First the good news: no-point 30-fixed mortgage rates are back under 4.00 percent (depending on the usual qualifiers), down a quarter-percent since the first of the year.
Global stock markets are declining in some concert, but there is no “crash” event, no self-feeding liquidation fueled by excessive leverage. This is as orderly a sell-off as sell-offs ever get.
Stocks get the ink, but usually don’t deserve it. Volatility is in the nature of stocks, true up-down rocketing around. A great many people claim to know why stocks have gone up or down, yet stocks are the least predictable of all markets. For all of that unpredictability, contrasting today’s causation theories leads to the heart of the matter.
The creationist wing of finance blames the stock dive on the Fed. They say — all anti-government types — that the Fed’s quantitative easing bloated asset values, and so it’s the Fed’s fault now that financial assets are unwinding. They also say the Fed now should tighten faster. You’re going to hear a lot more of this line of argument. There is always a group with a perfect clockwork alternate universe, and the anti-Fedders are the worst.
Creationism is tempting because it has kernels of truth. The Fed unquestionably aided stocks 2008-2013, and the prospect of even gradual rate hikes may be the trigger for this stock sell-off. But, China hitting its ceiling is a theory just as good.
Next in stock-murk: sometimes stock prices accurately discount the future, and sometimes they don’t. Among the oldest bad Wall Street jokes: stocks have predicted fifteen of the last five recessions. The stocks-economy connection is too tenuous to count on, yet there is one solid linkage: global trade tends to benefit all parties, raising corporate earnings, and global trade has stopped its 25-year growth trend.
Plain as day in the last year: oil down, stocks down. We used to think — from the 1970s until last year — that energy prices acted like a tax. Oil down, energy-company earnings down, but consumers up. Something profound has changed: the drop in energy costs has failed to stimulate consumption of anything, even energy.
Retail sales fell 0.1 percent in December versus November, rising only 2.2 percent year-over-year. After inflation, zilch. Knocking a buck off the price of gasoline theoretically puts in consumers pockets a quarter-billion dollars every day. How can stimulus like that fail to set on fire a recovered, healthy economy with an overheating labor market?
Stocks have given up the gains of the last couple of years, but not enough to be a wealth-effect suppressant, yet we seem suppressed. Or are we?
One answer: more than half of households are barely hanging on, incomes stagnant or falling, costs rising. Health care has risen fantastically in cost but underestimated in consumer price index: the miracle of the super-expanded deductible. You may be insured, but don’t get sick!
This sell-off is global
After the preceding kindly, cautious and professorial dissertation, now I can return to form. The Fed looks ridiculous. And after a week like this, possibly incompetent and dangerous. The Fed should not react to 10 percent or even 20 percent runs up and down in stocks, but this sell-off is global. The Fed has claimed that the U.S. is not subject to significant influence from the outside world, that it must begin to act now to reduce the rate of job creation, and that this energy market stuff and low inflation are temporary.
Everybody now has some understanding that China is in structural difficulty, non-cyclical, and so is the rest of the world. The U.S. has been the only global pocket of passable economic growth, and the Fed’s action and intent are at odds with every other central bank. Global stock markets evidence an unsustainable tension.
The bond market no longer cares how much the Fed tightens, betting now that no matter how high it goes, it will soon reverse. The Fed will have to shift, and soon, no matter how embarrassing. If it denies reality too much longer, the institution will suffer.
Markets usually ignore elections, but this infernal collection of candidates is overdue to notice a juicy target. If they start in on the Fed, markets will notice. The Fed’s game is confidence, today in short supply on all sides.
Ten-year U.S. T-note in the last week.
Ten-year US T-note in the last five years. You can see the all-time low in 2012, and the resumption of a downtrend which began with the double-tops over year-end 2013.
Fed-sensitive 2-year T-note in the last six months. At year-end going up in anticipation of successive tightening, now disbelieving altogether.
The Economic Cycle Research Institute has had only one bad call since 1968, announcing recession in 2012. Its index is a tad shaky, close to levels at the start of prior recessions (red dots), but not deteriorating.
The National Federation of Independent Business survey of small business has fallen off its 2015 peak, but the last four months have been flat, no recession signal.
Here’s the kind of contradictory data that’s driving everybody batty. Railroad usage has dived into recession. Manufactured goods and energy — primarily coal — move by rail. Can the economy survive sector recessions like this?
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
