- Numbers that scream “slowdown”… on the verge of “deflation”
- Jim Rickards explains how the Fed miscalculated, year after year
- “Chart chimps” turn bearish! (Some of them, anyway)
- The return of lead thieves to Anglican churches… responding to two readers who feel “tooled”… millionaires next door speak up!… and more!
The big finance/economic story this morning is all about shattered illusions — even if no one in the elite media will fess up to it.
The government issued two big economic numbers before the open…
- Retail sales: The headline number grew 0.1% from August to September — meeting expectations. But that growth, such as it was, is skewed. First, gasoline prices were falling… and the retail sales number measures dollar figures, not the quantity or quality of goods. Second, auto sales remain on a tear, thanks to easy financing terms.If you throw out gasoline and autos, retail sales were ruler-flat in September. Whoops, the “expert consensus” was looking for 0.3% growth.
- Wholesale prices: The producer price index slipped 0.5% in September, once again confounding the “expert consensus” calling for a 0.2% drop.Year over year, it works out to a decrease of 1.1%. Even if you throw out food and energy — as the Federal Reserve likes to do, because they’re “volatile” — you get an increase of 0.5%. That’s nowhere near the Fed’s 2% inflationary sweet spot.
Indeed, both numbers are screaming “slowdown” — on the verge of “deflation.”
The numbers are fueling rallies in both bonds and gold this morning.
Recalling that interest rates fall when bond prices rally, the yield on a 10-year Treasury note has dipped below 2% for the third time in two months. Treasuries rally when deflationary winds blow; they soothed the pain in a well-positioned portfolio during both 2008 and 2011.
Meanwhile, gold traders are sensing the Federal Reserve can’t keep up its “tough talk” much longer and indeed might shift toward easing policy next year — just as Jim Rickards forecast in this space on Monday.
Gold is up to $1,174 as we write. It’s a little too soon to say the Midas metal has broken through resistance that’s held since it went into a swoon three months ago… but the trend looks promising.
Both bonds and gold are putting the lie to the economic fairy tale of 2015.
The fairy tale goes something like this: China is slowing down, but it’s just a temporary blip as that nation shifts to a more consumer-oriented economy and the government roots out corruption. As a result, global trade is slowing down, pushing the U.S. dollar higher. That’s why the Federal Reserve keeps missing its inflation targets. But that too is just a temporary blip, and the Fed is set to start raising its benchmark fed funds rate before the end of the year.
“Like most fairy tales, it includes enough elements of reality to give it superficial plausibility,” says Jim Rickards. “Yet it relies on imaginary elements that are simply untrue.”
Here’s the reality as Jim sees it.
“Since May 2013, the Fed has been tightening monetary policy. They did this by threatening to taper asset purchases (May 2013), actually tapering (December 2013), removing forward guidance about zero rates (March 2015) and threatening to raise rates (March-October 2015).
“Without actually raising rates, the Fed has tightened policy by signaling a rate increase. Market reaction was to act as if a rate increase had already happened. That’s what markets do. They do not wait until events occur. Markets anticipate the future and adjust immediately.
“This Fed tightening cycle was based on expectations of stronger U.S. growth, higher wages and increasing inflation.”
So what went wrong? If you’ve been reading us for a while, you can anticipate Jim’s answer.
“The problem is that the Fed made this forecast using obsolete models. Every Fed forecast for the past seven years has been wrong by orders of magnitude.
“Raising rates now would make the dollar strong, make the deflationary trends more powerful and push the Fed even further away from its inflationary goals,” says Jim. “That’s why the Fed did not raise rates in September, and will not do so in October either.”
What’s more, Jim says it was this tightening by the Fed the last two years that set off the slowdown in China.
Remember, China keeps the yuan pegged loosely to the dollar. “As the Fed tightened, China had to tighten also to maintain the peg. Our IMPACT system could see that this was the real cause of the slowdown in China — the tightening of monetary policy.
“It is true that China was facing head winds from reforms and restructuring. Bubbles in credit, stocks and real estate were bursting all around. But China could have eased monetary policy to compensate for these trends. Instead, they blindly followed the Fed into a tightening cycle at the worst possible time.
“The Fed blunder had become a Chinese blunder through the foreign exchange channel.
“With the world’s two largest economies — the U.S. and China — both pursuing the wrong monetary policy at the wrong time, it’s no wonder that global growth hit the brakes.”
Now? “Both countries are looking for ways to ease,” says Jim. “China devalued the yuan in August 2015 and will do so again before next spring.
“The U.S. has not formally eased but hinted at easing in the minutes of the September FOMC meeting, which were released last week.
“But it’s already too late. The global slowdown has momentum of its own. Only repeated easing by China and the U.S. will reverse the process, but that will take time.”
And in the meantime, U.S. stocks are moving in the opposite direction of bonds and gold.
The S&P 500 is back below the 2,000 level.
But the Dow is taking it hardest among the major averages — back below 17,000 as we write, dragged down by Wal-Mart. The firm forecast sales would be flat during fiscal 2016 and earnings would drop sharply in 2017. Shares are down 8%, on track for their worst day in 15 years.
The globe’s leading market technicians are no longer singing from the same bullish hymnal, says Jonas Elmerraji of our trading desk.
Jonas and his fellow “chart chimp” Greg Guenthner are just back from Tokyo — where the International Federation of Technical Analysts held its annual gathering.
“This year’s IFTA conference was the first time in recent memory that I noticed a big divergence in market opinions of the technicians gathered at the conference,” says Jonas. “That’s an interesting signal.”
