by John Rubino
The sense that something isn’t right out there just got a lot stronger. And the Fed, in response, is now tiptoeing back towards QE. Let’s start with the sudden bad news:
(CNBC) – Nvidia stock fell as much as 19 percent Thursday after the company reported earnings for the third quarter of its 2019 fiscal year, which ended on Oct. 28.
The chipmaker fell short of analyst expectations on guidance despite beating on earnings and revenue estimates. The company’s cryptocurrency mining products suffered a hefty decline in that quarter, and the trend continued in the fiscal third quarter.
It has become less profitable to use graphics processing units, or GPUs, for mining, according to a recent analysis by Susquehanna. To mine cryptocurrency, computers compete to solve complex math problems in exchange for a specific amount of bitcoin or ethereum. But as both currencies have sunk in value, so too has this segment of revenue for Nvidia.
(New York Times) – General Electric may be the canary in the credit market’s coal mine.
The company’s bonds fell sharply this week even as an asset sale briefly lifted its shares. That’s a warning shot for all debt investors. American companies owe more money than ever, and the quality of their loans and bonds has deteriorated. Rising interest rates and slowing growth could make this a big problem.
The ailing $75 billion conglomerate is an extreme case, but it exemplifies much of what has happened in corporate America and around the world over the past decade. Historically low interest rates fueled a massive borrowing boom, enabling healthy companies to expand operations or buy back shares, and zombies to keep staggering along.
United States nonfinancial corporate debt stands at a record level of more than 73 percent of gross domestic product, according to the Bank for International Settlements. It never exceeded 65 percent before the 2008 financial crisis. France’s corporate debt-to-G.D.P. ratio has risen by nearly a third over the past decade, and China’s by more than two-thirds.
This growing quantity has been accompanied by a marked decline in quality. GE, which recently lost its coveted single-A credit rating, is again illustrative. Many other U.S. companies have been downgraded. As a result, the debt of those carrying triple-B ratings — the lowest investment-grade category — more than doubled from pre-crisis days to a record $2.7 trillion at the end of 2017, according to S&P Global Ratings.
(CNBC) – Nordstrom shares plunged after the company said Thursday it incorrectly overcharged some of its credit card customers and missed its original third-quarter earnings projections.
Nordstrom wrote down $72 million in credit card refunds to customers who were incorrectly charged higher interest rates. The one-time charge drove its net income down 42 percent to $67 million, or 39 cents a share, during the three months ended Nov. 3, compared with $114 million, or 67 cents a share, the year before.
Co-president Blake Nordstrom said the company has taken steps to ensure it doesn’t overcharge customers in the future. A change in some of its internal settings in 2010 caused it to erroneously charge higher interest rates on store credit cards that were delinquent, executives said.
“We sincerely apologize to these cardholders. We realize customers and shareholders place a great deal of trust in us, and that’s a responsibility we take seriously,” Nordstrom said on a conference call with analysts.
These are largely unrelated pieces of bad news. But that’s how phase changes work. In good times, everywhere you look things seem to be moving in the right direction. In bad times the opposite is true, with macro trends, tech anomalies, political turmoil and business screw-ups combining to give the impression that of a world in crisis.
In the latter case, investors develop a sense of impending doom and begin to act accordingly, taking profits, building cash and generally working to protect themselves from what feels like an approaching avalanche. Volatility spikes, markets trend down and the headlines get scary.
The Fed – the architect of the past decade’s rosegarden of upward-sloping trend lines – has noticed this changing zeitgeist and is taking the first tentative steps away from its recent tightening:
Fed’s Clarida says central bank getting closer to neutral and should be ‘data dependent’ on more hikes
(CNBC) – The Federal Reserve is close to the point of being “neutral” on interest rates and should predicate further increases on economic data, the central bank’s vice chairman said Friday.
Recent appointee Richard Clarida told CNBC’s Steve Liesman that nearly three years of increases have brought the Fed’s short-term interest rate near where it is neither restrictive nor stimulative, a key consideration when considering the future path of monetary policy.
“As you move in the range of policy that by some estimates is close to neutral, then with the economy doing well it’s appropriate to sort of shift the emphasis toward being more data dependent,” Clarida said during a “Squawk Box” interview, his first public comments since being confirmed in September.
With his comments Friday, Clarida becomes the second central banker in as many days to suggest that neutral isn’t so far away. Atlanta Fed President Raphael Bostic, in a speech delivered in Barcelona, said Thursday that the federal funds rate is “not too far” from neutral.
Phase changes generally build slowly and continue for a long time because once people form an opinion it requires overwhelming evidence to reverse it. With this shift from light to dark just getting started, it’s reasonable to expect a lot more angst from the world’s headline writers. So strap in. And buy gold.