appearance on 60 Minutes, stating that if the only solution Ray Dalio has is to raise taxes on the rich, and to hope the government spends the money productively, then he has no solution. So then he referred me to his article, which I read, word for word: Why and How Capitalism Needs to be Reformed, parts 1 and 2. Again, Capitalism does not need to be reformed. What needs to be reformed is Democracy. We need to embrace and re-discover Capitalism and what needs to be reformed is all of the Socialism that has been interjected into Capitalism.
Government Makes It Difficult for Small Businesses to Hire Young People
I told Ray Dalio that I would read his article and I read it and made some notes and I'm going to go over my thoughts now. Number one, right off the bat, Dalio talks about all the jobs he had by the time he was age 12. He came from humble beginnings, he wasn't born wealthy, he is a rags-to-riches story, an American Dream story. By the time his was 12, he made money delivering newspapers, mowing lawns, caddying, and he invested the money he earned in the stock market. The first thing that grabs my attention is, "how many 12-year-olds today have jobs?" Very few young people today have jobs. Why is that? one of the reasons is because the government has made it so difficult for small businesses to hire young people - minimum wage laws, and workmen's comp, disability, unemployment make it difficult for young people to get jobs.
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Rebound Expected in Jobs Report
Stock market in the U.S. continued to grind higher today, although I still believe that this is a bear market rally. The Dow added a little better than 40 points; the NASDAQ up about 47, so a bigger percentage gain there. The S&P was up about 13 points. This was following the release of the March Nonfarm Payrolls numbers - aka the Jobs Report. There was a lot of hope that we would see a rebound in the month of March. Remember, in February, they initially reported just 20,000 jobs created, which was well short of what had been expected. It was probably something close to 200,o00 jobs. And the consensus for March was for 170,000 jobs and we actually got 196,000 jobs.
Pretty Weak Number
That's the first look. So that is, what, 26,000 jobs better than had been expected. The February number was revised upward, but just to 33,000, and I think I remember when this number first came out, that there were a lot of naysayers who were saying, "This is crazy, there is no way this is true, let's wait for the revisions". Well, we've got a revision, and all we did is revise it up to 33,000. So it seems like the number was legitimate. We did have a rebound in the month of March, but 170,000 is not a lot of jobs, considering how few jobs were created in February. In fact, if you average the two months, it's a pretty weak number.
Weakness in Labor Force Participation Rate
The official unemployment rate, that held steady at 3.8%, but the labor force participation rate, which I know a lot of people have been encouraged by, because they see that number notching higher, it dropped back down .o2, from 63.2% to 63%. So that's some weakness there. Also, if you look at the manufacturing jobs, they were looking for a gain of 10,000 jobs. Instead, we got a loss of 6,000 jobs. They took the February gain, which was originally reported at 4,000, and we only gained 1,000. So the markets were looking for an improvement over the original estimate for February; instead, not only did we take February's number down, but instead of improving, we actually went in the other direction and lost manufacturing jobs.
Average Hourly Earnings Posts Sharp Slowdown
If you look at the average hourly earnings, they were looking for a gain of +.2 and we got half that of +.1, and that is a sharp slowdown from the gain the prior month, which was +.4, which was better than had been estimated at the time. So now you average them out, and, again, we're not getting much in the way of earnings growth, although we are seeing a rise in the cost of living.
Average Work Week Up
The average work week was up; it ticked up from 34.4 hours to 34.5 hours. Nonetheless, most of the coverage of the jobs numbers was that is was a good report. It was better than estimates, because they were looking for 170-whatever and they got 190-something, so it was better than estimates.
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Recorded April 2, 2019
February Durable Goods Order Declined Slightly Less Than Expected
We had a quiet day in the U.S. stock market today. Not much reaction from a slightly weaker than expected February Durable Goods Orders number that came out before the market opened. They were looking for a weak number; the consensus was for a decline of 1.8% - we got a decline of slightly less than that: 1.6%. They revised the prior month down from +.4% to +.1%, so we declined less, but from a lower number. Overall, slightly weaker. In fact, the Core Capital Goods number was also slightly weaker. They were looking for a rise of .2%; instead, we had a drop of .1% - although they revised the prior month up from .8% to .9%. Still a little weaker on the day.
Lyft Hitting Lows
But the market still seems to be oblivious to the weak data, in fact later in the day we did get the auto sales numbers that were disappointing, as well. A lot of bad news is being routinely overlooked by Wall Street. Lyft, the company that went public on Friday: I discussed the lackluster performance of that IPO on Friday. In fact, most of the commentary that I listened to or saw was positive. They were describing the Lyft IPO as a big success… everything went great… the stock went up… But what concerned me about the stock was not how it went up, but how weakly it closed. It pretty much closed on the low of the day. It had sold off pretty much all day, following the pop on the open.
Lyft Sank into Bear Market on Day 2
The stock came public at $72 and it immediately traded as high as $88.6, but closed the first day of trading at $78.29. Still above the $72 opening, but anybody who bought the opening print was down. Then it got clobbered on Monday and it fell again today. It only closed down slightly. It closed relatively near the highs of the day, but the low was $66.10. That's 25% below the peak price on Friday. So that's a bear market. In fact, officially Lyft sank into a bear market on its second day as a public company. So that bear market got even worse today. The stock is now better than 8% below its IPO price.
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
A Gift from the Federal Reserve
The Dow Jones closed out its best quarter since 1998 with a 211 point gain: 25,928.68 was the close. The Dow, on the quarter up 10.3% - the broader averages doing even better. The S&P 500 rose 12.3% on the quarter. The Russell 2000 - 13.8%, and the NASDAQ 15.6% gain on the quarter. of course, the entire rally was a gift from the Federal Reserve. Had the Federal Reserve stayed on its course, indicating that more rate hikes were coming; 3 or 4 this year; had the Fed continued with its planned auto-pilot reduction in the size of its enormous balance sheet, the stock market would be considerably lower. In fact, we probably would have added to the losses experienced in the 4th quarter of last year with additional losses this year. But the Fed, as I had been predicting for many years, reacted to the weakness in the stock market and the weakness in the economy by reversing course.
Bigger Cuts Ahead then the Market is Currently Pricing In
Now the Fed hasn't actually cut rates yet, although the markets are already anticipating rate cuts and not additional rate hikes. Where the markets got it wrong is that there will be much bigger cuts than what the market is currently pricing in. I think the market is looking at maybe 25 or 50 basis points of cuts. In fact, we're going all the way back to zero. A reduction in interest rates of 25 basis points or 50 basis points would do absolutely nothing.
Quackery: Substituting a Bubble for the Illusion of Economic Growth
I think the Fed, again, is going to have to go all the way down to zero once it decides that's what it's going to do. But had the Fed not changed course, the markets and the economy would be quite a bit weaker. Although not weaker - more air would have come out of the bubble. That's all the Fed has been doing with its monetary policy is sustaining a bubble. Allowing the bubble to get bigger and bigger, while preventing the underlying structural problems from being solved. Even though those solutions involve some short-term pain, as a trade-off for long-term gain, it is a very healthy process that would be good for the economy in the long run. But, instead, the Fed has interfered with the market's medicine and substituted its own quackery - substituting a bubble to create the illusion of economic growth as the economy is actually worsening.
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 – 15, 2019
Recorded March 26, 2019
Feigned Attempt to Shrink the Balance Sheet
I am finally back on land, having spent 9 days at sea, at the Investors Summit at Sea. I've been doing this annually now, this is my 7th time doing that. I am now back, technically one calendar year older. I want to catch up a little bit on what happened in the market later last week. I did do that one podcast from the ship following the complete capitulation on the part of the Federal Reserve, basically calling off all of the rate hikes that anybody thought may have been coming for the remainder of the year. Also calling off their feigned attempt to shrink the balance sheet - quantitative tightening. The balance sheet will barely shrink between now and the end of the summer, when it will stop shrinking altogether; if they can even keep up the pretense for that long.
Nobody Appreciates What the Fed Has Done
If you remember, when I was forecasting that this was going to happen, at the very beginning, in fact even before the Fed began to shrink its balance sheet, before the Fed raised rates for the first time, I said that if they ever tried to normalize interest rates, if they ever tried to shrink the balance sheet, they would ultimately abort the process - that they would fail in their mission. They could not complete the journey. It would create a huge problem for the Fed, which up until this point, it hasn't happened yet. Nobody really appreciates what the Fed has done.
There Will Be an Excuse
A lot of the people in the investment community are still buying at face value what the Fed is saying. But remember, when I said the Fed was going to announce that it was going to stop the rate hikes or call off quantitative tightening, I said at the time, that they were going to come up with an excuse. That the Fed was not going to tell the markets the truth about why it had aborted this mission - it was just going to make up an excuse. The Fed had to pretend that they could actually do this - that they were going to normalize interest rates, that they were going to shrink their balance sheet but something prevented them from doing it.
Fed’s Actions Speak Louder Than Its Words – Ep. 453
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Recording Today's Podcast from Willemstad, Curaçao
I am recording today's podcast from my cabin on a cruise ship, which is right now docked on the Dutch island of Curaçao, which is about 35 miles north of Venezuela. I've never actually been to this island, even though I live in the Caribbean now, in Puerto Rico, there are still many places in the Caribbean that I have not visited. I really wish I'd come here sooner. I had no idea how beautiful this island was. Not really the beaches, so much, although I'm sure they are equally spectacular. I didn't go to the beach. I just spent the day walking around town. But it's probably the most charming Caribbean island I've been to, as far as the architecture and the way the town is laid out - how beautiful the streets are, and the buildings and how clean they are. It really seems like a nice place to live. I think there is a permanent population of about 160,000 people.
The Fed's Decision
I want to spend my limited time on today's podcast talking about the Federal Reserve's decision today and the press conference. I did get back on the boat in time to watch the press conference live, and I do want to limit today's podcast to that discussion.
Before the Fed announced its decision on interest rates - nobody expected a rate hike, and we did not get a rate hike, but before the Fed announced today's decision, the markets were on the defensive. Earlier in the day, Donald Trump had mentioned that he now thinks that the tariffs on Chinese imports, or on Americans who want to buy Chinese imports, may remain in effect for a much longer period of time; indicating that maybe this great trade deal is not as close as the President was letting on in the past.
So the markets sold off. I think the Dow, maybe at the lows was down about 170-some odd points, not exactly sure, but then, when the Fed announced its decision not to hike, the market erased all of those losses, and I think at one point we were up close to triple digits. Nobody was expecting a hike; I think they were expecting the Fed to be dovish, but I don't think they were expecting the Fed to be this dovish.
Powell Tells Nation There’s Nothing to Fear – Ep. 452
Recorded March 13, 2019
VISIT PETER AT THE LAS VEGAS MONEY SHOW
May 13 - 15, 2019
Big Drop in Boeing: Opportunity to buy into Dip
The Dow is continuing to rebound this week, up 148 points today - 25,702 was the close. In fact, the Dow would be higher if it weren't for an about 11% decline in Boeing so far this week. I am going to talk on this podcast about the controversy surrounding Boeing and their 737 Max 8 aircraft. But for now I want to talk just about the markets. I actually think that it was the big gap down on Monday morning, where Boeing first reacted to the news of the plane crash in Ethiopia and the Dow was down better than 200 points - all of it the big drop in Boeing. I think traders looked at that news as an opportunity to buy into the dip. I think you saw people rushing in at that point. That kind of marked a short term bottom in the market and now we're back up around the highs of this bear market correction.
Smarter Money Selling into this Rally
I do believe that we're going to be running into resistance again at this area - but that was probably an opportunity for some people, they saw that dip and they rushed in and they bought other stocks. Typically there's some kind of news event that would coincide with some type of inflection point in the market. I don't think it's a significant low; I just think it is a low in an ongoing process, this bear market rally, this correction in the bear market is not ending quickly, but I do believe it is ending. I think the smarter money is selling into this rally.
Retail Sales: December was not a Fluke
The economic news - a couple of items that came out this week were a little better than estimated. But look at the Retail Sales number that came out on Monday. That one, to me, still confirms that the numbers that we got in December were not a fluke. A lot of people initially dismissed the weak number in December. The initial report for December Retail Sales was -1.2. They were looking for a rebound in January and the got one. They were only looking for a rebound of .1 and they got a rebound of .2. They actually revised the prior month that was originally reported as down 1.2, that moved to down 1.6. So an even bigger decline December than was originally reported. Remember, this is a 10-year low.
Whistling Past the Stagflation Graveyard – Ep. 451
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Market Down Before the Bell
A late-day rally wasn't enough to bring the U.S. stock market indexes into the black on the day. In fact, this is the first down week that the U.S. stock market has had in 2019. Something tells me it's certainly not going to be the last. The market was down from the bell this morning. Even before the bell, if you look at the futures, even before we got the jobs number - the February jobs report (which I will get into a little later in this podcast) the markets were already down. The Dow Futures, I think were off about 125, 135, something like that. Normally, the markets are not making a big move in either direction before the jobs report comes out, because people don't know what the number is going to be, and generally it's a market-moving number, so the markets are typically pretty flat before we get the number.
Trade Deal Up in the Air
This time, the markets were down. Based on rumors that the trade deal with China may be delayed. People were talking about this Mar-a-Lago Summit that was going to take place later in the month, and now I was reading about how there may not be a deal in time, and the Chinese may not want to go to Mar-a-Lago, and so the whole thing is up in the air. So people were getting a little nervous about the trade deal. So that's why the markets were already selling off, plus, I think the Chinese markets had been weaker overnight. Trump or someone else Tweeted out that Trump had said, as soon as we signed the trade deal, the markets are really going to spike. Apparently, nobody has explained to Donald Trump how the stock market works. Buy the rumor sell the fact. Maybe the President has more experience in the real estate market, not understanding how the stock market generally anticipates news, and sells off on the realization of that news.
America’s Twin Deficits Hitting Record Highs – Ep. 450
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Wall of Overhead Resistance
It looks like the correction in the U.S. stock market, and by correction I am referring to the rally, the first correction in what I believe is a new bear market - but it's looking like that correction may have finally run its course as the stock market has run into a wall of overhead resistance. In fact, the technical action on Monday was quite telling, because early in the morning we opened quite a bit higher - 100 points or so higher, and then had a 350-point reversal to the downside. The catalyst for the initial rally was yet another rumor of an impending trade deal with China. And it seems to me that we've basically run out of the ability to continue to rally the market by regurgitating the same news story over and over again.
Now They've Sold the Last Rumor
Remember I was saying that, when we actually have a trade deal, with China, my thinking would be it would be a "buy the rumor, sell the fact"? Well the problem is, traders have already bought that rumor over and over again and that they may have already sold the last rumor. They can't wait for the fact. They've just had so many rumors, that now they've sold the last rumor, and it doesn't even matter if we get a deal - the market is going to sell off. Of course, if we get no deal at all, then the market could sell off even more, because a great deal has already been priced in to the market. But there isn't going to be a great deal. There will be a deal, there will be nothing great about it; there will probably be nothing substantive about it. Expectations have been raised so high, which is another reason that I don't think Trump is as good a negotiator as he pretends.
Are Debt-Laden Consumers Finally Tapped Out? – Ep. 449
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Market Keeps Rallying on Regurgitated News
The Dow Jones started off the final day of the week with a pretty strong rally; we were up a little better than 200 points earlier in the day. Then we got some weaker than expected economic data which I will get to a bit later, and the market sold off. The Dow never quite went negative, and then we rallied back and the Dow managed to end the week back above 26,000 with a 110 point gain. In fact all of the major indexes were positive on the day. What caused the early morning rally was optimism, once again, that a trade deal with China is about to be signed, and it's kind of amazing how often the markets can bite on this and keep rallying on regurgitated news, because, we've heard this before.
According to Trump the Chinese Are Going to Pay, but According to Economics, Americans Are Going to Pay
As I have said on this podcast before, we are going to get a trade deal. A trade deal with China is inevitable. The only positive about the trade deal is going to be that it takes the prospect of a self-inflicted wound off the table. That's the only good thing. If we have a trade deal, then Trump is not going to increase tariffs on American businesses and on American consumers. That is the empty threat that is out there: "Hey, we're going to force China to the negotiation table because, if they don't, we're going to erect these tariffs, which, according to Trump the Chinese are going to pay, but according to economics, Americans are going to pay. That's one of the reasons that we can't afford to actually use this weapon that we are threatening the Chinese with.
Promising the Moon
In fact, one of the reasons that you had all this optimism about this new deal was Larry Kudlow was out talking about how great the new deal is going to be - how this is going to be a huge win for America, it's a fantastic deal, it's a boon, it's better than we could have expected, it is all-encompassing... He has really raised expectations. Doesn't Kudlow know anything about the expectation game? The idea is to under-promise so you can over-deliver. It seems like we're destined for failure here because everybody in the Trump administration is promising the moon.
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Jerome Powell Wades into the Deficit Debate
This year Fed chairman Jerome Powell made his obligatory visit to Capital Hill, where he spoke to Senators and Representatives about monetary policy. Of course, this really just amounts to a press conference for Democrats and Republicans to either talk up the economy or talk down the economy, depending on who's got the White House. Trump is the President, so you have a lot of Democrats trying to talk about why the economy is actually weak and trying to get the Fed Chairman to say something negative about the economy, or negative about President Trump. And, of course you have the Republicans trying to get Powell to validate how great the economy is, and how Trump's policies are helping the economy.
Republicans Aren't Willing to Recognize Problems
The biggest problem with all this is that the biggest promoters of how great the economy is are the Republicans. These are supposedly the defenders of capitalism and they're saying everything is great, everything is booming, and you have the Democrats, particularly the Democratic Socialists saying that there are a lot of problems. And the Republicans are saying that these problems don't exist.
Democratic Socialists Have no Idea Why the Economy is Screwed Up
Unfortunately, when it hits the fan, when we end up in a recession, and I've been making this point over and over again, Capitalism is going to be thoroughly discredited because the people who advocate it were oblivious to the problems. They said everything was fine. Now the Socialists will appear to be the ons who had it right - even though they were right for the wrong reasons. They have no idea why the economy is screwed up, and their plans to solve the problems will just screw it up even more. But the voters aren't going to know that. They're going to say, "Oh, these Republicans who talk about Capitalism, they were wrong. They didn't realize what a mess it was. These Democratic Socialists, they knew there was a problem, so let's vote for them."
Fed Indicates Tolerance for Higher Inflation – Ep. 447
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Another "Greatest Deal Ever"
'The Dow rose a little over 180 points today, closing above 26,000 -26,031.81, to be exact, for the first time during this bear market rally. I still believe that we are in a bear market rally, not a new bull market. the catalyst for today for today's stock market strength, and it was across the board; the markets were strong from the opening bell to the closing bell. I think the high in the Dow was maybe just above 200; we sold off intra-day. But the NASDAQ, the Russell 2000 were also higher on, again, optimism that there is going to be a trade deal between the U.S. and China. Donald Trump is saying that he is negotiating the greatest deal ever, which is something that I have been saying, regardless of what the deal ends up being, Trump is going to say "It is the Greatest Deal Ever".
What Helps China Is an Appreciating Yuan
But there was a lot of attention being paid to the deal, a lot of stories coming out that were close to a deal. In fact, I read that they do have a agreement on exchange rates. Currencies, obviously the U.S. likes to accuse China of being a currency manipulator, and so maybe there's some type of deal that says they won't manipulate their currency - they won't use their currency as a weapon. Which is something China wasn't going to do, anyway. To the extent that we win any concessions from the Chinese, where they agree not to weaken their currency, that basically amounts to nothing. In fact, a weak currency is bad for China. What helps China is an appreciating Yuan.
Today's "Fedspeak" on Inflation
More important than the talk about the trade deal was a lot of "Fedspeak" today. You had a lot of Fed officials that were talking; James Bullard, Clarida, John Williams - they were all talking. The real common theme today was inflation. I have been talking about this for years. How was the Federal Reserve going to basically respond to inflation above their 2% target? The real rate of inflation has probably been above 2%, in fact I'm confident that it's been above 2% every year.
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FOMC Minutes Describe Abrupt About-Face
This afternoon we got the minutes from the last Federal Open Market Committee meeting which took place a few weeks ago. This was the meeting where the Federal Reserve did what is now being described as probably the biggest policy shift in the history of the Fed. This was really an abrupt about-face, where they went from "Everything is great; we're going to keep on raising interest rates, and we are on auto-pilot - we are going to let the balance sheet continue to decline." All of a sudden, now they're "patient", meaning they're not going to raise rates at all in the foreseeable future, and not only is the balance sheet reduction program no longer on auto pilot, but it is now going to end prematurely sometime this year.
Fed Balance Sheet North of $4 Trillion
Of course, the balance sheet is still north of $4 trillion, and if the reduction program comes to an end this year, you're still going to be talking about a balance sheet $3.5 to $4 trillion in size. This would mean that almost all of the mortgages and treasuries which the Federal Reserve purchased in the aftermath of the 2008 financial crisis as part of its Quantitative Easing Programs, 1,2&3. Almost all of that debt will remain on its balance sheet after the Fed has finished shrinking it. Also, FOMC officials are now talking about Quantitative Easing once again as just another tool in the Fed's tool box. It's no longer something that will pulled out for an emergency, it's just going to be a normal policy tool for the Fed to deal with recession. Of course, that's going to be their main tool, given that this next recession is going to start when interest rates are at 2.25%. So there is not a lot of room for the Fed to try to artificially stimulate the economy when it hardly has any room to reduce rates.
Quantitative Easing is Debt Monetization
Of course, what does that mean about the Fed's balance sheet? That means the balance sheet will ultimately be much higher than it was when it began its current Operation Quantitative Tightening. We will be higher than we were before it started. All this does is confirm what I've been saying all along, that Quantitative Easing is Debt Monetization.
The Real National Emergency is the National Debt – Ep. 445
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Market Rallies on Old News
The U.S. stock market continues to rally on basically the exact same news story that keeps on getting replayed. Today, it was the absence of another government shutdown. I guess now, this is final when it comes to no more government shutdowns, although that should have been obvious to everybody when Trump caved the last time and decided to pay everybody and temporarily end the shutdown. I said on my podcast at that time that that was it; that there was no way that there was going to be another government shutdown - yet the market continues to celebrate when they think that the shutdown's not going to happen.
A National Emergency for the Wall
Well now they know for sure it's not going to happen. Everything's signed, it's a done deal and Trump is getting his wall anyway because he has now declared a national emergency, and so now because it's a national emergency, we are now going to pull these funds from other parts of the budget and we are going to build the wall.
The National Debt is the Real National Emergency
Of course, the real national emergency is not the lack of a wall, the failure to build the wall, but building up the national debt. The $22 trillion national debt. We eclipsed that dubious milestone earlier in the week. And again, when you talk about the national debt at $22 trillion, we're talking about the tip of a huge iceberg. This is just the funded portion of the debt. This is where the U.S. sells a bond and somebody owns that bond.
The Tip of the Iceberg
It doesn't include liabilities like what the government owes for Social Security, or guaranteed bank deposits, or mortgages or student loans - that's not there. Those are contingent liabilities. They're just as real. They're not even part of the national debt. So, when you look at all the liabilities that the U.S. government is on the hook for, you're talking about well over $100 trillion - so $20 trillion is maybe d5 or 10 percent of the debt. But that debt is the real national emergency.
GND Plus MMT Equals a Marriage Made in Hell – Ep. 444
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The 7th Best Start Ever for the S&P 500
The Dow was up 372 points today, continuing the bear market rally. In fact, this is the best start for a year in almost 30 years - 28 years to be exact. I think it is the 7th best start ever for the S&P 500. Now I think the other 6 starts that were better; 3 of those happened during rather dubious circumstances. Two occurred during the Great Depression, and one of them happened in 1987, and we all know how that year ended up. So sometimes getting off to a good start doesn't necessarily mean that the year is going to finish strong, or the year, itself, is going to be a prosperous year. Again, I think the main reason that the market is so strong early this year is, A) because of the sharp decline we had at the end of last year and B) because the Federal Reserve came in to save the market precisely the way I had forecasted for many years.
How Many Times Can the Market Rally on the Same Good News?
We had a lot of news today that was supposedly good news which provided the extra catalyst for the market. The question, of course, is, "How many times can the market rally on the same good news? One of the pieces of good news was the fact that it looks like maybe there is some kind of compromise on the border that will avert a second government shutdown, and that is supposedly good news. Of course, we've been having this type of good news over and over again.
Also, on the trade front, there were some rumors that the negotiations were going well (some of these rumors started by Trump), so when the market hears that, and that they will probably extend the deadline. If the negotiations were really going great, they wouldn't have to extend the deadline.
The Socialist Insanity of a Green Utopia – Ep. 443
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Disguising "Red" Goals in Green Wrapping
I'm still here in my hotel room in Orlando at the Money Show, but before I went downstairs on this Saturday morning, I wanted to record a podcast to address the issues raised by Alexandria Ocasio-Cortez, AOC, as she is now being referred to - I guess I'm just going to call her the bartender for simplicity. Well, anyway, the bartender-turned-congresswoman has released the laughable details of her "Green New Deal". Of course, the Green New Deal really lays bare the smokescreen that I have always believed existed with respect to extreme environmentalism. I've always thought that it masked a real desire for socialism; that the real goal of some of these radical environmentalists was socialism: nationalizing the means of production, getting government control. But they couldn't come out and say that. They had to disguise their "red" goals with green wrapping.
This Bartender is Advocating Fascism
They had to approach it as an environmental issue;"Hey, we have to save the planet!" and, yeah, who isn't in favor of that? Everybody wants clean air and clean water. So the way the Socialists really try to wedge their way into the mainstream was with this veneer of Environmentalism. But when you actually read the "Green New Deal", it blows all the smoke away. It really lays bare the Socialist agenda of environmentalists. Really, that's what the Green New Deal is all about. It's Red. It's all about turning America into a Socialist economy, or more particularly, a Fascist economy, because Fascism is really the form of Socialism that best describes what this bartender is advocating.
The Government Taking over the Means of Production
I have said from the beginning when Ocasio-Cortez ( the bartender) describes herself as a Democratic Socialist - "I'm not a real Socialist, I am a DEMOCRATIC Socialist - putting the word "Democratic before something bad doesn't make something bad into something good. If you read this proposal, it is pure, unadulterated Socialism. It is about the government taking over the means of production. The bartender actually believes that the government, by micromanaging the economy, it will succeed in creating prosperity. This is what every Socialist who has risen to power, rather by force or by vote, has promised the public. They always promise pie-in-the sky prosperity, all these great things that the government is going to provide. In order to get people to buy into this, they have to create a false threat of global warming.
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State of the Union Not Addressed
Last night President Trump delivered what purported to be a State of the Union address but really, Donald Trump talked about a lot of things, but he didn't really speak at all about the State of the Union. Bernie Sanders recorded his own response. He didn't do the official Democratic response; that was done by Stacey Abrams, the woman who ran for and lost the Governorship of Georgia in 2018. She was a Democratic candidate. I think the Democrats are grooming her probably to run for Senate in 2020 so they wanted to put her up on that stage and shine the spotlight on her.
Bernie Did a Better Job of Laying out Economic Problems
But Bernie Sanders delivered his own response on YouTube, and Bernie Sanders did a much better job of describing the problems in the U.S. economy, that Donald Trump ignored in his State of the Union address. He spoke a little bit about the economy; he said we're having an "economic miracle" here in the Unites States, that we were the envy of the world, the hottest economy in the world. Everything is great, and theoretically the only thing that could screw it up is if the Democrats keep going after him with this ridiculous investigation, but everything is doing great, which, of course is a bunch of nonsense.
Socialism, However, Won't Work
Bernie Sanders did a much better job of presenting the facts. He pointed out that maybe, if Donald Trump is talking about his rich friends at Mar-a-Lago Country Club - for those guys, the economy is great. But for average Americans, the economy is lousy and Sanders describes some of the problems that Donald Trump overlooked or ignored when he gave his address. This is going to be the problem for the Republicans in 2020 when they run for re-election, talking about how great the economy is, they don't have a chance. It's the Democrats who will be feeling the pain of the voters and coming up with their own solution. The problem is, the solutions that Bernie Sanders is putting forth, Socialism, aren't going to work.
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Stronger than Expected Jobs Number
We actually got a bunch of economic data released today; apparently the shutdown no longer is affecting some of these newer releases, although we still have a bunch of old data that has yet to be released. I have a feeling that there is a lot of weak economic data that has yet to come out. Today we got some stronger than expected data including the January jobs number. They were looking for 158,000 jobs to be created, which would follow the 312,000 number that we got for December, which was a surprisingly strong number. So the consensus was that we would have a weaker number in January; but we ended up with 304,000 jobs allegedly being created in January.
December Jobs Number Revised Down 90,000 Jobs
But they now tell us that we didn't create 312,000 jobs in December - we only created 222,000 jobs, which is still a pretty big number, but it's 90,000 less. That's a huge revision, to think that they were off by 90,000 jobs. Maybe they're off by 90,000 jobs in January. I guess we'll have to wait another month to find out. But that number was much bigger than what was expected; and of course, even if you take into consideration the revisions, it was still a better net number than what the markets were looking for.
U6 Went from 7.6% to 8.1%
The official unemployment rate rose to 4%. Part of that was because the Labor Force Participation Rate continued to notch up. It went from 63.1 to 63.2, and since more people are now looking for work, those people are now officially unemployed. But a bigger story than the official rate is the U6 rate, which is far more accurate if you want to get a real look at the U.S. labor market. Of course, it's not 100% accurate because it only includes discouraged workers who have discouraged for under a year. So it doesn't capture any of the long-term unemployed, which are a big part of the American labor market. But the U6 rate includes the short-term discouraged workers, but also the people who are working part time, but who really want to work full time. We had a surge, like half a million part-time jobs were added according to household survey during the month, so a lot of people working part time - they probably want to work full time, but they are settling for part time work. That meant that the U6 number went from 7.6 to 8.1.
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Monetary Drug Pushers
Earlier today, the monetary drug pushers at the Federal Reserve gave the addicts on Wall Street exactly the fix that they have been craving. In fact, not only did Powell deliver exactly what the doctor ordered with respect to interest rates, saying the Fed was going to remain "patient", probably indefinitely, with respect to another rate hike, but Powell also made it clear that the balance sheet wind-down, otherwise known as quantitative tightening, was off of auto-pilot. In fact, based on what Powell said, I would be surprised to see any significant reductions in the Fed's balance sheet from here. Not surprising, the market rallied as a result of getting what they wanted out of the Fed. At one point, I think, the Dow was up better than 500 points, but it did close up 434 points - back above 25,000 - 25,014.86, to be precise.
Quantitative Easing and a Return to Zero
But, you know, just like any addict, they can never get enough. I think that soon the markets are going to be demanding a lot more from the Fed than just a cessation of rate hikes and a commitment not to shrink the balance sheet. I think what the addicts are going to require is going to be more quantitative easing and a return to zero, and that is exactly what the Federal Reserve is going to provide, once it realizes that that's what's necessary. Of course, I don't think that is going to work; I think that is going to deliver the overdose that I have been warning about since the Fed first went down this mistaken policy road. I knew that we would ultimately end up exactly where we're headed. It's just that the markets still haven't figured this out.
Markets Need to Focus on the Why
The markets really need to be focusing on the Why. Not just looking at what the Fed is doing, but why the Fed is doing it, and what it actually means about the underlying health of the U.S economy or the efficacy of prior Fed policy. Now if you listened to the press conference, or even just read the prepared remarks, the Federal Reserve wants to pretend that everything is still great - that the U.S. economy is still in great shape. In fact, the Fed wants to pretend the U.S. economy is just a good as it was when it hiked rates during the September meeting, let alone the
Continued Rate Hikes and Auto Pilot QT
Going back to September, when the Fed was saying that they were going to do maybe 3 or 4 rate hikes in 2019, and that the balance sheet unwind was on auto-pilot, that the Fed was going to set that aside and sell off about $50 billion worth of treasuries and mortgages every month, just forget about it, not even worry about it and that the Fed was going to simply focus on interest rates.
Government Shutdown Ends, Fed Capitulation Continues – Ep. 439
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Downwardly Moving Expectations
The record-breaking partial U.S. government shutdown looks like it has now come to an end. Donald Trump today announcing that he is going to be re-opening the government for three weeks, and during that time we will have negotiations regarding funding for the border wall, the barrier, the smart wall - whatever it is being called now. Donald Trump seems to be downwardly moving his expectations of what that wall would constitute, how much terrain it would cover, but at the end of the day, I don't believe that whatever compromise we get 3 weeks from now is going to include any type of funding for the wall.
Democrats Trying to Teach Trump a Lesson
And I think that the President talking about potentially shutting the government down again in 3 weeks if the wall money is not there, I think that's an empty threat; I think that is a bluff that would be easily called by the Democrats. If you look at the Democratic press conference that followed the Trump announcement, Chuck Schumer basically said,"I hope the President learned his lesson." I'm surprised he even said that because it is admission that the Democrats were trying to teach Trump a lesson. That is, in fact, probably what they did.
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Broader Averages Up
The Dow Jones rose 171 points today recovering a little better than half of yesterday's 300 point decline, helped by some better than expected earnings in both IBM and Proctor and Gamble. The broader averages is also up, but not nearly as much, because of the impact from those stocks; obviously not as strong. In fact, the NASDAQ, and even the S&P 500 all took out yesterday's lows intra-day, but still managed to eke out small gains - actually the Russell 2000 was down slightly on the day.
Dow Transports Down All Day
But the Dow Transports were down all day. They didn't even recover; they closed off the lows, adding about 48 points to yesterday's decline. But everybody in the financial media, in fact everybody at Davos (I'm going to talk about that in a minute) but everybody seems to be completely forgetting the bear market. Ignoring the fact that we went into a bear market and pretending that either we're back in a correction of the bull market or we've actually left correction territory, as if the bull market is still intact, and that bear market that we had never even really took place.
I Wouldn't Bet on the Fact That the Bear Market Is Over
Now, it is possible that the bear market is over. I am not saying it's impossible. It seems to me again that it is extremely unlikely that the longest bull market in history is going to be followed by the shortest bear market in history. I guess it could happen but I wouldn't want to bet on it. A lot of people seem to be betting on it. To me, again, the rally that we had made a lot of sense. After all, the Fed came in and did exactly what I have been saying it is going to do since before they raised rates for the first time.
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High School Students Smeared by Mainstream Media
I am still out in Vancouver, British Columbia at the Resource Conference. I will be back in Puerto Rico on Wednesday. But I wanted to take a little time out to record this podcast here in my hotel room to address just one topic. And that has to do with this viral video that was making the rounds early yesterday that purported to show a group of high school students taunting an elderly Native American. As soon as this thing went out, spreading throughout the internet, the conduct of the high school students was condemned by everybody.
Fanning the Flames
All the celebrities and the media, everybody on the left we out there condemning the actions of these kids. In fact even the school - they were from an all-boys Catholic high school. Of course, there is nothing racist about the fact that the high school was all boys; there are all-girl Catholic high schools. The idea being that maybe you can educate kids better if they are concentrating on their studies, rather than members of the opposite sex. But even the school administrators or the principal came out and said they condemn the conduct of their students and they're going to look into this and that this does not reflect their values. Of course they're very tolerant, they're not racist, they don't discriminate. Maybe they will even expel these boys. Of course, that comment actually helped fuel the fire.
This Whole Thing is Made Up
I really wish that people would not be so quick to throw people under the bus when confronted by this feigned outrage from the left. This whole thing is just made up. If the government had been skewing this with would be called propaganda. But it is not the government; it is the media elites, it is the left that has concocted a fake story. They have altered the facts to conform to their agenda.
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It Is Not a New Bull Market
The U.S. stock market averages continued the bear market correction - the correction actually extended for another week. We capped a strong week with a strong gain today across the board. But this is a correction. It is not a new bull market. But of course, if you watch stations like CNBC you wouldn't know that. All day today all they kept talking about on CNBC was that the market is now out of correction territory, meaning that it is no longer down 10% from the highs, and so we're no longer in a correction.
We Entered a Bear Market
First of all, we didn't enter a correction - we entered a bear market. Now, bear markets have corrections, too. They're called rallies, except people at CNBC don't get that. They think the only correction is a move down in a bull market. Now this bull market went on for 10 years, so a lot of these guys don't remember the last bear market, and it wasn't even that long. A lot of these bear markets have been very short. They decline 40-50% and then the Fed was able to come in and save the day. But people don't get that we are in a bear market now. We haven't made new highs, so any rally is a correction. Certainly a rally of more than 10% - that's the same definition for the downward correction in a bull market. So if you want to apply that definition to an upward correction in a bear market - we are in a correction. This is a pretty big correction, helping the bear market fall a slope of hope.
Russell 2000 Had Best Annual Start Since 1987
The Dow was up around 330 points today, back up to 24,706.35. In fact, if you look at the Dow Jones year to date, we're up almost 6% so far this year. Strong move. We're not even finished with the month of January. Of course we have a holiday weekend, s the markets will not be open on Monday celebrating Martin Luther King Day. But there are still quite a few days left in January. The NASDAQ composite is actually outdoing the Dow, it is now up almost 8% on the year and the biggest gainer is the Russell 2000. It's up almost 10%. In fact the Russell 2000 is having its best annual start since 1987. Now, of course, 1987 didn't end well for the Russell 2000 or any of the stock markets. That was the year of the stock market crash in October.
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The Eye of the Financial Hurricane
U.S. stock markets continue to bask in the eye of this financial hurricane. Remember, we ended the hurricane following the September rate hike, and if you recall I titled my podcast, "The Hike that Broke the Camel's Back", and that's what really began the sell-off in the market. We had this horrific fourth quarter, the worst December since 1931. It may have ended up being the worst December ever had it not been saved by that last-minute Santa Claus rally - the biggest Boxing Day (Day after Christmas) rally ever, which followed the worst Christmas Eve in stock market history.
The Fed's New Dovish Outlook
But we entered the eye when the Federal Reserve came out and rescued the markets by backtracking on their previously indicated path of continued rate hikes and quantitative tightening. In fact, we had a lot of people come out this week from the Federal Reserve today, again, reiterating their new dovish outlook. Everybody is a dove. There are no more stock market hawks. Like there are no atheists in a foxhole - in a bear market there are not hawks, there are only doves. That included people who are no longer on the Federal Reserve. Fmr. Federal Reserve Chairperson Janet Yellen came out yesterday, and she said that she thinks it is very possible that the December rate hike is the last rate hike in the cycle. She's right about that. It's not just very possible, it's probable. Yesterday we had Fed Vice Chair Richard Clarida said that the Fed is going to raise rates fewer times than they had indicated in their most recent press conference. Of course, by then, they had indicated two rate hikes. Now he is saying they are going to raise rates fewer than two, which could be one, but it could also be zero.
Blind Fed Leading Blind Investors over a Financial Cliff – Ep. 434
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Everything up on the Week Except Treasury Bonds and the Dollar
The stock market ended a positive week on a little bit of a down note; all of the major averages had small losses today - well off the lows of the day. The market tried a couple of times to sell off but the dips were bought on each occasion and we ended up closing near the highs of the day, even though we were down on the day. Pretty much everything was up on the week except treasury bonds and the dollar. The dollar fell, long-term interest rates rose. Gold was up. Oil was the big winner, even though it was down close to a dollar a barrel today, we closed right around $52; up better than 8% on the week.
All Fed - No Change in Fundamentals
But what has been driving the rally has all been the Fed. There's nothing fundamental that has changed about the U.S. economy or about the U.S. stock market other than the "Powell Put" is now back in play. In fact, it's not just Powell putting that out there, he has been joined by a chorus of central bankers who came out today, yesterday, all throughout the week - they're all now reading from the same dovish playbook. They've got their marching orders and they are talking up the market. Now talking how the Fed has to listen to the market, be careful and take its cues from the market. It used to be that the market didn't matter. The Fed was going to do its thing and the markets are going to do what they are going to do. And it didn't take long for that to change.
The Fed Can Not Allow the House of Cards to Fall
Of course, I've been saying that all along; that the Fed was not going to allow this house of cards that they deliberately inflated to just fall apart. Now they had to pretend that they didn't care about the markets but, of course the whole time, they were hoping the markets actually didn't go down because they didn't want to have to reverse policy. They wanted to talk tough even though they didn't have a stick.
Markets Running out of Good News to Anticipate – Ep. 433
The Peter Schiff Show Podcast - Episode 433
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A Bear Market Correction
U.S. stocks continue their correction by moving higher yet again today. Remember, when you have a bull market, the corrections are down, because you're correcting the upward trend by moving backward. In a bear market, it's the opposite. You correct a downward trend by retracing upwards. That's what we're doing now. I think this is the first rally in this bear market, so this rally is, in fact, a correction.
Powell is now "Super Dove"
I think the U.S. stock market is off to its best annual start in about a decade; certainly the NASDAQ is up I think not quite 5% - 4.7% on the year. Of course, what got the correction going was the complete 180 by Powell in that round table discussion, where he basically reversed everything he was saying and became the "Super Dove" when it comes to rate hikes. So the market is now pricing out many rate hikes it had probably priced in and that was the catalyst to really get the market going.
Markets Have Not Priced in End of Quantitative Tightening
Of course, what hasn't been priced in yet are the rate cuts or the end of the quantitative tightening program and the re-launching of quantitative easing. All that is coming. The markets just aren't there yet. They just can't see beyond where we are now. They're looking at this mountain and they don't see the valley on the other side.
Interest Rates High Relative to Mountain of Debt
Again, it's not the rate hikes in the future that were going to cause the recession, the rate hikes from the past have already guaranteed a recession, even though interest rates in absolute terms and relative to where they've been historically are still very low, they are not very low considering the enormity of the debt that we now have; that we didn't have historically. So when you have this mountain of debt, a historically large amount of debt, you need a historically low rate. Even though the rates we have now are still low, they're not as low as they used to be and they're not as low as they need to be.
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Big Move Up Today
Another big move today in the U.S. stock market except this time the big move was to the upside, more than eradicating yesterday's big decline. In fact, looking back historically, yesterday's drop was the second biggest drop in history for the second day of the New Year. The biggest drop on the second day of a new year was in the year 2000. That was the year when the NASDAQ bubble originally popped. That big drop happened at a time where the market was peaking and we were just beginning a bear market where the U.S. stock market went down by about half and the NASDAQ went down by abut 80%. So not a good comparison.
NASDAQ Biggest Mover Up 4.25%
On the other hand, today's rise was the second biggest rise for the S&P on the third day of a new year in U.S. stock market history. The biggest rise happened in 1932, and that was during the great depression. Clearly not a good period for the U.S. stock market or the U.S. economy to have to go back to 1932 to see a third trading day in January where you have this big a gain. In fact, the Dow was up 3.3% on the day but the S&P up 3.4%. The biggest mover was the NASDAQ, which was up 4.25%. So much bigger than the drop that we had yesterday. The Russell 2000 was up 3.75%.
What was the Catalyst?
So what was the catalyst? Why did the U.S. stock market go up so much today after being down so much yesterday? First of all, the market started off on a positive note. I'm pretty sure we were up 2-300 points right out of the gate in the futures, even before we got the Nonfarm Payroll number that came out at 8:30 a.m. Futures were already trading, and there was already a big gain before that number was released. So it wasn't the jobs report that actually was responsible for today's move.
Fed Chairman Jerome Powell's Dovish Statements
It had much more to do with the comments made by Fed Chairman Jerome Powell. Those comments were made maybe an hour or so after the stock market opened. But let's start off early this morning. What was propping up the market in the morning, or overnight, was more optimism that a trade deal between the U.S. and China is imminent. Now, of course, whatever trade deal is negotiated is going to do nothing.
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Big Moves in the Market Today
For those of you who have been waiting all year for the first Peter Schiff Show Podcast of the new year, 2019, here it is. We finally got a day with enough worthwhile news that it made sense for me to do a podcast. I'll probably end up doing another one tomorrow, when we get the Nonfarm payroll numbers - the jobs numbers. We'll see if that's a big market mover. But we had a lot of movement in the markets today; all sorts of news came out as well, weighing on the markets.
Apple Closed Down 9.7%
The Dow was down 660 points today - pretty much about the same drop that we had on Christmas Eve. Now I doubt that today will be followed by a repeat of Boxing Day, where we get a 1,000 - point rally, but we'll see. The excuse of the day was probably Apple. You can say that Apple took a bite out of the stock market today. Apple announced yesterday just after the close that its sales would be disappointing, and Apple stock was down just under 10%. It closed down 9.7%, pretty close to the lows of the day - not the exact lows, but it has got to be one of the biggest losses in history for Apple.
Everybody Got a Rotten Apple Today
Apple is very widely owned; the Swiss Central Bank is a big holder of Apple stock. A lot of hedge funds own Apple, Berkshire Hathaway (Warren Buffet) has a big position in Apple - pretty much in everybody's portfolio. So everybody got a rotten Apple today. In fact, Apple is now down almost 40% - 39% from its peak price. Remember, when it was at peak, it was over a trillion dollars in market cap. It was Apple and Amazon that were trillion dollar companies. Well, no more. Apple, again, has dropped not quite $400 billion in market cap from its peak.
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Published on: Dec 28, 2018
Or Did It?
It looks like the Grinch may not have been able to stop Christmas from coming to Wall Street. It looks like the Santa Claus Rally came just the same. - or did it?
The worst Christmas Eve in the history of the stock market was followed by the biggest Boxing Day rally in the history of the stock market. We don't celebrate Boxing Day here in the United States; all the other English-speaking nations celebrate that holiday, but maybe we'll celebrate it in the future, given the fact that the Dow Jones rallied over 1,000 points this Boxing Day. So that more than eradicated the 650 point drop which was the biggest Christmas Eve drop in history.
A Bounce Could Come at any Time
If you recall, on my last podcast, I mentioned that following Christmas Eve's drop, this December was the worst December in stock market history. We has finally beaten out the 1931 December. But I also mentioned that given the extreme oversold condition that existed in the market, it was possible that a bounce could come any minute or any day, and I was not sure whether or not we would finish as the worst December in the history of the stock market because we still had several trading days left for the market to bounce, and that is exactly what happened.
The Grinch May Have a Change of Heart
In fact, we managed to close positive on the week. I think the Dow finished up about 617 points. Now, of course, we still have one more day for the Grinch to have another change of heart. If on Monday, the Dow is down more than 617 points which is easy to do given the volatility that we're seeing, especially we're no longer oversold to the extent that we were on Tuesday - then the Grinch may have ended up stealing the Santa Claus Rally anyway.
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Worst Christmas Eve Day in Stock Market History
As I thought would be the case, it looks like the Grinch Stole the Santa Claus Rally. Normally, the U.S. stock market rallies during the final five trading days of the year between Christmas and New Year's Day. But today was not only the worst Christmas Eve day in stock market history, it blew apart the old record. In fact, there has never been a Christmas Eve day where the S&P or the Dow fell by as much as 1%. Today, the Dow Jones dropped better than 650 points - 2.9% on the day.
Officially Not a Correction
Although the Dow now is the only major index not officially in a bear market (now down 19.15% from its peak), but the S&P 500, which dropped 2.7% today is now down just over 20%. So it's now official, Wall Street can stop pretending that it's a correction, they have to admit that it's a bear market. Now, if they want to hang their had on the Dow, O.K. well they can hang it there maybe for one more trading day, because it's not going to take much for the Dow to join the party. Of course, other indexes are extending moves into bear market territory. The Dow Transports are down 25.7%; the NASDAQ just under 24% to the downside.
The Russell 2000 Losing Gains Rapidly
The Russell 2000 is down 27.3%. This index is down better than 5-1/2% since Donald Trump was inaugurated. This was the index that was supposed to benefit the most from Trump's economic policies. It's still up about 6% since he was elected President. So all that hype is still in there. But at the rate the index is falling, this index is going to lose those gains pretty rapidly. Then, of course, Trump is not going to be able to talk about all the wealth that has been created in the stock market since he's been elected, because all that paper wealth will have been destroyed.
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NASDAQ Now in Bear Territory
It was a big down day, in fact there was even more carnage in the NASDAQ. Today is the day that NASDAQ finally slipped into bear market territory. So, Wall Street's been calling this a correction the whole way, well now the NASDAQ is down 22%, joining the Russell 2000, down 26% and the Transports down 24%. Those 3 indexes are now officially in bear markets.
It's All a Matter of Time
But what does that mean? That means when the NASDAQ was only down 5%, it was in a bear market. That's exactly what I was saying. They don't acknowledge the bear market until it's down 20%, but that doesn't mean it's not in a bear market. It just means nobody wants to admit that it's a bear market. Now we still have 2 indexes that are not in bear markets, the S&P 500 is now down almost 18% and the Dow Jones is down just under 17%. So Wall Street maybe can cling to the notion that these indexes are not in bear markets because they're not down 20%. Look, it's all a matter of time. As I said on the last podcast, I thought that the NASDAQ would be in a bear market by the end of the week and that's exactly what happened, and I'm pretty sure that the S&P 500 and the Dow are going to join this party before the end of the year.
Huge Bear Market in FAANG Stocks
Today's decline started off as a rally. The Dow was up about 400 points this morning, before it collapsed. So we basically reversed yesterday's decline and then we got clobbered and took out new lows. The NASDAQ was down 3%. That was the weakest index, and it was led down by the FAANG stocks, which are now down collectively, on average, 35%. This is just generally in the last few months. So this is a huge bear market in the FAANG stocks. The worst of the FAANG's is Facebook, which was down big again today, like 5 of 6%. Facebook is now down 43%. Second place, is Netflix, down 42%, then Amazon down 33%, and lastly, Google, which is down only 23%. Google just finally went into a bear market this week. If you look at the charts, there is nothing but air - there is a long way down between where we are now and where any kind of trend lines or support lines could be drawn.
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Seventh Rate Hike since Trump's Election
As expected, earlier today, the Federal Reserve nudged up the Fed Funds rate by another quarter point. The Fed is now targeting their rate at 2.25 - 2.5%. So the range is somewhere in the middle, there. This marks the sixth time the Federal Reserve has hiked interest rates since Donald Trump has been President, and the seventh time that the Fed has hiked rates since Trump was elected. Remember, during the entirety of Obama's 8-year Presidency, the Fed raised interest rates only once.
A 900-point Selloff
What the markets did not expect was the dovish hike to be so hawkish. In fact, the minute I heard the language, I was surprised that the Dow didn't immediately sell off, more than it did. It had a bit of a bounce before it sold off, the Dow Jones ended up down just over 350 points. The selloff from the high to the low was just under 900 points. Earlier in the day the Dow had rallied up about 300 points because there was a lot of anticipation that even though the Fed was going to hike rates today, that it would indicate it would pause. That was on neutral - that it wasn't really planning any more rate hikes for 2019, and would just play it by ear. It was going to be data dependent.
Dow's Worst December since 1932
But what the Federal Reserve said in their official statement that accompanied the news was that they had reduced their expectation for rate hikes for next year from 3 to just 2 anticipated rate hikes. Now, that may be considered dovish, but it did not nearly meet the expectations of the market. It was expecting something much more than that. When I heard that, I thought, "The market's going to get killed." And it did go down but I think a lot more of the carnage is going to happen probably later in the week and next week. In fact, the market is now down so much that the Dow is having its worst December since 1932. Of course, that was the beginning of the Great Depression.
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Two Podcasts in One Day!
For those of you who were worried that I wasn't going to be able to do a podcast today to talk about the stock market or the economy because I already did a podcast earlier this morning, well, you're wrong! Here I am, doing my second podcast of the day. This may be an unprecedented event. I don't know if I've ever recorded 2 podcasts in the same day.
Don't Miss This Morning's Podcast on the Unconstitutionality of Obamacare
The reason I did the earlier podcast was because I wanted to address the topic of the Federal court in Texas striking down the ACA individual mandate and rendering the entire Affordable Care Act unconstitutional. I would encourage you to listen to that podcast if you are interested in this topic or the Constitution to listen to it in its entirety.
Not a Crash, but Regular Volatility
But let's talk about another big down Monday. As I suggested when I did my podcast on Friday, I'm still thinking that there is a possibility of a Black Monday type event this year. I said we were running out of Mondays because we only had 3 left, and now one down. This, again was not a crash, but the Dow did close down better than 500 points. At one point, we were down over 600. You know, these big drops are not becoming a recurring event - they add up, right?
Worst December Start Since 1980
If you look at the charts, we look extremely vulnerable to a big drop. I read that already, we're off to the worse start for a December since 1980. That was really the end of the last bear market. We had a bear market that went from 1966 to 1982, so the last time we had a December this week was at the tail end of that long-term secular bear market.
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Decision May Well Stand up under Appeal
A Federal Judge in the state of Texas, U.S. District Judge Reed O’Connor, has ruled that the Affordable Care Act, otherwise known as Obamacare, is unconstitutional, and therefore the law would be null and void, that it would be struck down. Of course this will be the subject of appeal, so whether or not this decision is going to hold is still an open question. But if you listen to the way it is being reported in the media, the reaction from a lot of the people, particularly the Democrats, is that they are accusing this judge of being partisan, being a judicial activist, that this is a ridiculous crazy decision and that it will clearly be overturned. All this is a bunch of nonsense. The judge in this case is completely correct. Obamacare was unconstitutional before this decision.
The Rationale Behind Judge's Ruling
This particular judge focused on one aspect of the law, but there are so many reasons this law is unconstitutional. But for the purpose of this podcast is to focus on the rationale behind the judge's ruling and why I believe the decision is valid and may, in fact stand up under appeal. Under the new makeup of the Supreme Court, some of the new justices could easily side with the original dissent to form a new majority now that the law itself has been changed based on the Tax Cuts and Jobs Act, which is the basis of this particular decision.
Read Article 1, Section 8, Clause 3 of the U.S. Constitution
I did an earlier podcast on whether or not the U.S. government could require American citizens to purchase health insurance. Now the theory was that they had the right to do this under what is now known as the Commerce Clause (Article 1, Section 8, Clause 3 of the U.S. Constitution), one of the single most understood Constitutional clauses which has enabled the government to get away with all sorts of things that the Constitution does not authorize. This is where all the powers to the Federal government are delegated. One of the powers is to regulate commerce with foreign nations and among the several states and with the Indian tribes. That's it.
Constitution Allows Federal Government to Regulate Commerce, not Companies
Now based on that clause, you have had Supreme Courts validate government regulation of companies because the government claims that since those companies engage in interstate commerce, that it falls within that power, that Congress can regulate these companies because the company is engaged in commerce. Of course, that's not what it says. The Constitution doesn't say the Federal government has the right to regulate companies that engage in interstate commerce, it just says it can regulate the commerce, itself. The commerce has to do with the flow of goods and services over state borders. So this is an unconstitutional expansion of Federal power. The Federal government does not have the constitutional authority to regulate businesses simply because these businesses happen to engage in interstate commerce.
Federal Regulation of Business Outside of Constitutional Authority
But that was even the camel's nose under the tent, because then it got worse. Then what happened is companies that were regulated that did no interstate commerce were saying, "this law does not apply to me because I don't engage in interstate commerce." But the Supreme Court said that the Federal government under the Commerce Clause can regulate companies that do not even engage in interstate commerce if they can show that those companies somehow effect interstate commerce, even though they themselves do not participate in it. So now,
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Technicals Portend Bear Market in Small Caps and Transports
The Dow managed to finish off this Friday with a loss of less than 500 points. The Dow Jones Industrial Average finished down just 496.87 points. So I guess the headline can be: "We Avoided a 500 Point Decline!". At one point, the Dow was better than 550 points in the red. But, when you close that close to your low of the day, within 10 percentage points of the low, that is a very weak close. The Dow finished the day weak, the week weak, and it is a very weak month. In fact, the weakest indexes continue to be the Russell 2000 - I've been talking about the weakness in the small caps. That index is now down better than 19% from its peak just about 4 months ago. So we're almost officially in bear market territory. We'll probably be there by Monday, judging by the technicals.
Possible Black Monday?
The other index that is leading the way down is the Dow Jones Transports. This index is now down better than 18% from its peak. Both the Transports and the Russell 2000 are at the lowest levels of the year. They took out the lows from the earlier decline that happened at the beginning of the year, so the Dow and the NASDAQ have yet to take out those lows set earlier in the year, but I believe they will. In fact, they may even take them out before the end of the year. Monday, again, is looking extremely weak. I've been talking about this all quarter, where I think there is a potential for a Black Monday type of event. Obviously, we're running out of Mondays this year. Both Christmas Eve and New Year's Eve fall on a Monday and there will probably be very light trading going on, so potentially the markets could see a lot of selling if there are not enough people there to buy.
Appearance on Countdown to the Closing Bell this Monday
I will be on Fox Business News, The Countdown to the Closing Bell this Monday, with Liz Claman. Maybe if I get lucky we'll have a Black Monday on a day that I happen to be on television. I will be there for the final hour of the day and often times, the biggest part of the sell-off on big down days happens at the very last hour, so I'll be live on Fox Business for that potential big drop. Make sure to tune in live.
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Mainstream Forecasts Incorporating Recession
We are in the early stages of this bubble popping. That's why, if you look now at a lot of the mainstream forecasts, all of a sudden, they're all incorporating recession. The probability of recession is now very high over the next couple of years. I read J.P. Morgan now is saying that there is a 70% probability that the U.S. is in recession by the end of 2020. In fact, most of the forecasts I'm looking at now predict that the U.S. will either enter recession next year or in the following year. This is a huge change from where people were just a few months ago, where there were no recessions as far as the eye can see. Now we're staring them in the face.
Third Consecutive Drop in Small Business Confidence
One thing that really hasn't changed so much is that you have all this optimism that still abounds. It doesn't make sense to me that people could be so optimistic about an economy that they concede is so close to recession. Now, I think on Tuesday we did get a drop in small business confidence, it's the third consecutive monthly drop, and three months ago, small business confidence hit an all-time record high. But if you have more of these small business owners thinking that we are a year away from recession, in fact less than a year if you think recession is going to start in 2019 - we're going to be in 2019 in a few weeks. So, if you think recession is so close, how much longer can you remain so confident?
The Fed Doesn't Have Recession in its Forecast
Now, of course, the Fed doesn't have recession in its forecast; not even close. The National debt is careening toward $22 trillion and these guys are putting out their rosy estimates for economic growth. They're not starting to factor in these recession forecasts that are becoming more and more mainstream.
Fed Funds Rate in Negative Territory in Real Terms
The problem for the Federal Reserve is that they are trying to keep this bubble from imploding, but the task is impossible because enough air has already come out of it. Interest rates have already risen to the point where the camel's back has been broken. The Fed has now backtracked into admitting that we're just slightly below "neutral". We're one more rate hike away from "neutral" even though one more rate hike will still leave the Fed Funds Rate in negative territory in real terms, not in nominal terms. If you accept the government's inflation numbers and we got CPI and PPI numbers that came out yesterday and today - if you look at the core, we've got the hottest core in 7 years.
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Pearl Harbor Day 2018: A Very Interesting Technical Day
Today is December 7th, a day that will live in infamy. Unless you are a Millennial who was educated in the U.S. public school system. In which case you have absolutely no idea what happened on December 7th 1941. You've probably never heard of Pearl Harbor, you certainly don't know where Pearl Harbor is located. Maybe you've heard of World War II, but a lot of them haven't. Even those who have heard of World War II probably have no idea who fought, or even who won.
As Goes the NASDAQ, so Goes the Rest of the Market
Today, December 7th maybe won't live in infamy, but it seems to me it was a very interesting technical day in the U.S. stock market, which should give the bulls on the stock market something to think about. I think the action today, particularly in the NASDAQ, (I think as goes the NASDAQ, so goes the rest of the market) but that action was particularly significant.
