- Dow 16,450? Here comes the next big correction
- The ham-fisted way the Fed will pop the stock market bubble
- After four years of (weak) growth, startups in retreat
- Zika virus: Infants’ small heads “just the tip of the iceberg”
- Pokémon GO: Stalled in one country, banned in another, lucrative everywhere
The Federal Reserve is going off script… and the record highs in the U.S. stock market this week could quickly reverse into a 10% correction.
Yesterday, we mentioned in passing that the Fed planted a news story with The Wall Street Journal’s Jon Hilsenrath — the reporter who’s the Fed’s favorite conduit for “sending a message” to the markets. The story went online before the open yesterday and still merited front-page treatment this morning…
As we noted, the story sent the U.S. dollar index soaring above 97 for the first time since March. It’s holding the line on that level as we write today.
Here at The 5, we cast a side-eye yesterday. Even the government’s heavily gamed economic numbers aren’t strong enough to merit a rate increase. And if you read deep enough into the story, you see a disclaimer that the Fed remains “data dependent” in deciding when to raise rates.
So then what’s the deal with this exercise in “perception management”? And how could it trigger the next market swoon?
“The Fed is concerned that U.S. stocks are in bubble territory,” Jim Rickards wrote his Currency Wars Alert readers yesterday. “They suggest that the easier financial conditions caused by higher stock prices make this a good time to raise interest rates.”
So far, so good. Here’s the problem: All this “hawkish” Fed talk pushes the dollar higher. Because the Chinese yuan is loosely pegged to the dollar, the yuan also pushes higher. That’s the last thing Chinese leaders want.
Also, it’s the last thing they expect. They thought they had a deal back in February and this wouldn’t happen.
In other words, the Fed is running afoul of the “Shanghai Accord.”
For the benefit of our newer readers, we’re compelled to recap: Earlier this year, the global powers that be got scared to death that China’s economic slowdown would turn critical. If China goes down, the rest of the world goes with it.
So Jim Rickards says they hatched a secret deal in late February on the sidelines of a G-20 meeting in Shanghai.
Under the Shanghai Accord’s terms, the European Central Bank would act to strengthen the euro and the Bank of Japan would act to strengthen the yen. Meanwhile, the Fed would act to weaken the dollar, and the People’s Bank of China would sit still. Because of that loose peg between the yuan and the dollar, the yuan would steadily weaken — giving a boost to Chinese exports — without a formal devaluation by the Chinese.
Twice in the last year, the Chinese executed a formal devaluation. And both times touched off a global market freakout. The first time, the Dow industrials stumbled 11% during a two-week span last August. The second time, the Dow slipped 12% between mid-December and mid-February. The Shanghai Accord aimed to prevent a rerun.
But with the Fed going back on its word, the Chinese are devaluing on their own for a third time anyway.
And the process didn’t begin with the Journal story yesterday. “The Fed reneged on its weak dollar promise in May,” says Jim, “and began talking about interest rate hikes possibly in June or July… The dollar rallied almost 4% in a few weeks. That’s a huge move in currencies where changes are usually registered as small fractions of 1%.
“At that point, China felt double-crossed by the U.S. and began its third devaluation against the U.S. dollar.
“The USD/CNY cross-rate may be a more powerful determinant of stock prices than traditional barometers such as earnings, stock multiples or economic growth,” Jim goes on.
Again, those first two Chinese devaluations triggered corrections in the U.S. stock market. And the third would have done the same were it not for a relief rally that followed the freakout from the Brexit referendum four weeks ago.
Now we’re back at the lofty levels of last December and last August… and at a critical juncture.
With Brexit now in the rearview, Jim says stocks are set to tumble again — especially with the Fed resuming its chatter about a rate increase.
“The rate hike talk then makes the dollar stronger and prompts China to weaken the yuan. The weak yuan triggers capital flight, which causes a spillover liquidity crunch, which in turn leads to a correction in U.S. stocks.
“The Dow could plunge to 16,450 and the S&P 500 could plunge to 1,925 in a matter of weeks, wiping out trillions of dollars of investor wealth.”
Yesterday, Jim urged his Currency Wars Alert readers to lay on a trade that follows from these dynamics. It has the potential for 233% upside. A similar trade during the last Chinese devaluation was good for 200% gains in only three months.
For access to Currency Wars Alert, look here.
In the meantime, the major U.S. stock indexes are inching higher into record territory. The Dow has crossed the 18,600 level. The S&P 500 has pushed past 2,170.
No economic numbers of note today; the lone earnings number of note is Morgan Stanley, whose profit and revenue fell — but less than expected.
Treasury rates are moving back up, the 10-year at 1.58%. Gold has sunk to a three-week low of $1,318, and that’s not a function of dollar strength; as mentioned earlier, the dollar index is flat today.
More grim news on the startup front: “Total entrepreneurial activity” as measured by Babson College in Massachusetts fell from 14% in 2014 to 12% last year. That’s a reversal from four years of modest growth following the “Great Recession.”
“The findings,” says a Money magazine story, “could indicate that employees are satisfied with their jobs and unwilling to strike out on their own. But the research could also show a lack of confidence in the small business environment in the wake of the recession, Babson professor Donna Kelley told CNBC.”
