More Troubling Signs for the Global Economy
Good news for the bulls... The shutdown is over (for now)... Another 'dovish' change from the Fed?... More troubling signs for the global economy... 'An extraordinary, unusually turbulent, and disappointing quarter'...
Last week ended with not one, but two, 'bullish' announcements out of Washington...
First, President Donald Trump agreed to reopen the federal government, bringing the longest shutdown in history to an end. As Bloomberg reported on Friday...
Trump agreed Friday to a deal hastily negotiated by lawmakers after the 35-day shutdown, the longest in modern U.S. history, began to seriously impact air travel. Earlier in the day, LaGuardia Airport in New York was briefly closed due to a shortage of air traffic controllers, exacerbating flight delays across the country.
Under terms of the agreement, Trump will sign a short-term spending bill through Feb. 15 and Congress will immediately begin negotiating border security legislation.
Now, you could argue that the shutdown wasn't especially bearish to begin with...
After all, stocks have actually rallied since the government closed on December 22 (though they were extremely "oversold" on a short-term basis at that time). And outside of longer wait times at airports last week – or perhaps some delays getting their own money refunded to them by the IRS – we'd wager most Americans noticed no negative effects of the shutdown at all. (Kind of makes you wonder where all your tax dollars are going, huh?)
In addition, the truce may not last long... This agreement is only certain to keep the government open for roughly three weeks. And the president has already promised to shut down the government again – or declare a national emergency – if Congress can't reach a long-term deal that includes funding for a border wall.
Still, the news did remove some of the recent uncertainty that has been hanging over the market, if only for a while.
Markets also cheered news from the Federal Reserve...
As regular Digest readers know, the Fed has been unwinding its unprecedented quantitative easing ("QE") program for a little more than a year now. Porter reviewed the details behind this shift in the January 12, 2018, Digest, just months after it began...
It was less than 10 years ago, in the closing months of 2008, when our monetary masters – led by stuttering Ben Bernanke – began an enormous monetary experiment. The Federal Reserve started printing new money, out of thin air. These new dollars were used to buy financial assets – mostly newly issued federal bonds, but also mortgages of dubious quality. The result was a multiyear "one way" bet on interest rates that powered the earnings of banks, hedge funds, and traders. It also led to the largest increase in corporate and private debt ever and larger total debts than our economy had ever seen before.
The government, its private bank, and its pocket economists proved they could stop a debt crisis... by creating stupendous amounts of new debt. It was as though they'd worked a miracle.
Meanwhile, the balance sheet of the central bank in the U.S. grew from $800 billion to more than $4 trillion... Like squirrels watching a bank robbery, none of the economists and precious few investors noticed anything important happening...
Nobody noticed any inflation (because they ignored the huge rise in financial asset prices). Nobody noticed the collapse in certain commodity prices (like oil) and the resulting bankruptcies, where far too much capital had been borrowed and lent.
But QE was not actually a miracle...
And as Porter explained, eventually the "side effects" became too obvious to ignore. More from that Digest...
Like the pressure rising in a kettle, turning to steam, and blowing out with a whistle... things started going a little haywire in the global economy. By late 2016, negative interest rates threatened to destroy the global banking system...
At the time, even junk bonds in Europe were trading with negative interest rates. European banks were paying mortgage holders to live in their houses, instead of the other way around. Commodity prices fell so far that it was cheaper for many American energy producers to burn off natural gas instead of pushing it down a pipeline. It was as though the financial world had been turned inside out and upside down. Stranger Things wasn't just a TV show: It was our financial reality.
And then, what I believe was the final and ultimate warning sign of this big inflationary bubble – cryptocurrencies... In 2017, the bubble reached a whole new kind of level, something we hadn't seen since the days of the South Sea Bubble. Digital "tokens" – backed by nothing, yielding nothing, and conveying nothing – began to soar in value, merely because they, unlike paper currency, couldn't be manipulated by central bankers. By North Korean hackers? Maybe. But not central bankers...
The crypto bubble must have finally been too much to ignore. Even squirrels could tell something was wrong with our money.
As a result, the Fed officially began to reverse this stimulus in October 2017...
Over the past 15 months, it has allowed tens of billions of this debt to "run off" each month. Its balance sheet has fallen from nearly $4.5 trillion to roughly $4 trillion over that time.
When this move began, various Fed officials estimated it would run for three to five years and ultimately reduce the bank's balance sheet between $1.5 trillion to $3 trillion.