An "Outside Day"
One of the more reliable technical patterns is an "Outside Day". An outside day is when you trade above and below the highs and lows of the previous day, and then close above or below one of those lows. It's an outside day even if you close somewhere in the middle. An "Inside Day" is when you trade within the range of the previous day; you don't take out the high or the low. But the most significant type of an outside day is an outside day where you close above or below the previous day's high or low. That would be called an "Outside Reversal Day". It' s a positive if you could take out the previous day's low, but then rally and then close above the previous day's high.
The Russell 2000 and the NASDAQ Took out Yesterday's Lows
What the NASDAQ did today was the opposite of that. The NASDAQ rallied this morning on, I guess the weaker than expected jobs numbers and took out the highs from yesterday. In fact, all of the major markets - the Dow, the NASDAQ, the Russell 2000 - they all took out yesterday's highs. But then they came crashing down, The Dow did not take out yesterday's low - so the Dow did not have an outside day. But both the Russell 2000 and the NASDAQ took out yesterday's lows.
The Fed’s Policy Mistake Started with Greenspan – Ep. 421
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Dow Volatility Started with Huawei News
We had another very volatile day today on Wall Street, and it really got started last night with the news of the arrest in Canada of the CFO of the Chinese company, Huawei. Her father is the founder of the company and a very prominent, powerful and influential man in China and this set the mood. the Dow futures dropped initially, I think about 500 points as soon as the story broke. Obviously, anything that may throw a monkey wrench in the supposed deal that was made over dinner, mano a mano, down in South America between Trump and Xi. So this caused some problems.
Dow Down About 780 on the Lows
The market clawed its way back; I think we were down maybe 200 and change, but then we started selling off early in the morning and when the Dow Jones opened up, we were down maybe about 400-500 very quickly and we sold off almost down to 800 points. The Dow was down about 780 points on the lows. This is following yesterday's market holiday honoring the memory of the late President George Herbert Walker Bush. That day of mourning, however did not do anything to stop the carnage on Wall Street.
Market Clawed its Way Back on Fed "Wait and See" News
What it took was an article that came out later in the day in the Wall Street Journal. That article basically said that the Fed was considering a new "Wait and See" strategy after the December rate hike. And the odds of a December rate hike, which are coming up, the probability is about 75%, which is lower than it was, so there is still a chance that the Fed does not hike in December. But according to the Wall Street Journal doesn't take place immediately. This is after the December hike. So for 2019, the article suggests that maybe there'll be even fewer rate hikes than the markets believed.
Debt Service Costs Creating a Drag
Everything was weak until we got this news from the Fed that turned a lot of the tech stocks around and got the market moving higher. I don't think this does anything, because, it doesn't take the December rate hike off the table, and if the Fed raises rates in December, then all the problems that already exist because of higher rates, will be bigger. This means mortgage rates will be going up. Debt service costs will go up. One of the big drags on the economy now is that debt service costs have gone up. So if the Fed adds to that pain by following through with another rate hike in December, it will be just another weight on the economy's back. The Fed is still talking about raising rates in 2019 - they're saying one more, and we're going to wait and see.
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As I said on yesterday's podcast, I did not we had a "Wall Street Relief Rally", based on the stand down or truce in the trade war following the backtracking by the Fed on the potential number of rate hikes and the distance we were from neutrality.
Interest Rates Anything But Neutral
By the way, yesterday I referred to the rate hikes as normal; I should have said neutral - obviously what we have now is not even close to being normal. The Fed is trying to convince us that the new "neutral" rate of interest is now lower than what was considered neutral in the past. Why is that? Because we have such an enormous amount of debt now, the Fed has to keep interest rates much lower in order to achieve neutrality. But, of course, if the Fed needs to keep interest rates low, it's not neutral. Those low interest rates are actually stimulative. What the Fed is trying to do is use artificially low interest rates to prop up the economy and then claim that those artificially low rates are neutral. They're anything but neutral. They are accommodative. This is cheap money, this easy money, and ultimately it is going to set off massive inflation.
A Terrible Day, Technically
Nobody seems to understand that yet, but that's what's coming. People are continuing to be complacent despite today's substantial drop in the value of stocks. Today the Dow was down just shy of 800 points - 799 points. At the lows, it was down over 800. We didn't close on the exact low; maybe they're going to somehow claim that that was a rally or something - the fact that we closed slightly off the lows. This was a terrible day, technically, and in fact I mentioned again on yesterday's podcast, the fact that the market made the highs on the open - it did not trade very well, and it looked to me that we would fall down. I did not know that we would drop this much this quickly, but it doesn't surprise me.
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Interest Rates and Trade War
The two things that everybody seems to agree were weighing down the markets were the Fed's relentless drive to normalize interest rates, and figure out where "normal" was, and, of course, the trade war - the threat of additional tariffs overhanging the markets. So I think it was pretty clear to President Trump who is hanging his hat on the stock market, has decided that the stock market performance is the best barometer of his Presidency. So the fact that the stock market was falling was really a big problem for the President so he had to do what he could to try to get the stock market to go back up.
Fed Restated "Normal"
The first part of the two-pronged attack was the interest rates. Whether he was able to convince Powell to change his tune or whether Trump just got lucky and the Fed decided to backtrack, as I mentioned in my last podcast, the Fed has now said, "We are just below normal." Meaning that we only need one more rate hike before we get to normal, whereas in the past the Fed had said that normal was quite a ways away, and that the Fed would have to raise rates many, many more times in order to achieve normal. And of course, anybody who knows anything about the history of interest rates would have to agree that where we are now, at 2% is historically abnormal. It obviously could not be considered neutral based on any kind of past precedent. So the fact that the market was able to backtrack so quickly really threw a bone that the market and Donald Trump badly needed..
Trade Tensions Weighing Down the Market
But the other factor that was weighing down the market was all the trade tensions, and all the talk about the tariffs that were going to be imposed in less than a month. The first of next year we were going to get these 25% across-the-board tariffs.
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The Fed's Game of Chicken
The big news was yesterday, when Fed Chairman, Jerome Powell, basically flinched. I've been talking about the game of chicken that the Federal Reserve has been playing with the markets. The way the game of chicken goes, is the markets keep moving lower and the Fed keeps talking about how great the economy is and how many rate hikes are coming in the future. Somebody has to flinch - somebody has to blink. It's like you have these two automobiles driving toward each other, and there's going to be a major crash unless somebody turns the wheel.It seems like it was Jerome Powell who turned the wheel first, and, in fact, was chicken.
The Fed Is Worried About All Asset Prices, Not Just the Stock Market
As much as the Fed wants to pretend they don't care about the stock market - they absolutely care about the stock market. They are tremendously worried about a weakening stock market. Remember the goal of quantitative easing was to lift the stock market - to create a wealth effect and it was that stock market-created wealth that was going to drive consumption and the economy. And it wasn't just the stock market; it was also the real estate market. So the Fed is worried about all asset prices, not just the stock market. Clearly the real estate market is in even more trouble than the stock market, but both of these markets were headed lower, and I think that is what really prompted the Fed to blink - to swerve in this game of chicken.
Powell Suddenly Dials Back the Narrative
Now, of course you also had President Trump pressuring the Fed, you had Mnuchin putting some pressure on the Fed, which I think should also be a worrying factor. We don't really know. There was a lot of speculation about what was behind the Fed's change of heart - change in policy. After all, up until yesterday, even when you had the Vice Chair speak, the tone was very hawkish: "Yep, we've got lots of rate hikes coming." And now all of a sudden, Powell dials it all back. Basically, what Powell said that convinced people that maybe there will not be as many rate hikes in the future, is, "We're just below neutral. We're almost there, maybe one more rate hike ought to do it."
Is 2.25% to 2.5% Neutral?
First of all, we're still at 2%, so that would imply neutral is 2.25% or 2.5%. That really shows you how low the neutrality bar has been lowered given the enormity of the debt bubble that have. Once upon a time, and not too long ago, a 2.5% Fed Funds rate would have been considered highly stimulative.
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25% Tariffs Will Inflict Rather Substantial Damage to the U.S. Economy
The Dow Jones managed to finish the day up just over 100 points - I think that was about the high of the day, and we erased a loss that at one point was better than 200 points. I think a potential catalyst was a talk given by Larry Kudlow earlier in the day in which Kudlow raised some optimism over the possibility of a deal with China that would, of course avert the 25% across the board tariffs that are going to go into effect at the beginning of the new year. Of course, there is always the possibility of a resolution, and I still thin that there is going to be some type of face-saving resolution on both sides to avert these 25% tariffs. I do think that they will inflict rather substantial damage to the U.S. economy, which is already rapidly decelerating, despite everybody's refusal to admit that (including the Federal Reserve, and I'll get to some comments later in the podcast).
Trump Is Pulling the Strings
But I don't think the President can risk the 25% tariffs as much as he wants to posture that the U.S. economy is in great shape, and we are in a better position than China to weather any kind of short-term damage that might be created by the tariffs. I don't think the President is eager to test that hypothesis. I think he would rather take credit for averting the crisis, even if the crisis was a matter of his own doing. He throws out the potential for the crisis, but of course, the only reason why the crisis is dangling in front of us is because Trump is pulling the strings.
It's Impossible to Consume What Has Not Been Produced
To the extent that the Chinese can produce all these products, they don't need America to consume them; they can consume the products themselves. Once the products are produced, consumption is a foregone conclusion. It's easy to consume what's been produced; it's impossible to consume what has not been produced.
As Bubbles Burst the Malinvestments Are Exposed – Ep. 416
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Dow Could Not Hold Onto the Gain
After yesterday's, I think 550 point drop in the Dow, the market bounced back a bit today. I think at one point earlier in the day the Dow managed to gain over 200 points, but it could not hold on to that gain. It closed down just under one point. Very weak technical action for today's pre-Thanksgiving bounce. Normally, the markets are up on the day before Thanksgiving, and in general, they were. The other indexes all managed to close in the black, although considerably off their intra-day highs.
Decline in Retail Touted as Excuse, But It's Just a Bear Market
The XRT, which is an index of retailers (I talked about that on this podcast before) snapped an 8-day losing streak. More bad news came out from retailers yesterday; that was part of the reason that you saw the big sell-off in the Dow. That was the excuse; I don't think the market needs a reason to go down. It's a bear market, and that's what bear markets do - they go down. Of course people who don't know that they're in a bear market make excuses to try to rationalize why the market is going down because they don't want to admit that they are, in fact, in a bear market.
Dead Cat Bounces All Around
Everything bounced today, I guess dead cat bounces all around. Even Bitcoin managed a rally. In fact yesterday, Bitcoin got as low as $4,050. So it held $4,000. Of course, you have people saying, "Ah Ha! $4,000 is the bottom!" I doubt it. It makes sense that there'd be some support at a round number. I doubt that this is THE low. It may not last more than a day or two, given the momentum in this decline.
Malinvestments are a Classic Part of Every Bubble
Remember I have talked about all the malinvestments that are taking place. When a lot of people argued with me about why Bitcoin was going to succeed, they pointed out that all this capital was going into the industry; all this infrastructure was being built up, and so therefore Bitcoin was going to work because it had all this infrastructure behind it. My argument was always that infrastructure represents malinvestment. That is a classic part of every bubble.
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FAANG's Took a Big Bite Out of the Market
Another Monday, another big down day for the U.S. stock market, it is turning out to be one hell of a quarter; not all of the declines happening in October. But as I said earlier, it doesn't have to be in October for the market to crash. Today wasn't a Black Monday; certainly the percentage decline wasn't out of the ordinary. Although the FAANG stocks, in particular, there was a big bite taken out of those stocks, and it wasn't just the bite that was taken out of the Apple, which was some of the news that precipitated today's decline. A big down day nonetheless.
NASDAQ Having one of the Worst Quarters Ever
The Dow Jones down just shy of 400 points - 395, or 1.5%. On the lows, we were down better than 500 points. The Russell 2000 closed down just over 30 points - that's a 2% point drop. But the big drop was the NASDAQ - down 219 points, just over 3%, pretty close to the lows of the day. The NASDAQ is now down 12.5% so far this quarter - probably one of the worst quarters ever.
I think the only thing that may slow down the decline is if the Fed skips the December rate hike. Although, even that may not be enough. If the Fed doesn't hike in December, the markets might get worried that the Fed knows something and that the economy is much weaker and therefore earnings will be much weaker, so, to me, i think if the market's going to get a stay of execution from the Fed, it's actually going to have to be a rate cut.
Homebuilder Sentiment Lower Than Expected
There are plenty of other data points that are coming out, both corporate news and news about the overall economy, In particular, today, that I think weighed heavily on the markets. The first one being the Homebuilder Sentiment for November. That came out at 10am. So the markets were already trading based on another piece of news which I will get to. Last month, Homebuilder Sentiment's number was at 68. Now anything above 50 is supposedly O.K. It still means they're optimistic. And the consensus was for Homebuilder Sentiment to stay at 68. Instead, it plunged all the way down to 60. In fact, the range of forecasts went from a low of 66 to a high of 69. That drop, from what I've read, that is bigger than any drop we've had during any month of the last bust that led to the 2008 Financial Crisis. We've never seen a rate of decline like this. Obviously that scared the market. This is just one of the first sentiment indicators that is giving way. Obviously, home sales are imploding so you might expect builders to be a little bit nervous about this, even though they are still somewhat optimistic. But remember, this whole rally is built on confidence and the confidence is going to start going everywhere, In addition to the Homebuilders, you're going to see business confidence, particularly small business confidence, which was at a record high.
Apple Now in a Bear Market
But there was some other particularly bad news that came in before the opening bell, and that one was from Apple. They said they will be cutting production because of lower sales. That decision trickles down, effecting a lot of companies who count on those orders from Apple. The price of Apple is down by 4% on the day. But if you now look at the total drop - just over 20% - and that means the way Wall Street scores it, Apple is now in a bear market.
Facebook Led the Market Down
Of course, not just Apple, the FAANG's in general, the market took a bite out of those guys today. Facebook leading the market down - down another 5.5% on the day. That brings the total decline for this bear market to 40%. In second place is NETFLIX, that was down 5.5%, today so pretty much neck and neck with Facebook. But since its peak, NETFLIX is down 36%.
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Optimism Over No Tariffs Fueling Market Move
Donald Trump, I think, was the reason the markets ended up finishing in the black today, at least most of the major indexes. In fact, the only index that was down on the day was the NASDAQ - the NASDAQ was the only major index that was down on the week, thanks to weakness in tech stock, in particular, the FANG stocks. The comments that Trump made today basically gave hope to some people that potentially 25% across the board tariffs on all Chinese imports may not go into effect at the beginning of next year, which is the threat. If the Chinese ant Trump don't come to an agreement, then those tariffs are going to hit.
Tariffs Are the Stick
Apparently the tariffs are the stick that is going to be brandished by Trump, and he is going to use it to hit the Chinese over the head. But the threat of this big stick is supposedly going to bring the Chinese to the table, and there will be a deal that is favorable to the United States. Of course, if these tariffs actually go into effect, the people who are really going to be hit with the stick are going to be Americans. It's going to be American consumers who have to pay 25% more for everything they buy, and it's going to be American retailers who, of course, are going to sell a lot less stuff, because, if they have to raise prices by 25%, sales are going to collapse.
Fed Hinting that "Data Dependent" May Signal Slowdown in Rates
We had a couple of Fed guys out today -Fed Vice Chairman Richard Clarida - was interviewed today on CNBC by Steve Liesman - I happened to catch that interview, and was listening closely to what Clarida had to say. To me, he almost admitted that when the Fed pretended to be "data dependent" early on, they really weren't data dependent at all. They were just raising interest rates because they wanted to get them higher. They were afraid of getting caught with rates too close to zero in the beginning of the next recession, so they wanted to re-load that gun, so they wanted to get interest rates higher. They kept saying they were data dependent, but I never really thought they were. Once they started to raise rates, they were just on auto pilot. But now, Clarida seems to open the door to the possibility that maybe, some of the rate hikes that we think are coming aren't going to come, because he talked about how now, the Fed can be more data dependent than it was in the past.
Optimism Among Warning Signals
Where in the past, we talked about being data dependent, but we really weren't, but now we actually can be because now we're closer to neutral. And since we're now closer to that number we can take the data more seriously, meaning that if the data comes out weaker than we expect, well maybe we won't raise rates as much as we think. and I think Dallas Fed President Robert Kaplan was also out today making similar comments that were initially taken as Dovish by the markets, because he was leaving the door open, apparently to the fact that the Fed may not deliver as many rate hikes as the markets believe. Both of these guys are extremely optimistic and upbeat about the U.S. economy. As if none of the bad news that is happening around them matter. You've got the semi-conductors, you've got the retailers, you've got the autos, you've got the home builders. All these sectors are blowing up one after another and they guys at the Fed are thinking "No Problem!"
Cramer Exceeding Very Low Bar Set By Fed
Also today, Jim Kramer, on CNBC, was out there critical of the Fed, basically saying that these guys don't know what they are talking about and that he's smarter than them, and they should pay attention to what he's saying. Kramer may in fact know more than the Fed,
Investors Oblivious as Multiple Bubbles Pop – Ep. 413
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Very Negative Technical Action
We had another roller coaster ride in the stock market today, with the Dow Jones ending down about 200 points, but that was well off the lows of the day. I think we were down about 350 points, or close to it, at the lows. But, more interesting, we were up over 200 points earlier this morning. So this is very negative technical action, when you have these rallies and then close negative. In fact, we were down another 100 points yesterday on the Dow, and today, we came to within, I think 10 points of taking out yesterday's high - and then we not only crashed below yesterday's low, but we closed below yesterday's low. So another very weak day.
A Change in Name Only
I think one of the catalysts for the late afternoon rally, before the selloff, was all of the headlines coming out of Europe - the UK, regarding a Brexit deal, and I think that caused some people to buy stocks. The dollar actually sold off. It was down already; it sold off some more on that news coming out of Europe. But I don't know if this deal is going to fly . we'll see. I read through some parts of the deal, and to me, it looks like Theresa May is trying to borrow a page from President Donald Trump. Basically, what she is doing, is she is trying to rename the union that the UK has with Europe . If you read what they are going to sign on to, it is going to be some kind of trade pact that really kind of subjects the UK to all the rules and regulations that prompted them to want to get out of the European Union in the first place. So they're going to Brexit, but they're not actually going anywhere. Kind of like renaming NAFTA the USMCA . Basically, you're re-branding what you had before and claiming a victory. Maybe, politically speaking, May wants to try to honor the will of the voters by saying we accomplished Brexit, but basically not change anything. It's just a change in name only.
Share Buyback Chickens Coming Home to Roost – Ep. 412
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Surrendered Rest of Post-Election Gains in One Day
As I thought, it didn't take long for the markets to surrender all of the post-election gains. The Dow Jones today was down 602 points, so we've already lost it. It took one day. On my podcast on Friday I said that we would surrender the remainder of the gains this week and we did it in the first day of the week. The NASDAQ actually had an even bigger decline; down over 200 points - 206.03 to be exact -down 2.78%. The Russell 2000 was also down 1.98% - just over 30 points - just shy of 2%. The S&P 500 was almost down 2% - 1.97% - 54.79 points .
NASDAQ: Usual Suspects
The usual suspects, of course, having some of the big declines. Apple computer came out with worse than expected earnings last week- down another 5.45% today - down 194. It is now below 250 - This is a new low for Apple. A lot of the other computer stocks got beat up today: NVIDIA down 7.7%, Broadcom down 6.5&, so the entire tech sector really got beaten up. Of course, Swiss National Bank was a big loser; they are one of the largest investors in U.S. Technology stocks. I did read an article, though, that said that they trimmed their portfolios rather significantly before the October decline, so the Swiss National Bank did not quite take it on the chin as badly as might otherwise have been the case. But, potentially, the news that the Swiss Central Bank was paring back its portfolio could be part of the negative news that is currently weighing down the market.
$15 Billion of G.E. Shareholder Wealth up in Smoke
Looking at stocks like G.E. - have been talking about G.E. on this podcast for quite some time. It is down again another 7% today, closing below $8 - $7.99 - the low price on the day was $7.72. This is a perfect example of what happens when the buyback chickens come home to roost. General Electric was buying back a lot of stock when money was cheap. The company is loaded up with debt - $45 - 50 billion of debt. They also have $20 billion + of underfunded pension liabilities which I think are going to be more under funded when the market goes down. When money was cheap, yes, it was easy to borrow money and buy back stock; the price of the stock was going up. Look at 2016 alone. I think that was the biggest year of buy backs, although they have been buying back every year, but in 2016, G.E. bought back about $20 billion worth of stock, and the stock was around $30. It is now under $8. The stock is down 75%. That means if they bought $20 billion worth of stock, that stock now has a market value of just $5 billion. $15 billion of shareholder wealth up in smoke!
Rising Prices Reflect Inflation Not Growth – Ep. 411
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Dead Cat Bounce Flattens Out
The Dow Jones was down a little over 200 today, closing back below 26,000. NASDAQ composite down 124 - that's a bigger percentage decline, 1.7%, approximately. The Composite is being led lower by the tech stocks, particularly the FANG stocks once again taking a bite out of the market. The markets, though, were positive on the week, thanks to that huge relief rally that took place on Wednesday following the results of the midterm elections on Tuesday. But as I said on my Wednesday podcast, I thought that relief rally was just another dead cat bounce, that the fundamentals and the technicals still looked horrible for the U.S. stock market. I expected that rally to reverse, and of course that process had already begun Thursday and Friday. I think it will continue next week and I think the rest of those gains will be surrendered.
Higher than Expected PPI Sparked Sell-Off
The catalyst for today's selloff was a much hotter than expected Producer Price Index number. The PPI was up .6% in 1 month, which is a big gain. In fact this is the biggest jump in the PPI in 6 years. On a year-over-year basis, producer prices are up 2.8%. The market was looking for an increase half that size: .3%, Even year-over-year, when you strip out food and energy we were still up 2.6%, which is considerably above the 2% level that the Fed is looking at. Of course, the Fed is looking at consumer prices, not producer prices, but of course, nobody can consume what is not produced. These are really wholesale prices and of course they are going to get passed on to the consumer, so consumer prices are headed higher.
The Markets Don't Get It
But, again, the markets don't get it. Gold dropped the minute this number came out, gold dumped about $10. It was already down on the day, and then it sold off and never recovered. On the other hand, bonds were relatively stable when the number came out. Maybe rates ticked up just a smidgen, but actually bonds rallied on the day. Now maybe the weak stock market had a little bit to do with it, but the irony of it is that you get these numbers that show much more than expected inflation, and what do investors do? They sell gold and they buy U.S. treasuries. Now, that is the worse thing to do if there's more inflation. Gold is an inflation hedge. So, if inflation is picking up, you would want to own gold to protect yourself from inflation. On the other hand, the one asset that suffers the most, where the most value is eroded away because of inflation is a bond. A bond is specifically payments of cash in the future, and the more inflation we have, the less that future cash is worth.
Divided Government Will Produce Larger Deficits – Ep. 410
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Relief Rally Post-Midterms
The elections are over and the Blue Wave was averted and the Dow Jones rose 545 points today to celebrate that fact and the NASDAQ was up 194 points, 2.64%; Russell 2000 up 26 points, about 1.67% . Now you may be wondering why there was such a big rise in the stock market based on an outcome that was pretty much expected. The Republicans lost the House of Representatives, and that was something that was widely anticipated by the markets. But the loss wasn't that big; they lost 26 seats. I think 23 was the number that the Democrats had to pick up. But I think there was some concern that the Republicans may have lost the Senate - instead they actually picked up, I think 3 seats as of now, in the Senate - increasing their margin. This is only the third time in 100 years where that's happened, where you've had the incumbent party lose House seats but gain Senate seats.
Obama's Midterm House Loss: 63 Seats
But it is amazing that the press was trying to hold this out as some kind of repudiation of his policies: "You lost the House of Representatives". Big deal! Obama lost the house of Representatives during his first midterms in 2010. That was one of the biggest disasters for an incumbent since Roosevelt. Obama lost 63 house seats. Not 26 - remember the Tea Party? That was all 2010. Trump did so much better than Obama. In fact, the average loss for a midterm in the House is 37 seats. Trump's loss of 26 was much better than average, but you wouldn't know that from listening to the Media. But most impressive was the 3 seats gained in the Senate. Barack Obama lost 6 seats during his first midterm elections. That's a 9-seat difference between what Trump was able to accomplish and Obama's accomplishment.
Economy-Stimulating Tax Cuts Less Likely
I think the reason that the dollar was weaker is the narrative is that since the Republicans no longer have control of the House of Representatives that it is less likely that we will get more tax cuts - at least the tax cuts that would be stimulative to the economy.
Vote Against Socialism and Identity Politics – Ep. 409
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An Advanced Auction on the Sale of Stolen Goods
Tomorrow is Election Day, or as H.L. Mencken once described the process, "An advanced auction on the sale of stolen goods". My wife has been bugging me for some time to urge people who listen to my podcast to go out and vote on Election Day. I think she's prepared to blame me if there are any close races, either for the House, Senate or even for Governor that end up going to the Democrats - if I do not urge my listeners to vote against that wave, somehow it will be my fault. So I urge all of the people who listen to my podcasts to actually go out and vote this Tuesday on Election Day.
Lesser of Two Evils
In most cases, our votes are not even going to matter. In fact in most cases it is a matter of voting between the lesser of two evils. Even though the lesser of two evils is still evil, it is "lesser", and when it comes to evil, I guess lesser is better. In some cases there are actually some good candidates who are running. Sometimes, however, when good candidates actually get elected and get into the cesspool that is Washington, D.C., a lot of the values that led them into politics go out the window if they want to stay there. You can have good intentions when you get to Washington, you can be principled, and you can say, "I'm going there to make the country a better place" but ultimately once you get there, everything changes.
Politics Ahead of Principle
In fact, when it comes to elections, and politics, the worst candidate usually wins. If you are a candidate or an elected official, and you are making decisions that are economically sound, and that are in the best interest of the nation or your constituency, and if your opponent is making decisions based on politics, which are likely to result in a larger number of votes, Which decisions are likely to land me money from special interests? If you're campaigning on principle, and your opponent is a practical politician, who's going to win? Even if you win a few elections, you're eventually going to lose. And the politicians who are i office the longest, are most successful at putting politics ahead of principle.
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Futures Rallied after Drop on Apple News
I want to get to the nonfarm payroll number. This is the big number, and, maybe, because the initial number was good, the market rallied. Although, I think the real reason that the market rallied in the morning is because we had a big rally in Asia last night. There were some rumors that there would be some type of trade deal between China and the United States, and when that rumor came out, everybody bid up these Asian stocks. So the U.S. stock market, U.S. futures got bid up. So initially U.S. futures were way down on the Apple news, but then, when this rumors came out about a trade deal, then the markets rallied.
Hopes for Trade Deal with China
Part of the reason that people wanted to believe that there might be a trade deal is because everybody knows the election is coming up on Tuesday, and maybe the President is looking to do something between now and then in order to: a) make the market rally, but b) be able to claim victory. Like" aha! another deal like the USMCA - I got rid of NAFTA, and we have this new deal which is basically the same deal we had before, just with a different name, but he's able to pretend that he kept some kind of promise and now we've got a great deal, Whereas the old NAFTA was the worse deal in the history of deals, the one that he's got, which is virtually identical, is the best deal in the history of deals.
I thought maybe he would do something similar to that with China. Come up with some ridiculous agreement that basically does nothing, then talk about how great it is… but apparently, not. Maybe they can still do that on Monday if they really want to wait to the last minute and come up with some kind of bogus deal… But people believe the rumors, but then this morning Larry Kudlow was on CNBC early in the morning before the open basically shooting that rumor down, saying there was no deal.
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The Bulls Had No Fear
Today may be Halloween, but the Bulls had no fear. The U.S. stock markets closed higher today for the second consecutive day - the first time for the month of October. A lot of traders are probably happy that the month of October is over. Despite the back to back rally, this is still the biggest decline in a month for NASDAQ since 2008.
The Market Gave Back Gains Before Close
In fact, the rally off of yesterday's lows, I think was better than 1100 points. We had this huge gain, and even though today, the Dow was up better than 200 points (241 points), it was up about 450 points going into the last hours. So we did give back a couple of hundred points of that gain, which, to me, looked pretty weak. The NASDAQ had a 2% higher close; it was up 144 points. But you look at the Russell 2000 - much smaller gain there. That index up just a third of 1%. The Dow transports, they were barely positive. Not even 2 tenths of 1 percent - a 15 point rise in the Dow Transports.
Bear Market Correction
Nonetheless, all the Bulls were out in force on the financial networks claiming that the correction is over. Everybody was confident that the lows are in; that this big back to back rally is proof that you'd better buy now, otherwise you're going to miss the rally, and this is a typical correction, and now it has run its course. You know what? If this really was the "end of the correction", most likely, there wouldn't be so many people so confident that it was over. You'd have a lot more fear, especially on a Halloween. The fact that there is no fear, to me, shows that it is more likely that this is not the end of the correction but the beginning of the bear market. And that this rally is the correction. In bull markets, the market going down is a correction, because the trend is still positive. In a bear market, it's the opposite: the rallies are the correction.
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Dow Swings More Than 900 Points
Well we didn't have a Black Monday today, but we did have a pretty big selloff, especially if you measure the decline from the early morning pop to the late afternoon drop. I think it was better than a 900 point selloff. Earlier this morning the Dow Jones was up about 350 points, and I think halfway through the final hour, we were down as much as 560 points. Now, we managed to recoup a good chunk of those late day losses in the final half hour, with the Dow down just 245 points. Just over 1%. The NASDAQ trimmed its loss to 116 points - 1.63%. Of course, all the analysts are focusing on the fact that we didn't close on the lows! "Hey, it's strong; look, we had a huge rally, impressive rally off the lows!"
