Gotcha!

That didn’t take long. After last Friday’s blog comment about something always goes wrong, it did. In no surprise at all, Trump provided the “gotcha!” moment. There are a number of ways this drama can play out, but the stock markets of both China and the U.S. will force some sort of deal. The problem is when and how much more agony will stocks suffer before a deal.

Best case is a deal is announced Friday before the additional tariffs are put in force. More likely, the Trump Administration will say “great progress” is being made, and the tariffs will be put on hold. Then we wait. Again. We’ve been through this drill before, and we are headed that direction again. It is possible no deal will be made. If so, let the mayhem begin! But that’s a low odds outcome.

I have no idea how much lower stocks will go before a deal. No one does. What everyone does seem to agree on is that stocks will get back everything they lose and more once a deal is done. That sounds a little too pat for me. Yes, stocks will rally, but stocks will fall short of resuming any big upward move. Moreover, my bet is that businesses will not suddenly ramp up spending. With Trump’s attitude on trade, more trade wars are coming. He likes them, he thinks they work and, most importantly to him, tough trade talk plays very well in his pep rallies.

So, yes. This is all unnecessary bulls**t. I’ll simply stick with what I’ve been saying for months. With or without a trade deal, the economy will run out of steam. This will happen sooner without a trade deal, but it will happen. I would still like to see one last hurrah in stocks and a few months of bright economic numbers before the long, hopefully slow slide begins.

So, this is fun, sort of. The longer this drags out, the more “fun” we could have.

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Hopes dashed

I had hoped for an interesting jobs report that might spark some over-the-top reactions in the market, but, alas, no such luck. The payroll number was better than expected, but there were enough offsets in the full report to put a damper on any big reactions. The payroll number was flattered by the beginning of the hiring for census workers. the labor pool shrank (hence the lower Unemployment Rate), and hourly wage number was unchanged at 3.2% on a year-over-year basis.

The benign report helped the case of buying stocks, but more likely than not, the buying is more in anticipation of a Chinese trade deal in a week or so. Bond yields jumped at first but then fell as traders focused on flat wage growth. In other words, it was a big yawn.

The big yawn could last much longer. While the Administration keeps dropping hints and “leaks” of a deal soon, this could drag on much longer. It’s no longer a negative distraction for the markets, so what’s the rush? At least that seems to be the attitude now from the White House. When stocks were diving on trade news, Trump suddenly talked up progress and promised a “very big, very tremendous deal, very soon.” That was toward the end of December. At this point, stock traders just want to put it to bed and eliminate it as an excuse to stay away from stocks.

One thing does seem to be changing. There seems to be a growing sense that Fed policy might be driven by inflation alone in the future. Currently, there is a dual mandate of managing policy to inflation and unemployment. More economists and a lot of politicians are beginning to feel the Fed should manage to inflation alone, as is the case with the Bank of England. In other words, with such a benign level of inflation, the Fed should ignore any possible “overheating” in the economy. No more watching the jobs report, no worries about ISM, and no fear of 3-5% GDP. Nonfarm Payrolls could grow by 400k a month, and the Fed wouldn’t be concerned about it. They would only be watching CPI and the Core PCE.

Such a simply rule would take all the fun out of Fed day and render appearances by Fed officials meaningless. While the Fed isn’t there yet, they might be edging that way if you listen to what they have been saying recently. Subdued inflation in the tenth year of the recovery does call into question the dual mandate.

What does that mean? For the time being, this is the way I see it. The Fed does nothing on the funds rate, even with some stronger economic data, if the inflation rate remains low, which certainly seems likely. This is what the bond market is counting on. Effectively, the Fed will adopt a single mandate. But when the economy weakens, as I expect it will in the second half of the year, the Fed will suddenly rediscover the dual mandate and start cutting rates.

This all sounds really nice and manageable. The Fed does nothing for years and is more predictable than ever. The economy purrs along and interest rates remain fixed where they are. But, something is going to go off the rails and disrupt Peaceful Valley, it always does. A short list includes, trade deals can go awry (don’t forget problems on trade with Europe), some major international disruption, another EU crisis, and as Donald Rumsfeld said, “What we don’t know we don’t know.”

