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Discussion in 'Money & Finances' started by Harry Havens, Jun 29, 2017.
Yeah, I saw the Dow went through the roof today!
I would guess it to be a short term reaction to Powell's remarks. The issue is China, imo, that still lingers as an issue for nearly all multinationals.
The Scariest Economic Chart In The World Right Now May Come From China
The impact in the U.S. should be minimal, however consumer confidence weighs heavily on our nation's economic health. The Dow, S&P, as well as other gauges taking a beating... as well as negative financial reports increasing in the news, can potentially erode that confidence and send us into a tailspin.
Make no mistake about it... the media will highlight all the negative news going forward into the 2020 election.
Recently the Bank of England released their projections for Brexit under 4 different scenarios. The press seemed to jump on the vast difference between the May 2016 trend (gray line) and the resultant 4 scenarios. Quite a large difference, although some UK outlets gave mention to the "latest forecast" (black line), which being lower... still indicates a sharp drop in the UK economy, as related to Brexit.
The BOE has been both praised and bashed as result of this report, which I am led to believe was done per Parliament request.
I have no doubt a drop should be expected, however the terms "trends" and "latest forecast" seem problematic to me. Clearly the "2016 trend" was based on 2.1% growth of the preceding year, being projected out to 2024, while ignoring the slowing of growth from previous years. The "latest forecast" is based on the the previous year's growth of 1.48%, again projected out to 2024.
Nothing wrong with any of this, but as can be plainly seen... UK's growth trends are definitely slowing. One other item... The BOE, like nearly all central banks, rely on global growth numbers to assist in their forecast assessments.
From the IMF...
Which way is that trend moving?
Bonds and inverted yields are becoming a frequent topic. As a harbinger of recession, inverted yields do seem to be a useful forecasting tool, as every recession was preceded by "inverted" yields. However, not all periods of inverted yields have preceded a recession. It reminds me of the TV show TBBT. "All thumbs are fingers, but not all fingers are thumbs". Going forward, IF the 2/10 yields invert it appears to still be several months away, so even then should not be viewed as a guarantor of recession.
Where concern should focused, is with corporate bonds and possible impacts on the market. A substantial amount is slated to be rolled over in 2019. That it will likely be rolled over at lower rates than previous is almost a given. However, those rates will also be higher than anticipated in those forward earnings statements. Slips in efficiencies generally have outsized impacts on bottom lines. Earnings growth contributes to stock price levels.
While it might seem the sky is falling as related to stocks, it should be remembered that nearly all indexes are up 30%+ since early 2016. But a herd of bulls can be spooked and if a cliff is nearby... it becomes a follow the leader mentality. This is sometimes referred to capitulation. We ain't there... yet.
Stress tests and their value. There are several kinds of stress test, one being where you get some stuff injected in your system, get on the treadmill, huff and puff... in between a couple of scans. Passing this stress test, does not mean there are no blockages, just that blockages are not sufficient to stop flow of blood or something to that effect. I think I heard the threshold for pass/fail was around 50%. Don't know for sure and this is not important to the subject at hand.
Bank stress tests. This comes to mind following reading an article about Bernanke/Geitner/Paulson and their thoughts about the financial crisis and how serious it could have been and could it happen again... yada yada. Naturally it made mention of how much worse it could have been had they not stepped up to the plate. Again... yada yada.
As to the future of the financial world stability, the pass/fail standards for banking soundness (stress tests) have certainly toughened and therefore the soundness of the banking system is better prepared to weather another crisis such as 2008. Until you bring up how both Lehman and Bear Stearns would have passed today's standards in late 2006. It should be noted that any banking institution can be brought down, if investors and/or depositors lose confidence in that institution.
Bear Stearn's was salvaged by engineering a takeover by JPMorgan. The engineer being Bernanke. The reason given was the failure of Bear Stearns would ripple throughout the financial world with damaging consequences. Yet Lehman was left alone and the impact was immediate.
Of course a bailout of Lehman was unthinkable at the time, given the blowback from the Bear Stearns deal. Yet it was confidence in the FED that provided some semblance of confidence in the overall market, until the FED reversed course and let Lehman fail. A floundering system was in trouble until the FED threw out a life jacket with a rope attached, which was the equivalent of the Bear Stearns deal. Tying an anchor to the other end and pitching it overboard was the equivalent of the Lehman collapse. Confidence was thoroughly trashed.
How would the outcome have been affected if Lehman and Bear Stearns had been given the same consideration?
In any case, this should serve as a cautionary tale when chest thumping about passing "stress tests".
The CPI for November was released this morning.
The headline CPI (CPI-U) adjusted was flat month to month with unadjusted -0.3%. Annually un-adjusted at 2.2%
CPI-W increased annually at 2.2% and for the month: -0.4%. Both unadjusted
The C-CPI-U before adjustments was 2.0% annually and -0.3% for the month.
The drop in gasoline prices accounted for nearly all of the unadjusted drop (95%).
A cautionary tale part 2.
Natural gas prices had edged downward to the $3.5 range, yet coal prices are still increasing... especially for north east delivery. That was then and now NatGas is back on the upswing (currently at $3.745, up from yesterday's close of $3.53.
Natural gas inventories are still well below the 5 year average and even the range of that period...
This is troublesome on many levels, as the pipeline infrastructure in the north east is simply not capable of carrying the NatGas that would be required for a serious cold snap. Even last January it was constrained and as a result 55% of electrical needs came from coal fired generators, as NatGas was prioritized for residential and commercial use. 23,000 megawatts of NatGas power plants became unavailable and had to be offset by coal. It should be noted that coal fired generators are also of limited capacity and were near max during this period.
