[Paul Tudor Jones], who made a large part of his fortune by calling the infamous stock market crash in October 1987, referred to a chart of the market’s value relative to the country’s economy and said it should be “terrifying” to central bankers, namely Federal Reserve chief Janet Yellen, according to the report.
…The trader said that low interest rates instituted by central bankers around the world have ballooned U.S. stock market valuations back to 2000 levels, right before the dot-com bubble burst and shares plunged.
This chart is sometimes called the “Buffett Indicator” because the Berkshire Hathaway chairman once referred to it in an interview as one of the key measures of valuation he tracks.
Laurence D. Fink, chief executive officer of BlackRock Inc., said the lackluster growth of the U.S. economy and uncertainty around the Trump administration’s ability to quickly pass key reforms pose a risk to markets.
“There are some warning signs that are getting darker,” said Fink, in an interview Wednesday on Bloomberg Television. Fink, who runs the world’s largest money manager, mentioned a pullback in car sales and a slowdown in merger and acquisition activity as indications that uncertainty is rising. The slowest economy among the G-7 nations is the U.S., he said.
Before the holiday weekend begins, best-selling author James Rickards joins Olivia Bono-Voznenko outside the NYSE to talk all about the markets and his latest book, “The Road to Ruin.” Jim discusses the currency wars, Trump’s turnaround on China & the Fed and an inevitable crisis amid a weak system.
“Have 10% of your investable assets in [physical] gold.” — James G. Rickards
President Donald Trump has signaled his preference for a weaker dollar and low interest rates. He may end up with neither if the U.S. economy continues to recover and he delivers on his ambitious agenda of tax cuts and infrastructure spending.
…The bigger question is how Trump can coax the dollar lower and still promise to inject fiscal stimulus, Setser said. “Historically, a bigger fiscal deficit has put upward pressure on the dollar.”
…”I don’t see why the president shouldn’t be allowed to talk about this,” said Joseph Gagnon, a former Fed official who is now a senior fellow at the Peterson Institute for International Economics. “The strong-dollar policy has outlived its usefulness.”
The Federal Reserve is clearly and plainly telling us that it intends to take the US into recession in short order. I’m not sure what message the markets are hearing, but the Fed is messaging two to three more rate hikes this year into (according to GDP) a sluggish and slowing economy. The FFR (Federal Funds Rate) has been raised by 80 basis points and meanwhile the 10yr US Treasury yield has flat-lined. At this pace, the spread (which is as near a full proof indicator of recession as we have) suggests by year end we will have recession. Of course the Fed could halt it’s likely June, September, and December rate hikes (I’m assuming 30bps each…though 50bp jumps aren’t out of the question) and/or the 10yr yield could rise (but below I’ll show why this is highly unlikely). So, absent course correction, the spread on bank lending will vanish and likely turn negative by year end…and the economic impact is recession.
Federal Reserve Chairwoman Janet Yellen is the dove that President Donald Trump needs to achieve his economic goals, central bank experts said Wednesday as they contemplated the apparent reversal in his stance.
In an interview with the Wall Street Journal, Trump said he had respect for Yellen and said she was “not toast” when her term helming the central bank ends next year.
“I do like a low-interest rate policy, I have to be honest with you,” Trump said in the interview.
If something cannot go on forever, it will stop.” This is “Stein’s law”, after its inventor Herbert Stein, chairman of the Council of Economic Advisers under Richard Nixon. Rüdiger Dornbusch, a US-based German economist, added: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
These quotations help us think about the macroeconomics of China’s economy. Growth at rates targeted by the government requires a rapid rise in the ratio of debt to gross domestic product. This cannot continue forever. So it will stop. Yet, since the Chinese government controls the financial system, it can continue for a long time. But the longer the ending is postponed, the greater the likelihood of a crisis, a big slowdown in growth, or both.
I have argued that it is in the interests of China and the rest of the world to keep their financial systems separate. The rapid growth of indebtedness and the size of its financial system represent a threat to global stability. China needs to rebalance its economy and stabilise its financial system before opening up capital flows. Western financiers will have a different view. We should ignore this sectional interest.
World trade is on track to expand by 2.4 percent this year, though there is “deep uncertainty” about economic and policy developments, particularly in the United States, the World Trade Organization (WTO) said on Wednesday.
