- Hooray! It’s a normal world again!
- Oh, no! That’s very bad for stocks!
- More signs of stress in junk bonds… and that’s more bad news for stocks
- Just when you thought it was safe… the debt ceiling returns
- Buying Google for $12 (for one minute)… fun with the FRED website… reader confesses way too much in discussing the hemline indicator… and more!
OK, we think we’ve got it straight. Bad news really is bad news again.
For most of the last seven years — ever since the Panic of ’08 — we’ve been living in a Bizarro World where bad news about the economy has been good news for the stock market.
We’d get lousy job numbers on the first Friday of the month, for instance, and the Dow would zoom up 200 points on the theory that the news would inspire the Federal Reserve to mash the monetary gas pedal — or at least hold off tapping the monetary brakes.
And when the Fed followed through with EZ money policies at a subsequent meeting, that would be cause for yet another stock rally.
The bad-news-is-good-news dynamic started breaking down two weeks ago. The Fed punted on its chance to tighten and raise the fed funds rate — after jawboning all year about doing so.
“What have we seen since then?” asks Dan Amoss, who heads up our Jim Rickards research unit. “We have not seen a market rally, which typically follows dovish Fed announcements. This bearish impulse is a warning that faith in the Fed’s power to push stocks higher is fading.”
And so it goes with lousy job numbers this morning. The wonks (we’re reviving the term by popular demand) at the Bureau of Labor Statistics managed to conjure only 142,000 new jobs for the month of September.
Bloomberg polled dozens of economists earlier this week asking what they thought the number would be. The average guess was 203,000. The most pessimistic was 180,000. Hell, you need 150,000 just to keep up with population growth, and we didn’t even get that.
True, one month does not a trend make… but the BLS also revised the August and July numbers down.
The “NILF” number reached a record high of 94.6 million. If you’re unfamiliar with the term (and get your mind out of the gutter!), that’s the number of Americans age 16 and older “not in the labor force.” That is, they don’t have a job and they haven’t looked for one in the last month.
Thus, the labor force participation rate — the percentage of the working-age population in the labor force — has sunk to 62.4%, a level unseen since October 1977.
The unemployment rate remained flat at 5.1%. The real-world unemployment rate from Shadow Government Statistics — using the same methodology the BLS applied during the Carter administration — is likewise flat at 22.9%.
Econoday’s bottom line: “Forget about an October rate hike, and maybe forget about a December one too.”
Well, with Hurricane Joaquin’s projected track moving away from the East Coast now, the Fed needed a new excuse to stay put… and the BLS delivered just in time!
Which brings us to the bad-news-really-is-bad-news market reaction. As we write…
- All the major U.S. stock indexes are down at least 1%. The Dow is off nearly 200 points, although still comfortably above 16,000. The S&P 500 clings to the 1,900 level by closely cropped fingernails
- Treasuries are rallying hard — sending prices up and yields down. The 10-year yield has plunged to 1.91%, nearly a six-month low
- Gold is rallying nearly 2.5%, to $1,140. A nice bump, but the bid is still lower than it was a week ago
- The dollar’s getting slammed against most of the other major currencies, tumbling nearly 1% against the euro, to $1.13
- Crude is back below $45.
But if you’re looking for real signs of market distress, the place to look is junk bonds.
“The junk bond market keeps deteriorating,” says the aforementioned Dan Amoss. “The popular junk bond ETF, HYG, looks to have been making a big, rounded top over the past two years:”
The junk-bond warning we’ve been sounding all year is being echoed even louder from other quarters than it was when we pounded the table on Wednesday. Here’s a Wall Street Journal item Dan spotted this week: “The difference in yield, called the ‘spread,’ between bonds from America’s strongest companies and ultrasafe U.S. Treasury securities has been steadily increasing, a trend that in the past has foreshadowed economic problems.
“Wider spreads,” the report continues, “mean that investors want more yield relative to Treasuries to own bonds from U.S. companies. It can signal that investors are less confident about companies’ business prospects and financial health…”
“Interestingly,” says Dan, “the article reaches a bullish conclusion. It speculates that a strong U.S. economy will keep corporate defaults low.”
Really? With employment looking as weak as it does today? And manufacturing looking as weak as it did yesterday?
Well, that brings up an interesting paradox: “Most professional investors are still complacent about the economy,” Dan explains, “believing the Fed’s economic forecasts.”
That is, much of Wall Street is losing faith that the Fed will follow through on its promises to raise rates… but it still buys into the Fed’s too-optimistic projections about the “recovery.” That faith, too, will soon be lost… and the job numbers today have begun the process in earnest.
“If corporate bond yields keep rising (and prices keep falling), stocks are likely to fall,” says Dan. Worse, “Heavily indebted borrowers will find it more difficult and costlier to refinance debts.”
Leading the way is the energy industry, which racked up $5 trillion of debt — figuring it would be easy to pay off because crude would trade at $80-100 forever. As Jim Rickards has said since January, even 10% of that debt going sour — a conservative projection — could set off the next financial crisis.
The Federal Reserve is completely unprepared for that crisis — for reasons Jim exposes right here. But there’s no reason you can’t prepare — for reasons Jim explains right here.
For the record, the U.S. Treasury’s latest projection of when Uncle Sam will hit the debt ceiling is Nov. 5 — setting up a potential default on the national debt.
