The Market Radar

We anticipate monitor and comment on market-moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t afford to ignore us.

 

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When 50 Percent Of U.S. Households Were Insolvent

Not that long ago, by the way.

My good friend, David Jones, sent over some new data this past weekend.  We have been busy.

Our First Take

Not a lot of prose tonight as we will let the data and charts speak with only some short comments.   We take a quick look at two issues in this post: 1) the growing wealth inequality in the U.S., and 2) the massive hit the American middle class took during the Great Financial Crisis (GFC).

Stay tuned for more analysis in future posts.

Stunning Growth In Wealth Inequality

Though we were cognizant of the growing inequality of wealth in the United States, we had not really internalized it and were shocked — no, floored — by the following data.

NW_Table

The table of data speaks volumes and explains much of the dynamic currently taking place in the U.S. economy and the American body politic.

The net worth of the top 1 percent compared to the bottom 50 percent has increased from a multiple of 6.5 in Q1 1990 to 26.0 in Q4 2018.  Absolutely stunning!

In growth terms, the wealth (net worth) of the top 1 percent has increased by 532 percent in the same period compared to only a 57.1 percent increase in the net worth of the bottom 50 percent.   Whereas the growth rate of the 1 percenters has outpaced nominal GDP by 2x since 1990, the net worth of the bottom 50 percent has tracked the economy by a paltry factor of 0.2, which truly reflects how the American economy has morphed into the asset-driven beast that it now is.

The moral of the story here is you better own assets.  Pity, or maybe fear, the younger generations saddled with their student loan debt and the debt they will inherit from the baby boomers.

Middle-Class Devastated During The GFC

The most shocking chart of our first cut at the data was the quarterly time series of the bottom 50 percent’s net worth.

Bottom_50

The bottom 50 (the data are aggregated thus not all households were insolvent) lost its entire net worth during the GFC and was technically insolvent (liabilities exceeding assets) during 8 of the 11 quarters during the period of Q2 2010 to Q4 2012.   The collapse in housing prices was the main culprit as the chart below illustrates but dig a little deeper and the huge increase in home mortgage leverage, which the cohort began to take on in earnest during the early 2000s, was, a, or, the, major factor in the destruction of wealth.

Nothing new here but interesting to finally see laid out in a clear and concise manner.

Though the Fed’s quantitative easing (QE), which targeted asset prices — as inflating them — shares much of the responsibility for the growing wealth inequality,  it also helped resurrect the balance sheet of the bottom 50 percent.  Some call QE “socialism for the rich” but there is no doubt some did trickle down to help the lower 50 recover some their net worth.

We suspect or know almost certainly,  many households are being lost in translation – in the aggregation and averaging.   Several million have yet to recover in our bifurcated economy.

We still need to take a deeper dive into the data but we did notice a big chunk in the recovery of the net worth of the lower 50 was the reduction in home mortgage liabilities.  We not yet sure how this took place but suspect much was through default, foreclosure, and debt forgiveness.  We also noticed big jumps in certain quarters.

RE_1

How Did The 1 Percent Fare During GFC?

Not too bad, in a relative sense, especially when juxtaposed to the hit the lower 50 took during the GFC.   This is reflected in the chart of the 1 percenters net worth.

Top_1

The net worth of the 1 percent fell almost 26 percent from Q3 2007 to Q1 2009, the respective peak and trough of the stock bear market.

Note the red bars also reflect the quarters when the lower 50 were technically insolvent.  In some of those quarters, the wealth of the 1 percent actually increased.   That rage was felt and reflected in the 2016 presidential election and is still playing out in real political time.

Upshot    

We have nothing against the 1 percenters, after all, we were part of, and may still be a member of that cohort.  The data does show the unsustainability of the current situation, however, both economically and politically.

We implore the plutocracy to take the data seriously, make a plan and commit to making and paying for the necessary social investments to stave off a more severe political disruption.   The optimal solution is always to help pull others up rather than having them pull you down.

Trump Not The Answer

We firmly believe Donald Trump is not the answer and is just a warm-up act to the real deal that may be yet to come.  We have looked at the economic data under the Trump administration, which we will present in the next few days, and the needle has moved very little and is reflected in the current polling data.

 

Monring Consult_Polls

A truer form of populism is moored in the economics of the left, in our opinion, though President Trump gets a lot of mileage from his anti-trade rhetoric and policies even as farmers seem to be turning on him.