WTO director-general Roberto Azevedo said that clarity was still needed on U.S. President Donald Trump’s trade policies, while making a general appeal to resist protectionism.
The results of upcoming elections in major economies including France should provide more predictability for investors, he said.
One of the great mysteries and biggest concerns in the economy right now is the slowing growth in bank lending. Economists are searching for answers but none are entirely satisfying.
Total loans and leases extended by commercial banks in the U.S. this year were up just 3.8% from a year earlier as of March 29, according to the latest Federal Reserve data. That compares with 6.4% growth in all of last year, and a 7.6% pace as of late October.
The slowdown is more surprising given the rise in business and consumer confidence since the election. And it is worrisome because the lack of business investment is considered an important reason why economic growth has remained weak.
Veteran money manager Bob Doll is becoming increasingly worried that the American economy poses a greater threat to the U.S. stock rally than the political tensions traders are currently focused on from President Donald Trump and Congress.
Sentiment on the U.S. economy may be too high, leaving investors vulnerable to negative surprises on growth, according to Doll…
…“We remain constructive in the medium-and long-term toward risk assets, but are growing increasingly cautious about the short-term outlook,” Doll wrote in a letter to clients April 3. “More than politics, the economy probably presents a more probable roadblock for equities.”
Federal Reserve Chair Janet Yellen said the primary reason for raising interest rates in March was a simple one: the central bank is confident in a steadily improving economy.
Here’s the rub. The economy hasn’t really been improving lately, it’s actually been deteriorating somewhat. Despite record-setting rallies in stocks and renewed optimism among business leaders, hard data mostly point to a still-subdued environment for both investment and consumer spending.
…So while the Fed has promised to raise interest rates a few more times this year — some say two more, others three — the reasoning for such an increase may be unraveling a bit.
PG View: Yellen acknowledged disappointing growth in her testimony before Congress, but markets shrugged it off. That may be starting to change
Central banks attempt to walk this fine line – generating mild credit growth that matches nominal GDP growth – and keeping the cost of the credit at a yield that is not too high, nor too low, but just right. Janet Yellen is a modern day Goldilocks.
How is she doing? So far, so good, I suppose. While the recovery has been weak by historical standards, banks and corporations have recapitalized, job growth has been steady and importantly – at least to the Fed – markets are in record territory, suggesting happier days ahead. But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.
I’m with Will Rogers. Don’t be allured by the Trump mirage of 3-4% growth and the magical benefits of tax cuts and deregulation. The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond.
PG View: Gross makes a good point about being more concerned about capital preservation. Although he doesn’t mention it specifically, one of the best assets for accomplishing that task is gold.
Chinese Premier Li Keqiang said Sunday that the government aims to deliver economic growth of around 6.5% in 2017, compared with last year’s goal of 6.5% to 7%.
…The premier set a target of about 12% for the growth of M2, China’s broadest measure of money supply, down from last year’s objective of 13%. Actual M2 growth was 11.3% at the end of 2016, lower than Beijing’s planned pace as the central bank tightened its monetary policy to reduce asset bubbles.
PG View: China has maintained an elevated GDP target by allowing debt to expand dramatically. This modest cut to the target is not going to reverse that trend.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 1.8 percent on March 1, down from 2.5 percent on February 27. The forecast for first-quarter real personal consumption expenditures growth fell from 2.8 percent to 2.1 percent after this morning’s personal income and outlays release from the U.S. Bureau of Economic Analysis.
PG View: I wonder if those at the Fed that struck a hawkish tone just yesterday are feeling a little less ‘compelled’ to raise rates . . .
Upholding EU rules is no longer practical, because the current system imposes too many constraints and contains too few effective adjustment mechanisms. To be sure, fiscal, structural, and political reforms are sorely needed; but they will not be sufficient to solve Europe’s growth problem. The bitter irony in all of this is that eurozone countries have enormous growth potential across a wide variety of sectors. Far from being basket cases, they simply need the system’s constraints to be loosened.
Will Europe’s future resemble a slow-motion train wreck, or will a new generation of younger leaders pivot toward deeper integration and inclusive growth? It is hard to say, and I, for one, would not dismiss either possibility.
One thing seems clear: the status quo is unstable and cannot be sustained indefinitely. Absent a marked shift in policies and economic trajectory, the political circuit breakers will be tripped at some point, just as they have been in the US and the UK.