So, I’m not giving up that something interesting will happen again. There will be some reason for a big stock market selloff in the next few months. Maybe there will be some reason for a big bond market selloff, though that is looking less likely all the time, especially with the Fed’s new attitude.

It’s a good thing I no longer have to write about the economy and the markets every day. It’s a struggle to find anything at all interesting to say, as evidenced in this blog post.

 

 

Catching up

Today is the one-month anniversary of my retirement, and I thought this would be a good day for first post-retirement blog. Let me just say, I need to go back to work! Retirement is hard!

Just kidding, but this first month has been waaaay move active than I thought. We had been thinking about retiring in another state, but thinking became doing in a hurry. We put our house here on the market at a very high price on April 11, thinking it would take some time to sell if at all at that price, and immediately left for an exploratory trip on retirement places under consideration in Santa Fe and Colorado. Before we even arrived in Santa Fe, we got a call from our realtor we had a full price offer! So, s**t got real! Long story short, we bought a house in Santa Fe and will be moving first of June. How’s that for one month of retirement?

Frankly, I’m glad I haven’t been working the past month. It would have been a real struggle to find anything interesting to say about these markets or the economy. Stocks have continued to ooze higher, though I think the foundation is getting shakier by the day. Rates are up a whole 10 basis points since March 31. We’re continuing to get mostly good economic data, but there have been enough weak-than-expected numbers to keep hope alive for the bond bulls. Case in point, today’s much stronger ADP private payroll report was ignored by bond bulls, but the weaker ISM index was fuel for the bull machine to pop prices higher. The China trade talks remain unsettled. Trump is still the President. So, not much has changed.

It would have been fun to comment on Herman Cain’s Fed nomination, but fortunately that opportunity was fleeting. I could rail on the Stephen Moore nomination, but that one might be ending soon as well. For those unfamiliar with Moore’s stance on interest rates, rates are always too high when a Republican is in office and too low when a Democrat is in the oval office. Hey… give him props for simplicity. I wish his chances were fading because of his often-hilarious economic analysis and takes on Fed policy, but it looks like he is going down for other reasons.

To refresh your memory, it’s been almost a year since I predicted the Fed would not tighten at all in 2019. I thought the economy would be okay but just shaky enough to hold off the Fed the first part of the year before getting even shakier later in the year, which would lead to a rate cut the last quarter or maybe first quarter 2010. I haven’t seen anything yet to change my mind, but I really hope I do see something. I would much prefer the economy blast ahead and rates would move higher. Higher stocks and interest rates are great for retirees!

That’s a brief recap and update. I regret I couldn’t come back for my first blog with some big new ideas. However, I do think there will be some days ahead that will be much more fun to comment on. I hate dull.

Speaking of dull, the FOMC meeting came and went today. Shocker. The Fed did not do what Trump said yesterday they should do. As expected, the Fed left rates unchanged, instead of lowering the funds rate by 100 basis points and re-starting QE as Trump wanted.

In January the Fed clearly flipped on policy after the stock market debacle in November-December. They would never admit that, but it’s clear. While they should be criticized for reacting to the stock market, they might get bailed out by the weakness in inflation.

Here’s hoping for some much more entertaining blogs ahead!

A timely return

I will retire March 29. I don’t know how often I will post, and it won’t be regularly, but I’ll use this as an outlet when I have something to say.

I started this blog in early 2007, if memory serves. I titled the blog DJ and the Bear, as the name reflected what I thought was coming. I blogged regularly then until 2011, less regularly after that, and then nothing since 2012 when I joined the League. My choice, not the League’s.

So, maybe coming back to the blog now is a bad sign! And in fact, I have become bearish on the economy. I am not a growling bear at this point, more of a cub. But let’s see how this goes.

Computer takeover confirmed

I wrote this article about a week ago for a publication and thought I would post it here on the blog. This is something to think about. The theme of the article begins about five paragraphs in.