China Trade Deal At The G20?

It’s going to be interesting to watch how he walks the fine line of trying to keep stocks afloat by cutting a trade deal with China’s President Xi at the G20 next week, while simultaneously feeding the base the red China meat.  Irreconcilable differences, in our opinion, unless Xi or Trump caves.  Not likely.

Trojan Horse For The Rich

Nonetheless, a narrative is taking shape that the Trump administration is more of a Trojan Horse for the 1 percent — tax cuts for the wealthy,  cuts to social services, and pumping stocks, where the top 10 percent directly hold 86 percent of total stock wealth with the bottom 50 holding less 1 percent;  presented as a Honey Boo Boo reality show to entertain the base.  Not exactly the savior of the working class.

We may or may not agree with the narrative, which is really not the point, but it’s inflating out in the ether and appears to be impacting the polling data, so please, spare us the hate mail.

Stay tuned for Mr. Toad’s Wild Ride, folks.   Long pitchforks and water cannons.

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Doubtful ECB Can Prevent Recession – O. Blanchard

Take a few and listen to O., well worth your time. 

Olivier Blanchard, the former IMF chief economist and part of our elite “One Smart Dude Club (OSDC)”, speaks on the ECB’s monetary policy and the tools it has available to fight an economic downturn.   He essentially concludes Germany, which is reluctant to venture into fiscal stimulus but will be hurt the most by the trade wars,  will have to do some backsliding on its frugal ways.

Traders and ‘bots way offsides today, including us (but not short) as we were gone fishing, took a one-two body blow from the Draghi dove and Trump tweet.

It’s all about the Tape  Tweet, folks.

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S&P500 Key Levels

Snoozefest until the FOMC on Wednesday.  Lots of Doji candles reflecting traders don’t wanna do jack all.  Volume running at about 90 percent of the 10-day moving average.

Market expecting no rate cut, though a 20 percent probability is not exactly zero.  It feels to us the market could be set up for some disappointment.  Expectations of three rate cuts by year-end seem excessive with 3.6 percent unemployment and 2 percent off all-time stock market highs.

The market needs a reality check here with respect to expected rate cuts and will be very sensitive to and looking for clues in the FOMC statement.

Key Levels

The S&P is having trouble at the key Fibo, 2900.95.  If that goes, the recent high of 2910.61 then off to new highs at 2954 plus.

On the downside, 2874 is a big number,  the 50-day moving average, and last week’s intraday low.   Going fishing tomorrow.

 

S&P

Expected_Fed Funds Rate

 

Expected_Fed Funds_probs

 

S&P_Chart

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Are Italian Mini-Bots Coming For You?

Are the ‘bots about to start trading Italian mini-BOTs?

Talk of a parallel currency in Rome is spooking some in the analyst community.

A proposal is being kicked around to issue small-denomination bonds — so-called mini-BOTs (short-term treasury bills) —  used by recipients to pay taxes or to buy goods or services from state-owned companies.  If the plan is realized, it could set Rome on the path to a parallel currency and an eventual “Black Wednesday.” where Italy leaves the euro.

Supporters, include Lega, one of Italy’s ruling parties.

Opponents argue it would lead to higher public debt and chaos.

“If Italy goes down that rout, it will in my opinion be a disaster for the country. You are going to have a loss of general confidence in the Italian debt in the markets,” Jacob Kirkegaard of the Peterson Institute for International Economics told CNBC last week.  – CNBC

Contrary to conventional wisdom,  Italy’s debt problem is really rooted in the economy’s inability to grow.

Yet the Italian public finances are in a frightful mess. The ratio of government debt to GDP is now at 132pc. Danger territory is supposed to begin at 90pc. Even so, excluding interest payments, the government actually runs a budget surplus. Indeed, it has done so for 25 of the last 27 years. Italy shouldn’t have to squeeze its budget still further. The fiscal problem derives from a combination of a heavy weight of debt incurred in the past and very sluggish economic growth, continuing into the present.  – Roger Bootle, Telegraph

Italy Primary Surplus

Italy Growth

The adoption of the euro along with an unhealthy banking system, which is saddled with bad loans from the debt crisis, has partly contributed to almost no economic growth since January 1999, the introduction of the common currency.

The real problem is structural, however, rooted in demographics and the lack of productivity growth.  A rigid labor market, bloated public sector, nepotism,  limited investment in human capital and education, and the small size of most companies, are some of the explanations given for the country’s stagnant productivity.

Italian_Spread

 

Italian_bond_buyers

FocusEconomics projects Italy’s GDP growth coming in at just 0.1% in 2019 and 0.6% in 2020.

FocusEconomics

Talk or even rumors of currency devaluations, much less kicking around proposals for an effective parallel currency risks setting off nonlinear dynamics, which are difficult to predict and control.   These issues are best discussed behind closed doors and in secret, then sprung on markets unexpectedly before panic forces the action.

We sense it is about to get very interesting in Euroland.

Stay tuned.

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S&P500 Key Levels

After rallying 6.66 percent from the bear trap low last Monday to yesterday’s high of 2910.16,  the S&P is now consolidating that big move.  The ‘bots have mastered the art of the bear trap.   F**k wads!

The 50-day moving average held today, which is positive.   The 2900 level seems to be a big number and a key Fibo retracement of this recent 7.63 percent sell-off.  A close above 2900 greatly increases the odds the 2954.13 all-time high will be taken out.

Note, our target for the S&P was 3025 before the Big Dipper sell-off hits but began to doubt that especially after the threat of Mexican tariffs came onto the radar.  The market is conditioned to salivate when the Fed rings the bell of mo monetary stimulus and, as you can see in the table and matrix below, the market prices a higher and higher probability of a Fed rescue as each day passes.

We respect that and don’t fight it but are reducing risk as the market moves higher.  We believe we are in the late or extra innings of this bull market, valuations are at extremes and the tectonic geopolitical and economic plates, which have been the foundation of the secular bull market are rapidly shifting.

You have to feed the seals while they’re barking, folks. Trying to sell into a panic market with no bid is not fun and very unhealthy for your P&L.

 

S&P

 

S&P_Chart

 

Expected_Fed Funds Rate

 

Expected_Fed Funds Rate_2

 

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Coming To The Louvre

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What To Expect When America Starts Electing

It’s 511 days to the 2020 Presidential election and we sense a total disconnect between the movement in the polling data and market expectations of the outcome.  It reminds us of our conversation with a hedge fund manager one month before the midterm who was certain the Republicans would remain in control of the House.

We laid out our “Lavender Wave” scenario of at least a 35 seat pick-up by the Democrats– they eventually gained 40 House seats.  He wasn’t having any of it, however,

“I better check with my pollster.”

We do try and keep our partisan bias out of our political analysis and focus solely on the movement of the polling data in a disciplined analytical framework.  We have won a lot of bets from those who cannot and are out of touch with the data.

In fact, we know of nobody except yours truly that predicted Trump would win the electoral college and Hillary the popular vote in 2016.

2016_PE

We simply looked at the dispersion of the Hispanic vote, which many were betting would determine the outcome on the margin because of Trump’s offensive rhetoric, and found it was mainly concentrated in California and Texas.  We concluded these states would not flip and would cancel each other.  Nevada and New Mexico were the other two states where the Hispanic vote was concentrated enough to have a significant impact on the electoral vote.

2020 Presidential Election

Now Wall Street believes there is a 70 percent chance Trump is reelected.   Have they not looked at the data or is it just wishful thinking?

CNBC_HeadlineThe Morning Consult tracking poll illustrates the devastating movement in polls since President Trump took office.  In every state that is going to matter in November 2020, there has been a double-digit negative move against the President’s approval ratings even in the reddest of red states.

As of the May polling data,  the President is above water in only 2 of the 17 states,  Texas and Georgia, and just barely.   This contrasts sharply with February 2017, when Trump’s approval rating was higher than his disapproval in 15 of the 17 states.

 

Monring Consult_Polls

Stanley Gets Its

One smart dude appears to be looking at the data, however.  Stanley Druckenmiller, the great hedge fund manager,  thinks the President is in “deep, deep, trouble.”

Druckenmiller said he believed President Donald Trump will lose his reelection bid thanks to discontent in key swing states. He said the Republican president got lucky in 2016 and could lose if Democrats run a more centrist candidate. The problem, he said, would be if a “crazy” Democrat beats him.

“I personally think it’s going to depend on the Democratic candidate, but he drew an inside straight: He won seven out of seven states by less than half a percent,” Druckenmiller said this week. “If you go county by county in Pennsylvania, Michigan and Wisconsin, he is in deep, deep, deep trouble. And that was with the economy growing at 3%.”  – CNBC, June 7th

One Day Is An Eternity In Politics

Much can happen in the next 500 days and the world may be a totally different place.  Moreover, the Democrats are more than a year out before officially nominating President Trump’s opponent.

In the 1988 presidential campaign,  Massachusetts Governor Michael Dukakis held a 17-point lead over Vice President George Bush coming out of the Democratic convention at the end of July only to lose the general by almost 8 percent of the popular vote and an electoral landslide of 426-111.  Gary Hart, a much stronger candidate than Dukakis, and the clear front runner to take the nomination blew up early in the nominating process over allegations of extramarital affairs.   Monkey Business.

It doesn’t seem that President Trump will have the ability to turn the vote as Bush #41 did unless the Democrats nominate a very, very weak candidate, which is not a zero probability, by the way.

Our analysis leads us to conclude Trump will not be able to move women, who make up 52 percent of the electorate and more likely to vote than men, or the younger voters no matter the level of the Dow or the GDP growth.   His numbers are very ugly and pretty much set in stone.    The latest poll, today’s Quinnipiac, shows Trump 25 points underwater with women and 30 points underwater with 18-34-year-olds.

 

Polls_Jun11

Unless President Trump reinvents himself into a kinder, gentler metrosexual and completely reverses his views and policies on global warming  — how will that play with the base — it is game over for his presidency if women and the younger voters show up in November 2020.

The Lefties Are Coming 

Wall Street is also going to have to come to grips with the politics of the younger generations.   We have been writing about this for years.

Brooks

 

But it’s hard to look at the generational data and not see long-term disaster for Republicans. Some people think generations get more conservative as they age, but that is not borne out by the evidence. Moreover, today’s generation gap is not based just on temporary intellectual postures. It is based on concrete, lived experience that is never going to go away.  – Davod Brooks, NY Times, June 3rd

Once again, we find ourselves betting against the conventional wisdom of the Street.

The Russians Are Coming? 

Finally, the Russians really have their work cut out for them in the November 2020 election.  Expect the unexpected, folks.

Nothing surprises us anymore and most don’t seem to care.

The Russian government interfered in the 2016 presidential election in sweeping and  systematic fashion…

The presidential campaign of Donald J. Trump (“Trump Campaign” or “Campaign”) showed interest in WikiLeaks ‘s releases of documents and welcomed their potential to damage candidate Clinton…

The social media campaign and the GRU hacking operations coincided with a series of contacts between Trump Campaign officials and individuals with ties to the Russian government.  – Mueller Report 

As always, we reserve the right to change as the facts change.

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Expected Fed Funds Rate (Lower Band)

We will try to post this on a daily basis showing the expected value of the Federal Funds rate (lower band) at each of the FOMC meetings over the next year and recent changes in the market expectations.

The data illustrate no change expected in Fed Funds at next week’s FOMC;  25 bps cut at July meeting;  decent odds of another cut in September;  two rate cuts by the October meeting; and three cuts by January.

We will add the probability matrix in the next post.

 

Expected_Fed Funds Rate

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Jobs Market Weaker/Risks Higher Than Perceived

Last month we noted the divergence of nonfarm payrolls (NFP) and the employment data illustrated in the updated table below, which drove our skepticism about the labor market and overall strength of the economy at the same time many were breaking out the pom-poms.

Last Friday’s payroll data blew out expectations with a monthly gain of 263 new jobs yet employment fell again by 103k, the third decline over the past four months.  This is the first time in our database, which begins in 1990, that a positive monthly payroll number had an opposite sign of the employment data in three of four consecutive months.

That should make all of us sit up and listen.  – GMM, May 7th

 

Employment_Table

 

May Report – Two of Past Four Months < 100K Jobs Created

Fast forward one month, the BLS reported a big miss on Friday in nonfarm payrolls, including downward revisions of prior months. The employment data and NFP are beginning to move together again, at least for the month, however.

Dig Deep Folks

Digging deeper into Friday’s data we found that the 3-month moving average of the change in nonfarm payrolls is now in its lower quintile, 17th percentile, since October 2010, when the streak of 105-consecutive months of positive NFP prints began. Moreover, NFP has come in less than 100K in two of the past four months.   That has not happened since the summer of 2012, which ushered in QE3 the following fall.

