- “They don’t ring a bell at the top”… but it appears David Stockman did!
- Market bender after Trump speech gives way to a wicked hangover
- Strange economic indicator at all-time highs… and that’s not good
- Crude sinks, pound rises
- A fatal “all-clear” signal for the too-big-to-fail banks
- IMF chief compromised by Kremlin? (that’s a joke)… Homeland Security chief tells TSA critics to shut up (not a joke)… will a stock-market crash drag down gold with it?… and more!
There’s an old market saying about how “they don’t ring a bell at the top.” That is, it’s rarely obvious when the market begins a long downward slide. Only in hindsight — months or even years after the fact — do you know when the top was in and it was time to bail.
Then again… it’s been seven weeks since the Dow set an all-time record on Wednesday, March 1. The index sits mired this morning about 600 points below that record.
And we’re struck by what David Stockman was writing his Bubble Finance Trader subscribers that very week. “Wednesday’s blowoff frenzy amounted to the proverbial clanging bell at the top.”
It’s worth revisiting his words this morning. There’s still time to act on them… though maybe not much.
That March 1 top — good for a jump of 300 Dow points — came the day after President Trump delivered his big speech to a joint session of Congress. You know, the one where afterward the mainstream gushed about how he looked “presidential” for the first time.
“Wall Street totally misread the speech,” David wrote. “The robo-machines — and the remaining troop of day-trading carbon units that mimic them — can only read words, not the political tea leaves.
“Accordingly, when The Donald promised a ‘big, big’ corporate cut and a ‘massive tax reduction for the middle class’ and also a big defense increase, more money for veterans, education, border control and a $1 trillion infrastructure bill to rebuild America’s ‘highways, bridges, tunnels, airports, schools, hospitals,’ the machines dutifully ‘priced in’ even more for the vaunted Trump Stimulus.
“Trump proved beyond a shadow of a doubt that he and his team have no clue about the horrific fiscal facts of life confronting them,” David continued.
“They are utterly unaware, apparently, that they are plowing right into a Grand Debt Trap that will put the kibosh on not only the vaunted Trump Stimulus but on the entire 30-year era of Bubble Finance.”
Two weeks after the speech, the national debt ceiling came back into force after it had been suspended for a good year and a half. And so begins the usual D.C. kabuki theater in which the Treasury performs accounting tricks to stay under the ceiling for a few months while the party in Congress that doesn’t hold the White House postures and preens about fiscal responsibility.
Only this time there’s a twist: The GOP’s Freedom Caucus will also take a stand against raising the debt ceiling. That will leave only the establishment Republicans like Paul Ryan leading the charge… and we already know how well that worked out with Ryan’s “Obamacare Lite” bill.
“At some time in June or July,” David wrote, “the Mother of All Debt Ceiling Crises will occur for the simple reason that there is no pathway to a House and Senate majority for a multitrillion-debt ceiling increase.
“Instead of the priced-in Trump Stimulus, what is coming down the pike is one or more government shutdowns, and even the possibility that the U.S. Treasury will have to allocate payments based on prioritizing available revenues to debt service, Social Security payments, military payrolls, etc. — and then shoving the remaining bills in the drawer.”
Meanwhile, a separate donnybrook is shaping up next week as a deadline looms for Congress to pass a stopgap spending bill to keep Washington running through the rest of fiscal 2017. If nothing passes by a week from Friday, it’ll be time for one of those “partial government shutdowns” like October 2013.
It took a few weeks for the afterglow from Trump’s speech to wear off, but a handful of “market pros” are finally starting to sniff out what’s coming.
The Federal Reserve Bank of Philadelphia maintains something it calls the Partisan Conflict Index. This indicator “tracks the degree of political disagreement among U.S. politicians at the federal level by measuring the frequency of newspaper articles reporting disagreement in a given month,” says the Philly Fed.
The latest reading is off the charts. The last time it was anything like this was during the 2013 shutdown… only this time the shutdown hasn’t happened yet!
High-powered financial pros are citing this figure as they signal each other that trouble’s ahead and it’s time to take cover.
Here’s what the Institute of International Finance — a trade group comprising the world’s biggest banks — is telling its clients: “Much hinges on U.S. tax reforms/cuts, so the news that the administration will be going back to the drawing board — meaning that [Treasury] Secretary [Steven] Mnuchin’s ambitious August deadline for a tax code overhaul plan is unlikely to be reached — is disappointing for growth stocks.”
But most of Wall Street remains oblivious: “The algorithms that have been driving the stock averages to tulip mania highs have no clue about the political firestorm just around the corner,” David says.
“But when it hits, the machines will begin puking up a tsunami of sell orders like never before.
“As a reminder, here is what happened after the Nasdaq 100 erupted between November 1999 and March 2000. There was nary a black swan in the sky, it seemed — until there suddenly incepted a dizzying two-year plunge of almost 85% from the nosebleed peak depicted below:
There was something that happened around the same time of that Nasdaq peak during the first half of 2000… and David is warning it just happened again. He expects the fallout to hit as early as this Friday — blindsiding millions of investors. But if you play it right, you can transform the turmoil into 29 times your money. David explains the stakes right here.
For the moment, however, most of the major U.S. stock indexes are in the green. The outlier is the Dow, dragged down by another miserable earnings report from IBM. The Big Board is in danger of breaching 20,500.
