Federal Reserve

When “Fundamentals” Attack

By David Stockman  |  October 3, 2019

Before this week began, the odds the Federal Reserve would cut its benchmark interest rate during its October meeting were around 40%. As of this morning, those odds were up to 75%.

We’ve been discussing the fact that this is not “the greatest economy ever” for months. This week’s incoming economic data only confirms it. What’s different now is equity markets are starting to shake, rattle, and roll.

Wall Street is worried.

The Mighty Fed

We’ve already seen the worst October 1 ever. Stocks were down another 2% yesterday. Bad services sector data had the Dow Jones Industrial Average down as much as 335 points early this morning.

So, the market expects the Fed will react. And why shouldn’t it behave this way? That’s what our monetary central planners have taught it to both expect and demand.

Indeed, there can no longer be any doubt at all that the Mighty Fed has been reduced to the status of Wall Street’s pitiful bitch. The Tweeter-in-Chief might as well fire Powell and replace him with, well, a weathervane.

After all, it doesn’t get more equivocal than this:

“There will come a time, I suspect, when we think we’ve done enough. But there may also come a time when the economy worsens and we would then have to cut more aggressively,” said Mr. Powell at a news conference Wednesday. “We don’t know.”

Look, folks, we’ve been discussing the fact that this is not “the greatest economy ever” for months. That’s not my quarrel; anymore, I think there will “come a time when the economy worsens.” And that’s coming, soon. I’ll be talking about it right outside Imperial Washington at next week’s Irrational Economic Summit.

The thing is, Powell speaks here – and this was actually two weeks ago, following the September 17-18 meeting of the Federal Open Market Committee – as if what he and his egghead friends do inside the Eccles Building actually makes a hill of beans worth of difference on Main Street.

I say they’d be just as effective when it comes to the real economy – more, perhaps – building Lego models.

As Michael Coolbaugh notes in his Thursday market commentary, the basic rules of economics have not changed – despite with Bubblevision would have you believe.

And the data are indeed getting worse. Is this the beginning of the Wall Street selloff that precipitates the next Main Street recession?

Stay tuned… because it could mean a lot more than that.

Repeat After Me: “This Time is Not Different

By Michael Coolbaugh

In the beginning of September, I discussed the yield curve and the carelessness with which the mainstream media was extolling Sir John Templeton’s four most dangerous words in investing.

After a summer fraught with TV personalities, Wall Street strategists, and former members of the Federal Reserve Board alike arguing “this time is different,” here we are again…

First, it was the strategists telling us the bond market had completely lost touch with any sense of reality, as it seemed to be pricing in a recession. For lack of a better term, they were telling us the market was wrong.

Next came those same strategists proclaiming the Institute of Supply Management (ISM) surveys had lost credibility as a leading indicator following the plunge in manufacturing data to the lowest point since the Global Financial Crisis.

Said differently, not only was the market wrong, but now the data was wrong as well.

Then, we were told that, because manufacturing only accounts for approximately 10% of U.S. gross domestic product, services is what truly matters, and that still looked fine.

Never mind the fact that, historically, manufacturing always turns lower before services. Here we were, for a fourth time, being told “this time is different.”

Spoiler alert: Today’s ISM non-manufacturing report demonstrated – once again – that this time is not different.

As if the headline data isn’t bad enough, the details of today’s report are even more concerning than the blue line in the graphic above.

The IHS Markit Non-Manufacturing Employment measure fell to 48.6, below the 50 level that separates “expansion” from “contraction.” This marked the largest two-month drop since 2009 and the first reading of “contraction” since 2010.

You see, the market, in its infinite wisdom, can provide clues about the expected direction of the economy. If you listen to these clues, you can better position your investments so that you are not caught off guard when the harsh reality sets in that this time may not be different.

As I outlined in the September 19 Deep State Declassified, Mr. Powell and Mr. Orwell, the warning signs have been piling up. It’s not just cyclically sensitive commodities, bonds and currencies that disagree with the S&P 500 Index, behavior inside the market is telling a similar cautionary tale.

A Brief History Lesson…

Charles Henry Dow was an American journalist who co-founded Dow Jones & Company and founded The Wall Street Journal. He also invented the first index, the Dow Jones Industrial Average, and developed what eventually became the Dow Theory.

Dow Theory is a method of market analysis, with six main tenets. But it’s most widely known for its stipulation that the Dow Jones Industrial and Dow Jones Transportation averages must confirm each other.

In other words, we should see similar behavior out of the companies that make the goods as we see from those that transport the goods.

Now, many will argue that today’s economy is vastly different than during Charles Dow’s experience in the late 1800s. And, while manufacturing does make up a smaller portion today than in the early 1900s, a consumption-driven economy still requires those goods to be delivered.

What we’re seeing today is a classic example of underperformance from the companies that transport the goods.

This type of behavior was evident just prior to severe market downturns during 1998 to 2000, 2006 to 2008 and 2015 to 2016. With the exception of 2015-16 – which was arguably altered by Chinese stimulus to the tune of over $1 trillion – this market message has signified an impending recession.

This theory, which was published as early as 1922, continues to provide astonishingly accurate warning signs of impending economic malaise nearly 100 years later.

So, you must ask yourself, “Am I still willing to bet that this time is different?”

After “Peak Trump”: Charting Uncharted Waters

It’s my pleasure to be delivering the Keynote Address at the 2019 Irrational Economic Summit October 10-12 right outside Imperial Washington.

But you don’t have to dare the Swamp, folks, because you can watch all the videos… read all the transcripts… view all the presentation decks… from the comfort of wherever you are with a Full-Access Livestream Pass.

The stakes are already high heading into 2020. The U.S. presidential campaign is already underway. And the Tweeter-in-Chief is tied up in the day-to-day movements of the major stock indexes like no president before him.

And the increasingly desperate incumbent will do anything he must to hold the White House.

That’s why I’ve titled my Keynote Address, “After ‘Peak Trump’: Charting Uncharted Waters”.

Leviathan gets bigger, Wall Street gets richer, and Main Street… well, Main Street gets more and more little every day.

We’re rapidly approaching the end of the oldest, weakest economic “recovery” in American history. At this major tipping point, there’s no telling what the Donald’s great disruptions could do to your wealth.

Click here to learn more about the Full-Access Livestream Pass to the 2019 Irrational Economic Summit.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR