Category: Economy

The Great Unwind Update

The original post showing the feds balance sheet before they started to unwind all these securities was shown here.
The fed has sold about $150 billion dollars worth of assets.

Most of it was MBS and Notes/Bonds. The updated balance sheet is shown below.

The fed is running the danger of inverting the yield curve. They own zero treasury bills. If they continue on this path, they will most likely cause a recession sometime in the next 2 years. They are unwinding very slowly. However, there will be many unintended consequences to this plan. As of right now, credit markets appear healthy and no signs of stress are present. Signs of excess, yes, but not stress.
Begin to build more of a cash position. When the recession comes, fear will grip the market. Step in calmly and buy when everyone is selling.
There is an old investment saying:
“Buy when there is blood on the streets”.
My response: just make sure you have the cash to buy.

Market Update

The US markets are looking solid.  Consumer sentiment continues to push upward. The Conference Board Leading Economic Index rose 0.2% in May. The job market is tight. Credit is still expanding and the fundamentals are sound for US stocks to continue their rise upward.
Emerging markets are struggling. This is primarily due to a rapidly rising dollar due to repatriation of US firms from oversea funds. Additionally, US interest rates are rising and higher than other parts of the developed world. This will attract savers to dollar-denominated assets. Trade war headlines also seem to push up the dollar. This is the wrong interpretation by market participates. Trade wars are all about shrinking supply of given goods. The strong dollar will make emerging markets unattractive for the time being.
Europe and the ECB are struggling to “normalize” monetary policy. They have given signals that the negative interest environment will last into 2019.

Amazing AI Technology

Amazing video of google AI making hair cut reservations and restaurant reservations.

AI spells doom for certain industries such as telemarketers and phone answering services. If you are in this line of work start your plan B.

A Buyers Market

The job market is tight. Employers are having difficulty filling open positions. It has been nearly two decades since unemployment has been this low.

At the same time, overall job turnover is stagnant. This is your opportunity to set out into a “Buyers Market” for your skill set. Now is the time to be job hunting. Ask for a lot more money than you are currently making with your new job interview. Do not be so agreeable. Agreeable people tend to get paid less. Take your new offer to your current boss and ask what can be done to match it. Median/Large size companies are run by low level managers. They will tell you they can not authorize such a large raise. Your next question is, “Who can authorize it?”. Take it to the next higher up. Go higher if you need too. Present your case on why you think you should get paid this much. Be relentless in your mission but not confrontational. If you are getting the standard 2% yearly raise in this economy you are doing something wrong.

Social Security Reform is Coming

Social Security’s total cost is projected to exceed its total income in 2018 for the first time since 1982 according to the 2018 OASDI Trustees Report. The 2017 OASDI Trustees Report estimated this would not happen until 2021.
Every year the following chart from the OASDI Trustees Report gets worse and worse. Here is what is in the 2018 report.

Depletion is scheduled for 2034.
Social security was passed by FDR in 1935. The original age to claim Social Security payments was 65. The average life expectancy in 1935 was 62 years old. Today, that would mean the retirement age to receive SS benefits would have to be 80 years old.
Just like in the 1980’s, SS “reform” will come. When you hear the word reform think “can kicking”. Think higher SS taxes.
Social Security taxes are assessed on all wages earned, up to a capped maximum of $128,400 as of tax year 2018. The path of least political resistance is to raise this cap significantly. Any significant cuts in SS benefits will cause a wipe out of any congressman who supports it. The public demands the benefits continue. Where it comes from is not their problem.

Small Time Deposits Grow

The total M2 money stock is about 14 trillion dollars. Small time deposits are a component of the M2 money supply. Small time deposit money stock is at about 457 billion dollars. Small time deposit stock is defined as the following:
“Small-denomination time deposits are those issued in amounts less than $100,000. All IRA and Keogh account balances at commercial banks and thrift institutions are subtracted from small time deposits.”
In other words, this is average Joe’s time deposit. These time deposits are, no doubt, a very small component of the M2 money supply. The growth of small time deposits has been on the rise since Q2 of 2017.

Growth of this money supply has not been positive since the 2008 recession. What gives? I believe this can be explained by rising interest rates. The small guy and people on fixed incomes have been decimated by Federal Reserve policy over the last decade. The moment interest rates began to rise, they piled into time deposits. They are searching for yield. Even though interest rates are still very low by historical standards, they are willing to take the risk free money over buying stocks.

Headwinds Facing US Stocks

The US economy is roaring. Corporate profits are roaring. There is no indication that a 2008 recession is on the horizon. All indications show continued US growth.
There are a few headwinds that have developed over the last few weeks that will undoubtedly raise volatility and prevent US stocks from making all time highs.
First, Italian politics been catching headlines.  This has caused a spike in Italy’s bond yields. The 10 year spiked about 150 basis points over the past month.
Political issues in Argentina and Turkey are also adding to investor fear.
This has caused a flight into the US dollar and US treasuries, which is seen as a safe place to park money from financial turmoil.
Additionally, the Trump administration has gone off the rails with tariffs. These headlines of a “Trade War” will certainly not help US stocks. However, I still view a significant trade war as a remote possibility.
Despite all these obstacles, US stocks have been pressing up against major resistance. I view this as a bullish indication that US stocks are wanting to press up and challenge their all time highs. I am still a buyer on market corrections.