A Downside Reversal
There was nothing impressive about that rally. This actually was a downside reversal. Remember we were all talking last week about the upside reversal that wasn't? When the market was way down, and then it only closed a little bit down? That's not a reversal. Today was a reversal. We were way up, and we closed way down. That is a real downside reversal, and that's far more significant than the meaningless, fictitious reversal that we had last week.
Warning Signs Ignored
Look at some of these individual stocks: Boeing, last week, which was one of the only Dow stocks that actually had a good day - remember it had better than expected earnings, and Boeing went up? It was down almost over 7% today - Boeing getting killed. IBM, though, a much bigger deal: down 4%. A new 52-week low - multi-year low. This should have been a warning sign right out of the gate. It's kind of amazing that people ignored the news that came out over the weekend on IBM and they bought the market anyway.
Red Hat Hail Mary
IBM announced that it was buying a company called, Red Hat, and it's an all cash deal. They are way over-paying for this company. Now IBM is the poster child for stock buybacks. And the fact that they are throwing this Hail Mary by over-paying for this company really shows you that time is running out.
Numbers Always Look Good When Recessions Begin – Ep. 405
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Look Carefully at the Price Index
The GDP number came out yesterday; 3/5% did slightly beat the consensus of 3.3%, but remember, for a while the Atlanta Fed was looking for a print in the 4's. But the New York Fed was at 2.2%, so the print was much higher than what the New York Fed was looking for. But if you look at the internals, the biggest reason that we got 3.5% was because of the price index - the "deflator". Last quarter, when we had 4.2%, the government said that prices rose at an annualized rate of 3%. But in Q3, they said that prices only rose at an annualized rate of 1.7%.
Calling B.S. on that Number
Now I call B.S. on that number. I don't think we had that significant a slowdown in the annualized rate of inflation between the second quarter of the year and the third quarter of the year. If the 3% inflation rate had held steady, then Q2 GDP would have been just 2.2%. So, obviously not nearly as good a headline as 3.5%. We'll see if they revise this thing down after the election. Obviously the Republicans can still campaign on 3.5% even if it turns out that 3.5% was an over-estimate.
Largest Trade Deficit in History
I think new data is going to come out - particularly on trade. Donald Trump is out there again bragging about how we're winning the trade war. I talked about that. That was the topic of my last podcast because we just printed the worse Merchandise Trade Deficit on a monthly basis in U.S. history.
Trade Deficit Amounted to the Largest Subtraction from GDP in 33 Years
The trade deficit was so large in the third quarter that it subtracted 1.78 percentage points from the GDP number. That is the largest subtraction from GDP that we have had from trade during a quarter in 33 years. What happens, when you calculate GDP, you take government spending, you take consumer spending and business spending and then you add in your trade surplus or you subtract out your trade deficit. Now, since we never have a trade surplus, trade is always a net subtraction from the GDP.
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Merchandise Trade Deficit Largest Trade Deficit on Record
Today's rally had to overlook the bad news that came out today. I was watching CNBC this morning just before the news was announced and the anchor said, "We've got a lot of news coming out at 8:30 and I am going to go over the news items in order of importance. The first news item was the Durable Goods numbers (+0.8%), and then they went over the weekly jobless claims (202,000) and wholesale inventories (+1%). That was it. That was all they reported. They left out the most important number that came out at 8:30, which was the Merchandise Trade Deficit ($26 billion - largest trade deficit on record). But as far as CNBC is concerned, the trade deficit is immaterial. It doesn't even matter what the trade deficit is. In a way, they are right. because the markets couldn't give a damn.
People Don't Recognize that the Trade Deficit is a Bad Thing
At one point in time, the trade deficit was the most important number that came out every month. It was more important than the Non-Farm Payroll number. That's when people were smart enough to recognize that a trade deficit is actually a bad thing. But Donald Trump has made the trade deficit a big part of his Presidency. It was a big part of his campaign. You would think that maybe CNBC would consider the trade deficit important enough to even mention. If they were presenting the numbers in order of importance, at least mention it 4th, but they don't even mention it at all. That's how unimportant the trade deficit is.
Durable Goods Up Only Because of Defense Spending
But the Durable Goods number that came out (+0.8%) was reported as a good number because it was a beat. They were looking for -.5%. But the main reason that the headline beat was because of military orders - defense spending: aircraft. But if you take all that stuff out and you just looked at core capital goods, they were looking at an increase of .5% and we got a decrease of .1%. So the only reason the number went up is because the U.S. government took on more debt to buy more military equipment.
Will Fed Capitulation Forestall Stock Market Crash? – Ep. 403
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So much for yesterday's dead cat bounce. All of the U.S. stock market averages came plunging down today, in fact they all closed below yesterday's lows. So even though we had those big rallies off the lows, today, we lost the entire gain and closed lower than yesterday's low point. That is is the most bearish signal you can get.
Yesterday's Short Covering
Remember on yesterday's podcast, I was not impressed with yesterday's rally. I thought it was a typical "reversal Tuesday" rally that should be ignored. To me, it looked like a lot of short covering, particularly if you look at the type of stocks that were being bought. They seemed to me that they were the stocks that had a lot of shorts, so the shorts saw a big gap down and decided to take an opportunity to cover. But, when you have a lot of shorts who cover, that's actually bearish, because during the next decline, they are no longer there to buy. That's why this next decline could be particularly vicious. I don't think the decline is finished; as I said, I think it is just getting started, unless the Federal Reserve is going to come in and change the nature of the game,
Biggest Single NASDAQ Decline since 2008 Financial Crisis
The Dow was down over 600 points today - 608 points. That is a percentage decline of 2.41%. Of course there were a lot of stocks that did a lot worse. Earnings today from AT&T - that stock was down just over 8%. I think there were also some worries concerning the slow growth of subscribers at DirecTV, a recent AT&T acquisition. Also, UPS, came out with disappointing earnings today. The stock was down 5.5% today. Boeing might be the only stock that was positive today, up 1.3% - a beat.
The fact that this was the biggest single day decline in Nasdaq since the 2008 financial crisis means that today's drop is larger than any point drop that we had during the 2008 financial crisis. You have to go all the way back to the bursting of the dot com bubble. Something big is happening when you see this kind of drop. The market technically couldn't be weaker.
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A Big Constituency of Highly Indebted People
The fact that you have created this big constituency of highly indebted young people - they're like indentured servants. The government now loans them the money and now they are in debt to the government for the rest of their lives. But now the government can say, "Vote for me and we'll let you off the hook!"
You Don't Have to Repay Your Loan as Long as You Keep Re-Electing Me
Or they might have some other program where they do not completely wipe out the debt; maybe if you work for government for a certain number of years - maybe they will try to craft the program in such a way to make sure that these young people constantly vote for whichever politician promises to keep the wolves at bay: "You don't have to repay your loan as long as you keep re-electing me." It is another group of bought voters. Just like Social Security. Why does Trump want to pander to Social Security? Why does he want to say, "We're never going to cut Social Security."? He wants all the people who are on Social Security to vote for him, or to vote Republican.
At Least the Democrats Say the Rich Are Going to Pay for It
No one wants to take anything from anybody. Nobody wants to give anybody the bad news. Trump wants to be all things to all people. Everybody gets everything; no one has to sacrifice. No one has to pay. Everybody eats free lunch - no one has to cook it. At least the Democrats say the rich are going to pay for it. Trump says nobody's going to pay for it. It's all going to magically appear because of this booming economy which isn't even booming. At least the Democrats' lie seems a little more believable. They are not saying the money's coming from nothing, it's coming from these rich people who are lucky enough to have all this money and we can just take this money from them - they're not going to miss it because they don't need it anyway, and somehow it's enough for everybody to have everything that they want.
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Overwhelming Evidence of a Weakening Economy
The Dow Jones was the only one of the major indexes to close the day higher. The S&P was down slightly, we had larger declines in the Nasdaq and the Russell 2000. More importantly than the movements that we've just seen on the day, or even the week, look at what's happened thus far during the month of October, which I had been warning on my podcast. It looked like there could be a weak October, given where we were in the market, given how ridiculous the sentiment was in the face of overwhelming evidence that the economy was weakening
Russell 2000 Down 9.2%
If you look at the numbers, the Dow Jones is down 3.8% so far on the month. That's the best performing of the averages. The S&P, down about 4.7% on the month, Nasdaq Composite down 7.4%; the transport down 8.3% and the Russell 2000 - 9.2% decline. Remember, the Russell 2000 is where everybody wanted to buy. Earlier last month the talk was that you needed to be in the Russell 2000 because the rest of the world was in trouble, you needed a safe haven from all the turmoil around the world, that the U.S was going to win the trade war, and of course, the companies that had the least vulnerabilities to the trade war were the domestic companies that weren't multinational and those are the companies that you would find in the Russell 2000. Small-company U.S. stocks - so people were piling in. Those are the stocks that have done the worst. Down 9.2% on the month.
Gold, Gold Stocks Up; Bond Yields Continue to Rise
While stocks were going down, gold was going up. Gold is up about 3% so far during the month of October. Gold stocks doing even better - GDX and GDXJ each up about 8% so far on the month.
Bond yields continue to rise; they were higher today; higher on the week; higher on the month and as bond yields are rising, the dollar is also rising, but ever so slightly. We're not seeing that much of a gain in the dollar. But ultimately, the dollar is going to turn around when people finally what should have been obvious all along: that the U.S. economy is not nearly as strong as is generally believed. It is certainly not as strong as the Federal Reserve is claiming.
Markets Fall as Fed Shrinks Balance Sheet
The FOMC minutes were out earlier this week and once again, the Fed is displaying extreme confidence in the U.S. economy as it continues to maintain its stance that it will continue to raise interest rates; that it is going to continue with its plan to shrink its balance sheet. Of course that is the real reason that the markets continue to fall. The Fed continues to threaten the markets with higher interest rates.
When You're in a Bear Market, You Don't Need an Excuse for the Market to Go Down
Yesterday, we had a pretty big drop in the markets intra-day; the Dow surrendered some gains and a lot of the people in the media were trying to figure out what was to blame. They were pointing to speeches that Larry Kudlow made where he was talking tough against China or Trump talking tough or even European Union getting tough with Italy - I forget all the various excuses.
But, you know what? the market would have probably fallen even if none of those things had happened. When y0u're in a bear market, and I think there's a very good chance we're in a bear market, you don't need an excuse for the market to go down. The market just goes down.
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Thanks to Listeners for 400 Episodes of The Peter Schiff Show Podcast
For those of you who say that Peter Schiff does Podcasts when the Dow is down, Dow Jones was up 547 points today. This is my 400th episode of the Peter Schiff Show Podcast. I want to take a moment to thank my audience - everybody who has been listening to the podcast. Especially to the people who have listened to all 400 episodes. By the way, if you missed a few, they're all archived.
Check out all the Archived Episodes of the Shows
Some people have been listening for a lot longer. I was doing a daily talk show for 3 years or so. I started it after my failed Senate campaign to continue to get my ideas out there. But I eventually did not have enough hours in the day to commit to be at a mic for 2 hours each day doing a live show, even though I enjoyed it - we had a lot of guests and I took a lot of calls. Before I ran for Senate, I did a once a week call-in show, Wall Street Unspun. Some people who are listening to the podcast go all the way back to the Wall Street Unspun days. A Special thanks to the people who have listened all of these years.
Please Take the Time to Rate and Review my Podcast
Remember, if you have been listening to my podcasts, certainly if you've listened to all of them, do me a favor and rate the podcast on iTunes or whatever platform you use to access my podcast. Rate the podcast, make comments about the podcast, put 5 stars down there.
Market Up, But We May Still be in Bear Territory
There is so much overwhelming evidence that the bull market is over, and that's what I want to focus on. The housing stocks had a rally today but the auto stocks are still very weak. The economic data that I've been seeing has been weak but nonetheless, as I said earlier, the Dow was up 547 points, that was 2.17%. But the NASDAQ Composite was up 214 points - 2.89% on the day. The Russell 2000, which had been getting beaten up was up 43 points today - 2.82%.
Gold Steady, Dollar Negative Most of the Day
Gold was only off a couple of bucks. It started the day higher, 5-6-7 dollars, but in the face of this tremendous rally, gold kind of lost its bid. But it didn't really sell off. It was only down a little bit. So gold stocks in general were down, but not much. The dollar spent almost the entire day negative.
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A Very Volatile and Technically Weak Trading Day for the Dow
Here I am for the third day in a row doing a podcast. It's market volatility that has brought me to the mic yet again. The Dow Jones down 525 points; a very volatile and technically weak trading day for the Dow. The market opened down, we quickly sold off, a couple of hundred, but then we rallied back! We got positive. I think we were up a hundred, maybe more, and then going into the last hour or near the last hour we sold off hard. the Dow was down I think close to 700, I'm not sure exactly, but then, we got a rally. Not all the way back to unchanged, but then in the final 15 minutes of so the Dow rolled over once again to close just off the lows. Down 525 points. Over 2% down. Not as big a drop as yesterday's drop, but coming on the back of yesterday's drop, it adds up.
Some of the Tech Stock Actually Rallied Today
The transports, not down as much, another 1.5% added to yesterday's loss. NASDAQ - some of the tech stock actually rallied today, so that helped the NASDAQ; some were down, though. NASDAQ down 93 points, 1.25%. Russell 2000 down 30 points. That was just under 2%.
If the Stock Market Went down Enough, There Would Be a Bid in the Bond Market
The Bond market was actually up today. Finally we had a day where people were buying bonds. But I said this was going to happen. Eventually, if the stock market went down enough, there would be a bid in the bond market. That's exactly what happened. If the stock market stops falling, then the bond market is going to resume its descent. This is the same dance that we were doing earlier in the year, that eventually came to an end, but we're back where we started from.
So if we get stocks going up, then interest rates are going to go back up, which is going to scare the market. Now they're going to go back down, and so now people will buy bonds.
The Bear Market Has Begun, Recession to Follow – Ep. 398
JOIN PETER at the New Orleans Investment Conference
831 Point Rout in the Dow Jones Industrial Average
If you listened to Friday's podcast, I mentioned that I thought I would probably be doing a lot of podcasts this week. I did one yesterday, and I am doing another one today because my feeling about the stock market was confirmed today with an 831 point rout in the Dow Jones Industrial Average, down 3.15%. This is the biggest decline that the Dow has had since that 1000+ point drop that we had in February. I think it is maybe the third biggest down day ever, point-wise. Percentage-wise it's not even close.
NASDAQ Down Over 4%
The DJIA actually did a lot better than a lot of the other averages. The Dow Jones transports were down just over 4%; 445 points. the NASDAQ was down over 4% as well - 315 points. Weakness across the board in the stock market today. And it's not just the homebuilders and the autos. I've been talking about those sectors as leading indicators and, yes, many of those stocks made new 52-week lows today as well. But they were not the worst performers on the day.
Financials Helped Lead the Declines
The financials were helping to lead the decline. Again we have Morgan Stanley at a new 52-week low, down 3.3%. Goldman Sachs down 3.6%, a new 52-week low. But really, the biggest losers on the day were the tech stocks. These have been the stand-outs. This is what has been holding up the market - the FAANG stocks, all of these technology infotech stocks - and a lot of people were actually describing them irrationally as a "safe havens". I couldn't believe it when people were saying that tech stocks were the new "safe havens". When you hear stuff like that, you know you're close to the end.
FAANG Stocks Selling in After-Hours Trading
If you look at what some of these darlings did today, and I'm looking at the after-hours prices, too, because they're selling. More selling is going on now, after the bell. But look at NVIDIA, down over 9%, Amazon down 7.3%, Netflix down 10% on the day. AMD down 11% - Twitter down almost 9%, Apple down 5.5%, Intel 4.5%, Cisco, 4.7%, Facebook down almost 5%. this is basically one day plus an hour of aftermarket trading.
JOIN PETER at the New Orleans Investment Conference
Democrat Women Screaming in Agony
Brett Kavanaugh, over the weekend was confirmed by the Senate, and there were some Democrat women in the gallery watching the vote and they were just screaming in agony; that this was such a terrible thing. I don't think we've ever seen anything like that. They had to have the Sargent at Arms constantly removing people during the vote. The vote passed 50-48, on party lines.
These women were not screaming in pain because they think that a sexual predator is now on the Supreme Court, but apparently they think that Roe v. Wade will be overturned, and that abortions will be illegal in the U.S. This is all a bunch of nonsense. This is not going to happen. This is all much ado about nothing.
Liberal Judges Who Make the Constitution Be Anything They Want It to Mean
What it really all boils down to is that the Left wants a certain type of judges on the Supreme Court. They want liberal judges who believe in big government and all these social programs. They want these judges on the court to have a loose view of the Constitution, that the Constitution means whatever you want it to mean.
What the Republicans want is to appoint justices who will uphold the Constitution - NOT their political agendas. There's a reason for that. If you are a Conservative, you like the Constitution the way it is written. You like the law. If you are a Liberal, you hate the Constitution. The Constitution is a roadblock to everything you want to accomplish.
The Constitution Was Written to Limit the Power of Government
Remember: the Constitution was written to limit the power of government. That's where the laws apply. The Constitution is not about individuals. The Constitution is a law that was meant to apply to the government. to limit the power of the Federal government. To a lesser extent the states, because the Constitution does prohibit the states from doing certain things, but whatever is not prohibited, the states are free to do unless they are barred by their individual constitutions.
The Whole Principle Was to Have Weak Federal Government
What the Constitution does do is that it gives the U.S. government specific powers that are very few and enumerated. The Constitution says that if the Federal government doesn't have the power to do something, if it is not written in the Constitution that the government can do it, then they can't do it. The whole principle was to have weak Federal government and most of what governments do was on the state level. They didn't even want big government at the state level. Most of what the Federal government would do was in war time.
A Small Government Can't Give People Free Stuff
So if you are a Conservative and you believe in limited government, well then you like the Constitution. But if you are a Democrat or a "Liberal", you want to use the government to right wrongs of society. You want it to even things out, to redistribute wealth, to provide a social safety net, if you believe in giving people free stuff (free education, healthcare). A small government can't give people free stuff. If you believe in Social Security and Medicare and Obamacare and the minimum wage, all that stuff is unconstitutional.
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The Catalyst is Rising Interest Rates
October is just one week old and the carnage on Wall Street has already begun. I wonder if the October complacency is beginning to be shaken with the down move that we see. Now, the Dow Jones is not down very much; in fact, it barely fell on the week; but the S&P was down about 1%. But the NASDAQ was down more than 3% on the week. The catalyst is rising interest rates, which of course, the markets have been ignoring up until Wednesday afternoon, when all of a sudden somebody started to worry about the markets.
A Weak Thursday and Friday Led to 1987 Black Monday
The big declines happened on Thursday and then again today. The declines are not really big; not by the standards of an October crash, but we still have several weeks left for a big down move in October. We had a weak Friday, a weak Thursday - that's exactly what we had in October of 1987, which led to Black Monday.
Economy Far More Vulnerable to a Rate Shock
Remember, the backdrop there was rising interest rates. We have interest rates rising now, of course they're not nearly as high as they were back then. But percentage-wise, this is probably even higher, given where we're starting from. Of course, the economy is much more highly leveraged now than it was in 1987 and it's actually far more vulnerable to a rate shock now, than it was then. Of course, back then, people were worried about rising trade deficits - they're even bigger now than they were back then.
Investors Not Smart Enough to Worry About Trade
In fact, we got the trade deficit out today for August. Another jump following the jump we had in July. I think it was the biggest increase in 6 months. Imports are rising, exports are falling. It's bad news on trade. People were worried about trade back in 1987. They're not smart enough to worry about it now, but they should. The trade deficit is probably more important today than it was back then.
Trump’s NAFTA Rebrand Is a Marketing Fraud – Ep. 395
JOIN PETER at the New Orleans Investment Conference
NAFTA was the Worst Deal in World History?
I want to talk about Donald Trump's new trade deal. When Donald Trump was running for President, he said that NAFTA (North America Free Trade Agreement) was the worst trade deal ever negotiated ever by anyone in world history. It wasn't just the worst trade deal that America got into, it was the worst trade deal that anybody ever got into.
I don't know how many trade deals Donald Trump actually studied, and whether he compared them to NAFTA to know that NAFTA was worse than any other deal that had ever been negotiated, but that was his claim. In fact, even in the ceremony where he took credit for the new deal that he negotiated he repeated that NAFTA was the worst deal ever negotiated.
We Went from a Good Name to a Lousy Name
Then he unveiled his deal, which he now calls the greatest deal ever negotiated. So we went from the worst deal in the history of deals to the best deal in the history of deals. The problem is, it is basically the same deal! The only thing that has really changed is the name. We went from a good name to a lousy name, and the funny thing about it is Donald Trump is claiming that the name is better. The old name was NAFTA. The new name is USMCA. Us-ma-ca! Us-ma-ca? What kind of name is that? We basically went from a nice name to a ridiculous name.
NAFTA Re-Branded with a Worse Name
But the bottom line is that's probably the most substantive difference between the two deals. Pretty much, it is the same deal. Yet this is the greatest deal in history and the old deal was the worst deal ever. This is standard operating procedure for Donald Trump. Everything is great now that he is President. Donald Trump pretended everything was awful before he was elected, and now, he's made everything fantastic, but he hasn't done anything.
You listen to Fox News, they're talking about this thing like it is the greatest thing since sliced bread. It is NAFTA re-branded with a worse name.
Could Soaring Twin Deficits Portend October Surprise? – Ep. 394
JOIN PETER at the New Orleans Investment Conference
Today was the end of the month of September; it's also the end of the third quarter we are now beginning the final quarter of the year. When we come back to trading next week, we will be in the month of October, and as I mentioned on my last podcast, we have had some substantial stock market declines in October, obviously not every October has a big drop, in fact most of the Octobers don't, but some of the most notable declines have occurred in the month of October, including the crash of 1987 and the crash of 1929.
You'd Think There Would Be More Concern
But given that our valuations are probably higher now than they were at those prior peaks, you would think that there would be more concern right now about the possibility of another October surprise in the way of a major decline in the stock market. But the stock market finished the day positive - on the week it was a mixed picture. The Dow Jones was down a bit and the NASDAQ was up on a week that the Federal Reserve did, in fact, raise interest rates yet again, as expected. Now we're at 2-2.25%.
Italy's Economy Putting Pressure on the Euro
The yield, though, on the long bond actually went down, in fact, it was down a little bit again today (Buy the rumor sell the fact). The dollar continued to rise and I thought that maybe we would have seen a dollar sell-off following the rate hike. But I think the reason is because of the weakness in the euro, the result of what's going on in Italy. The Italian market is under a lot of pressure because the Italian government is running deficits that exceed 2% deficit guideline imposed by the Eurozone. I think that Italy's proposed new budget deficit is 2.4% of Italian GDP. This puts pressure on Italy which is also putting pressure on the euro.
Our Debt to GDP Is Twice That of Italy
It's interesting that if America tried to get into the EU, we couldn't because out debt to GDP is about 5% and that's now. It will soar well over 10% in the next recession. Our debt is twice as high relative to our GDP as Italy's. If we keep running trade deficits like the trade deficit that we printed this month, we are going to be having a serious crisis in the dollar. It was bad trade deficits and concerns about the dollar was one of the biggest reasons we had the 1987 stock market crash.
Eighth Interest Rate Hike
As expected, the Federal Reserve raised interest rates for the eighth time, today. The rate is now 2 to 2.25 percent, so I guess the midpoint is 2.125%. The move was highly anticipated, of course, even I expected the Fed to raise rates. At this point I had been expecting that for some time ever since the Fed first began raising interest rates it became apparent that they would continue to move rates higher.
"Accommodative" is Out
The only thing that was potentially significant about this rate hike was the removal of the word "accommodative" by the Fed in their official statement to describe the current state of monetary policy. I initially thought that that was a significant removal of the word. Obviously, the Federal Reserve thinks very carefully about the written statements, so if they chose to remove a word, that was there, and they know that people parse through these words with a microscope. The fact that the word was missing, obviously by intention - it wasn't just an accident - that they're trying to send a message.
What I first thought the message was, and I still believe that was in fact the message (even if the Fed is trying to backpedal), but that the Federal Reserve views a 2% as neither accommodative nor restrictive. Maybe neutral. The Fed now believes that rates are high enough that they would no longer be described as accommodative.
Interest Still Below Inflation: Negative Rates
Meanwhile, rates are at 2%. Two percent in my mind is still a highly accommodative monetary policy, especially when the annual rate of inflation, even the way the government measures it, is above 2%. That means you still have negative rates of interest. How can you describe negative real rates as anything but accommodative?
Powell: "Don't Read Anything Into The Omission of Accommodative"
Powell was specifically asked about the removal of the word accommodative from the statement during the Q&A period that followed the official announcement. Basically, what Powell said was, "Don't read anything into the removal of that word".
Divided Government Will Not Be Bullish for This Market – Ep. 392
JOIN PETER at the New Orleans Investment Conference
Divided Government is Good?
If the Democrats get control of Congress, which is a likely occurrence, what I'm hearing now is that this is bullish for the stock market! The stock market bulls are saying that if we have divided government that this is historically positive for the markets. So even if the Republicans lose control of the House, and maybe even the Senate, it's OK, because it's divided government and that is good.
Hoping for More Deregulation
This is a bunch of nonsense. Has divided government historically been a positive? I think so, in that when you have a divided government you are less likely to make progress in legislation and since most legislation is harmful, the less legislation you get is better. But in the situation we have now, the hope is that we will have deregulation. That the progress that Trump will make will be in removing regulation. Obviously if the Democrats take control of Congress, if you were hoping for more deregulation then your divided government will put a stop to that. So if divided government keeps government from getting smaller then it is not a good thing. If divided government stops the government from getting bigger, then maybe you could say it is positive.
Building an Entire Stock Market Rally on Trump's Agenda
But if you have built an entire stock market rally off of the supposed success of Donald Trump and his agenda, and his ability to get his agenda through Congress, that ability is going to be substantially curtailed, if not completely eliminated if the Democrats control Congress. Nothing that Trump wants to do will get through Congress so if you've been betting that it would, then the Republicans losing control of Congress is definitely a bad thing.
Not The Contract with America
This is not Newt Gingrich and The Contract with America, when Republican control of Congress forced Bill Clinton to move to the right and maybe stopped some of his big government agenda that would have gotten through a Democratic Congress. When you had the Republican Congress putting a brake on Clinton's agenda, moving the nation more to the center, yes, that was a positive for the markets.
We Don't Want to Even Fathom a Negative Influence on the Stock Market
But why would losing a business-friendly Republican Congress to the Democrats, to Socialist Democrats, why is that bullish for stocks? How could you possibly think that is bullish for stocks if you think what we have now is bullish, and we lose a chunk of that, that just shows you that it doesn't matter what happens, these analysts are always going to say it's bullish. No matter what happens, it's bullish for stocks, because stocks are going up. We don't want to even fathom the possibility that anything happening would be negative for stocks.
The Trump Tariff Put Will Expire Worthless – Ep. 391
JOIN PETER at the New Orleans Investment Conference
Illusion will be Replaced with Harsh Reality
This is dangerous stuff. This is the same thing thing that was being said when George Bush was President. Just because you're a Republican you don't have to claim that anything that was done by another Republican is great, in order to make the Democrats look bad. Ultimately that comes back and bites you because you loose credibility when the economy turns down. When it turns out that it was just a bubble, it was just an illusion, and when the illusion is replaced with harsh reality, you've got nothing and it makes it easier for the other side to scapegoat Capitalism for the problems and to hold out more government as the solution.
The Trump Tariff Put
One of the more ridiculous ideas that are floating around now is the existence of the so-called "Trump Tariff Put". I've heard a lot of talk about that and basically, it goes like this: Trump is very concerned about the stock market; yes, he is threatening these tariffs - we have additional tariffs. If the tariffs actually prove to be harmful to the economy or to the stock market or to both, Trump can simply soften his stance, or maybe just surrender in the trade war. Just give up on the tariffs and the stock market will come roaring back. If the stock market is falling because of the tariffs and then we take the tariffs away, there's no reason the stock market won't just rally back up. So in other words, there's this put. It' s heads, the market wins, tails nobody loses.
Even If the Market Goes Down, You're Going to Get Bailed Out
As long as the tariffs aren't doing any damage, the markets keep going up, but if it turns out that the tariffs do damage, then they get rid of them, and the market resumes, even if it temporarily went down. So that is the Trump put, just like the Greenspan put, which became the Bernanke put, the Yellen put (whether or not there's a Powell put...). The idea was, "Hey, if the market ever falls, the Federal Reserve will slash rates to make it go back up again. So you can't lose, even if the market goes down, you're going to get bailed out - whether by the Federal Reserve or by Donald Trump.
If You're Looking to Invent Another Reason to Be Bullish and Not to Be Worried…
I think this type of attitude is more just wishful thinking. It's the kind of attitude that permeates a mania, a bubble. It's the fearless, "Hey if you're looking to invent another reason to be bullish and not to be worried…" If this stock market really starts to fall, it's not going to matter if we call off the tariffs. If the market is falling, chances are it is falling not simply because of the tariffs. The tariffs might be one element that is a problem for the markets, but it may simply be one of a number, and just getting rid of the tariffs will not be enough to turn around a bear market in stocks, which is long overdue.
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Sacrificed on the Altar of Political Correctness
I want to spend the rest of this podcast talking about politics; in particular, what's going on with Brett Kavanaugh and his fading chances of sitting on the Supreme Court. It appears that he may be sacrificed on the altar of political correctness. I also blame the Republicans for allowing this to happen - to have fallen into this trap; not just with Kavanaugh.
No Sense of Proportion
This has been slowly building, the camel's nose under the tent, and once the Democrats play this card - and this is not the racist card this is the rape card, the violence against women card. there's a zero tolerance now. You can't even create the appearance that one is somehow tolerant of any kind of sexual abuse against women. There is no sense of proportion.
