The college girl (Alexandria Ocasio-Cortez) was on 60 minutes with CIA CNN operative Anderson Cooper. She stated the “rich” are not paying their fair share.
Reality check:
The top 5% earners are paying 60% of all income taxes. They are never called out on this. What do they mean by fair share?
Category: Economy
Amateur Hour
Steve Mnuchin’s call to major banks to check on liquidity concerns over the weekend was certainly strange. There is zero indications of liquidity concerns of the top major banks. Nothing. Zilch, Nada. There are many data points on this. I will show one.
Now compare this to what happened in 2008.
It became clear in the beginning of 2008 that something very serious was happening in the banking system.
Steve Mnuchin is either clueless, trying to pander to Mr. Trump or a combination of both.
The idea that the treasury or the president can stop a falling stock market or stop a financial crisis is misplaced. After every financial crisis, a whole new set of laws are rolled out. Lawyers in Washington D.C. declare that now there are backstops and a stock market panic will never happen again. They are always proven wrong. Presidential administrations have very little to do with stock market movements. The driver is the Federal Reserve. It has always been the Federal Reserve.
Yield Curve Starts its Inversion
As of today, the middle portion of the yield curve has inverted.
The 5 year compared to the 3, 2 and 1 yr has inverted. The probability of a recession in 2019 is growing.
On the Sidelines
I am sitting on the sidelines with cash waiting to be deployed. I am still of the view that a recession in 2019 is unlikely. However, I would rather be defensive at this point. The market has had good returns and I am happy to cash out and wait on the sidelines. A lot of psychological and technical damage has been done to the market. It will need time to repair.
There are two points that have caused me to worry the past few weeks. First, the money supply is still stagnant. This is unusually for this time of year.
Looking more closely at other week moving averages shows the M1 components have fallen off a cliff.
Second, the yield curve is getting flatter and looks ready to invert sometime in 2019.
I want to emphasize that if these trends do not reverse there will be a recession. However, there is a good time lapse between these events happening and a recession.
Charting the US Governments Interest Expense
Interest expense for the US government has been on the rise.
As percent of revenue, it has been declining for decades even though the US government debt has exploded.
This is due to the 37 year bull market in bonds that started in January of 1982. If this bull market has concluded, as some have suggested, this will bust the US government due to the governments debt structure. I am not convinced this bull market has ended. A bull market like this will tend to have a climactic end. I suspect in the next recession bonds will rally to absurd heights (i.e. lower interest rates). To many of the bond bears have crawled out from their 37 year cave to call an end to this market. It will end when the last bear has thrown in the towel. I don’t sense this has happened yet.
Dr C. Gives a Hint
Dr. copper holds a PHD in economics. It looks to be making a failed H&S pattern.
Copper is a pretty reliable indicator of trouble. The chart is starting to look ugly and I plan to short copper if it breaks below the right shoulder.
Second, the US dollar looks set to make a run to 100. Although I did not take this trade (to sloppy), there is not much resistance past this point.
The general market action looks like this correction can go lower and last longer than previous ones. Although during this time of year we get the ‘Christmas rally’, I am standing clear of everything. It is best to move into cash and wait.
On a separate note, I want to show a market with bad price action.
Low volume and zero price action. Holders of bitcoin have lost interest. A sudden drop on high volume is a bad sign for this market.
United States of Arabia
The USA now produces about 12 million barrels per day, a new record high. This makes the US the top oil producer in the world by far.
The OPEC cartel becomes less relevant each day that passes.
Correction but No Recession
This market correction may last longer than previous ones. Downward and sideways action might be in the cards for 2019. Lots of markets around the world appear to be making topping patterns. China, Taiwan, India, Germany and the US look set to fall further. Investors and traders seem to be worried about China and Europe. There is nothing I see that suggest a 2008 style event will occur in the near future (6 months or so).
Excesses are building but nothing indicates stress is forming. The next recession will be one for the history books as the rubber band continues to get stretched.
Delinquency rates continue on a downward trajectory. If there was any stress, it would begin to manifest itself in the data.
On the money supply note, small-time deposits ( a small component of M2 money supply) continue to have massive growth.
After nearly eight years of being negative, it turned positive in the spring of 2017. One important reason for this is rising interest rates.
Rising interest rates also explain the draining of excess reserves.
Banks are putting this money to use. The fed currently pays a 2.2% interest rate on excess reserves. Since this 2.2% is risk free, banks believe they are finding better deals elsewhere. Rising interest rates in the US are going to reverse a lot of trends that have been set for the past decade.
Foreign Holders of US Debt
China and Japan still own the majority of US government debt. The only important observation is that they have not added to their US holding over the past year even though the US government is ramping up borrowing. US companies and investors have been making up the difference and added $1.5 trillion to their holdings from a year ago. As yields rise, investors and companies will be more willing to own US government debt. The 3 month is yielding about 2%, which is attractive in my opinion. I don’t think the US government is going to go bust in the next three months.
The real problem is that government borrowing is crowding out the private sector. Governments can not allocate resources effectively. They are driven by politics, not profit and loss.
US Market Correction
The correction that started last week is a typical correction around this time of year. Looking back, it will prove to be another buying opportunity. Corrections will happen. They are unpleasant for sure. Markets tend to take the escalator down during corrections. This leads to fear and volatility. All we can do is watch price action and get clues to when it will end.
One reason given for this correction is around China’s financial woes. I believe the current fear around China’s financial instability, as it relates to US markets, is overblown.