Computer Takeover Confirmed

Traders and market-watchers kept waiting all week for something to happen – anything. But, something never came, and anything was nowhere to be seen. The market is usually good for one or more days of big swings and volatility, but there was none of that last week. A very late rally in Friday’s trading took the Dow up 40 points from a low of -70 points; this created the only 100 point trading range for the entire week. The primary reason for the lack of action in the stock market was the lack of action in euro trading as the currency moved little last week. There were several weak economic indicators from Europe, but it’s obvious that stock traders want to wait to see what the European Central Bank President Draghi has in store for them. As you recall he is promising to “save the euro.” His first lifesaver for the euro will not be thrown until September. This could keep stocks on an even keel until then regardless of the news.

The only market that was active last week was the bond market. For the second week in a row, the bond market showed noticeable signs of fatigue. This was apparent when the U.S. Treasury came with its monthly sales of longer-term debt. Demand for the issues was the weakest in about two years. It appeared that the 10-year note might break above 1.75%, and speculative traders were talking about a move to 2% was in the cards. But the selling stopped suddenly for no apparent reason, and yields rose only slightly on the week. Mortgage rates are roughly a quarter percent off the very lowest rate of this cycle. A move to 2%, should it develop, would boost mortgage rates at least another quarter percent. This is something to keep in mind if you’re shopping for a home or looking to refinance your home.

The lack of economic news last week will be made up for this week as several important numbers hit the tapes. Retail Sales will be released on Tuesday, and this is the biggest number of the week. After three consecutive months of declining sales (the first time this has happened since 2008), economists are expecting sales to turn higher. Most reports from major retailers for July indicated better sales as back-to-school buying kicked in. This is the report to watch.

We’ll also get Industrial Production, the inflation indexes, and Housing Starts along with a number of other minor indicators. After three months of generally weaker-than-expected economic data, the numbers this week will be critical. Surprises to the downside might confirm more than your garden variety seasonal respite. Of course stock traders won’t necessarily react to bad news. In addition to having the Draghi promise to look forward to, they also believe that Bernanke will kick off another round of money printing should our economic numbers continue to recede.

I’ve talked a lot in the past about how computer trading has taken over the short-term trading in stocks. News, economics, and fundamentals are irrelevant in the world of computers. Complex algorithms, seemingly currently tied to the euro, trigger trades that amount to 70-80% of the daily volume. Some of you might be skeptical of that viewpoint, but I heard someone last week in a position to know to verify that view. The CEO of one of the largest high-frequency trading firms was interviewed on CNBC last week regarding criticism of the impact on the markets by high-frequency trading. The CEO was surprisingly direct and strangely robotic in his answers, especially when the interviewer challenged his views. He reminded me of Hal in 2001 Space Odyssey, except for the fact that the CEO had a face. He mentioned but didn’t spend much time on the common claim that high-frequency trading provides liquidity to the market. That’s a farce, and everyone knows it.

To his credit, sort of, he cut to the chase and stated flatly that the individual investor has no business trying to trade this market short-term and should stop trying. He said the computers are in charge now and high frequency trading is only going to grow in its dominance. When challenged by one outraged interviewer, he said it’s okay if investors want to buy stocks for the long-run based on fundamentals. (Generous of him don’t you think?) He said the computer programs don’t recognize or factor in anything like economic or earnings data, but individuals can’t compete with computers in the short-term. Some of the questions got pretty intense as the interviewers were probably trying to shake him. After all, CNBC depends on individual investors tuning in daily in hopes of getting investment insight to make money. But there was no shaking this guy. He simply calmly restated his positions that computers are in charge now, and there is nothing you can do about it. I swear the guy was a robot or cyborg. He went on to say that the algorithmic programs “learn” as they trade and will always stay several steps ahead of human decision making. I give him an “A” for honesty but an “S” for scary.

This is not really a surprise if you’ve observed the markets over the last couple of years. It’s clear that rational human beings aren’t making these decisions. Now, if we can just get CNBC and business scribes to stop saying “investors bought today” or “investors sold today.” Investors have nothing to do with it. This is not to convince you to get out of stocks, but the cyborg trader has a point. Trading in the short-term has gone to the computers. The only reasonable way for individual investors to stay in the stock market is to invest in a diverse portfolio of funds or stocks that can stand the test of time over the long-term.