Allegation About a 35-Year Old Event
There was an allegation that became more significant 2 days ago when a previously unnamed woman who claimed that BrettKavanaugh assaulted her when they were in high school. Now, of course, Kavanaugh is 53 years old now, so this is over 35 years ago.
There Was a Lot of Alcohol at This Party
Kavanaugh denied the initial allegation. Initially, the identity of the woman was unknown, as was the nature of the "sexual assault". So Kavanaugh denied it. Now we actually have a name: Christine Blasey Ford, 51, a professor of Psychology, a registered Democrat. She has come forward now with the details of the encounter and the lack of details, because much of it she does not recall. After all, it happened 35 years ago, and according to the accuser, there was a lot of alcohol at this party. She says that Kavanaugh was drunk, so she was probably drunk herself. I don't know if she has admitted to being drunk - there was alcohol at the party and the boys were drinking it. It stands to reason that she probably had some alcohol herself.
The Next Economic Hurricane Will Be a Category 5 – Ep. 389
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Making the Rich Pay
Julia Salazar, another Democratic Socialist defeated Martin Dilan in the NY Senate primary. The only reference to taxes on her website was to "make the rich pay their fair share". That's it. Nothing about what specifically she wants to raise, by how much she wants to raise it and how much money is going to come it. This is going to be provided, that is going to be provided, and the people vote for her! This is how dumb the electorate has become.
Shift to Democratic Socialism
This is what I have been warning about on this podcast. This shift in the political spectrum. The Democrats are moving to the left. Democratic incumbents are going to be replaced by Socialists or will have to openly embrace Socialism themselves in order to maintain their seats. This is very dangerous, because when it does hit the fan, and it should hit the fan before the next elections a Democrat is going to be the next President, and the Democrats are going to control Congress. It's not going to be the Democratic party of Bill Clinton or even Barack Obama. It will be the Democratic party of Bernie Sanders.
Sovereign Debt Crisis and Dollar Crisis
We're going back to the anniversary of the Financial Crisis and the collapse of Lehman Brothers, and the next crisis, which will be a sovereign debt crisis and a dollar crisis. It's going to be much much worse. Bailouts are not going to work; stimulus is not going to work.
Injecting Stimulus Directly into the Rears of the Democratic Voters
But they're not going to try the same type of stimulus. They're not going to talk about injecting monetary heroin into the banking system to create a wealth effect. They're going to inject the stimulus right into the rear ends of the Democratic voters. They're going to want to give the money directly to the people, whether it is through some kind of basic income program or government make-work or forgiving student loans. Whatever they do, it will be about showering money that the Fed creates out of thin air and putting it directly in the pockets of the voters. That is just pure unadulterated inflation.
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Another Round of Tax Cuts
Now the Republicans are talking about another round of tax cuts. Just in time for the November election. Whether or not these tax cuts actually get passed is anyone's guess, but it will be an issue on the campaign trail, either because they delivered the tax cut or because the only thing standing in the way of a tax cut is the Democrats. Remember the individual tax cuts were passed the last time are temporary - they phase out. The corporate rates do not phase out. Of course, all tax cuts are temporary because any Congress can raise taxes any time it wants, so it's just semantics.
Temporary Tax Cuts Were a Lie
The reason they had to make the individual tax cuts temporary was so that they can pretend that the increase in the budget deficits was not going to be as high as everybody knew that it was. The presumption was that Congress would vote to extend them. Here we are, not even a year has gone by and the Republicans already want to come back and make them permanent, which shows that the temporary tax cuts were a lie.
Government Revenues up 1% - Government Spending Up 7%
The August budget deficit was $211 billion - nearly double the deficit that we had in the same month last year. In the first 8 months of the year, the deficit is $895 billion. This is a trillion dollar deficit during a supposedly booming economy. If we can't generate surpluses in a booming economy, imagine the enormity of the deficits when the economy is not booming,. Imagine how bad the deficits will be when the economy is actually in a recession. In this most recent year, the deficit is $222 billion higher than the previous year and government spending is up 7%, yet revenues only rose 1%. So it is not closing the gap, not by a long shot.
Too Big to Bail
The U.S. government is too big to bail - not too big to fail - too big to bail. Of course the government technically does not need a bailout; it just prints more money. Of course, that's the problem. They will print money that nobody wants and the currency is going to collapse.
Saying Yes to Socialism Says No to Prosperity
Recently on the Bill Maher show Jim Carrey said, "Socialism is great, so why don't the Democrats just embrace it? Say yes to Socialism, already. Now they can come out and openly declare that they are Socialists now because everybody likes it. When you say yes to Socialism, you're saying no to some very important things, like individual liberty, freedom, prosperity. Voters don't know that. They just think Socialism is a bunch of free stuff, and they get more free stuff under Socialism than under Capitalism. People want stuff.
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GM Hit New Low for the Year
If you want to look at some of the signals you're getting from the markets, look at the automobile stocks: General Motors and Ford, which are basically the only 2 automobile companies we have left. (Chrysler is now owned by Fiat.) They both hit 52-week lows today and they're both in bear markets. General Motors closed at $33.91 - a new low for the year. The stock was as high as $46.76 in June. The stock is down almost 30% in the last couple of months. It's a bear market.
Ford at a Six-Year Low
The story at Ford is even worse. Ford was up at around $12 a couple of months ago. It is down to $9.27. If you look at its high - it was at $16 in September of 2014. Ford is down to where it was the summer of 2012 - 6 years ago. It's at a 6-year low. If we go any lower we'll be at an . 8-year low.
Two Auto Companies Solidly in Bear Market
So you've got our 2 automobile companies solidly in bear market territory, making new lows. These are vital parts of the economy. There are many industries that feed off these companies, the aftermarket industries. These are the good jobs, the high paying jobs that Trump promised to bring back. Remember he was really campaigning in Detroit and other places where they make cars. These companies are hitting multi-year lows.
Tariffs Aren't Helping Auto Industry
So the tariffs aren't working. The tax cuts aren't working. The auto companies are going down. Remember, stocks are forward looking, so the stocks are basically saying that there is a big slowdown coming in the automobile sector. Profits are not going to be there. Tax cuts are not going to be very valuable if there aren't any profits.
Industry Slowdown in Home Building
Also look at what is happening with the home building companies. All these stocks getting killed - some down over 5% today alone. They are pretty much all in bear market territory. So now the homebuilders are also saying, "The industry is going to slow down."
Autos and Housing Are Not Booming
Those are 2 very important sectors of the economy: housing and autos. If they are on the verge of recession. If the stocks in those sectors are forecasting recession, how is it possible that the U.S. economy is experiencing a "historic boom"? "It's booming like it's never boomed before!" Yet autos and housing are not only not part of the boom, they're actually having a bust. Riddle me that, Batman. How is it that the economy is so strong when these two key sectors are so weak?
Interest Rates and Inflation
Why are these sectors so weak? Well one reason, of course, is rising interest rates. Everybody believes that interest rates are going to keep rising which means more nails in the coffin of the auto sector and the housing sector. And of course, both housing and autos are being hit by inflation because of raw material costs. It's more expensive to build cars - it's even more expensive to build homes.
Tariffs Attacking Our Vendors and Bankers
The tariffs are getting higher. Trump was out today saying he is going to put another $240 billion of tariffs on Chinese products in addition to the $200 billion we already have queued up and yesterday he was talking about going after Japan and we're the ones who have the most to lose by picking all these fights with all the countries that are supplying us the goods we need and loaning us all the money we need. We're basically attacking our vendors and our bankers and somehow think this is a good strategy.
Big Leading Indicators Say Something is Wrong
So you can't have a recession in autos and housing simultaneously and somehow the rest of the U.S. economy is impervious.
Another Bear Market Before the Election
The odds are that we are going to have another bear market and we're going to have another recession and the odds are that both are going to start before the next election. What are the odds that Trump can be re-elected if we are in a recession and in a bear market? The only thing that Trump's got going for himself is to talk about how great the economy is, and how high the stock market is. You take that out and what does he have left?
Trump Claims Most Accomplishments Than any other President in History
I was listening to a press conference with the President today, and one of the false claims he made is that he said, "I've accomplished more in the first two years of office than any President in history." Now, I don't know where he is getting this; what exactly has he accomplished as compared to other Presidents' accomplishments. I'll agree, most modern Presidents, to the extent that they accomplish, they accomplish larger government.
We Started with Perfect Government - Small!
We started from a perfect place. We started with limited government, and most of what Presidents have accomplished was to accomplish more government by allowing more legislation to be passed, making government bigger and restricting individual liberty. From that perspective, I like a President who accomplishes nothing. We started with maximum liberty and minimal government. What I want to accomplish is maintaining minimal government.
Shrink Government and Enable Private Sector to be Great Again
When Donald Trump talked about "Making America Great Again", if he actually wanted to do it, restoring our greatness means shrinking government and enabling the private sector to be great again by removing all the burdens that have been placed on it. Has Trump actually done more, good or bad, than any other President? I doubt it.
Who Saved Social Security?
But one of the things that Trump claimed credit for, is that he said he "saved Social Security and Medicare". He said the Democrats wanted to ruin it or get rid of it, and I saved it. What Democrat wants to get rid of Social Security?
Let’s Honor the Labor of the Entrepreneur – Ep. 385
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What About Employers' Day?
Labor Day is coming up on Monday it it annoys me that we just have a Labor Day and we don't have an Entrepreneur Day. We don't have a day to celebrate the employer. Why is that? The entrepreneurs are the unsung heroes of the American economy. I'm not saying that the workers don't make a contribution, but the assumption, when you talk about workers is that the boss doesn't work. If you look at small businesses, in general, the owner of the business works harder that anybody else. They're usually the first one there and the last one to leave.
Employers Don't All Get the Luxury of a Paycheck
When someone owns a business, they don't have the luxury of collecting a paycheck. They get paid only if there is a profit. They get paid only after all the workers get paid, the landlord gets a check, and if they borrowed money they have to pay interest to the creditor, they have to buy all the equipment, they have to pay all the bills. Sometimes businesses lose money for years while the owner works 18-hour days. So that's who we should be celebrating, but we don't do that.
Politicians Know Where the Votes Are
Why is that? Why do politicians try to get the votes of the employees? That's where all the votes are. Most people are employees. Few people have the know-how to run a business. Try to make a business run, try to organize all the pieces and get it to work, that's a very difficult thing to do, and that's why most people don't even try. Everybody gets a day off with pay, which is great for the worker, but the money to pay everybody not to work comes from the boss.
Thank Your Boss
But want to wish everybody a happy Labor Day, especially all you employers out there. If you have a boss, thank him or her. Express thanks for all the hard work it takes to make sure your paycheck doesn't bounce. Anybody can sign the back of a paycheck. It is much harder to sign the front of a paycheck and to make sure that there is money in the bank so that those paychecks don't bounce.
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Fed Responsible for Most Recent Move Up
I think what's really responsible for this most recent move up is the Fed comments. Now maybe Trump can take credit for those, maybe President Trump was able to get Jerome Powell's mind right after all, when it comes to rate hikes, although, if you look at the coverage from Jackson Hole, most people think that Powell stood strong and was resisting the calls from Trump to go easy on rate hikes and he was standing by the Fed's commitment to raising rates. But that was not really what was said. Not just by Powell, but by other Fed officials who were there who were giving interviews from Jackson Hole.
2% Today Is Not the Same Thing as 2% in the 1990's
To me it was clear, and I mentioned this on my previous podcast about the Fed being willing to let the inflation genie out of the bottle, that the Fed is basically back-tracking on rate hikes that the markets may have anticipated for 2019, by talking about how interest rates are closer to normal now. That 2% today is not the same thing as 2% in the 1990's, not wanting to invert the yield curve, waiting for the whites of inflation's eyes before they actually come out blasting by doing everything that it takes.
Pound of Cure Beats an Ounce of Prevention
I think that the Fed has basically said we are going to sit back, we're not going to be pre-emptive on inflation fighting, we don't think inflation is going to break out, but if we're wrong, then we'll do whatever it takes. Basically the Fed's new attitude is, "Why take an ounce of prevention when you can always use a pound of cure?" Because when it comes to inflation, that ounce of prevention, given how frail the economy actually is and what a big bubble we have, that ounce of prevention could be lethal so let's just forget about that. Somehow we're going to be able to slam the economy with a pound of cure, we're going to be able to get aggressive on fighting inflation if for some reason it ends up being much worse than we thought.
Fed to Let Inflation Genie out of the Bottle – Ep. 383
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Dovish Speech Given by Jerome Powell
The catalyst for the rise in gold and the decline in the dollar, I believe, was the dovish speech given by Jerome Powell today in Jackson Hole. Whether or not the speech is perceived as dovishly as I believe it is, I think we're going to have to see if we are going to get some follow through in the dollar and in the gold market next week. It is critical to see how the markets follow through to today's actions. If I'm right, we could see a big move up in the price of gold next week and a big move down in the dollar.
Hedge Funds Are Net Short Gold
Remember we've got a lot of people who are short gold now for the first time since 2001, the hedge funds were net short gold and I think they could get caught in a losing trade and have to scramble to buy back the gold that they sold. Also, lots of people are now loaded up long the dollar, short the emerging market currencies. But the impetus for this trade, the momentum, had to do with the bullish posture of the Fed and the anticipation that the Fed will continue to raise interest rates and shrink its balance sheet.
But if what Jerome Powell said today causes traders to second guess those assumptions and maybe dial back their expectations for rate hikes - maybe not necessarily the 2 rate hikes that everybody believes are coming in the balance of 2018 - but potentially the idea that there may be no rate hikes at all coming in 2019, that 2018 may be the end of it. In fact, maybe, we won't even get the December rate hike. I think to the extent the traders start to re-price the odds of future rate hikes this could be a big move in the dollar, a big move in gold and again, we have got to see what happens, because maybe this was a one day event… maybe traders are not going to read into Powells comments what I think he meant. But, given the reaction that we had today, I think there is a reasonable chance that that is exactly the way the markets are going to take it. We have so many people on the wrong side of this trade right now that it's a perfect time for the market to swing the other way.
Trump’s Denial of the Obvious Compounds His Mistake – Ep. 382
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Trump Suffers Huge Double Blow
Yesterday, two key people - one the President's former campaign manager Paul Manafort was convicted of multiple counts of serious financial crimes, and later that day, Michael Cohen, the President's personal attorney, copped a plea to multiple financial crimes. So you have two key figures in Trump's campaign who are not criminals.
Violation of Campaign Finance Laws
Now, obviously, the President has not admitted to a crime, he has not been convicted of a crime, but still - guilt by association. The most problematic, at least thus far, is the fact that one of the crimes that Micheal Cohen pled guilty to had to do with violation of campaign finance laws. He made two large payments ($100,000+) to two women, one was a porn star and one was an ex-Playboy playmate. Both of these women claimed that they had had affairs with Donald Trump. In order to buy their silence, to pay them off, Donald Trump funneled some money, through Michael Cohen, to these two women.
Trump's Original Story Doesn't Make Sense
Of course, Donald Trump claims that he knew nothing about it - that Michael Cohen just decided on his own to make these payments and Donald Trump didn't even know about it. That was his original story until he changed his story and said he found out about it later. Although, they even have a tape recording of Donald Trump and Michael Cohen discussing how to make the payments before they were made.
Guilt By Association
Of course, Trump's version of the story doesn't make sense. But now Michael Cohen, as part of his plea, said that the payments that he made were made at the direction of the President. Donald Trump asked him to make the payments, he made the payments, and he has now pled guilty to the crime of making those payments. So if it was criminal for Michael Cohen to pay off these women the way he did, well then obviously the President conspired to commit that crime.
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Strong Dollar Policy?
There used to be a lot of talk about the so-called Strong Dollar Policy. We had the Strong Dollar Policy when Bill Clinton was President, George Bush; I guess when Barack Obama was President, as well. I've talked about it, I've written about it in Crash Proof, How to Profit from the Coming Economic Collapse; I talked about it like it was the Loch Ness monster. Everybody knows about it, everybody's heard about it but no one has actually seen it.
We Like the Strong Dollar. A Strong Dollar is Good for America
We didn't actually have an official policy that constituted the strong dollar policy. It was simply talking about the strong dollar being in the national interest, and that was just the mantra that was repeated often by the Secretary of the Treasury or by the President. "We like the strong dollar. A strong dollar is good for America… and that pretty much constituted the policy.
The Trend Was Your Friend
But nonetheless, having the belief that there was some kind of hidden strong dollar policy helped to create confidence in the dollar, even in periods of time when the dollar was declining. Perhaps it would have declined even more had it not been for the belief that there was some kind of strong dollar policy. And of course, when the dollar was rising, the "strong dollar policy" really helped add fuel to the increase because after all, you were riding the policy. So the dollar was going up and that was what the U.S. government wanted, so it was all good. The trend was your friend.
Donald Trump's Weak Dollar Policy
Well, it should be obvious that Donald Trump has a weak dollar policy, whether he wants to name it or not, that's the policy. Of course, the weak dollar policy will not involve actually doing anything, just as the strong dollar policy didn't involve doing anything, but I think the rhetoric will have the same impact in that when the dollar finally starts to fall, it will fall even faster when people think it's a deliberate policy.
Revisionist History Portends Socialist Future – Ep. 380
The Accountable Capitalism Act
Elizabeth Warren unveiled her new idea in an op-ed in the Wall Street Journal. It is her new bill, called the Accountable Capitalism Act. Of course, I have said this before, there is no truth in advertising when it comes to legislation. Whenever Congress passes a bill, the name of the bill is generally the opposite of what the bill actually does. So if they pass a bill called, "Tax Simplification", that means that they just complicated the tax code. But nobody wants to vote for a bill that's called "Tax Complication", so you can't label it "Tax Complication" when that's what we're doing, so you label it Simplification so everybody will like it.
This is All About Socialism
That's what Elizabeth Warren is doing in her Accountable Capitalism Act. This is not about Capitalism. This is about Socialism. The idea here is that Capitalism is not accountable, and so this act is going to hold Capitalism accountable. In reality, capitalism holds everybody accountable. Under a Capitalist system, everybody is accountable for their own actions. If you screw up, then you have to suffer the consequences. If you make a mistake, it's on you. If your business fails, there's not bail-out.
Capitalism is the Ultimate in Accountability
So Capitalism is the ultimate in accountability. It's fair and everybody is held accountable for their own decisions and their own actions. What Elizabeth Warren wants to do is to take that accountability away. She wants to have the government get in there and take away the accountability inherent in the Capitalist system.
The Socialist Un-Accountability Act
Not only is the act mislabeled, it is actually the Socialist Un-Accountability Act. It wants to take people who would normally be accountable and make them unaccountable. It's all Socialism wrapped up in a Capitalist bow. What she wants to do is:
* She wants to force corporations with over $1 billion in revenue, regardless of their profit, to appoint at least 40% of their board from the ranks of their workers
* She wants to re-install the stakeholder accountability that existed until the 1980's
Warren: Profits have Screwed Up the Country
I read the op-ed and I listened to her interview with Kramer on CNBC and according to Elizabeth Warren's revisionist version of American History, corporations cared about their stakeholders, meaning their employees, customers, communities up until the 1980's. Then all of a sudden, in the 1980's, everything changed. All of a sudden, it was all about profits. It was all about maximizing shareholder value. And that's what screwed up the country.,
Populism and Democracy Are a Dangerous Combination – Ep. 379
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Turkey's Current Account Deficit
The "Turkey baste" continued on Monday, although Tuesday we did have a bit of a reversal, Tuesday bounce in the lira, rising about 7 percent or so, in today's trading. But still, it is down considerably from where it was a few weeks - a few months ago. But I do believe that the financial media is exaggerating the problems that existed in Turkey prior to the crisis reaching the headlines. Yes, Turkey has a current account deficit, but the current account deficit is not nearly as large as the media is making it out to be. In fact, it is similar in size to the current account deficit that the United States is running, if you look it as a percentage of GDP. In fact, Turkey's trade deficit is a much smaller percentage of its GDP than is the American trade deficit.
Dollar Strength Hurting Emerging Markets
The problem in Turkey is twofold: one is the strengthening dollar, which is putting pressure on all of the emerging markets' currencies and economies. It's just that Turkey was a weaker link in that chain, so Turkey is being disproportionately impacted by the outlook that the dollar is going to keep rising. This puts a lot of pressure on economies where there has been a lot of foreign investment. A lot of loans are in dollars. A lot of the money that has been coming into the Turkish economy has been private investment, fueling capital investment within the Turkish economy. It 's not the government borrowing all this money; it's businesses borrowing money. The international community was willing to lend. After all, interest rates were really low for a long period of time and so capital was chasing a higher yield and some of that capital went into emerging markets, including Turkey. But obviously, you have a lot of loans that are dollar denominated and that's one reason that a rising dollar is so bad for emerging market economies.
Erdogan's Populist Policies Critical of High Interest Rates
What really elevated the problem for Turkey was not simply that the currency was falling, but look at what President Erdogan was saying: he is a populist leader who is saying things that appeal to voters. He's also appealing to nationalism. Trying to make it "Turkey against the world". Pursuing policies that put Turkish interests first. He has been critical of the Central Bank raising interest rates. He has been particularly critical of the whole concept of raising interest rates.
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Turkey is the Epicenter of Emerging Market Concerns
Right now, the epicenter of the concerns about the emerging markets is coming from Turkey. What is the problem with the Turkish lira? Turkish President Erdogan is veering off into some very dangerous territory with his stance with the Central Bank of Turkey and now the political battle of egos that he is having with President Trump over the release of an American pastor who is imprisoned in Turkey. As a result of this, the President is now turning up the heat on Turkey with sanctions, which is compounding Turkey's problems. Today was probably the biggest one day drop in the Turkish lira. Today, the Turkish lira might have been down about 20% intra day.
Trump Doubling Down on Tariffs with Turkey
Throwing fuel on the fire, early in the morning, when the lira was already down 12%, Trump announced that he would be doubling the existing tariffs on Turkish steel and aluminum. Turkey has a trade surplus with the U.S. like just about everybody else. Is this going to hurt Turkey? A little bit. Obviously it hurts Americans more because now Turkish steel is that much more expensive.
Speculative Frenzy Shorting the Turkish Lira
All of this is adding fuel to the speculative frenzy to short the Turkish lira. I think you have a lot of hot speculative money that has been leaning down on that currency. It is basically fueling an even bigger problem. They have high inflation, they have very high bond yields. The yields in Turkey up until recently, even though inflation was high, you had 400-500 basis points of positive bond yields.
Turkish Economy Essentially Strong
The Turkish economy has actually been quite strong over the years. As a result of that a lot of international money has been invested in Turkey. Foreign direct investment has been going into the Turkish economy, participating in the Turkish equity market, lenders have been loaning money. Some of that debt of course, is dollar denominated and euro denominated which is the problem now, because if you are a company generating revenue in Turkish lira, if you have dollar or euro debt. Now a lot of people hedge; if your obligations are in a different currency, you would hedge that currency to the lira. But the weakness in the lira drives inflation even higher, because as the lira loses value, you need more lira to buy stuff and as inflation goes higher, there is more pressure on the central bank to raise interest rates to try to fight that inflation. But higher rates also feed into inflation by increasing costs.
Turkish Debt to GDP Much Lower than in the U.S.
President Erdogan is putting pressure on the central bank not to raise interest rates high enough to crush all the speculators who are shorting the Turkish lira. What also should be done is they should dramatically reduce government spending in Turkey. Not that it was out of control to begin with, but they want to make sure they don't have deficits. If you look at the debt to GDP in Turkey it is considerably lower than in the U.S.
The U.S. Dollar is Not the Subject of a Run - Yet
The U.S. is in far worse shape than in Turkey, in fact it's not even close. But the difference is the U.S. dollar is not the subject of a run right now. But if you think about the predicament that Turkey is in, this is the same predicament that the U.S. is going to be in - we're just not there yet.
Double Standards and Hypocrisy of the Left – Ep. 377
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Alex Jones Banned
Alex Jones was banned from iTunes, Facebook, YouTube - his entire YouTube Channel is gone! He had over a million subscribers. The Alex Jones videos on my YouTube channel where I appeared as a guest are still up, but the ones on Alex's site are no longer there.
What About the First Amendment?
This raises a lot of very interesting and disturbing questions. First of all, you have a lot of people talking about censorship. What about the first amendment? The most important thing to remember about freedom of speech is that all of that has to do with government. Government cannot infringe on your freedom of speech. This has nothing to do with a private business. So, Facebook or YouTube are private companies. I don't have a right to have a YouTube channel. When you sign up for YouTube, they have the terms & conditions and you agree... YouTube doesn't charge me to have a YouTube channel; I don't have a right to demand one - it's private property. I can still do videos and get them out on this website and on other channels. I can listen to the Alex Jones Show podcast, even though it is not on iTunes.
Banning an Opinion
I don't think YouTube and Facebook taking Alex Jones off is a First Amendment issue, or is censorship. It certainly is a double standard. Why are Alex Jones' videos being taken down? Supposedly because it is hate speech or fake news. It is his opinion, and if you don't want to listen to it, don't. I don't think he is out there inciting violence. There are actually sites on YouTube and Facebook that do advocate violence. There are Communist YouTube channels. Why is that allowed on YouTube? What is Communism? That is where the government forcibly steals private property. Communism is a much bigger threat to the families in Newtown than Alex Jones denying that there was a shooting there.
Intolerance for Any Opinion that Disagrees
The Alex Jones channel made a lot of money for YouTube. Why would they want to get rid of it? YouTube is about selling ads and they need content, and Alex Jones some very good content. I think the reason was pressure from advertisers who were getting pressure from consumers saying. 'We're not going to use your products if you keep selling ads on this channel."
This is the type of society we live in, where the left is so intolerant of any opinion that they disagree with that they will do anything they can to shut it down. Whether it is trying to use the power of government or trying to use their power as consumers to organize and put pressure on companies to silence people who are saying things they don't like.
Slanting Content Invites Fairer Competition
As long as it is not the government silencing free speech, the message is still out there. Alex Jones will still be out there, just not on YouTube, Facebook or iTunes. Ultimately, if places like Facebook or YouTube started to censor enough people, it would destroy the value of their franchise. If they slant their content it leaves the door open for a competitor to come in and offer free speech.
Where you see massive hypocrisy is the same people who are up in arms about a small bakery who does not want to decorate a cake for a gay wedding and use the full force of the U.S. government to force them to so something they disagree with, have no problem with a trillion dollar company (Apple) denying service to Alex Jones because they don't agree with what he is saying. You either defend private property and liberty or you don't. I don't think we can force a baker to bake a cake for a gay wedding and we can't force YouTube to provide service to Alex Jones.
Mainstream View on Trade Dangerously Wrong – Ep. 376
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Ridiculous Rhetoric in Tariffs
One of the drivers behind the increasing cost of living is going to be the tariffs. The rhetoric here is really ridiculous. Talking heads on the mainstream media say, "We've got China by the balls..." "We're going to make them feel some pain..." "They're going to give in..." We're going to force them to play fair because they have so much to lose..."
We Have More to Lose and China Has More to Gain
The reason that the Chinese stock market is suffering more than the American stock market is because investors are clueless. They believe all the nonsense that China is going to lose the trade war and America is going to win. It couldn't be further from the truth. We have a lot more to lose, in fact China has a lot to gain, if they would only figure it out. Why have the Chinese for so long been willing to subsidize the U.S. economy? That is what they have been doing. They have been artificially suppressing the standard of living of their own people so they can prop up the standard of living in America. They have been denying their own citizens the production they otherwise would have been entitled to by diverting that production to exports.
Economists Made Same Faulty Analysis After WWII
This is the same type of argument that economists made, and I pointed this out on my first book, Crash Proof: The Second World War was nearing an end. There were economists who were worried that the end of the war would bring about a recession because there would be lots of unemployment. All of the factories that were producing military products wouldn't have anything to make anymore. And all the soldiers and factory workers would be unemployed. Everybody was worried that there would be a big economic downturn.
U.S. Postwar Economy Boomed Because the Government Dramatically Cut Spending
Fortunately nobody took the advice of those economists. We ended the war anyway and rather than an economic downturn, we had an economic boom. In fact, you hear all these economists today who like to say that WWII got us out of the Great Depression. That's not correct. Yes, the GDP went up during the war because of all the military production, but if you look at the standard of living of American citizens during the war, compared to that of the post-war era, it was when the war ended that the economy boomed. Why? Because the government dramatically cut spending.
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Abolish the Capital Gains Tax?
If we simply had no capital gains tax, but wen are still taxing the worker on the value of his labor without any deductions whatsoever, I just don't think that's a fair system. That's one of the reasons I would not want to just abolish the capital gains tax. I would want to abolish the entire income tax and go to an indirect tax, such as sales tax or tariffs. We would obviously have a much smaller government if it had to survive on indirect taxes, on excise taxes. This is what the framers of the (of the Constitution) originally envisioned. They thought that direct taxes, like an income tax, would only be used during times of war. That's why they made it so hard to enact.
Indirect Tax Rather than Direct Tax
During peacetime, the government was supposed to operate on excise taxes. Of course, the whole idea of income tax to me is inconsistent with free people. Free people do not have to report everything to the government. They don't have to fill out paperwork under penalty of perjury and file all these tax returns, keep all these records. If the government is forcing us to do all this, the government is the master and the people are the servants. That is not what America is supposed to be about.
Is Government the Master and We the Servants?
Of course, the biggest problem I have with the capital gains tax cut is that government spending is not also being cut. So we're talking about another tax cut without reducing the size of government. Since government spending needs to be paid for, if we're going to cut the capital gains tax, how are we going to pay for government spending that capital gains taxes used to pay for? Obviously we are going to borrow it. And borrowed money is going to do more damage to the economy than any benefit we get from reducing the capital gains tax.