But not a decisive one: “My friend Neil, who runs a commodity brokerage firm out in Kansas City, reminded me that the attendee poll this year actually looked pretty similar back in late 2010 and early 2011 — it’s no coincidence that market conditions were similar back then, either.”
The S&P 500 ended 2011 flat and then rallied hard in 2012-13… and one leading technician thinks that history might rhyme, if not necessarily repeat.
Craig Johnson leads the technical research team at Piper Jaffray. His year-end targets for the S&P in 2013-14 were nearly spot-on. He’s still bullish, and as evidence, he presented this chart to the audience in Tokyo:
“This year’s correction,” Jonas elaborates, “also rhymes with bull market pullbacks that we saw at the start of secular bull markets in 1957 and 1983 as well. That’s some important context to keep in mind the next time markets start to seem shaky again.”
And now two of our longer-term themes collide in a single story — commodity thefts and pointless regulations.
One of the weirder aspects of the commodity boom earlier this decade was a rash of metal thefts — including the poaching of lead from the roofs of Church of England parishes. In early 2011, The 5 chronicled how thieves were using Google Earth to spot their targets from the sky. At that time, lead was commanding $1.30 a pound.
The British government cracked down, forming a special task force. Scrap metal dealers had to be licensed. Cash payments for scrap metal were banned.
But now there’s a resurgence of thefts — despite the crackdown and despite lead prices falling to 80 cents a pound nowadays. More than 200 Anglican churches have been hit this year, and it might be the work of organized gangs. “Police say some of the recent attacks have shown greater sophistication including the use of drones to select church roofs with most lead,” explains the London Independent.
An attractive target for an ungodly act. [Wikimedia Commons photo by Paul Farmer]
Police in Northamptonshire say the loss per church typically works out to $46,000, with insurance covering less than a quarter of that. At least one church has turned to a crowdfunding website to cover the shortfall…
“I’ve got to agree with the other readers and call BS on your reasons for introducing two more Jim Rickards services,” writes a reader of Jim’s flagship publication Strategic Intelligence. “My ‘lifetime’ subscription gains access to a teeny-weeny bit of knowledge the man supposedly has?
“You have power of last word in response to your readers. If our roles were reversed, most of us, your subscribers, have sufficient wordsmithing and excuse-making repertoires to respond with BS answers as you do. We are not fooled. At this point, Agora appears to be one big pimp machine. How disappointing to many of us.
“Will you be placing this subscriber’s letter in your next bulletin?”
The 5: Our crack customer service team tells me you’re a newer reader. The proper challenge, as our longtimers know, is “I dare you to print this!”
“Actually,” writes another, “the charter material in Strategic Intelligence promises to increase your wealth in the coming collapse, so your explanation that the two new services are designed to increase wealth while SI is designed to preserve it is inaccurate according to Rickards’ own material.
“I too feel ‘tooled’ by subscribing to a new service that immediately recommends that I buy two more services just to do what the first one was designed to do.
“You guys are playing a bit too loose here, and I am surprised a guy like Jim would condone all of these actions unless he himself is over a financial barrel. My expectation is that he will do his best for us with ‘SI’ and not dilute his energies and advice, as it seems you are planning for him to do.”
The 5: Let’s try this again.
Perhaps we were a bit careless yesterday in delineating Strategic Intelligence from the two high-end services. ‘SI’ can indeed grow your wealth — as we hope you’ve noticed on this day when Treasuries are rallying (reacting to deflation in the present) and gold is rallying too (anticipating inflation in the future).
Strategic Intelligence is an entry-level publication. It’s not the place where we’d suggest you could double or triple your money only weeks or months from now. But that is the aim of the premium trading services. They feature higher-risk and higher-reward recommendations. You don’t have to buy those services and play those recommendations to stay a step ahead of the global elites and build a nest egg that’ll outpace the cost of living, if that’s all you want to do.
And whenever you do feel you’re ready to assign a small portion of your portfolio to a more aggressive strategy, the two trading services will be waiting for you. Hope that helps explain the distinction more clearly…
“Several years ago, a realtor friend of mine read The Millionaire Next Door and told me she thought she was reading my biography,” a reader writes after we gently hit out at that book yesterday.
“If there’s one habit I’ve always had, it’s to spend less than I make. If you can live on 105% of your income, you can live on 95% of your income. Doing so for decades is a lifestyle — not a financial diet or crash course. It’s not rocket science. Spend less than you make and invest the difference reasonably. Besides, a million is not what it used to be.”
“I too started a small business and grew it to a multimillion-dollar business with good profits,” another weighs in.
“I started it during one of our many ‘recessions,’ and I can assure you it had nothing to do with luck. How about 80-100-hour weeks, driving 10-year-old autos and having no debt? I chose to bootstrap my business and have employed 10 people at a time for 25-plus years. I laid no one off during any of the ensuing recessions; we tightened our belts and moved on.
“I was no ‘trust fund baby,’ either. Actually, I am probably one of the few Americans around today that knows hunger… and not from choice! My wife and I also donate more each year to charities than my dad made over his entire lifetime. Giving back is paramount.”
The 5: We have no beef with you. All we’re saying is that you’re the outliers among legions of people who’ve launched their own businesses.
Some of it is generational, too. In 2013, U.S. Trust did a study of people with a net worth of $3 million or more. Almost one-third of the baby boomers with that net worth said they grew up in lower-middle-class homes. But only 18% of Gen Xers and 6% of millennials said the same.
Now, part of that is that the boomers have had more time to build up their nest eggs. But the boomers’ timing was also lucky. They didn’t get suckered into the housing market at the peak like the Xers, and they didn’t get suckered into taking on $30,000 of student debt before entering the job market like the millennials. It’s a lot easier to be successful without either of those cinder blocks weighing you down…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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