…Growth in employment has been slow, and the unemployment rate remains elevated.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month…These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. FOMC, September 13, 2012

Note the unemployment rate in August 2012 was 8.1 percent compared to 3.6 percent reported last Friday.   We have many problems with how the unemployment rate is constructed (see here) but it is nonetheless stunning to talk about a new round of monetary easing with 3.6 percent unemployment.

I see the ghost of a dead king, folks.  Something is rotten in the state of Denmark. 

 

NonFarm_Chart

Financial Conditions

During the fall of 2012, the Chicago Fed National Financial Conditions Index was at around -0.40 compared to -0.83 today.   In addition, the valuation of the S&P500, as we measured it last week in terms of work hours needed to buy the index, is now 69 percent more expensive than it was back September 2012.

That’s not just a higher level of the S&P, folks, it is a higher macro valuation —  the index level deflated by a measure of economic activity, average hourly earnings.  In other words,  the S&P500 has outpaced the average hourly wage of producing Americans by 69 percent since the summer of 2012.  Enter the populists.

Misplaced Market Focus

We believe markets are too focused on the level of interest rates in terms of the Fed’s potential firepower to fend off the next recession and take a bit more comfort that  policy rates are 200 bps plus above zero.   Not so fast.

IMF_Monetary Transmission

Monetary Easing With Extreme Asset Valuations

Asset inflation, not credit expansion, is now, at least as we perceive, the main transmission mechanism of monetary policy, which drives aggregate demand through the unleashing of animal spirits and the wealth effect.  If the Fed embarks on a path of monetary easing with the initial conditions of extreme asset valuations, as we have measured them, that makes us extremely nervous.

Number Hours_2

Some households in our bifurcated economy are in decent shape, not that levered, and have room to borrow to drive consumption on the margin but we suspect not that many. And those who can have a lower marginal propensity to consume than those who can’t.

This is not to say the S&P500 won’t continue to rally on monetary easing.  The market is pricing an 86 percent probability of at least two rate cuts by January 2020 and a 21 percent probability of four or more cuts and the S&P has already rallied 5.8 percent from last Monday’s low which was one nasty bear trap.

It is our view, the next easing will likely be a watershed event where markets begin to lose their already misguided overconfidence in the efficacy of central banks.  The bubble to end all bubbles.

Almost everyone is too focused on interest rates and not asset valuations as the initial conditions when a new round of monetary priming begins.

We suspect the market will start to worry and soon begin to internalize our above analysis not too far into the next round of easing and come back down to earth, slammed by a Big Dipper correction, sell-off, bear market, or whatever you wish to call it.

Do realize the Big Dipper is

a large asterism consisting of seven bright stars of the constellation Ursa Major – Wikipedia

Ursa Major.  Sounds about right.

Ursa_Major

 

Get Shorty

We will continue to be looking to reduce risk exposure and scanning for short opportunities as the markets lather themselves up with the coming or expected liquidity served up at the Last Chance Saloon.

One Big Caveat

As always, we reserve to right to be wrong.

Though we like being right and making money, we are often wrong and understand nobody knows the future. We analyze and write also to discipline our thoughts, stress test conventional wisdom, and help our readers to see an alternative perspective to the perma-cheerleading that dominates financial media.

Moreover, we also recognize the probabilities are rarely on the side of the bears.  Since 1921, for example, the Dow has generated a positive annual return almost 70  percent of the years.  In only 12 of those 98 years, the Dow has experienced back-to-back negative years.

Furthermore, even if all our facts are correct, our conclusions may be completely wrong.  Then there is the big problem of getting the timing right.   This is not an easy business, folks.

Lawyer Abe Lincoln

To illustrate this, we like to use the story that Abraham Lincoln used to tell to try and persuade juries when he was an Illinois circuit court lawyer.

The story goes that Lawyer Lincoln was worried he had not convinced the jury during the closing argument of a civil case against a railroad.   The jurors had gone to lunch to deliberate.  Lincoln followed them and interrupted their dessert with a story about a farmer’s son gripped by panic,

“Pa, Pa, the hired man and sis are in the hay mow and she’s lifting up her skirt and he’s letting down his pants and they’re afixin’ to pee on the hay.” “Son, you got your facts absolutely right, but you’re drawing the wrong conclusion.”

The jury ruled in Lincoln’s favor.

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All Things Macro

This is good stuff, folks.  Joe, who is a friend, easily makes it into our elite “one smart dude” club.   Click on the video.  It’s well worth your time and will make you smarter.

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