Peak GDP Sets Stage for Major Economic Fail – Ep. 374
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U.S. GDP Growth Reported at 4.1%
Today we finally got the highly anticipated first look at U.S. economic growth, or really GDP growth, because the GDP is not that great a barometer of the economy. Nonetheless, thats the one that everybody uses to measure it, and that's the one that we're going to talk about. Perhaps I can get into why the GDP is such a flawed measure in a different podcast; I really don't want to get into it today. I just want to talk about the numbers that are being spoon-fed.
Atlanta Fed Forecast of 3.8% Might Be Closer to Final Number
In any event, we got the number today, and there was initially a loth of estimates that we could just blow it away this quarter, that we could have a number north of 5%, and we got 4.1%. So, we at least are above 4%, which lets Donald Trump brag about the number being over 4%, although we'll see how long it stays over 4%. You know, we did get a lot of data that was coming out this week, and in recent weeks. In fact, the Atlanta Fed lowered its forecast, which at one point was as high as 5.4% and it lowered it down to 3.8% yesterday. I think that 38 might end up being more accurate than the 4.1%. In fact, we may end up being below 3.8% by the time they make the final revisions.
Celebration May Be Premature
They actually revised the first quarter back up to 2.2%. So they revise these things constantly. The first number is rarely the correct number. In theory, they could revise it up but I think it's more likely that the revision is going to be down, so the celebration is premature.
New Home Sales Lowest in 8 Months
Two numbers that came out this week that caused the Atlanta Fed to move down to 3.8%: one was new home sales. It was the lowest in 8 months. In fact, they revised down some prior months. I had already reported in a previous podcast the weak numbers for existing home sales, which is a bigger number because most of the homes that are bought already exist. But the ones that are being built have a bigger impact on the economy proportionately because of all the construction jobs.
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Voting Responsibly for Freedom
I am "pro" young people because I want them to grow up in a free country. I want them to have every opportunity to be as prosperous as possible. Democracy is actually an enemy of freedom. Young people have a better chance to achieve their goals if the 18-19-20 year old generation aren't voting for leaders who pass policies that will actually undermine our success and our progress. They're not sophisticated enough yet; they don't know enough yet about the real world to understand the real role of government.
Socialism Masquerading as Capitalism
The goal is to have the best government. that's why we don't let elementary kids vote. Why? because they are not sophisticated enough and even 18-year olds who have never had a job are not able to discern what we need for good government. I am trying to reach more and more young people to help them understand the benefits of freedom and capitalism and understand the dangers of socialism and of socialism that is masquerading as capitalism, crony capitalism and corporatism. We have the U.S. government controlling the economy with regulation and taxes and then blaming everything that goes wrong on the free market. Everything that goes right is because of the free market. Everything we achieve is despite all of the road blocks that government creates and the level to which they go to undermine success.
Turn on to Liberty
So the more young people who can listen to this podcast (younger people are more likely to listen to podcasts) the more knowledgeable voters we'll have to vote for good government. The higher this podcast is ranked, the more people will discover it. I have heard this story many times: first time listeners who have found me. Once I turn them on to liberty, once I appeal to them, I open their eyes. They then do their own research; they start to read. They start to tune out all the propaganda and start thinking for themselves. I can change people's mind.
Help Me Get the Word Out
You can help me change people's minds by posting your rating and review this podcast on iTunes. Put the stars on there and write up a review and help me get my podcast to more people. That's the way to win this political war. There is a giant move to the left. People have misinterpreted the results of the last election. The electorate is moving left. That left wave is going to affect the moderates and even the Republicans in this next election. The coming recession will be worse than the last one and is going to be entirely blamed on free market capitalism.
Pierce the Smokescreen of Mainstream Media
We need to make as many people as possible realize that they are being lied to. The media can repeat a lie often enough that people believe it is the truth. The point of my podcast is to get the real truth out there and to pierce the smokescreen of lies that is being blown by the government, by Wall Street, and by the mainstream media.
Trump and Fed to Blame Each Other for Recession – Ep. 372
Presidential Tweets Express Anger at the Fed
The catalyst today was more tweets from President Trump where he is expressing anger, not only at the Federal Reserve, and at the ECB and at the Bank of China, because he is accusing both Europe and China of being currency manipulators; taking advantage of us by weakening their currencies. He's saying that a weak currency gives you an advantage. It doesn't.
Strong Currency Provides Trade Advantage
When it comes to trade, it is a strong currency that gives you the advantage because trade is all about imports. How do you get more stuff for your own citizens, and the way you pay for that stuff is by exporting. But the goal is to export as little as possible and to import as much as possible. If you're a buyer, you always want to pay the least and get the most. So you pay for stuff when you export because you're using resources to produce stuff for other people. But you're not producing stuff for other people because you're charitable, you're trying to earn the money to buy stuff for yourselves that other people made.
Is Trump Firing Back?
Having a strong currency is a huge advantage because it means you can claim a greater portion of the global output. Because the dollar has been so over-valued thanks to the generosity or the stupidity of our trading partners, Americans enjoy greater consumption than what would otherwise be available to them if we were limited by our own collective production. So we actually have the advantage. But by calling out China and the ECB for deliberately weakening their currency, you would think that Trump may want to fire back.
Weakening the Dollar
Donald Trump doesn't control the Fed, but the Treasury Department can intervene in the foreign exchange markets. Maybe, if Donald Trump really believes that these other countries are deliberately weakening their currency and if he has no control over the Fed but he does have control over the U.S. Treasury, he can have the Secretary of the Treasury intervene, go into the Foreign Exchange Market and start dumping dollars, trying to drive the dollar down so that we can reclaim the advantage. At least the way he looks at it.
Trump Driver is Suing the Trump Organization
On thing I talked about on the Joe Rogan podcast was a story that broke the same day of my last podcast, which I thought was very interesting. It was about Donald Trump being sued by his former personal driver, who still works for the Trump organization, by the way, he's worked there for over 25 years until Trump became President and got a tax-payer provided driver, he had to pay his own driver. I think the guy was getting a $70K/year salary, which to me seems about right.
Diver Claims He is Due Overtime
The driver sued the Trump organization because he claims that he was due overtime, and he didn't get paid overtime. Now he's worked for the Trump organization for 25 years. He has known his pay all these years and never once complained and now after 25 years he wants to use the labor laws to retroactively force the Trump organization to give him a pay hike.
Terms and Conditions of Employment
First of all, he is not an hourly employee. It's not like he is punching a clock and the organization asks him to work overtime. According to the article I read, the driver needed to be on call for Trump something like 10-11 hours a day. Maybe 55 hours a week he was on call in case Trump needed him. That does not mean he was driving all that time; he just had to be accessible to Trump. He couldn't go on a vacation or leave town, but he could watch a movie, he could read a book, he could trade stocks on the internet, he could do whatever he wanted. He had plenty of free time between times he drove for Trump. He knew exactly what the deal was and he chose to work under these conditions.
What happens in America is that employees like to go back in time and re-write the deal more favorably to them. If this driver did not like the terms of his employment, he had two options:
* He could have gone to Donald Trump and said, "I'm working on call 10 hours a day - that's more than a normal 8-hour job, you're paying me $70K/year, If you want me to be on call that many hours, you need to pay me more money. Then Trump would have had two options - pay more money or find another driver.
* If the driver did not like his employment conditions of that job, the compensation package, the amount of hours he had to be available, he was free to drive for somebody else.
Government Regulation Is Why Drugs Cost so Much – Ep. 370
Misguided Tweet About Pfizer
Another misguided tweet that came out today from the President had to do with drugs:
Pfizer & others should be ashamed that they have raised drug prices for no reason. They are merely taking advantage of the poor & others unable to defend themselves, while at the same time giving bargain basement prices to other countries in Europe & elsewhere. We will respond!
So here's the President, threatening businesses for raising prices; for making a profit. If Obama were calling out big business like this, the Republicans would be all over him, or if Hillary Clinton were saying this:"You don't understand capitalism! This is an assault on private enterprise!"
Trump's Protectionism Tolerated by Republicans
But Trump says it and it's no big deal. Can you imagine if Hillary Clinton had launched these recent tariffs? Can you imagine the backlash by the Republicans? "This is terrible, the President doesn't understand capitalism; the President doesn't understand free trade; this is going to backfire; this is going to lower our standard of living; this is going to raise prices!" The Republicans would be all over Hillary Clinton. They would have been all over President Obama. Republicans have generally been known to be in favor of free trade. It's the Democrats who wanted some protectionism because they wanted to protect workers. They think free trade will lower wages, hurting the blue collar worker. So you would generally associate Democrats with protectionism. The Republicans wanted to be Free-Traders.
Get Rid of FDA Red Tape
Now, of course, since President Trump is advocating protectionism, the Republicans don't want to attack him because they are blindly loyal to the party. So now he's bashing Pfizer and other private companies for "gouging" the consumer, just raising prices for no reason. This is all misplaced. I agree that drug prices are too high; they should be a lot lower. It is not that Pfizer is rising prices for no reason. One of the reasons drugs are so expensive is the FDA. This is something President Trump can do something about. He is the President. The FDA is a Federal agency. Why not get rid of all that red tape? It takes an average of 10 years and $2.6 billion for a drug company to develop a drug and get it to market. The drug has to recoup those costs when they finally get a drug to market.
Will the Trade War Prick America’s Bubble Economy? – Ep. 369
"Bring on the Trade War!"
Today is Jobs Friday, but before I get to the jobs report, I want to talk a little bit about the escalation of the trade war, In fact, some stories I'm reading are that the trade war began today, or last night. A lot of the tariffs are finally being imposed. The market reacted positively; the Dow was up 100 points today. The NASDAQ was up 100 points as well, which is percentage-wise a much bigger increase - 1.34% move - so who cares about a trade war? "Bring it on! America is going to win the trade war because we've got the least to lose because we've got the biggest deficits.
Dollar Sold Off Despite Trade War and Jobs Number
The dollar, meanwhile, sold off today. The dollar index closed at 94, barely held the 94 handle. It traded below briefly, despite what many people consider a stronger Nonfarm Payroll report. So, the dollar went down despite the beginning of the trade war and despite the supposed strong jobs number. To me, the dollar topped out at 95; I expect us to crack below 94 next week, and if we break below 93, if we get into the 92's I am pretty sure the rally is over, technically speaking and we're heading for new lows relatively quickly.
Who is the Industrial Powerhouse?
Let me get back to the trade war that we are supposedly going to win. One of the most interesting things about it, is when you look at the goods each side is imposing tariffs on. When you look at that, you can see which country is the industrial powerhouse and which country is a third world country masquerading as an economic power. Here are the goods made in China that Trump wants to tax the American citizens on:
Aircraft engine parts
Air & gas compressors
Oil & gas drilling platforms
Industrial heating equipment
Machinery for processing meats
Paper making machinery
Machinery for molds, cements
Printer & copy machine parts
Machinery for glass products
Printer & machinery for making rubber
AC & DC generators
Radar & radio equipment
Equipment for circuit breakers
Television parts & video recorders
Electronic traffic signs
Trains & rail parts
Diesel cars & trucks
Market Closed Early for July 4th Holiday
The U.S. stock market closed early today, ahead of tomorrow's Fourth of July holiday when the markets are of course closed and Americans are out celebrating Independence Day, the birth of the nation, July 4, 1776. I love the Fourth of July as a holiday; it is purely American.
Framers of the Constitution Risked it All
One of the problems I have with the Fourth of July is that it makes me feel both good and bad about what happened on July 4, 1776. I am honored to have been born in a nation that was conceived in liberty and I think about the sacrifices made by the people who signed their names beneath John Hancock's name to that document. These men risked it all to put their names on the Declaration of Independence, committing treason against the British government. If we had lost that war, the King would have killed our founding fathers, as traitors.
The American Experience is Unique and Privileged
So you think back on the accomplishments and the sacrifices that were made and the incredible republic that our founders created. I'm proud that, but at the same time, I'm sad that it has all been lost. We no longer have the nation that our founders created for us. We have lost all that it means to be an American. It used to be so special to be American, based on the type of nation that we were, and the type of individuals that Americans were; what it meant to be an American, how unique and privileged it was.
The Role of Government in America
And today, even though the American economy is regarded as at the top, a lot of that is a function of debt and it's all an illusion. The difference between an American and any European these days is not nearly as great as it was. If you have never read the Declaration of Independence, and I am sure most of you probably had at some point, you might want to take another look at it, and give the entire document a read. I am going to read just a part of the second paragraph, because this is the most important aspect to understand the essence of what America is supposed to be, and what the American government is supposed to do. This is important because there are all these Socialists out there who want to re-define America - Democratic Socialism. This paragraph helps you understand the role of government in America.
We Hold These Truths to Be Self-Evident
Governments can have different roles in different countries, but in America, there is a certain role that government is supposed to have. It had it for a long time, but it no longer fills that role:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, —
Sky High GDP Forecasts Coming down to Earth – Ep. 367
Dow Ending a Down Week on a Positive Note
The Dow managed to finish a down week on a positive note; the Dow Jones was up about 55 points - 24,270-ish is where we closed. Although intra-day, we were up better than 250 points, so most fo the losses came toward the end of the day, as the Dow was not able to hold on to all those gains. It held on to some of the gains, but Russell 2000, not as lucky. That index ended up finishing a down week down on the day. Probably the difference is the oil stocks, which are really helping out the Dow, to a lesser extent maybe the S&P 500 and that also closed positive on the day, but just barely, and well off the intra-day highs.
I Predicted Oil Would Be Heading Toward $80/Barrel
While we're talking about crude oil, we were up again today, in fact, we haven't even finished trading as I'm recording this, but as I am looking at it, it is at 74.40, up .$.95 - right near the high of the day. I think so far that was $74.46, so, almost 74.50. Oil is just a powerhouse. For those of you who say, "Hey Peter Schiff, you haven't gotten anything right since 2008!", I beg to differ. I've gotten some things right; I've gotten some things wrong, but one of the things I nailed this year is the oil market. I was very bullish on oil early in the year. I was saying that oil prices were headed up to $80-$100/barrel at the beginning of the year. When the year started, we were barely above $60, so $80 still looked like it was far away, but I was pretty sure we were going there. And, obviously, we're not there yet, but the year is only half over, and we're a lot closer to $80 than half way. I don't think we're going to stop at $80. I think it will be somewhere between $80 and $100/barrel.
What is Driving Crude Oil Right Now?
The question is, what is driving crude oil right now, because the dollar is rising. Today, it did not rise. Today the dollar index got smoked. Some of that had to do with political news announced last night in the Eurozone regarding immigration, but the dollar wasn't just weak against the euro today, it was across the board. All the currencies scored big gains. The dollar index is back down below 95 - 94.63. Remember I said on my last podcast I did not think there was much room above 95 for the dollar index to rise. So far I'm right about that.
Socialists Take N.Y.C. Is the U.S.A. Next? – Ep. 366
Election Results in N.Y.C. Indicate Political Backlash
Trump has already said that he's "Made America Great Again", so whatever problems he inherited, he's already claimed to have solved, which means any problems that arise now are brand new, under Trump's watch, and he and the Republicans are going to take the blame. An early warning sign of just how big a disaster this can be arrived yesterday in a N.Y.C. Congressional primary. You had a 10-term incumbent Democrat - the guy's been in Congress for 20 years. These guys are impossible to get rid of - trying to get rid of them is like trying to get rid of herpes. Joseph Crowley had been unopposed for 14 years. 28-year old Alexandria Ocasio-Cortez is going to be, if she wins, will be the youngest woman ever elected to the House of Representatives. She is a former bartender with no real political experience other than being a member of the Democratic Socialists of America. They believe in the abolition of capitalism in favor of an economy run by either the workers or the government.
Oil Prices Prop up DJIA, but not Broader Markets
Even the surge in oil stocks was not enough to keep the U.S. stock market in the black today. The Dow Jones finished in the red by 165 points. That is a drop of .68 percent, but the broader markets which don't have the exposure to the energy sector faired much worse. You had the composite down 116 points - 1.5% - and the Russell 2000 down almost 1.7%. Oil prices had a huge day today. They closed off the highs, but still up $1.80. $72.33 per barrel for the price of oil. We did get as high as $73.06 on West Texas earlier today, so this is a new high for the year. Remember, this is what helped the market avoid an 8-day losing streak when we got that 9th day rally, thanks to oil stocks; and I said at that time that I didn't think that was good news for the markets because higher oil prices may be good for companies, but they're not good for the overall economy. They're even higher now and it will be an even bigger drag on the economy.
Trade Wars and Deficits Bearish for the Dollar
More importantly than the oil price in dollars is the oil price in euros, which continue to weaken against the dollar and other currencies, The dollar index had another strong day. We're back above the 95 handle: 95.26. I think this is where the resistance is for the dollar, so I don't expect much headway above 95 on the dollar index. I still think that the markets have this all wrong; a trade war is not a positive for the dollar. So everybody who is betting that all of these trade tensions escalating is somehow dollar positive, they're wrong. Just as the people who are betting larger budget deficits are dollar bullish. Both of these events are dollar bearish, as the dollar bulls are soon going to find out.
Oil Prices Threaten Inflation in the Eurozone
In the meantime, the increasing price of oil is going to send Eurozone inflation blowing through the 2% ceiling. I talked about that in this podcast. They don't have a 2% target in the Eurozone, like we supposedly have in the U.S. Here, the Fed is targeting 2%. They've even said they're targeting higher than 2% to be symmetrical around 2%. But in the Eurozone, 2% is the ceiling. That's why Draghi keeps saying we want to get close to, but below 2%, because it's a hard ceiling. Why they're trying to get close to it is beyond me because if you get too close to it you're in danger of going above it.
Most Banks Would Fail Stagflation Stress Test – Ep. 365
Nobody realized just how bad the economy is, but they're about to find out. All of the economic data that came out this week points to stagflation, if you look at the data. Look at the Philly Fed - dropped down to 19. It is the biggest drop in 4 years; the lowest since the election. Look at the manufacturing PMI - those numbers came out yesterday - dropped to a 7-month low, the lowest since November 2017. If you look at the actual numbers - new orders fell sharply but input cost rose to their highest since September 2013. So you have rising input costs, yo have falling orders; to me this is all stagflation.
The Fed's Stress Test was too Easy
As I pointed out, even Alan Greenspan, not too long ago on CNBC talking about stagflation. He can see it. But you know who can't see stagflation? anyone at the Federal Reserve. The Federal Reserve announced the results of their stress tests, and surprise, surprise! Everybody passed. So the Federal Reserve designed tests to measure the banks that they regulate would perform under adverse economic scenarios. First of all, if a teacher gives a test, and everybody gets an A, then the test was too easy. Clearly the Federal Reserve designed this test so that everybody would pass, which of course, is why the test means nothing. Obviously they don't want to announce that the banking system is not sound, so they want to run these bogus stress tests to create a false sense of confidence in the banking system.
Look at the Fed's Assumptions
I want to actually look at the stress test. You really can't tell anything unless you look at the assumptions. What type of stress is the Federal Reserve assuming the economy might encounter? First of all, you have the most likely scenario they assume - their base case. Their base case scenario, which is their forecast is that everything is great. The economy continues to grow 2 - 2.5%/year - a little bit more this year but then it slows down. Inflation stays right at 2%, interest rates stay about where they are, unemployment goes a little bit lower - everything is great, right? Now, their adverse scenario goes as follows: the U.S. has a mild recession, and during that mild recession the Federal Reserve is able to lower interest rates down to about zero again. The yield on the 10-year falls to about .75%, so 10-year yields fall below 1%; Inflation falls; they don't say how low but it falls below 2%, unemployment rises and peaks at 7%. This is their adverse scenario. Interest rates go back down to zero. That doesn't sound that horrible. Inflation goes down - what is so horrible about lower inflation? This is not that bad.
The Elephant in the Room is Stagflation
But then, you've got to look at their extreme. In that scenario, we have a bigger recession, and according to the Federal Reserve, there is a global aversion to buying government debt, like bonds. So because of that aversion, the yield on the 10-year doesn't fall to .75% the way it does under the adverse scenario, it stays where it is - right around 3%. So because interest rates do not fall, there is a bigger decline in asset prices - I think they have a 65% decline in stock prices, a 30% decline in real estate prices, unemployment rises to 10%, and inflation falls to 1%. I can't help but laugh at this severely adverse scenario, where inflation is only 1% and the Fed is able, again to lower interest rates down to zero. What is the Fed missing? The elephant in the room: stagflation.
The 2008 Financial Crisis Was Not Even Close to the Worst Case Scenario
There's an old saying that generals always prepare to fight the last war, and the same is true with central bankers. What was the last war? It was the 2008 Financial Crisis. What happened during that crisis? Interest rates went down, inflation went down, the dollar went up (by the way, the adverse scenario also assumes appreciation of the dollar,
Upping the Ante
The shot heard around the world in the ever-escalating trade war was fired last night by Donald Trump, threatening to impose another $200 billion of tariffs on American consumers wishing to buy Chinese goods. This followed the $50 billion in tariffs. And, remember, when Trump announced the first $50 billion tax on Chinese goods, he threatened that if China retaliated by taxing its own citizens, that Trump would up the ante with even more taxes on American citizens, although he did not use those terms. He's acting as if the guns are pointed in the other direction. But, the Chinese, of course, not to lose face, immediately went tit for tat with Trump and now Trump had no choice but to follow through with $200 billion more in taxes. Now, I guess the ball is in China's court. We'll see where they take it.
Dow Closed Down for Sixth Consecutive Day
The markets obviously didn't take it very well. They sold off. In fact, the decline in the U.S., as seems to be typical, was much more muted than the reaction was around the world. The Dow was down, it closed down for the 6th consecutive day. This was the longest losing streak for the Dow since March of 2017; down 287. The lows were down about 415-430 or so, but not that big a decline. And the Russell 2000 was up again. Another all time high. I think on the 6 days that the Dow has been down, the Russell 2000 has only been down 2 of those days. So it keeps going up, and this shows you that traders have convinced themselves that America is going to win the trade war - or at least, take the fewest casualties. Because the reason that the Russell 2000 is doing better than the Dow or the S&P is that you don't have the multi-nationals.
Trump: Greatest Economy in the History of the World
The theory is that the domestic economy can easily weather the trade war. That it is no big deal, that trade is a small part of the U.S. economy, and so we have nothing to worry about! But if you are worried, well maybe worry about the multinationals that stand to lose, so just focus on all these small companies that are benefitting and basking in the glow of the greatest economy in the history of the world, and if you don't believe it, just ask President Trump.
ECB Announces Dovish Tightening
The big market-moving central bank announcement this week was not the Fed. They came out with their so-called "hawkish hike", but yesterday, the ECB came out and they were supposed to announce the end of their Quantitative Easing program, their own version of the taper, which they did. But they surprised the market by indicating that they would not raise rates above zero, where they are stuck, until the summer of 2019. The markets had not expected such a delay in rate hikes, so it was a dovish tightening announced by the ECB.
The ECB Effectively Eased
When the Fed raised rates, the reaction was pretty much what I expected. The dollar did not strengthen. Gold did not go down. All of that had been priced into the market. What caused the dollar to rally and gold to sell off was the ECB and their unexpected ease, which put a bid into the dollar. We got a huge rise in the dollar yesterday. We got a 2 percent or so drop in the value of the euro against the dollar. And the weakness in the euro, along with the strength in the dollar caused a lot of the emerging market currencies to sell off, so it was a huge dollar rally, not because the Fed hiked, but because the ECB effectively eased.
Initially, yesterday, gold jumped 2% in terms of the euro. In fact it jumped up the the high end of the range that had been trading against the euro and it was very close to a breakout against the euro. It was only up a couple of bucks against the dollar, so all of the rise was in terms of euros, and of course, other currencies also fell against the dollar.
Unexpected ECB Move Caused Gold Sell-off
This morning, the traders came out huge. When we couldn't get above that key level in terms of the euro, there was massive selling of gold this morning right out of the gate, and gold finally dropped about $20. Remember on Wednesday I talked about the fact that gold had been in a $12 range all month, and I knew that that wasn't going to persist. Gold was going to have to break out one way or the other. I anticipated gold to break to the upside because I expected gold to rise after the Fed hiked rates, which is what has been happening. What I did not expect was for the ECB to come out with an effective ease, and that's what caused gold to break out of that range. So I was right about the breakout but I was wrong about the direction due to the unexpected ECB move.
Fed’s Inflation Victory Is a Loss for Consumers – Ep. 362
Fed Raises Rates for the 7th Time
The Federal Reserve raised interest rates today. I think this is the 7th rate hike. Six of these rate hikes have now taken place since Donald Trump was elected; five of them since he was inaugurated. The official rate now is 1.75% to 2%. The Federal Reserve targets the midpoint of that range. But the Fed has been tightening a lot longer than those 7 rate hikes, because, remember, before they hiked rates, they talked about it and they were tapering. And the tapering was a De Facto tightening, because interest rates were effectively negative while the fed was doing QE. So, as it was tapering those purchases, it was reducing how much rates were actually negative, and that was, in fact tightening.
Press Conference After Every Meeting?
So the Fed has been tightening for a lot longer than the markets believe, which is why the recession is probably going to come a lot sooner and be a lot deeper than what anyone believes. There were rumors that came out earlier in the week that Powell thinks there should be a press conference after every single meeting. Right now, they just do it quarterly, and when they initially announced that, the reaction in the markets was, "Oh, maybe that means more rate hikes." because every time the Fed hikes rates, they have a press conference. So the thinking was, if they have more press conferences, they would have more rate hikes.
Powell's Bullish Comments Contrarian Indicator
I don't think it means that at all, in fact, there is no rule that says that the Fed needs a press conference to hike rates. They can hike rates at any meeting; in fact, they don't even need a meeting! They can hike rates between meetings. They just haven't been doing it, but there's nothing that says they can't. So, I don't think having more press conferences means anything, but people are always looking for an excuse to do something, so that might have been an excuse. But if you listen to what Powell said at this press conference, he sounded bullish on the economy. Listen to the words he chose. Given the fact that he is so bullish and the fact that the Fed is a pretty good contrarian indicator, if Powell is extremely bullish, it likely means that the best days of our so-called growth are behind us, and it is all down hill from here.
Tariffs Did Not Cause U.S.Trade Deficits – Ep. 361
Market Movers: Singapore Summit
We've got a lot of potentially market-moving events going on this week; we've got the Summit which I think is getting underway this evening with North Korea's President Kim Jong Un and President Trump meeting in Singapore.
No Market Move Expected on Rate Hike
We've got the Federal Open Market Committee Meeting beginning tomorrow, it's a 2-day meeting ending on Wednesday. The odds of a rate hike are 100%! So in all probability there will be a rate hike. Eventually the Fed is going to reverse course and that will come as a surprise; odds are the surprise won't happen on Wednesday. Right now we are at one and a half to one and three quarters, so the next hike will be one and three quarters to two. I think what might surprise the markets, is if the Fed dials back expectations for later hikes. A lot of people are still looking for 2 more hikes this year in addition to the one we will get on Wednesday. They may indicate that they are closer to the end of their rate-hiking cycle. Maybe they will dial back their anticipated "Quantitative Tightening". I don't think the Fed is going to deliver much at all in the way of Quantitative Tightening but they may indicate to the markets that they're not going to do as much as what the the markets believe. But in any event, given a 100% probability of a hike this time, the hike itself will not move markets at all.
What If They Don't Hike?
If the Fed does not hike, that would provide a big boost to gold and a big drop in the dollar. If they do not hike, that would be an indication that there may not be as many future hikes. But, again, if you look at how gold has traded in the past, if you look at how gold has traded in this cycle, it has generally been bullish for gold, if not the very day, then within the next few days.
Focusing on Emerging Markets
I'm going to spend most of today's podcast talking about what is going on in the emerging markets, in the currency market and in the stock markets; what the speculators are doing, why they are doing it and why I think they are wrong and why I think it creates an excellent opportunity for investors to fade this trade and prepare for the ultimate reversal of these moves.
Freedom Fest in Las Vegas
But before I get into that, I want to talk about a few other topics of interest that happened after my last podcast. I also want to talk about Freedom Fest in July. I am going to Freedom Fest again, as I do every year in July. Not the greatest time of the year in Las Vegas - not that there's really a bad time to be in Las Vegas, you're going to have fun in Las Vegas whenever you go - but it is quite hot in July. Of course I spend almost all my time indoors, so the heat really does not affect me. And when I do go out, it is at night, and it is not so hot. The event is July 12-14 and if you have not already registered you can do it now. It will be at the Paris Hotel & Casino; I will be there with my entire family - my wife and 3 kids. We'll be at our booth, you can come by and have a chance to meet my wife and kids and say hello.
Presentation on Tax Incentives of Working and Moving to Puerto Rico
I am going to be participating in several events; I am going to be doing a talk on Puerto Rico and the tax incentives of working from and moving to Puerto Rico. Most of you should know by now, I am Puerto Rican. Puerto Rico is my main residence; I summer in Connecticut, but I am a resident of Puerto Rico. Euro Pacific Asset Management and Euro Pacific Bank are both based in Puerto Rico.
Bitcoin Debate Moderated by Naomi Brockwell
Also I am going to be doing a Bitcoin debate against Jeffrey Tucker and Gary Smith - is it real, or is it Tulipmania? All of you realize what side I am on. The debate will be moderated by Naomi Brockwell, who is known as "The Bitcoin Girl" in fact she appeared on my old radio show, the Peter Schiff Show, and I sure wish I'd listened to her and bought a bunch of bitcoin - obviously I would have a lot more money today.
Special Privileges for Some Means Freedom for None – Ep. 359
Not much has been going on in the economy or the financial markets the last couple of days. Its been pretty quiet, so I'm going to take an opportunity to record a podcast more on current events and politics, so if you're not interested in those topics, then maybe just wait for my next podcast, although, when I did the Peter Schiff Radio Show 5 days a week, there were people who complained when I did not talk about the markets, or even the economy. But I always enjoyed talking more about politics and current events, and I think the feedback I got was more engaging, so the show was more interesting.