Now the term Polar Vortex has come back into play, as nearly all reliable forecasting models are suggesting a severe cold snap for January across the North East. If it is similar to last year and heaven forbid...worse, then lights could go out. That's not a joke or even a remote possibility. It is very possible.
While "frozen concentrated orange juice" was the plot line for "Trading Places", investors do rely on weather forecasts for a variety of issues.
I am more interested in the economic impact and a polar vortex of last year's variety could very well pile onto to make a gradually slowing economy pick up the pace.
Tis the year end so why not a chart with festive colors of the season. Regrettably the red outweighs the green.
3 things should really stand out.
While the chart is skewed to the average of Obama's administration, it fell below current by the end of his term. It is no stretch to note that the growth in debt is climbing upward. That is not a good thing.
While nominal GDP has outpaced the debt growth, which is a good thing... the nominal GDP is now slowing and it can be expected to slow further. That is not a good thing.
The debt service on the total debt had slid the past 25 years, that trend is now reversing and will very likely continue a painful move upward.
From a debt outlook, 2019 might be bearable, but there is not good ending for these current trends, imo.
Looking forward, a few areas of concern.
Will China's growth continue to slow? It is looking very likely.
Will the EU's growth continue to slow? Also likely.
Will the US growth continue to slow? Likely?
Will the European Central Bank fully reverse their negative interest on excess reserves? That would be near suicidal in my opinion.
Will the U.S. Federal Reserve raise rates again in 2019? Ignore the chatter... the answer is likely by year's end, unless we clearly see a recession.
Will the U.S. fall into recession in 2019? Considering everything was "looking good" back in June, 2008 and 2 years later the official start date of the recession was set at December, 2007... We will likely need a few more years to answer that one. My guess is no. It will be an interesting 2020 election, imo
That should do it for my chimerical crystal ball gazing.
Interesting charts, @Harry Havens. Clinton's numbers were boosted both by the tech "bump" and by the Gingrich Congress. I, too, am disturbed by the growth in debt, but if the Fed continues to raise rates, it may tip us into a recession. We don't yet know what will come of the Brexit or the China negotiations and the effect on the markets. I think the economy as a whole is doing well, and I am told (although I haven't checked) that commodities are also doing well. The U.S., Russia, and the Saudis all appear to be messing with the oil markets, too, so that may affect things going through 2019.
A blast from the recent past. Previously I concocted this chart as a method of conveying my worries over the rising national debt.
I haven't updated as we are now in an "extraordinary measures" period. That period being when the debt limit is upon us and the treasury uses "extraordinary measures" to stay under the debt limit. Basically, non-marketable debt securities (intra-governmental) are not issued with the exception of S.S., Medicare and a couple of others. This period is likely to end in September, as all of these "extraordinary measures" will have been exhaused.
This explains why that intra-governmental figure is dropping, while the marketable securities, fashionably known as debt owed to the public is rising. https://www.treasurydirect.gov/NP/debt/current
As it has for some time, the rate of growth in the national debt has kept well ahead of the pace of nominal GDP growth. Even though I am unable to ascertain the exact current level of national debt, due to the aforementioned "extraordinary measures", the data presented still overwhelms the projected 1st Qtr. nominal GDP growth rate of 3.0% annualized. (Half is inflation, half is real annualized gdp growth).
The Gephardt Rule was reinstated in Congress back in January. It essentially attaches a raise in the debt limit for bills passed by the house, taking into account debt service, federal revenues, etc. Of course the Senate must concur and it must get a presidential signature. That is where the fun will begin, as we get to see which side blinks first. Pelosi will have to make concessions to whip her democratic majority into get anything passed, so expect an increase. The republicans will scream it is insane, after spending like drunken sailors the past few years.
Not sure what the compromise will be, but a significant rise in the national debt can be expected. It has to rise nearly a trillion dollars to just offset the impact of "extraordinary measures".
Yeah, I wonder what happened to the "Fiscal Conservatives"?
Little being said in the media about the debt ceiling, but it is now within a 3~5 month window. It will likely be resolved in 3~5 months, within days of default, but at what long term cost.
Article from FXstreet.
Committee for Responsible Government...
Default, in this instance, is a delay in payments. It would impact an array of programs and government services and as such... is a political hot potato, as failure to agree on raising the debt ceiling would have a negative long range economic impact. As consumer spending is about 70% of our GDP... limiting direct payouts such as pensions would decrease the available funds for consumer spending. Even the threat of such an event, tends to limit consumer spending by those affected, as carryover money is saved. This also tends to impact the companies on the receiving end of that consumer spending. The likelihood of a recession increases, as we move forward into the 2020 election cycle.
The time to address this issue is now, not when it begins to impact the economy. Fear mongering is a wonderful political tool, so dire warnings will given in the run up to the cut off date. IMO, it is a deliberate attempt to proactively place blame, to gain political advantage.
The only thing going our way with the debt, is interest rates continue to remain stable historically low at end of 2018.. 2.579%, compared to 2.543% from previous year end.
Often it is said that foreign buyers of our national debt is creating the demand for dollar denominated assets such as our bonds. Such demand keeps the dollar strong as well. However, the demand for our dollarized bonds has remained stagnant for the past 4 years at about $6T. The demand is now for dollar assets, such as companies, property, etc.
Besides the $6 trillion in bond indebtedness to foreign countries, we have another $13.7T in debt for a total of $19.7T. Of course we have investments in other countries, but the net investment position is currently at -$9.7T.
Glad you are back, @Harry Havens. I was just thinking that we hadn't heard from you in a while.
I drop in from time to time, just haven't had a lot to say. Even the last posting is mostly a rehash of a rehash, etc. The only variable being the ceiling.
@Harry Havens @Don Alaska
Perhaps we might endeavor to discuss some other technical aspect? Oh, maybe, "Stresses in thin plates and shells"? That one gave me fits!