But make no mistake about it, short-term trading can impact the long-term. Big downswings in the stock market can undermine business confidence and can unnerve and drive away individual investors in stocks at just the wrong time. Big upswings in stocks for no good reason can also lure investors into the market at just the wrong time. Stock prices can also influence interest rates, even for short periods of time, which can impact your mortgage rate. The cyborg trader seemed to suggest we go about our lives and leave the stock market to them. It’s not as benign as he made it seem. Not only does the short-term influence the long-term, but as computers become even more dominant the risk of a repeat or worse of the “flash crash” of 2010. The regulators are the only ones that can fix this, but they seem unwilling to address the issue and are just hoping that nothing “bad” happens. In this regard, they remind me of the leaders of the European Union. They are just hoping nothing bad happens. Hope is good, but it’s not a solution.

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Mini- Housing Boom/Bust?

I haven’t posted anything on this blog in a while what with writing for dwightjohnston.com, the California and Nevada Credit Union Leagues, and Callahan, but I thought I would post a few thoughts on housing. The next few weeks will be very interesting. The crisis point in Europe I have been expecting could be in the early stages. All bets are off then on everything, including housing.

Last week we wrapped up the months various housing reports with Existing and New Home Sales numbers. Both of those continued the trend of modestly more positive news in housing. As I’ve written in the past, I believe this is the year we can finally say the housing market bottomed and began a slow, gradual turn. But the challenges ahead aren’t insignificant. Incomes are not growing and most mortgages require substantial down payments. Additionally we don’t know how much supply will hit the markets from foreclosures this year and the next. The landscape for housing in indisputably better, but I fear that some of the articles appearing now might be misleading and encourage people to leap into the housing without weighing all the pros and cons.

I had to check my calendar recently to make sure I didn’t travel back in time after seeming some stories on housing. Over the past couple of weeks several leading newspapers have written stories about bidding wars breaking out over houses. The stories divide into two camps. On one side, the wars are over the shrinking supply of distressed homes as investors try to top each other to buy these properties. While it’s a good thing to see inventory leave the market, more is coming and we don’t know for sure if the investor crowd will remain so ravenous. But, more importantly, these articles often leave a false impression of what is really going on. They fail to report that the wars are mostly all cash bidders, but more importantly they fail to point on the reality of the sale prices. Some articles cited gains of 20% or more in areas in Florida and Arizona. That sounds fantastic until you look at reality. As an example, one county in Florida reported the median home price rose from $90,000 to $111,000 in just one month! Fantastic, right? But the records show that the median home price in that same area was $294,000 in 2006. The articles fail to point that out. So beware the hype about percentage price gains. It’s easy to make the gains look good when they are coming off such a low base number. Don’t get caught up in the hype.

The second type of battleground for bidding wars is occurring in some the priciest areas of the country. In the Silicon Valley homes are bringing multiple offers as the latest round of high tech bubble money is flooding the area. Other areas, such as Beverly Hills, are also seeing the bidding war phenomenon return. These areas are still crazy expensive, but the current prices are considered bargains. Homes that might have sold in 2006 and 2007 for $5 million or so are going for $3.5 million. Get ‘em while they’re hot! Here is what got my attention. One very happy realtor said he had not seen this sort of frenzied investor activity for homes since 2006 and 2007! Hmm. Are bubble signs already popping up?

The point of this discussion is that we’re beginning to read articles that make it sound like there is a new housing boom going on, and you’re about to miss out. The articles read as if they have been written by realtors. The accounts do make good headline fodder after years of relentless negativity on housing, but don’t let these sunshine reports influence your personal decisions. Rates are very low, which is a huge plus, and if you need and can afford a home in your preferred area it’s not a bad time to consider it. But do not get caught up in the hype and live to regret it. That happened to a few million people just five or six years ago. The housing market is far from fully healed. Investor activity is disguising what is really still a market in a nascent recovery. The frenzy will run out of energy long before the market runs out of houses.