While Congress passed a stopgap budget bill Wednesday, preventing a “partial government shutdown,” the debt ceiling still looms. It’s been looming since mid-March… and ever since, the Treasury has been borrowing from government pension funds, among other measures, to stay under the limit. (That’s how the national debt has remained steady at $18.15 trillion the last six months.)
The Nov. 5 deadline is earlier than previous projections, which stretched into December. Treasury Secretary Jacob Lew chalks up the change to lower-than-expected quarterly tax receipts.
Lower tax receipts?! But we were told the economy is booming!
For a brief moment on Tuesday, Sanmay Ved owned the rights to one of the world’s most desirable Web domains… and it cost him only $12.
Google recently got into the Web-domain business, hoping to muscle aside the likes of GoDaddy.
“I used to work at Google, so I keep messing around with the product,” Mr. Ved tells Business Insider. “I type in Google.com, and to my surprise, it showed it as available. I thought it was some error, but I could actually complete check out.”
Soon Ved’s inbox was updated with sensitive information intended for — well, Google. Then he got an email from Google saying it had canceled the order because it turns out, golly gee, the website had already been registered. And he was refunded his $12.
“So for one minute, I had access,” says Mr. Ved. “At least I can now say I’m the man who owned Google.com for a minute.”
How it could happen is still a mystery. Was it a bug in Google Domains? Or did someone at Google fail to renew the domain name? And is that someone still gainfully employed?
“Amazing how the Fed’s ‘We’ve got your back’ policies can generate an illusion that the U.S. economy has decoupled from the rest of the world and is stronger than that of any other major nation!” reads the first entry in today’s mailbag.
The reader has had some fun with the versatile chart-generating capabilities of the St. Louis Fed’s “FRED” website.
We should probably explain what he’s done here. The blue line shows sales of cars and light trucks going back more than a decade. The red line shows the percentage of banks that are loosening their standards for car loans; evidently, the data go back to only 2011. (Yes, the chart says “tightening,” but notice the percentages are negative.)
“Once the loosening trend flattens (which looks soon), so will sales,” our reader goes on. “Who’s the sucker from the re-hypothecation of the auto loan derivatives? You’da thought subprime would still be a lesson learned.”
The 5: We’ve kept a wary eye on subprime auto loans since the spring of 2013. By November of that year, a quarter of new car loans were going to borrowers with credit scores of 500 or less. It’s only gotten worse since then.
No, the auto lending market won’t take down the economy or the financial system — it’s much smaller than the mortgage market.
But the reader is right — the trend can’t go on forever. It’s why we chuckled at this morning’s Wall Street Journal: “Autos flew off dealer lots last month at the fastest pace in 10 years, but the good times are stirring tension between U.S. carmakers and unionized workers that threatens to undercut the industry’s rebound.”
Oy… Both the carmakers and the unions are whistling past the proverbial graveyard…
“The new investor who asked for advice has received two good responses so far, and I’d like to add some more,” writes a reader with another follow-up from Wednesday.
“I’m not an old hand by any means, and I can claim only modest success, but one thing I’ve found important to keep in mind is the difference between investing and trading.
“When you invest, you buy for the long term. One of the Agora team calls this the ‘coffee can.’ When you engage in trading, you buy a stock or option with the expectation of making a short-term gain and then selling it to move on to another short-term opportunity.”
The 5: A good point, and one maybe we don’t emphasize enough for the novices.
The coffee can is part and parcel of Chris Mayer’s strategy. Indeed, if you’re patient enough, the approach can turn every $1 invested into $100. And even if it doesn’t, wouldn’t you be happy if it turned that $1 into $10 or $20?
More on Chris’ investing blueprint and how you can get started with as little as $200 at this link.
“You mean,” writes an incredulous reader about the hemline indicator, “that to force economic recovery, all we have to do is convince our ‘lady fairs’ that miniskirts are back ‘in’?
“Forget the miniskirts; let’s go for the microminiskirts. Even if it doesn’t work, who would care?”
“Oh, GOD!” chimes in another on the topic — although we’ve trimmed his six exclamation points down to just one.
“You should get an account on Tumblr! That is a free Web service like Facebook, except it allows adult content. You can choose whatever account you want to follow; then your daily feed is populated with whatever those accounts post — like Facebook. You can get modest accounts or hard-core.
“What I find amazing are all the selfie accounts — accounts that post nothing but selfie pictures of naked or seminaked women. These young women voluntarily take a quick picture of themselves in their bathroom mirror with their cellphone and send it to the Tumblr account — or somewhere, but it ends up on these Tumblr blogs.”
“What level is the hemline in this day and age? Online, it’s nonexistent!”
The 5: And you know all this… how?
With that, we’ll wrap up the hemline indicator discussion before it goes any further off the rails…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. We’re deadly serious about what we said earlier — the Fed doesn’t have the resources to cope with the next financial crisis.
We know this because of the extensive research Jim Rickards has conducted for us.
“In 1977, before most of today’s Wall Street analysts were even born,” he says, “I was doing complex tax and accounting work at Citibank.
And thanks to that accounting background, Jim’s uncovered the biggest accounting hoax since Enron — one that could wipe out millions of Americans.
“The fallout will be 525 times bigger than Enron,” Jim says, “and is sure to affect all American citizens — no matter where you live, what you do for a living or how much money you have.
“The mainstream media could uncover this deception anytime now.
“Once you hear this story on the evening news, it will be too late for anyone to act.”
Which is why Jim’s put together a four-step plan to prepare for the coming chaos.
Click here to see all the details.