Supreme Court Wedding Cake Case
So, I am going to talk about a couple of topics today; one has to do about that ruling that came out of the Supreme Court yesterday on the baker in Colorado who had refused to bake a cake for a gay wedding. I know I have talked about this topic in the past; it is not the first time it has come up, but it has come up again in the wake of this ruling so I want to revisit that topic.
No More Swimsuit Competition for Miss America
Before I get to that topic, I would like to address a lighter topic, but nonetheless just as interesting. The Miss America Pageant is no longer going to consider beauty as the criteria for the pageant. In other words, it is a beauty pageant, but beauty doesn't count. It's not outer beauty, it's just going to be, I guess inner beauty. They are going to get rid of the swimsuit competition, they are going to get rid of the evening gown competition and they will select a winner based on other characteristics. I'm really not sure what. I know they've got the talent competition; no one really paid too much attention to talent. Some of the women actually had some talent. Usually the most humorous part of the Miss America Pageant was the Q&A where there were often political questions asked and the contestants would try to give the most politically correct answer they could come up with.
Jobs Report Feeds Delusional Economic Narrative – Ep. 358
Today is the first day of June and it's also jobs Friday. But before we get to the always highly-anticipated nonfarm payroll number, I want to talk about some of the economic data that came out yesterday, on Thursday.
Personal Income and Spending
I think the most significant release was the Personal Income and Spending number for the month of April. The spending numbers were so strong that it prompted the Atlanta Fed to adjust its estimate for Q2 GDP all the way up to 4.6% and I think they notched it up another tenth today to 4.7%, so this is the highest estimate they've had since they had that 5.4% estimate for Q1. Of course we now know that we got 2.2%, so they were much too optimistic on Q1 and my gut is they're equally overly optimistic on Q2.
Spending Went Up as Income Went Down
Let's talk about this Personal Income and Spending data. The surprise was not on the income, but on the spending. In fact, the revisions, when they went back to March. the original report was for a .3% gain in income and a .4% gain in spending. They ended up revising the income number down, so income rose only by .2%, but they revised spending up. Spending went up by .5%. What does that mean? That means savings went down quite a bit, because, where did the money come from to finance the extra spending? It didn't come from income, so it came from savings, or it came from debt. Either people depleted their existing savings, or they went deeper into debt by putting their purchases on the credit card.
Spending Money Twice as Fast as They Are Earning It
But then, for the month of April, we got a .3% increase in income, which was anticipated, but spending, instead of rising by .4%, rose by .6%. So consumers are spending money twice as fast as they are earning it for the month of April: .6 up on spending, .3 up on earnings . So, again, what does this tell you? People are tapping into an already shallow savings pool or they are running up m0re credit card debt to buy stuff.
Ep. 357: Populism a Bigger Problem in the U.S. Than Italy
Economy Slowing Down
We got quite a bit of economic data that was released today, pretty much all of it confirming what everybody seems to be denying, and that is that the U.S. economy is, in fact, slowing down, at least the way we like to measure it. We will get more data later in the week, of course we get the big number, the nonfarm payroll number, on Friday. We always get that number the first Friday of the month; this Friday is June 1, so we are going to get the May jobs number.
Last Month's ADP Jobs Number Revised Down
We got the ADP number that came out this morning. It was weaker than expected. In fact, there was a significant downward revision to the prior month, which was originally reported at 204,000 jobs. That was revised down to 163,000 jobs, so about a 20% reduction. This month, the consensus was 187,000 and we got 178,000; of course, that number will also be subject to revision next month. But, to me, that shows that we can potentially get a weaker number on Friday as well.
Decline in Refinances at an 18-Year Low
Earlier this morning, we got some data on mortgage re-fi's, which we get every week. We get the numbers on new mortgages and mortgage re-fi's. Everything is down. This makes sense, because mortgage rates are going up. In particular, the decline in refinances is to an 18-year low in mortgage re-fi's. One of the reasons that the inability to refinance your mortgage is going to become a problem is that re-fi's have been providing a lifeline to consumers to enable them to continue to spend.
Refinances Available as Property Values Rise
When you refinance your mortgage, you're generally doing it to reduce your monthly payment because you are able to qualify for a lower monthly payment. Some people who perhaps could not qualify a couple of years ago because they did not have enough home equity, but as real estate prices have risen that has enabled people who have been unable to refinance in the past to re-fi now. Especially for those who are doing a re-fi and are also doing a cash out.
Biggest Move in Crude Oil
Not much action today in the stock markets on this Friday before a 3-day Memorial Day holiday weekend. The action was really in the oil markets, the bond markets and the foreign exchange markets. The biggest move happening in crude oil. Crude was down just over $3/barrel today; one of the biggest declines I've seen in some time. We're back down to $67.50. Earlier in the week, we almost hit $73/barrel for crude, and here we are now at $67.50 - a pretty big drop today. We were down yesterday, also.
Speculation in the Market
The rumors today were that Russia and Saudi Arabia may be upping their production and it was that news that sent the market falling. But remember, markets don't move in a straight line. You get a lot of speculators who get into the market and generally they're not there for the long run; they're there to catch a trend, and they're there to ride it as long as they can. They tend to put stop orders in beneath the market. In the case of oil, if you're long, you'll have a sell stop and many of those stops likely got triggered today.
You probably had some people trying to minimize their exposure. Either they limited their loss to the extent that they got in recently and they got stopped out with a loss or maybe they've been long for a while and they've been moving their stops higher to protect their profits and now they got stopped out of the trade. But I think this is more technical noise. I don't think this uptrend in the price of oil has changed based on this pullback from $73 now to $67.50. Maybe we've got a little more downside, but if you look at the chart, you can barely see the decline. The more recent uptrend that goes back to July - you look at this uptrend and it is holding perfectly. We're not even down to the line yet. We still have a little bit to fall before we hit that line.
FOMC Is Far More Dovish Than the Minutes Imply – Ep. 355
Markets Rallied on Fed Minutes Interpreted as Dovish
Earlier today we got the release of the latest Federal Open Market Committee minutes and before the minutes came out (they come out at 2pm Eastern Time). Prior to the release, all the stock markets were down; the Dow was down maybe about 150 points or so, and when the minutes came out, we got a rally, and the Dow closed up about 50 points. So, a 200-point rally on the minutes, and the reason the minutes acted as a catalyst for the rally is that they were interpreted to be a bit more dovish than expected.
The Fed's Symmetrical Inflation Target
To me, the minutes were as expected; I had already been talking about the Fed's view that inflation can go above 2%. That they were willing to allow for some kind of "symmetrical" inflation. The symmetry in this case meaning, we were below 2% for a long time and so now we can be above 2%. I guess for some reason the markets focused in on that.
Specifically, the minutes read that
"A temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective."
What does "Modest" Mean?
Now, I don't know why allowing inflation to be higher than 2% is somehow helpful toward achieving their 2% objective. To me, It would be more helpful if they just kept it at 2%, if indeed that was their real objective. But, even if you look at the language that they use, they don't really define what symmetrical could mean. They talk about inflation being "modestly" above 2%: What is "modestly"? Is is 2.1%? What about 2.5%? Is .5% "modest"? They don't really define what "modest" is. I have a feeling, again, that there's never going to be a definition, that it is going to be an ever-moving goal post. Even 3% could be "modest". "Hey, it's only 1%, right that's "modest", right?
Fed Is Impotent When It Comes to Inflation
But on a percentage basis, you wouldn't consider 3% modest. You're above 2% by 50%. 50% is not a modest percentage, but they could say 1% is a modest percentage. Who knows? I think the Fed is going to be looking for every excuse not to raise interest rates aggressively, no matter how high inflation gets. Of course, they're not going to be that transparent. The last thing they would want to do is to let the markets know that they are that impotent when it comes to inflation.
Solid Gains Today in the Major Stock Market Averages
We had solid gains today in the major stock market averages; the DJIA putting in the largest percentage gain, just over 1.2% or 298 points. I think at the highs, the Dow was up 370 and change, so a strong day, S&P, NASDAQ also up not quite as much calculated as percentages. The Russell 2000 was not up as much as the other averages but it is at a record high again today. I think it's the Russell 2000 that ultimately could make the biggest percentage drop once stock market traders start to figure out what's actually going to happen.
A Lot of Saber Rattling and Not a Lot of Fencing
But in the meantime, today, they were celebrating the cease fire in the trade war. Although, I don't think I should call it a cease fire because nobody actually fired a shot. It has been more of a war of words than a real conventional battle, I mean there was basically a lot of saber rattling and not a lot of fencing. But I think what happened today is that we callee a truce. Both sides sheathed their sabers and agreed that there is not going to be a war.
The Markets Have Not Adequately Priced in the Cost of a Trade War
And I think the markets were relieved, and so we got a relief rally based on that good news. Although I don't think the markets sufficiently priced in the cost of a hot trade war. I know Donald Trump said, "Oh, trade wars are easy to win." Believe me, if they were easy to win, we would have waged one. They're not easy to win. I don't think the markets really discounted how bad it would have been had the cold war turned hot.
Nonetheless, the fact that it wasn't going to happen - I think most people would agree that a trade war would be bad, and if now there is going to be trade peace, well there is a peace dividend and so we got that today.
Las Vegas to Vancouver to Las Vegas
I'm recording today's podcast from my hotel room in Vancouver, Canada. I'm up here for a couple of days at the 2018 Vancouver Resource Investment Conference and actually I left Las Vegas to come here; I am at the Las Vegas Money Show, I was there yesterday and I will be back again tomorrow for another talk, and on Thursday I am flying to Puerto Rico for another conference before heading back to Weston, Connecticut for the summer.
Debating Bonds with Gary Shilling
I was on a panel yesterday in Las Vegas at the Money Show and it was moderated by Mark Skousen, and one of the guys on the panel with me was Gary Shilling. And I've been arguing with Gary Shilling for a long time; there are plenty of YouTube videos of Shilling and myself over the years, arguing. He is basically a perma-bull when it comes to U.S. Treasuries. He is always bearish on the stock market and he's always bullish on the bond market. For a while, he was right to be bullish on the bond market, because we had a huge bull market in bonds. But the bull market appears to be over, yet Gary Shilling is as bullish as I have ever seen him on the U.S. bond market. He is also bullish on the dollar; I guess if you are always bullish on the bond market you are also bullish in the dollar because bonds are dollar I.O.U.'s.
Shilling: China Would Never Sell U.S. Bonds
Now I think this is one of the times when Gary Shilling is dead wrong. One if the points that he made that I challenged him on was when he started talking about China. He said the Chinese would never sell their U.S. Treasuries because if they sold them, the prices would collapse, and they would be destroying their own portfolio; therefore they are not going to sell because they do not want to destroy the value of the assets they might want to sell.
China Can Just Let Their T-Bills Mature
I pointed out to Gary that the Chinese don't have to sell any Treasuries to get out of them. They simply have to let them mature. Then it is not China who has to sell the Treasuries, but the U.S. Treasury who has to find a new buyer to replace China. If China were dumb enough to own a lot of 30-year government bonds, then they would have to put those bonds on the market. That would affect the price. In fact, if you were China, and you owned a trillion dollars worth of 30-year bonds, and you did try to sell, the price would collapse. China may be dumb, but they are not that dumb. They own a lot of T-bills, so they will mature in 30 days, 60 days, 90 days; they don't have to sell anything.
The Bear Market Rally
The big story continues to be the bear market rally that has been going on in the U.S. dollar. The dollar index closed above 93. The low this year was just above 88, so we've risen above 5% so far in the U.S. dollar index. Year to date we're up on the dollar a little over 1%. We're still down about 6% from where the dollar ended 2016, but we've had this considerable rally in a relatively short period of time. To me, it has the makings of a bear market rally, a short-covering rally. There hasn't been any good economic news that would explain the strength of the dollar. In fact, I talked about Fed comments from last week which to me, are quite dovish when you have the Federal Reserve indicating a tolerance toward inflation above 2% talking about "symmetrical inflation" rather than keeping it below 2%, So to me, those are statements that would normally be negative for the dollar.
Technical Rally for Short-Covering
The economic data, the jobs numbers that came out last week - much weaker than expected, so all the information would actually argue against a more aggressive Fed, in favor of a more dovish Fed, yet the dollar is rising anyway. I think it's technical, I think it's short-covering and I think it is short-sighted.
Dollar Strong against Emerging Market Currencies
One of the areas where the dollar is the strongest is actually against the emerging market currencies. Not the currencies that are in the U.S. dollar index - that's dominated by the euro, the pound, the yen - but the emerging market currencies, they're the ones that are bearing the brunt of this sell-off, and it's a self-perpetuating problem, because as these emerging currencies go down, it puts upward pressure on their already increasing inflation rate. I think inflation is picking up all around the world, but if your currency is going down, that puts even more pressure on consumer prices, and the politicians of these emerging economies are resisting higher interest rates, both to combat increasing inflation and to support a weakening currency which is only adding fuel to the fire.
Currency Traders Have It Backwards
What's so ironic about all this is that traders are missing the bigger point. The United States is in the exact same predicament (only worse) than the emerging economies. We are going to be faced with the same set of dynamics, in that we are going to have rising
Consumers Won’t Be Comfortable with Higher Inflation – Ep. 351
Fed is Willing to Tolerate Higher Inflation
Today is the first Friday in May and that means we got the April Jobs Report released today, and before I actually get into the details of the jobs report, I want to talk about what happened with the Fed this week. I think that is the most significant news of the week. The Fed's statement on Wednesday and the comments from today are the real reasons we had the 300+ point rally in the Dow today, that's why we had the 400+point turnaround in the Dow on Thursday. It's all about the Fed and its willingness to tolerate higher inflation.
Fed Inserted the word "Symmetrical"
So we got the FOMC announcement on Wednesday after their 2-day meeting, and as expected, they left interest rates unchanged. The most significant part of the statement that accompanied the Fed's decision not to raise rates was inserting the word, "symmetrical" in their description of inflation. Up until Wednesday, the Fed was always worried that we didn't have enough inflation. The inflation rate was too low, and their goal was to get it up to their 2% level.
We Can Go Above 2% to the Same Extent We Were Below 2%
Now the Fed is saying that they are at 2% and they expect the rate to actually go above 2%, and they're OK with it. What they mean by symmetrical is that inflation was below 2%, at least the way they measure it. It's probably always been well above it, but let's just look at the government statistics. Based on the government statistics we had inflation of 1.4, 1.5, 1.6; it was always below 2. So now what they're saying is we can have some symmetry on the upside, meaning, all right, we can have 2.5, because 2.5 and 1.5. the average is 2.
The Fed is Actually Lifting Their Inflation Target
So what the Fed is really saying is their goal is not to have 2% inflation, their goal is to have inflation that averages 2%. So if we've had inflation of under 2% for all these years, we can have inflation of over2% by the same proportion for the same number of years and they we would have averaged 2% inflation for the entire time. So, in reality, what the Fed is really doing, and I have been saying this all along - for years and years - they are actually lifting their inflation target.
Market Tends to Produce Better Returns in the First 4 Months of the Year
There is an old Wall Street adage: "Sell in May and Go Away". The reason for that saying is that seasonally, the market tends to produce better returns in the first 4 months of the year, January through April, and then, historically, beginning in May and throughout the summer, the market can generally go down, and I think the time to buy back in is typically September/October. There are a lot of big down days, down months, crashes, so get out of the market in May, go away and then come back later in the year and buy back what you sold.
Selling Started Right out of the Gate
Today was May 1 and it looked like a lot of people were not going to wait to sell; they were selling right on the open. The Dow was down all day. At the worst, it was down better than 300 points but it pared its losses significantly, down just 64. But the NASDAQ, which was never actually down that much (when the Dow was down 300 the NASDAQ was down only about 25) the NASDAQ ended up positive 64. The S&P was up just under 7 points.
Facebook Getting into the Dating Business
Stocks were under pressure all day. I think the turnaround in Facebook - Facebook ended up a couple of percent. Mark Zuckerberg announced plans to try to clamp down - I think he said he would have 20,000 people working in compliance. They also announced that they are going into the dating business. I'm surprised it has taken Facebook so long to get into that space. It seems such an obvious fit. They already have everybody's profile. I think some of the other online sites, Match Group which owns Plenty of Fish are falling. It's like Amazon stepping into your market.
Heading toward 20,000
The market turned around and maybe that news lifted the NASDAQ, but to me, it was a weak day, the market was generally under pressure. The Dow did manage to hold onto the 20,000 mark. We were well below it - we were close to 23800. It is really going to get interesting is when the Dow gets down to 20,000. I think that's where we're headed.
Markets Down But Not by as Much as Expected
All the major U.S. stock markets were down on the week, but not by as much as I thought. We got that big drop on Monday, where we got the very bad reaction to even better than expected earnings. Plus, with interest rates rising, I thought we would have had more selling, but we didn't we actually rallied back most of the week from the big Monday decline, not enough to recover all of the losses, but the total losses on the week were not that bad. The Dow was down today, actually, by about 11 points. The NASDAQ eked out a small gain as did the S&P 500.
Yield on the 10-Year Highest Since Financial Crisis
Interest rates were moving up. In fact, the yield on the 10-year on Wednesday hit 3.035%. This is the highest it has been since before the Financial Crisis and I think one of the reasons that the stock market recovered a bit this week was because investors breathed a sigh of relief that the yield didn't stay above 3%. We closed above 3% on that Monday, I think it was 3.024%, but then we dropped on Thursday and dropped again on Friday; we went out at 2.957%, and that's only a slight increase from the 2.951% that yields closed at the prior week.
Existing Rates High Enough for Significant Damage
I think the markets are lulling in a false sense of security if they think that it's just one and done. "We finally took out 3%, maybe we cleared out some stops, and that's it. Yields have peaked, so there's nothing to worry about." As I said on my last podcast, even if this is the peak, I think it is already high enough to do significant damage to the economy, to the financial markets, to U.S. government finances. But - it's not the peak.
Rising Bond Yields Are Not Bullish for the Dollar
Rates have barely begun to rise and I think they are going a lot higher. Higher rates did continue to support the dollar. The dollar actually had a strong week; the dollar index closed up just over 1% on the week. It was down slightly today, so we surrendered some gains earlier this morning, but it was still an up week for the dollar. Again, I think those people who are buying the dollar are going to lose a lot of money if they don't turn around and sell. I think this is a sucker rally. As I said in my last podcast: Rising bond yields are not bullish for the dollar.
Good Earnings Can’t Support an Over-Priced Stock Market – Ep. 348
The Correction is Over and the Bear Market is Resuming
As I have been speaking about in my last couple of podcasts, it looks like the period of relative calm in the markets is over and the next leg down has begun. So the correction is also over - not the downward move - that is not the correction - this is the bear market. The upward move was the correction. It was the first correction in this young bear market. Technically it is not a bear market yet because we're not down 20% but that is only a matter of time. So I think the correction is over and the bear market is resuming, the primary trend being down.
Dow Transports Big Losers
In fact, the U.S. stock market was down for its fifth consecutive day, although today was the biggest decline. The Dow ended down 424 points. We managed to close just above 24,000 at 24,024. But we were well below. At the lows of the day we were down about 600 points. Percentage wise we were down 1.74%. The NASDAQ, about the same, down 1.7%. At the lows it was down close to 150 points on the NASDAQ. Percentage wise, the Dow transports were the big losers, down 221 points - 2.08%.
Earnings Don't Matter
Now, one of the things that investors have been counting on to support stock prices and, in fact, drive them higher, were earnings. Everybody's been saying, "Earnings are going to be higher!" Now what have I been saying on my podcasts, over the last several months? I've been saying that it doesn't matter, because all these great earnings, if they materialize, are already baked into the cake. They are already discounted into the price of the stocks. So in other words, they don't matter. It's "buy the rumor, sell the fact".
Double Whammy of Faster Growth and Lower Taxes
If everybody knows that earnings are going to be good, well, they've priced in those expectations into the market. Why do you think the market has gone up so much since Trump was elected President? It was on the anticipation of all these earnings that were going to come from a combination of faster growth and lower taxes. In fact, the lower taxes are why we were going to get the growth, so it was going to be a double whammy. Well, all that was priced into the market.
Another Friday Down Day
It looks like the period of calm may be coming to an end and the storm may be looming just over the horizon. The Dow Jones finished down today, just over 200 points off the day's low. I think I saw us down about 280. This was the 4th consecutive Friday where the markets were lower - there was a holiday in there (Good Friday) - it has been 5 Fridays. This seems to be a trend. The markets still managed to eke out a gain on the week. All 3 of the major indexes managed gains despite the losses on Friday.
Investors Should Really Worry about the Bond Market
What should really be worrying investors are the losses this week in the bond market. Yields continue to ratchet up almost every day, and in fact we closed at the high point all across the curve, from the 2-year all the way up to the 30-year. The 1--year yield, which is the one everybody seems to be talking about closed at 2.96%. So this is a new high for the year. You've got to go back to pre-2008 financial crisis to get a yield up that high. But the yield is still very very low.
Who Believes that 3% Yields are Here to Stay?
The amazing thing is to look at the 30-year. The 30-year is 3.15. It's actually just under 20 basis points - 19 basis points is all you get for taking 20 additional years of interest rate and inflation risk. Think about that! Think about how crazy that is. Interest rates right now on the 10-year are just under 3%; on the 30-year they are slightly above 3%. Why would anybody believe that 3% yields are here to stay?
Low Rates Are an Aberration
Obviously, if you go back to the post-war period and look at what rates have averaged on the 10-year, these low rates are an aberration. They've been going on now, for a while, but they can't go on forever, Yet the market thinks it's going to go on for another 30 years. If you think about a 30-year bond, that's like buying a 10-year bond today, holding it for 10 years, letting it mature, then buying another 10-year bond, holding that one for 10 years, letting it mature and buying another one! So you do that 3 times over 30 years, in theory it should give us the same rate as buying one 30-year bond right now.
Podcast Break: Investor Summit at Sea
I apologize to everybody who has been waiting patiently for my next podcast. Las week I went the entire week without doing a podcast, which is unusual. If you are a regular listener to this podcast you'll know that I was on a cruise ship all last week; I was on the Real Estate Guys' cruise. The internet connections on a ship are very slow; particularly the upload speeds - plus I was very busy, so I really decided to take a week off from podcasting.
Markets Were Overall Quiet
You know, there really wasn't that much that happened last week. the markets were overall quiet, although the U.S stock market rallied, gold didn't do much, the dollar didn't do much; no real earth-shattering news, so I didn't see any reason why I couldn't wait until I was back onshore, which is what I'm doing, and in fact, I was so busy today that it is very late on a Monday night and I'm just trying to get this podcast recorded today.
FOMC Minutes Released
First of all, I'll talk about some if the stuff that happened last week. We did get the release of the FOMC minutes, in fact, after the minutes came out we had a pretty big drop in the price of gold. Gold did manage to get all the way up to about 1365 during the week before selling off and I think the Fed minutes were a catalyst to get gold to sell off. Of course, it really can't get much below 1330; there is a lot of buying that comes in down there.
Fed Half Right
The read on the minutes was that they were hawkish in that the Fed was signaling that the economy is going to keep strengthening and inflation is going to keep rising. Well, at least they're half right. The economy isn't going to keep strengthening, but inflation will keep rising,
PPI Close to a Breakout
In fact, they're not even half right: They're right that inflation is going to go up, but it is going to go up by a lot more than they think, so even the part they got right they really got wrong. We did get some inflation numbers - official measures of inflation that the government released last week. If you look particularly at the Producer Price Index, core producer prices rose at the fastest pace in 7 years. And if you look at a chart, we're very close to a breakout of resistance on core PPI. Core CPI also up a little better than expected, but this is just the beginning of a trend. During the week oil prices made new highs. We got above $67 a barrel, so we're continuing to get closer and closer to 70 and eventually and 100. It's not just oil prices that are rising, it's pretty much commodities prices across the board.
Fed Will not Deliver Rate Hikes
But the Fed is not going to be able to deliver the rate hikes that the market is expecting and, again, it is the expectation of more rate hikes that is keeping a lid on the price of gold, but it's only a matter of time before the market blows the lid off and the price of gold goes up.
Trump Warns Investors to Prepare for Pain – Ep. 345
Wednesday Reversal Day
On my Wednesday podcast, I talked about Wednesday reversal day, where we gapped way down and then rallied and closed up. It was a strong outside reversal day. I thought this could be the beginning of a correction. The correction meaning a rise in a bear market. Everybody thinks we're in a correction now of a bull market, but I think the bull market is over and a rise is the correction.
Three Consecutive Up Days
So I thought maybe we'll get one based on that reversal day, and we did. For one day. The market was up on Thursday; I think the Dow was up better than 200 points, so we did have some follow through to Tuesday and Wednesday's gains. We had 3 consecutive up days. Remember we had a big down day on Monday, but then we had those 3 up days.
End of Bear Market Correction
Well the whole correction came to an end today. The Dow at one point again was down better than 700 points; we didn't close that badly - we were down 572 points. Still, below 24,000; 23,932. This is only the second close below 24,000 this year, on a weekly basis. The last time was 2 weeks ago. The NASDAQ was down 161 points back below 7000 - 6915.
Dangerous Territory in Dow Transports
Dow Transports were also down big. They were down 307 points, just barely avoiding the Dow Theory sell signal. So we're not quite there. We can easily be there on Monday. If we have another down day on Monday, it seems that we're going to have a sell signal for the Dow Theory.
That seems to be the pattern: big down day Friday followed by a big down day Monday. Believe me the technicals on this market look awful. So there is certainly another chance that we have another big sell off on Monday. This entire bear market so far, we've had a pattern of a big sell off on Fridays and Mondays and sometimes we get a big down day, we don't get the follow through on Monday, but to me, this looks like it's all clear on the way down.
Americans Have the Most to Lose in a Trade War – Ep. 344
It was another extremely volatile day in the U.S. stock market. When I finished my podcast on Monday and we had that big drop, I suspected that Tuesday might be a reversal Tuesday. So I thought we'd get a bounce on Tuesday and, in fact we did. We had a big rally; the Dow was up 400 points or so. Then this morning the Dow opened up down 500 points. In fact when I woke up this morning, a couple of hours before the market opened, the Dow was down closer to 600.
Typically when we get these huge sell offs right on the open because overnight weakness, what generally happens is that we end up reversing up - getting some buying after we open the markets down, and that's exactly what happened. The markets ended up recovering the entire loss. We closed around the highs of the day: the Dow up 230 points and the NASDAQ up just over 100 points. This is a reversal. Checking the numbers, the Dow did not take out yesterday's low but the NASDAQ and the S&P did. All the markets closed above the previous day's high.
Bear Market: Primary Trend is Down
I'm sure some people will look at these numbers and say, "Hey, this is a technical reversal, we took out the lows we closed above the highs, it's an outside day and this is maybe the end of the correction. I do think potentially we could have more to the rally. But I think the rally is the correction. I still think this is a bear market. We narrowly avoided the Dow Theory sell. The Dow Theory is still on a buy, and now we have a bit of a reversal, so maybe this correction has a little more legs. The correction being the move up. I think the primary trend is down. I don't think today's reversal is big enough to have put in the low of this correction if it is a correction. So I still think that we are in a bear market.
Really a Head Fake
As I suspected and as I stated in my last podcast at the end of the first quarter, I speculated that the rally that closed out the quarter was really a head fake. When the quarter started, I said you would see a resumption of the downtrend of the evolving bear market, which I believe we are already in.
Even though technically we're not there yet because we're not down 20%, but you can't get to 20% without first hitting 10%. Although not officially acknowledged, we are in a bear market. Just as often a recession is not acknowledged until after 2 quarters of negative GDP growth, but clearly you're in the recession for a long time before it's officially acknowledged. That doesn't mean you weren't in a recession before they admitted it, albeit not officially. Similarly, they haven't proclaimed this bear market.
The Fed Could Change the Game
There's one caveat: if the Federal Reserve comes in and changes the game by taking away the rate hikes or launching QE4, then we may never make it to a bear market. But if the Fed continues on its current path and maintains the current pretense, then we are in a bear market and it's only a question of time before it is officially acknowledged.
No Real News to Blame for Sell Off
As I expected, traders came back from the Passover/Easter break and started to sell. They came in almost out of the bell; no real news to blame the selloff on. Now they tried to blame it on Trump and the tariffs, and while I agree that tariffs are a problem, there was nothing new over the weekend. Yes, China came out and announced a couple of billion dollars worth of tariffs on some agricultural products, etc, but this was not unanticipated. Anybody who did not think this was coming - c'mon - China could have could have done a lot worse than this.
Any News is an Excuse to Sell
In fact, the market could have just as easily rallied on the fact that this is such a small response and they could have said, "Oh, this is nothing, it could have been a lot worse!" So the markets could have bought, if they were in a buying mood. But this is a bear market, and so all news is bad news. So, whatever the news is, that's an excuse to sell.
Chinese Tariffs on Agricultural Products
But what it does, is it lulls investors into a false sense of security: "Well, the market's not going down for any reason", "It's not because we're in a bear market, it's because of the reaction to the news that the Chinese are going to have tariffs on agricultural products.
Major U.S. stock markets managed to finish a holiday-shortened week with strong rallies. The Dow Jones was up 254 points on the day; earlier in the day it was up better than 400, so the last hour did see the U.S. markets giving up part of their gains. The NASDAQ up 114 points, S&P up 35.87 points, so these rallies today were enough to put the market in the black for the week. But not for the month - all the markets are down significantly in the month of March, and also for the first quarter. All the major stock market indexes are down.
First Down Quarter in 10
This was the first time in 10 quarters - we had 9 consecutive positive quarters. I think that's a record; I'm not sure, but 9 consecutive up quarters. The U.S. stock market finally broke that winning streak. We'll see how investors who thought U.S. stocks can only go up, we'll see how they may react to their first down quarter in 10, but it's not going to be the last down quarter. It's not going to be the last down quarter. I think its going to be the beginning of several down quarters to come. Remember the market action that I've been observing really looks to me like a bear market.