Bonds and gold are both selling off, though not dramatically. Gold has retreated to $1,280, thanks in part to a bit of dollar strength. The dollar index is up about a third of a percent at 99.8.
Crude has broken below the $52 level; the Energy Department’s weekly inventory report indicates another drop in oil stockpiles, but a smaller drop than last week’s.
“The best performing currency the past two days is the British pound sterling,” says our friend Chuck Butler, managing director at EverBank Global Markets.
On Monday morning, the pound was trading at $1.254. This morning it’s around $1.28. “Apparently, currency traders, investors and what-have-you like the idea of the snap election that Prime Minister Theresa May called yesterday for June.”
Chuck is more cautious: “Despite all this euphoria by the currency traders, this is a big risk for May — that voters might have changed their minds regarding Brexit.”
Contrarian indicator: The International Monetary Fund has sounded the all-clear for the global financial system.
OK, we’re oversimplifying. But the IMF’s semiannual Global Financial Stability report is pointing to a stronger outlook for the global economy. In theory, that means households and companies and governments are better positioned to keep up on their debt payments, making the banks less shaky.
It’d be swell if it were true… but that’s par for the course from the IMF of late. A couple of years ago, it was issuing what amounted to hair-on-fire warnings. Have the too-big-to-fails really become smaller or less failure-prone since then?
For us, the real news during the run-up to the IMF’s spring meeting in Washington is this — the praise IMF chief Christine Lagarde has for how Russia has navigated three years of nonstop economic turmoil brought on by low oil prices and Western sanctions.
“They took the right fiscal measures,” she said. “They kept inflation under control. They adopted a very good monetary policy, which included the floating of the currency, making sure that the financial sector was stable.”
It’s remarkable. Not that we disagree — as we’ve noted before, Russia’s central bank chief, Elvira Nabiullina, is one of the few central bankers on the planet who has a clue — but Mme. Lagarde is surely opening herself up to charges of “collusion” with the perfidious Putin. Heh…
Lagarde: Victim of Kremlin “kompromat”?
As we noted last December, Lagarde emerged wounded from a scandal back home in France. We’re not saying she needs to watch her back, but… she needs to watch her back.
And now, fittingly on the anniversary of the “shot heard ’round the world” and the start of the American Revolution… the most outrageous 5 business-travel alert ever.
No, TSA policy hasn’t changed… but our colleagues at our sister e-letter America Uncensored tipped us off to a speech given yesterday by Homeland Security Secretary John Kelly. If you’ve ever objected to the depredations of the TSA or other agencies under his purview… Kelly all but told you to, shall we say, “sierra tango foxtrot uniform.”
His employees, he carped, are “often ridiculed and insulted by public officials, and frequently convicted in the court of public opinion on unfounded allegations testified to by street lawyers and spokespersons.”
But that was just a windup to the speech’s most choice line: “While you’re binge-watching Mad Men on Netflix,” said Kelly, “TSA is stopping an actual madman with a loaded gun from boarding a flight to Disney World.”
Uh, actually no. As we mentioned in 2015, undercover security testers snuck contraband — including simulated weapons and explosives — past the TSA’s systems on 67 out of 70 tries. That’s a failure rate of 95%. TSA responded as only a government agency can — by amping up the same techniques already proven not to work.
We got an excellent and timely gold inquiry in our mailbag after yesterday’s 5.
“You quote Jim Rickards as saying: ‘Gold looks like a classic asymmetric trade. It may go up slowly or go up suddenly, but there don’t appear to be any factors on the horizon that would take it down.’
“What about when the stock market begins tanking, causing all the traders with long leveraged positions to get margin calls that they cover by taking profits on their paper gold holdings?
“As was mentioned in The 5 last week ‘margin debt is at all-time highs,’ and though that is not a leading indicator of a coming crash, it does drop drastically as a consequence of a market crash.
“Thus, when the market drops, as many of your editors are saying it is going to do very soon, a lot of that margin debt will need to be paid off. Taking profits on paper gold could be the easiest, and smartest, thing traders will do. If this does happen, how will that affect the price of gold?”
The 5: Ah, you read your 5 carefully, don’t you? (That’s not snark. We’re legitimately impressed.)
The phenomenon you describe is exactly what unfolded during the Panic of 2008.
Gold topped $1,000 for the first time in March 2008. It hung out in the $900s for several months afterward. Then in the fall, Lehman Bros. went under and the too-big-to-fail banks needed bailouts. Traders needed to meet margin calls. They sold gold — not because they wanted to, but because they needed ready cash more than they needed gold at that moment. Gold sank to $720.
With apologies to the late Paul Harvey, here’s the rest of the story: In the teeth of the crisis, the Fed swooped in with “quantitative easing” and other measures to keep the system afloat. The market rightly anticipated those measures would be inflationary.
By September 2009, gold had reclaimed that $1,000 level. It went on to nearly double over the next two years, peaking above $1,900 on Sept. 6, 2011.
The point is that yes, gold will likely sell off at a time when liquidity is lacking. But governments and central banks will respond with measures that will inevitably revive the gold price and then send it to brand-new heights…
Happy Patriots’ Day,
The 5 Min. Forecast
P.S. Only next time, the 2008 gold scenario might play out differently: As Jim’s been saying for years, the global monetary authorities might have to set an arbitrary dollar price of gold to restore confidence in the system — perhaps as high as $10,000. You can reacquaint yourself with how that will work in this archived episode of The 5 from last September.