Or as we’ve observed before — new readers, we direct you here to one of the most important episodes of The 5 we’ve done all year — it could be people scared to death of buying health insurance on the individual market and paying the full load of payroll tax once they start working for themselves.
We pay heed to numbers like these because the Kauffman Foundation tells us startups are responsible for nearly all net job creation going back to 1980. Not a good sign…
“Zika is a modern plague, and it is going to be much worse than we guessed,” the scientist told Stephen Petranek of our science-and-wealth team.
Stephen is in Woods Hole, Massachusetts, meeting with researchers from the Woods Hole Oceanographic Institution. The expertise found there extends well beyond marine science… and one of Stephen’s contacts — he asked that his identity be kept confidential — was keen to sound the alarm about Zika.
This individual says microcephaly — the small brains and heads infants may be born with if their mothers are infected by the virus — “is just the tip of the iceberg.” He predicts “a generation of kids that seem normal at birth, but by the time they’re in sixth grade, we start going, ‘What’s wrong with this kid?’”
The problem is that scientists don’t yet know how the virus attacks the brain. The simplest way to get a handle on it would be with fetal brain tissue. But that’s a nonstarter in Congress.
Stephen is following a company that’s working on a way to kill all manner of viruses, including Zika, that wouldn’t rely on fetal brain tissue for its research. “I have heard that some members of Congress are eager for the firm to make a pitch to them for funding related to Zika.” He’ll continue to track the story in Breakthrough Technology Alert.
Now for today’s random roundup of Pokémon GO headlines…
The augmented reality game’s debut in Nintendo’s home base of Japan was supposed to be today. But now it’s on hold; depending on who you believe, Nintendo might’ve been worried all the new traffic would crash its servers
There won’t be any Pokémon GO traffic from Saudi Arabia; America’s forward-thinking, progressive ally in the Middle East has banned it.
And then there’s this from our home base in Baltimore…
Yes, for all the outrage directed at law enforcement of late, the biggest threat to Baltimore’s finest this week came from a distracted driver playing the game who plowed into a parked cop car.
If you’ve been reading us this week, you know our Ray Blanco thinks Pokémon GO is much more than a silly mobile phone game; he believes it amounts to the start of a tech investing boom rivaling that of the 1990s. If you’re still not convinced, Ray’s just put together the most compelling case he can make. You can be among the first people to watch it — and seize the moment — by clicking here.
“We need to consider other problems,” a reader writes, determined to carry on yesterday’s “Darwin Award” thread inspired by assorted Pokémon GO accidents.
“As you mentioned on Monday, none of the participants that had an ‘accident’ as a result of playing was killed. Therefore, one must conclude that they were injured and/or caused property damage, either to their own or someone else’s.
“That raises the question about your other items regarding health care costs. The real problem is not that they might off themselves, or even someone else, but rather the huge unexpected increase in health care costs for their recovery! Not to mention the increase in property damage claims! Yikes! Where does it end?”
The 5: We recognize you’re being tongue-in-cheek here. (We think.) But it’s time for a quick reality check.
“Pokémon Trading Cards Causing U.S. Crime Wave,” was the headline a Pennsylvania newspaper gave to a 1999 Associated Press story — complete with “tips for parents” to relate to their kids such as, “Don’t tell others the location inside your house where the card collection is stored.”
Somehow, civilization survived the original Pokémon craze. It’ll probably survive this one too. “If players follow basic, obvious outdoor safety precautions — look both ways before crossing the street, safety in numbers, etc. — then searching for virtual Pokémon will be no more dangerous than doing anything else,” writes Robby Soave at Reason.
Once more, we make the investment case at this link.
“Everybody talks about marijuana as if it were our salvation,” writes an MD, hanging crepe about yet another investment opportunity on our radar.
“The National Institutes of Health has studied the composition of burning tobacco and marijuana as commonly smoked and the only difference between the combustion products is the nicotine and THC. Tar, acetone, benzene and other deleterious components of the smoke vary only slightly in their percentage in the smoke.
“Worse yet is the longer inhalation time with marijuana, letting it interact with lung tissues for a longer time. Twenty–30 years from now, we will see a repeat of the tobacco disasters with emphysema, cancer and cardiac disease rates increasing and perhaps no big marijuana companies to sue. This is going to end badly.”
The 5: Breathing any kind of smoke into your lungs is problematic on one level or another. We get it.
But the most cutting-edge — and lucrative — medical treatments involving cannabis won’t entail a joint or a bong. That’s where our attention is directed.
“Once again, you guys nailed it,” a reader enthuses after yesterday’s episode. “You must start using FST (Federal Standard Time) when writing about the slow, laborious feds.”
“No way!” writes our final correspondent. “This time you’ve gone too far! Obviously, the Secret Service agents pay for their own hookers. Taxpayers just pick up the hotel rooms. Duh!”
The 5: You sure? I mean, those guys probably get a per diem when they’re away from home that they can spend as they choose, right?
Best regards,
Dave Gonigam
The 5 Min. Forecast
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