Today, of course, window dressing; oftentimes you see rallies on the last day of the quarter. Managers maybe are trying to buy up some of the stocks they own to dress up their statements so they look better so they can bill on higher portfolio value. If you have enough people doing the same thing: paint the tape, whatever you want to call it, you can get some of these rallies. But my guess would be that we can quickly undo this rally next week when the second quarter begins, and maybe some people who are looking at the quarterly performance decide that this is it. We rode the upstream and let me allocate some of the money out of U.S. stocks, whether it's to bonds, whether it's to foreign stocks or because they want to go to cash, whatever, we can certainly see some reallocations beginning early next quarter.
Don't Screw up the Final Day of the Quarter
Especially if some of these downtrends that really broke in some of these major stocks. I talked about some of the big losers on my last podcast, and a lot of those stocks got clobbered yesterday; they did manage to rally back today. Maybe Donald Trump was being careful about his tweets today because he didn't want to screw up the final day of the quarter.
Investors Remain Oblivious to Flashing Warning Signs – Ep. 341
Incredible Stock Market Volatility
We're having more incredible stock market volatility and I've spoken about the pickup in volatility as another sign that things are different; that we've had a change. Increased volatility usually happens at inflection points, especially when we had a record period of minimum volatility. A of a sudden, we're having incredible swings in the stock market. Case in point: Monday and Tuesday.
Up Day on Friday
When I did my podcast on Friday, I thought maybe we could have a Black Monday. We had a big down day on Friday, we had a big down day on Thursday. The market was down around 1100 points in 2 days. Could we have another big down day? Of course we actually ended up having a massive up day, in fact, I think the Dow was up better than 700 points on Friday. It closed 600 and change; not quite 700. The NASDAQ was up about 220 points, so even a bigger percentage move.
How to Boil a Frog
So we had this huge gain, and what a lot of people don't realize is that the stock market has some of its biggest daily gains in a bear market, not in bull markets. You have some spectacular rallies in bear markets. That is how bear markets operate. They are trying to follow the slope of hope. It's like trying to boil a frog. You turn up the heat slowly so the frog doesn't notice the temperature change and jump out. The idea is when you have these big spikes in the market, that creates some hope and optimism to hold on to stocks, thinking the decline is over. People are afraid to miss out on the next big up day, so it keeps people in the market, like keeping the frog in the water.
The Rally that Wasn't
So yesterday we had this huge rally and today we started off with another rally; the Dow was up over 200 points early on, NASDAQ was up 40 or 50 points and then by mid day the market rolled over. At one point the Dow was down better than 400 points. The NASDAQ at its lows was actually down more than the gain yesterday. Now there was a small rally on the close, the NASDAQ was only down 211 so about 10 points less than yesterday.
The Rally that Failed
On my last podcast, which I recorded on Wednesday, I pointed out that the market's failure to hold the rally in the aftermath of the rate hike. In the face of all of the bullish statements made by Powell about how great everything was, and how strong the economy was, we had a near 300 point rally that failed.
All Systems Go for a Market Decline
The Dow surrendered the entire rally, closed on the lows of the day; not a huge decline - it was only about a 45 point decline, but seems significant to me was the reversal. The fact that the market could not hold onto those gains - to me, that looked technically very weak. And I said on that podcast that I thought all systems were go for a stock market decline.
Not a Correction
Of course, I had a lot of other anecdotal evidence and things that I look at that had been leading me to believe that more down side was coming. In fact, I have never believed that we are in a correction. Everybody wants to talk about it on television - it's a stock market correction, because they don't consider it a bear market until you're down 20%.
In a Bear Market
Well, in every bear market, before you get down 20%, you've got to be down 10%. So if this is a bear market, if we ultimately go down by more than 20%, then this is a bear market right now. It's only a correction if it doesn't turn into a bear market. But if it becomes a bear market, it's been a bear market the entire time. I think we are in a bear market.
Fed Will Come in with Live Support
Now, I don't believe this bear market will be as bad as it could be. This market could go down way over 50%; I am not expecting that, because I do believe that the Federal Reserve will come in at some point and save the market, or at least try to save the market. But I think it's going to be a bear market before that happens, meaning the Dow will have to be below 20,000 before the Fed actually realizes that it needs to be put on life support.
1154 Point Decline in 2 Days
But what happened yesterday - the Dow dropped 724 points, huge decline, and then again today we were down another 424 points. 1154 point decline in 2 days. The bigger decline, percentage wise happened on the NASDAQ. The NASDAQ still hasn't made a new low for this move. It did close today below 7000, down 174 points, 2.43% on the day, but we still have further to go.
Is the Fed Losing Control of the Narrative? – Ep. 339
Fed Surprised No OneToday, the Federal Reserve surprised nobody. They raised interest rates by 25 basis points; the 6th rate hike since the Fed began, in December of 2015. The rate is now between 1.5% and 1.75%, so the midpoint of that is around 1.635. So we're still significantly below 2%, but I guess we're closer to 2% than 1% and obviously, we're a lot higher than zero which is where rates stood during most of the Obama Administration.The Fed Already Broke ItAs I said in my last podcast, everybody was convinced the Fed was going to raise rates, which is probably the reason they did it. The Fed doesn't want to upset the apple cart; the Fed does not want to concern anybody; if anything seems to be going well, "If it ain't broke, don't fix it." Of course, the Fed already broke it although the Fed does not understand that.Fed Looking All the Way out to 2020In fact what the market was looking for was an indication of whether or not the Fed was going to hike 3 times this year, or would they hike 4 times. I still don't think they know, although the consensus seems to be that as a result of today's statement and press conference, we're going to get 3 rate hikes this year, which means 2 more, not 3 more, but it's still not a done deal. But the Fed seems to be even more optimistic ab0ut the economy going forward, so the Fed is predicting 3 more rate hikes in 2019 and then more rate hikes in 2020. So the Fed is looking all the way out to 2020, saying the economy is going to be great, and we're going to keep on raising rates.Fed's Optimism Waxes as Economic Reality WanesIn fact, the Fed seemed more optimistic about the U.S. economy then they were in the past, which, to me, is all politics. Powell is up there, trying to talk up the U.S. economy because that's exactly what his boss, Donald Trump, wants him to say, so he is being a team player. One of the funnier parts of Powell's prepared statement is that he said the outlook for growth has been improving in recent weeks. Recent weeks! How is he saying that the outlook for growth has been improving when it has done the opposite?Q1 GDP Forecasts CollapseSix weeks ago the Atlanta Fed's Q1 GDP Estimate was at 5.4%. The are now down at 1.8%. Those are the same weeks where Powell says the economic outlook has been improving. How is it improving when you have a collapse from expecting 5.4% to expecting 1.58%? It's not just the Atlanta Fed. All the investment banks, everybody who forecasts GDP growth has ratcheted down their foresasts significantly in the very weeks where Powell is now saying the economy is improved.
Tomorrow is the first of the Fed's 2-day Federal Open Market Committee Meeting, and it's going to be the first meeting where there is supposed to be a rate hike and a press conference for the new chairman, Jerome Powell. The markets are pretty much at 100% probability that the Fed is going to raise rates on Wednesday. What the markets are grappling with is whether or not the Fed will raise rates 4 times this year, or only 3.
Now, if they are going to raise them 4 times, it would mean they raised rates once per quarter. So they raise them in March, they raise them in June, they raise them in September and then they raise them again in December. Now, if they only do it 3 times, then, they pick one of these quarters where they don't do it. Most likely, if they only do 3 hikes, the hike they're going to skip is going to be the June hike. And, of course, if they skip the June hike, they're probably not going to hike in September or December, either because the economy will be much weaker by then, the U.S. stock market could be much lower. The fact is, I'm still not 100% sure that the Fed is going to hike on Wednesday.
I would agree that it is more likely than not that the Fed is going to hike, because they've been hiking interest rates all along. The Fed so far has not given any indication that they're not going to hike because they don't want to give up the ghost of this "vibrant recovery", where they need to raise rates because everything is going so well. But that whole narrative, that whole illusion seems to be fading very quickly. As a matter of fact, on Friday the Atlanta Fed's model for Q1 GDP went down another notch! They are now down to 1.8% for Q1 GDP. Now does it sound like the Fed should be rushing to hike rates when GDP growth for Q1 is only going to be 1.8%? Does that sound like an economy that is in danger of overheating? When they were at 5.4% 6 weeks ago or so and now they're down to 1.8% and falling? For all we know, we could end up being below 1%.
Does the Fed really want to add more downward pressure to an accelerating economy by raising interest rates? So far, everybody just assumes that they're going to hike rates. but we'll see. Another factor that may weigh on the Fed's decision is the stock market. We still have tomorrow and Wednesday morning for the stock market to tank. Today, the tanking process already began.
At one point today, the Dow was down almost 500 points. At its low it was down around 490. The NASDAQ, the bigger decliner was down almost 200 points intra day. Now the markets recouped some of those losses, so the NASDAQ only closed down 137 points; that's still a 1.84% drop. It's a big drop, not nearly as big as 200. The Dow was down 335. It's back in the red on the year. The Dow was down about 100 points so far this year. We're only about 800 Dow points above the closing low from March. I think we're more like maybe 1300 Dow points above the intra-day low in the U.S. session. But who knows? the market could tank tomorrow, we'll see, and then, is the Fed going to hike rates with the market tanking?
The Worse Things Get, the Less Investors Notice – Ep. 337
Retail Sales Down Three Months in a Row
I've got so much to talk about today, it's hard to even figure out where to begin. So I'll start with some of the economic data that came out today, in particular, the February Retail Sales number. Remember last month we had a bad number, -.3, the second month in a row we had a decline in retail sales. The expectation was for a big rebound in February, +.4. Now, I suppose the good news, if you are looking for retail sales to pick up is that they revised the January number upward from -.3 to -.1. Still a drop, but not quite as big. But instead of getting a rebound, we got another drop! We got another .1% decline in February. That's a trifecta. Three months in a row of falling retail sales. That hasn't happened in 6 years. This is pretty rare.
Great Jobs, Lousy Sales
Why is this happening? Remember on Friday, we got this "beautiful", too-good-to-be-true, just what the doctor ordered jobs report that said about a million people got jobs. Why didn't any of those million people take their paychecks and spend them at a retailer? Trump is talking about all the great jobs and all the raises that people are getting and all the tax cuts, why are retail sales down for 3 months in a row?
Spike in Inventory Numbers
In fact, we also got some inventory numbers that came out that spiked up because of an 18-month slump in sales. So inventories are building because nobody is buying what's on the shelf. Well, that doesn't make sense if you believe the economy is great and we've got all these jobs. But if you're like me and you've been very skeptical of the economy being good, this is a validation, because Americans are broke.
Borrowing at Record Highs
This is despite the fact that borrowing is at a record high. Consumers are borrowing a lot of money, yet they're not spending it on retailers, what are they doing with the borrowed money? The government is borrowing a lot of money, we're running these huge deficits, yet it is not even affecting retail sales. That is really the goal, they want people to go out and shop, and it's not happening.
Atlanta Fed Again Lowers Q1 GDP Estimate
After the retail sales numbers came out, we got the Atlanta Fed updating their forecast for Q1 GDP. Remember, this is the forecast that was at 5.4% about 5 or 6 weeks ago. Of course, you remember on my podcast, as soon as that came out, I said, "This is crazy. There's no way we're going to be anywhere near that. They will be doing this limbo for weeks and months and they're going to be lowering the bar". On Friday, I reported on my podcast that they has lowered the bar to 2.5%, the lowest forecast since they started forecasting Q1 for 2018. And what I said on Friday was, "They aren't done going lower. there's room for this bar to go down". I said I thought that the GDP for Q1 would be under 2%.
Goldman Sachs Also Lowers Q1 GDP Forecast to 1.9%
Today, after these retail sales numbers, the Atlanta Fed went down to 1.9%. That is a decline of 65% in their forecast from 5 or 6 weeks ago. It's not just the Atlanta Fed. Goldman Sachs is now at 1.9%. And you know what? This is probably not the low water mark. I think there is at least a 50-50 shot that we end up with a zero handle on Q1 GDP.
Borrowing Q2 GDP Growth and Shoving it into Q1
Given how weak the data has been coming in, especially the big trade deficits. The only reason we might end with a 1 handle and not a zero handle is these rising inventories. In the short run, they give a boost to the GDP, but if inventories are rising because nobody is spending, what does that mean? That means that businesses are going to allow the inventories to wind down, they're not going to keep stocking up. So what we're doing is we're borrowing GDP growth from Q2 and we're shoving it into Q1.
NASDAQ New High
The stock market had one of its best days of the year; I think it was the second best day. The Dow was up 440 points - just under 1.8%. The NASDAQ was up 132 points; about the exact same percentage as the Dow. The NASDAQ is now at an all-time record high! It closed at 7,60.81. That is a new record. We have taken out the high from before the 10% correction. The NASDAQ is the only major index that has done that. That is not the case for the Dow, the S&P or even the Russell 2000, but the NASDAQ has taken off.
Optimism Around Stocks Not Affected by Tariffs
Remember I talked about this on my last podcast; people are trying to create the idea that these tariffs might be good for U.S. based companies, maybe some of our technology companies. I don't know how people are trying to spin this thing, but there's a lot of optimism about the sector of the economy that people believe will be not affected by the tariffs. Maybe there is a narrower set of stocks that everybody wants to pile into, and those stocks are disproportionately in the NASDAQ.
Perfect Nonfarm Payrolls Report
But the catalyst today was the perfect Nonfarm Payroll Report that came out today. If I were a conspiratorial person, which I am not, you could really say, "Wait a minute. This looks too good to be true. This is just what the doctor ordered ." Remember, last time we had the jobs report, even though the jobs number itself was weaker than expected, the markets were spooked by the bigger jump in wages. In fact, a lot of people thought that the 2.9% YoY growth in wages, and I think the month number was up maybe +.3, that that was really the catalyst for the big sell-off that we had. In fact, that was the number that everybody was looking for; not maybe the headline number, but the wage number. People wanted to confirm that wages were really growing.
Market Worries Boost in Employment Might Hike Wages Too Much
Trump, of course, every time he talks, he talks about the enormous growth in wages that is really not taking place, although, the President talks about a lot of things that aren't happening and claims credit for them. But the market was worried that we might get a bigger boost in wages which might mean inflation is coming, maybe the Fed will have to raise rates 4 times, instead of 3 times.
But yesterday, I watched the President's speech, and I'll get to that later, when he talked about the tariffs. One of the things he was talking about when he was talking about the statistics, and specifically he was talking about the jobs numbers and the unemployment numbers - he referred to the statistics as being "beautiful". Everything was perfect, we had record low numbers: African-American unemployment was down, unemployment rate the lowest in I don't know how many years, and he said, "These statistics are beautiful!" That is his new word to describe government employment statistics.
Phony, Fake, Fraud, a Joke, Fiction, a Hoax
Well he had different words to describe those identical statistics when he was a candidate, and beautiful wasn't among them. The words that he used as a candidate when describing the government jobs numbers were: phony, fake, fraud, a joke, fiction, a hoax. Those were the adjectives he used when he was a candidate. Now he says the numbers are beautiful.
All Government Economists Should Be Fired – Ep. 335
Continued Stock Market Volatility
The U.S. stock market continues to be extremely volatile, and as I have said many times on this podcast, I think this volatility following a long-term record lack of volatility is a good sign that the uptrend has changed. So there's a good chance that the bull market is now a bear market, although few people seem to realize that. We're still relatively close to the highs. In fact, the NASDAQ shrugged off the morning weakness and managed to gain for the fourth day in a row.
Choosing the Best Seats on the Titanic
I'm actually hearing people commenting that tariffs or a trade war could benefit U.S. companies; give them an edge over the multinationals. All this is wishful thinking. Maybe they're trying to argue that there are some seats on the Titanic that are better than others. Believe me, if the economy tanks, and the tariffs or a trade war exacerbate it, there will not be a place to hide in U.S. stocks.
Market Spooked by Cohn Resignation
The volatility started last night with the announcement of the resignation of President Trump's Chief Economic Advisor Gary Cohn. One of the reasons that his resignation spooked the market (Dow futures initially tumbled about 400 points) was that he is opposed to the tariffs. The fact that he is leaving would leave people to believe Cohn has lost that argument internally at the White House, so he is leaving a path to which he has objected. For people who were thinking that Cohn would rein in the President, and that his rhetoric will not lead to action, now believe that Trump will go forward with the tariffs. So that's why the market sold off.
NASDAQ Finished Positive for the Fourth Day in a Row
By the time we opened up, the futures had moved off their lows and for most of the day the Dow traded between down a little over 100 and down 300. But we had a rally near the end of the day. The Dow closed down only about 82, and as I said earlier the NASDAQ finished positive for the fourth day.
Exemptions for Canada and Mexico Good News - For Canada and Mexico
Part of the news is that Trump is considering exempting Mexico and Canada from the tariffs. That's supposedly good news; I guess it lessens the probability that those countries will retaliate, but of course, a large portion of the deficits that Trump is concerned about in steel and aluminum, that's where the deficits originate. So the markets rallied on that news. Also the Canadian dollar and the Mexican peso rallied on that.
Mexico and Canada Will Have More Trading Partners
If these rumors are true, and you never know; the President can change his mind from tweet to tweet, but if, in fact, the tariffs are enacted, exempting Canada and Mexico, that is great news for Mexico and Canada. They are going to benefit from these tariffs. The U.S. economy will not. Mexico and Canada will be able to sell more steel and aluminum to American consumers at even higher prices. So they will benefit, just as domestic steel companies with benefit. Canadian and Mexican steel exporters can shop the entire world, whereas American manufacturers will be limited to North American sources.
Trade, Comparative Advantage and Protectionism
I want to devote this entire podcast on the subject of trade and comparative advantage and protectionism, and this trade war that President Trump is so confident about. He wants to declare war because he thinks we are going to win. He's a winner, and he wants America to win and so he wants to launch a trade war so that America can win.
The Trade Deficit is the Problem
I've been talking about how the trade deficits are at record highs. We have the biggest trade deficits ever and Donald Trump, when he was a candidate rightly criticized these trade deficits. They are a huge problem. They are endemic of an even bigger problem, and Trump understands that. He knows enough to realize that trade deficits are bad. I will give him credit where credit is due because most economists don't even see the problem with these trade deficits. They are wrong. Trump is right. The trade deficit is a problem.
Tariffs Will Not Solve the Problem
But where Trump is wrong is in thinking that these tariffs are going to solve the problem. They won't. They will make the problem worse. This is the irony of these tariffs. They will result in larger trade deficits, not smaller trade deficits. And that's even without any foreign retaliation; meaning, if China, if Europe, if our trading partners do nothing in response to these tariffs, the result will be larger, not smaller deficits. Manufacturing jobs - the very jobs that Trump is hoping to save will be lost as a result of these tariffs.
Mr. Trump: Slash Regulations!
I wish someone in the Trump administration, would share this podcast with President Trump. He needs to really this about economics, to understand what needs to be done. If Trump really wants to shrink America's trade deficit, there are ways to do that. He could slash regulations, not just talk about all the regulations, but actually slash a bunch of them.
But the most important thing that Trump could do to make America more competitive in manufacturing is to shrink government. We need to cut government spending on a massive scale. We need to reform entitlements. These are things that President Trump doesn't want to touch. He's making government bigger. What we need is more savings. We need more capital investment in plant and equipment - but that's not happening. These larger deficits are going to crowd out what little investment we have.
Second Consecutive 300-Point Drop in the Dow
The Dow Jones was down 380 points today, in fact this is the second consecutive 300-point drop we've had in the Dow. The Dow is now down about 4% for the month of February which just ended today. This also means the Dow's record-breaking monthly winning streak has also come to an end. Remember, the Dow was up every month since Donald Trump was elected President including every single month in calendar year 2017. That is something that has never happened in the history of the stock market. There has always been at least one month during any year where the market went down - except for last year, when it went up every month and it was also up in January.Not so in February. Big decline. The Dow dropped better than 1000 points on the month. We'll see if this is the beginning of a much bigger downturn. In fact, it could easily be the beginning of a bear market.
Powell's Congressional Testimony the Catalyst
The supposed catalyst for the sell-off yesterday and today was Powell's testimony before Congress yesterday. He goes before the Senate tomorrow - he was in front of the House yesterday to give his talk about the economy. The Congressmen's questions are all self-serving. They are all talking for their own constituents and nobody really cares what Jerome Powell says - except the market. The stock market is looking and caring about what he says.
Powell is Hawkish
What Powell said that spooked the markets - he was optimistic! He was hawkish - he was bullish on the economy. First of all, what do we expect? He is on Team Trump, just as Ben Bernanke said he was a team player when he supported the economy under Bush. So the Republican narrative is that the economy is great - everything is booming and Powell is going to toe that same line. But of course, when Powell speaks, the markets listen, and the markets didn't like that upbeat tone. It made them think, oh, we're going to keep getting rate hikes. Maybe we're going to get 4 rate hikes instead of 3 - and the stock market sold off.
Will Powell Try to Fix What He Broke?
It rallied again a little this morning; we were up over 150 I think early in the day, but all of the decline happened in the last hour of trading, as is typically the case with some of these sell-offs. So it doesn't bode well for tomorrow. - Unless Jerome Powell tries to fix what he broke.
Remembering Irwin Schiff
Today would have been my father, Irwin Schiff's 90th birthday. If you're not familiar with my father's story, and I'm sure most of the people who listen to this podcast are familiar with my father but if you're not go to schiffbooks.com and pick up a copy of "The Federal Mafia," which was one of only 2 books banned by the Federal Government. We have a lot of books, "The Kingdom Moltz" a book that really shows off my father's sense of humor. It's beautifully illustrated by an artist named Andy Ice. I always liked that book as a kid. The book is very appropriate now, because it really explains inflation and where it comes from. My dad's old website, paynoincometax.com is still up, which has an archive of his old radio shows that he did weekly from Las Vegas. If you listen to my Dad, you'll know what I'm coming from. My dad talks a lot about economics.
Everything is Great!
But today, everything is great; Wall Street had a huge relief rally today; the Dow Jones was up almost 350 points, pretty much closing right on the highs of the day. The NASDAQ had an even better day, by percentage, up 120 points. The Dow was down on the week until today, but this big gain brought it up for the week.
Down Day in the Bond Market
I think the reason the market was so strong was we finally got a down day in the bond market. The yield on the 10-year treasury went back down. We closed at 2.871. Remember, we got to 2.95, we almost got to 3% and now we're back down to 2.871 on the 30 year. We had gotten up to 3.22 a couple of days ago. I think this took a lot of pressure off the stock market and people came in buying. "Everything is great; nothing to worry about!"
Commodities Strong Across the Board
The commodity market, though, was very strong across the board. Look at the surprise strength in oil. Everybody was talking about oil prices coming down - we're already back up to $63.50 and above. Almost back the the highs. Oil prices are going a lot higher. It's not just oil prices that are going up; commodities in general. I think we are in the early stages of another major boom in commodity prices. We had a big boom that ended in 2008 with the financial crisis. This is going to be a bigger boom, because it's not going to end in a financial crisis. This is going to be a dollar crisis, which is music to the ears of the commodity markets because they're all priced in dollars.
Trump Is No Reagan & Powell Is No Volcker – Ep. 331
Dow Down Over 250 Points
Today the Dow Jones was down just over 250 points; we're back below 25,000. I think we were down better than 300 on the lows of the day, but we went out pretty low. The dollar was actually quite strong today; the dollar index had one of its better days of the year - +.61. We're back at 89.71. We had gotten back below 89, with an 88 handle. Gold had a bad day today after having had some pretty good days last week. The price of gold down almost $18 now; just below $1330. We got above $1350 last week, but we couldn't hold it. I think we really need to go above $1400 to clear away this overhead resistance.
Bond Market Continues Decline
The only trend that really continued was the bond market, continuing to go down. It's pretty much a daily affair. Yields rising off the highs of the day - we're back below 2.9. We got to 2.915 on the 10-year. We closed at 2.893. But I think it is the back-up in yields that continues to put downward pressure on gold and some upward pressure on the dollar. Now, in the scheme of things, it does not matter because the dollar has been falling all year, despite the fact that rates have been rising all year.
False Narrative That High Rates Are Good for the Dollar
But the narrative that higher rates is good for the dollar still permeates the markets. Traders still have not figured out that they've got this one wrong. Likewise, they still haven't figured out that rising inflation is good for gold, not bad for gold. In fact, I think the catalyst for today's rally in the dollar and the sell off in gold is the news that came out on inflation on Friday.
Bad News about Inflation
We got some really bad news that inflation is picking up. We got the data for import prices and export prices. Export prices were up by .8% but import prices, which were clearly more important, because we have to pay for our imports - our import prices shot up 1%. They were expecting a gain of .6%, so 80% higher than what was expected. Year over year, you're talking about a 3.6% increase in the price of our imports.
Import Prices Rising Faster Than Export Prices
Now this is bad for a couple of reasons: 1) If our import prices are rising faster than our export prices, what does that mean about our trade deficit? That means its going higher. But 2) It's inflation, or the cost of living, because we have to pay for these imports. If imports are 1% more expensive, month over month, that means it costs Americans more money to buy whatever is imported.
St. Valentine's Day Rout
I wouldn't really call what happened in the bond market and the U.S. dollar market as a St. Valentine's Day massacre, maybe it was a slaughter; even slaughter was too harsh a word. It was a rout. But this is nothing compared to what is going to come. The daughter is going to get slaughtered a lot more and the bond market is going to get slaughtered a lot more in the days ahead. Maybe not exactly tomorrow, but there will be days ahead that will be much worse than today. This is the tip of a huge iceberg.
Doing the Impossible
Before I get into the tail of the tape today, and all the horrific economic numbers that came out today, I want to take a step back and talk about President Trump's budget, which was released on Monday. Basically, the Republicans succeeded in doing something that you would have thought was impossible. They are making the Democrats look like the fiscally responsible party.
First of all, there are some cuts in this budget that are never going to happen. There are a lot of assumptions that are saving money, like they assume a total repeal and replace of ObamaCare, which isn't going to happen. In fact, if it didn't happen when Republicans controlled Congress, how is it going to happen when the Democrats control Congress in 2019? So this is all farcical.
But one of the biggest farces of the entire budget is the underlying economic assumptions. They're assuming that the very low unemployment rate gets even lower. But, the most farcical of all, is that they assume that the economy grows uninterrupted at an average of 3% for the next 10 years! This so-called expansion is already 9 years old. That makes it the second or third longest expansion in history, and if it continues this year, I think it will be the largest expansion in history. If it continued for another 10 years it would be almost twice as long as the next largest economic expansion in history. What are the odds that that is going to happen? But even if that happens, even if we get 10 years of 3% economic growth (we probably won't even get 1) but let's assume we get 10, even with that, the budget does not balance.
Not Even Pretending the Budget will Balance
This is the first time the Republicans are presenting a budget that, even in 10 years, does not balance. Now, think about this: When they were presenting budgets that had a pretense of balancing in 10 years, and they were way off the mark, can you imagine how much further off they will be now when they are not even pretending the budget is going to balance?
Trillion Dollar Deficits and no QE
In the first couple of years they are forecasting trillion dollar deficits. As I said on the podcast before, the last time we had trillion dollar deficits, the Fed was doing a trillion dollars a year in QE. Right now, the Fed is still posturing that it is not going to do any QE. In fact, it is posturing that it is going to do QT - it is going to shrink its balance sheet.
Big Political Problem for the Republicans
But here is going to be the big political problem: Since the Democrats are now the fiscally responsible party, they will be able to hang these deficits around the necks of the Republican candidates like an Albatross. I know a lot of people are thinking, "Wait a minute, Peter! Obama doubled the deficit & the national debt - there are all kinds of deficits under Obama, so how can the Democrats say that the Republicans are the big spenders and they are the fiscal Conservatives?
Inevitable Keynesian Logic
It is very easy. It is basic Keynes. They are going to say is when Obama ran deficits, they were necessary to get us out of the recession that Bush caused by cutting taxes on the rich, and the corporations. So they were a necessary economic stimulus to get out of the ditch that Bush drove us into. After all, Clinton, a Democrat,
Republican Hypocrites Embrace Debt to Avert Shutdown – Ep. 329
A Change of Trend
Another volatile day of trading ended with the Dow gaining a little over 300 points - 330 points to be exact. The NASDAQ composite was up just shy of 100 points - 97.33 - and the S&P gained 38.5 points. But about 2 hours before the close, the Dow was down over 500. And then, in about 20 minutes, it rallied from down 500 to positive, and then at the close it had that 300-point rally. But it started the day up about 200 points, so between up 200, down 500, up 300… Again, we're continuing massive volatility which, as I said is indicative of a change of trend. We were so long in an uptrend with no volatility, now all of sudden we have this massive volatility.
"Just a Reversal"
Of course there are a lot of people jumping on this:"Oh, it's a reversal, it's a bottom, we rallied 800 points" Look, that's not how you make a bottom. 800 points is nothing. We had 2 thousand point drops, so I don't think the bottom is in. Is it possible that there will be a rally off of here? Of course, anything is possible, but I don't think it is probable. I think it is a higher probability that we are going to re-test that low. If this really is a correction, and not a bear market, I think the low that we put in earlier today is going to have to hold. It is going to have to have some kind of test.
Fundamentals Look Much More Like a Bear Market
But, again, looking at the fundamentals, this looks so much more like a bear market. In fact, when you listen to the talking heads on CNBC, they keep saying, "Relax, don't worry… this is a correction… the market is long overdue for a correction… we haven't had a correction in a long time…corrections are normal, and all that is true. But we also haven't had a bear market in a long time, and bear markets happen. Bear markets are normal. So how do they know that what we're having now is not the long-overdue bear market?