Apparently, that may no longer be the case. As the Wall Street Journal reported on Friday...
Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they'd expected when they began shrinking those holdings two years ago, putting an end to the central bank's portfolio wind-down closer into sight.
Officials are still resolving details of their strategy and how to communicate it to the public, according to their recent public comments and interviews. With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank's Federal Open Market Committee next week.
The markets were clearly pleased...
All three major U.S. indexes closed higher for the fifth straight week. But again, we're not sure this news is quite as bullish as many apparently believe...
Sure, if true, it means one of the strongest headwinds for stocks over the past several months could be slowing.
But like the Fed's sudden decision to halt its rate hike cycle last month, it also suggests the economy remains far weaker than it has previously led us to believe.
Of course, this isn't the only sign that all is not well with the economy today...
In recent weeks, we've heard a long list of firms warn of slowing sales. These companies span a wide range of industries. And they include such global bellwethers as FedEx (FDX), Apple (AAPL), Samsung, Delta Air Lines (DAL), American Airlines (AAL), Constellation Brands (STZ), Ford Motor (F), Goodyear Tire & Rubber (GT), and Intel (INTC), among others.
Unfortunately, we can add two more notable names to the list today...
Longtime readers are familiar with industrial-equipment giant Caterpillar (CAT)...
The company has long been considered one of the best bellwethers of the global economy. Its machines are used in everything from farming to transportation to construction.
When the world is growing, Caterpillar tends to do well. When the world is slowing down, it's typically one of the first companies to feel it.
This morning, CAT shares fell as much as 9% after the company reported significantly weaker-than-expected fourth-quarter earnings. The company said it earned a profit of $1.78 per share, compared to analyst expectations of $2.98 – its biggest earnings "miss" since 2009. Caterpillar also slashed its sales and profit outlook for the rest of the year.
Meanwhile, shares of graphics-card and chipmaker Nvidia (NVDA) plunged double digits after it also warned of a sharp slowdown. As the Wall Street Journal reported...
Nvidia lowered its revenue outlook for its fiscal fourth quarter by $500 million because of what it said was weakening demand in China and a rocky cloud-computing business, a revision that wiped nearly 15% from the chip maker's already beleaguered shares.
The reduced expectations for the quarter came on top of a revenue projection from Nvidia in November that already was $700 million less than what analysts at the time had expected, underlining a deteriorating outlook for a company investors had coveted as it found new uses for its chips in cryptocurrency mining and artificial intelligence.
Jensen Huang, Nvidia's founder and chief executive, called the quarter "a real punch in the gut." It "was an extraordinary, unusually turbulent, and disappointing quarter," he said in a letter Monday to shareholders.
As we've noted several times lately, it would be easy to dismiss any one of these companies' concerns as merely company- or industry-specific...
But we're now seeing the same warnings popping up across a wide range of industries around the world. It would be foolish not to take them seriously.
We continue to urge caution. If you were losing sleep during December's decline, consider taking advantage of the recent rally to "de-risk" your portfolio a little.
Raise some cash, so you'll have "dry powder" to take advantage of lower prices down the road. Be sure to own a little gold. And if you still have a significant percentage of your net worth in stocks, consider "hedging" with a few short sales or long put options.
Regular readers know our colleague Dr. David 'Doc' Eifrig is also concerned...
In fact, for the first time since this bull market began, Doc is now recommending all his subscribers get "defensive" immediately.
During an online briefing last week, Doc explained exactly why he's so worried... and more important, what he recommends doing about it now.
If you missed it, it's not too late. You can still watch a replay of the event for a few more days. Click here to see it now.
New 52-week highs (as of 1/25/19): Kirkland Lake Gold (KL).
In today's mailbag, a reader is confused about Doc's recent briefing. As always, send your notes to feedback@stansberryresearch.com.
"To whom it may concern, my access to [last week's event] was interrupted so many times, that I did not have the patience to wait. If I am correct from viewing the emails sent out today from your office the only way I can see the re-run of the presentation is to sign up for your life-time offer.
"This method of doing business does not seem consistent with what Stansberry has done on previous occasions when existing subscribers have not been able to view a presentation.
"May I request that when you hyperlink to a recording of a presentation is offered, then that is what the text means. Thank you." – Paid-up subscriber John Z.
Brill comment: Hi John, we're sorry you had trouble accessing Doc's briefing last week. But don't worry, as we said above, you can still access a free replay of the event for a few more days right here.
Regards,
Justin Brill
Baltimore, Maryland
January 28, 2019