The big macro wheels are turning and everybody better pay very close attention. The Reckoning is coming. Best hope for a substantive China trade deal and a last minute save on Brexit to perhaps delay the inevitable: The Coming Recession.
This week’s full frontal capitulation by the Fed has not only removed a key buying carrot, but also has brought about the inversion of the yield curve, a classic confirming warning sign that a recession is coming. The key question of course: The when and the how. Bulls will want to hope the recession is at least another year or two away to engage participants in a final game of musical chairs before the rug gets pulled. Bears will point to structural forces and factors that suggest that a recession may come a lot sooner than anyone expects.
In this edition of the Weekly Market Brief I’ll outline some key macro risk factors and dissect some key technical developments I think everyone should be aware of.
Before I do that a quick announcement: After considering all the feedback I’ve received (thanks by the way) I’ve decided to continue to provide a video component as part of the Weekly Market Briefs whenever possible. They truly help provide context and color to the charts. If you want get notifications of the videos you can subscribe via my channel here: NT YouTube Channel.
Now onto markets:
Let’s me get something straight here: Bulls continue to be wrong on the macro and bears continue to be right.
Fact: All the glorious projections made by bulls about growth and earnings continue to get overrun by the deteriorating macro reality. The same folks that didn’t forecast the 2015/2016 earnings recession also didn’t predict the 2019 earnings recession (or the 2018 20% market drubbing for that matter) and are once again clinging to dovish central banks to bail them out.
And, up until Friday, this game has worked yet again:
Let’s call a spade a spade: Without a complete policy flip flop by the Fed $SPX wouldn’t be trading anywhere near 2800 so soon in 2019. Can we all just acknowledge this?
Reminder: Guy Adami made this very point on CNBC Fast Money on February 15th:
Note that, over a month later, the $DJIA, small caps, banks, transports are all lower now compared to the date of that clip.
A rally off of the December lows made technical sense. Up to a point, but then it became jawboning after jawboning and culminated in the complete capitulation by the Fed this week. And at what price? Perhaps the total loss of credibility by the Fed. Not only on substance, as they have been entirely wrong about their ability to autopilot the balance sheet roll-off and to continue to raise rates in 2019, but also, at minimum, in appearance.
You can see the sheer bafflement at what the Fed has done:
Jeffrey Gundlach: "This U-Turn – on nothing fundamentally changing – is unprecedented. Three months ago, we were on 'autopilot' with the balance sheet – and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning." @Reuters @TruthGundlach
— Jennifer Ablan (@jennablan) March 21, 2019
So why the complete the change? Look at the timeline: This from December 18:
I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!
— Donald J. Trump (@realDonaldTrump) December 18, 2018
Then just a few weeks later on January 4th Powell suddenly came out and signaled flexibility on the balance sheet.
On February 4th Powell, Mnuchin and Trump had dinner.
On March 20th Powell announces the end of QT for September with an immediate reduction for this summer.
The Fed gave Trump everything he demanded. The appearance is awful.
The point is not lost on others:
I'm hearing that Trump just gave Jay Powell free tee times for life anytime he wants at any of his golf clubs.
— Peter Boockvar (@pboockvar) March 21, 2019
QT is now in effect over and QE will recommence in some form at least by 2021 at the latest:
The Fed will never “normalize”, the ghosts of the financial crisis will remain in the system and 3 months of “non accommodative” in 2018 have now been reverted to back to “accommodative” with no end in sight.
The implication is obvious: The Fed gave up its independence, reacted to political and market pressure and shot its credibility (whatever they had left). And now the Fed may be at risk of becoming subject to political partisanship with the nomination of Stephen Moore to the Fed Board. “A respected economist” President Trump called him on twitter. I’m sorry, but Moore is neither an economist nor is he respected. He’s a political hack and his track record on economic policy is dismal and appears mostly politically driven. I am concerned that a Fed without credibility is on the path to lose the confidence of markets. It’s a key risk factor to watch if Moore actually manages to get confirmed (an open question).
But credit where credit it due: The Fed has managed once again to jam up markets despite the continued deterioration in everything macro. Examples:
-3.7% earnings growth for Q1 2019.
And now an inversion of the yield curve (see video below for further discussion):
..and a record monthly deficit pre-recession:
Well done. Remember all the nonsense that was peddled to the public about flowing milk and honey when the tax cut was pushed through?
“Kudlow expects to defy expectations again with predictions that the bill will not add to the deficit but rather “pay for itself.”
“I think this thing is going to pan out better than almost anybody thinks. The deficit is going to be much lower,” Kudlow said. “This thing is going to pay for itself.”
He also predicted an economic growth rate of about “3 to 4 percent,” saying it could spur economic growth in other countries“.
The macro data above renders these declarations a poor joke. Completely wrong. About everything. But none of this is a surprise. I had outlined all this critically in the run up to the tax cut (Tax Cut Scam) as well as the impending pain to come from these tax cuts (Tax Cut Recession).
So let’s be clear: The macro is developing precisely how voices like myself have been outlining it to unfold and yields and the bond market have been advertising this since the trend line on $TNX got tagged last year:
And now we have an inverted yield curve with a US government forced to finance trillion dollar deficits before a recession. And these funding requirements will only balloon higher, as will interest on debt payments, while they are now chasing slower growth right at the end of the longest expansionary cycle in history.
Who won? Corporations ($AMZN pays zero taxes this year, $SPX 500 CEOs (Now clocking in a median MONTHLY salary of $1M, congrats), and taxpayers get to foot the bill as benefits are on the chopping block in this year’s budget proposals. Wealth inequality was bad, now it’s on rocket fuel. Any wonder why people are pissed off and political movements are start to gravitate toward redistribution?
The Fed’s chasing reality, central banks are hopelessly stuck with their bloated balance sheets with less ammunition to react, a tax cut that has expanded wealth inequality and government deficits, slowing growth everywhere and an inverted yield curve. Buy stocks say the folks who predicted none of this.
So I have to again ask: What has changed since 2007?
— Sven Henrich (@NorthmanTrader) January 24, 2019
The answer is nothing. Except more debt, slower growth, more wealth inequality and now permanent dovish central banks. So yes, best hope for a substantive China deal and a miraculous Brexit resolution or the reckoning of all the artificial liquidity excess of the past 10 years may unleash upon this globe much sooner than anyone cares to imagine.
Now let’s review the charts and technicals:
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