Two weeks ago, we reported that when Goldman observed the latest gasoline demand data, it said that either something must be wrong with the data, or the US is in a recession: as the firm’s commodity analyst Damien Courvalin put it, such a steep drop in in US gasoline demand “would require a US recession.” He added that “implied demand data points to US gasoline demand in January declining 460 kb/d or 5.2% year-on-year. In the absence of a base effect, such a decline has only occurred in four periods since 1960 during which time PCE contracted.”
Bloomberg’s Liam Denning confirms that “big dips in U.S. gasoline demand, especially of 5 percent or more, are almost unheard of outside of a recession or oil crisis.” Goldman then adds that “to achieve the 5.9% decline suggested by the weekly data, our model requires PCE to contract 6%, in other words, a recession.”
PG View: A recession? Huh . . . Haven’t we been talking about growth risks recently? This would certainly give the Fed pause.
With gas prices here in Denver modestly above $2, they can’t really blame an absence of demand on price.
The administration’s target of 3 percent economic growth is “very achievable” because tax reform, regulatory relief and cuts to banking regulation that encourage lending will boost growth, Treasury Secretary Steven Mnuchin said Thursday morning in his first televised interview since taking office last week.
In an interview on CNBC’s “Squawk Box,” Mnuchin said that the policy changes would not likely begin to translate into economic growth until the end of next year.
The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt. On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars.
Is this just a coincidence? As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.
Italian government debt is coming under heavy selling pressure today, sending benchmark 10-year yields to the highest level since the Greece’s eurozone crisis in the summer of 2015.
Investors are dumping Italian debt after a major ruling from Italy’s highest constitutional court paved the way for early elections in the eurozone’s third largest economy, which will introduce a form of proportional representation to the country.
PG View: Events in Europe have been pushed from the headlines in recent weeks, but it’s worth remembering that the risks there remain considerable.
Britain is leaving the European Union, a protectionist is in the White House, the front-runner in France’s presidential election wants out of the euro. Yet paradoxically, investors have concluded the world is getting less risky, not more. The result: a hunger for shares that carried the Dow Jones Industrial Average over the 20000 mark Wednesday for the first time.
It is hard to explain this with economic fundamentals. They have improved since Donald Trump’s improbable election victory in November, but not by much.
The biggest danger facing stock investors now is a severe bear market.
Yet you’d never know that from the World Economic Forum in Davos, Switzerland. In fact, the possibility of a financial crisis doesn’t even make its list of top 10 global risks, as outlined in the Forum’s Annual Risk Report.
…he U.S. stock market is overvalued by virtually any measure…
PG View: IF the stock market should collapse under the weight of these excessive valuations, a lot of capital exiting shares will undoubtedly find its way into gold.
China’s economy grew a faster-than-expected 6.8 percent in the fourth quarter, boosted by higher government spending and record bank lending, giving it a tailwind heading into what is expected to be a turbulent year.
But Beijing’s decision to prioritize its official growth target could exact a high price, as policymakers grapple with financial risks created by an explosive growth in debt.
PG View: Amid ongoing capital outflows and considerable uncertainty with regard to future trade relations with the U.S., China seems likely to at least try to paper over these risks with debt and further weakening of the yuan.
Global growth is expected to accelerate to 2.7 per cent this year after growing 2.3 per cent in 2016, its worst performance since the 2008 crisis. Advanced economies as a group are expected to grow at a slightly faster rate of 1.8 per cent this year, up from 1.6 per cent in 2016.
…”But there are significant downside risks . . . including political uncertainty.”
PG View: The World Bank is anticipating 2.2% growth in the U.S. this year. While that’s an improvement over the sub-2% growth likely to be confirmed for 2016, it’s still pretty tepid. And any number of things could adversely impact those numbers as well.
Since every penny of that new debt was presumably spent, it should come as no surprise that the latest batch of headline growth numbers have been impressive. Which is the basic problem with debt-driven growth: The good stuff happens right away while the bad stuff evolves over time – in the form of higher interest costs that depress future growth – making it hard to figure out what caused what.
That’s bad for regular people who have to live through the resulting slow-down or crisis.
PG View: It looks once again like we may be pulling economic growth forward from the future via increased debt. While that may give the economy a short-term boost, the longer term prospects becoming increasing dire as the debt load mounts.