- Despite government shutdown, tax refunds will go out… right?
- Jim Rickards: No Fed rate hikes in March…
- … Unless Jay Powell loses “patience”
- China comes clean on gold holdings (puh-leeze)
- Nomi Prins follow-up: Bond ratings bingo
- A reader’s “ready to start shooting”… Occupy Wall Street was first shot in new civil war?… And a whole lotta hate on both sides (echoes of North and South)
Your tax refund is safe after all. Or so we’re told. At least this year.
“Tax refunds will go out,” acting White House budget director Russell Vought said yesterday. That’s despite the “partial government shutdown” — and despite policy during previous shutdowns.
Gee, and in the back of my mind I was already constructing a lead item for one day a couple of weeks from now built around the simple and timeless proposition: You can’t trust the government to keep its promises.
Of course, because it’s timeless, that’s still the case — especially when it comes to Social Security.
Today’s the day many of us in the workforce got emails from the Social Security Administration inviting us to log in and review our annual “Statement” — telling you what monthly benefit you’ll theoretically be entitled to.
“Theoretically” being the operative word. As we said on this day a year ago, the feds have broken their promises about Social Security over and over.
We also said on this day a year ago that 2019 was a likely time that still more promises would be broken via yet another “reform package.” We still won’t rule out that possibility, D.C. gridlock notwithstanding. Big changes to Social Security tend to come in the year after a midterm election with divided control of the White House and Congress.
Anyway, tax refunds are going out. On the one hand, we’re heartened to see Americans will get back what belongs to them. On the other hand, we would have relished the prospect of a mass revolt on the scale of the yellow-vest protests in France — drawing together people of diverse ideologies. Maybe some other time…
“The Fed has taken a March 2019 rate hike off the table until further notice,” says Jim Rickards.
As noted here on Friday, Federal Reserve chairman Jerome Powell said the Fed would be “patient” with further increases in the fed funds rate — one driver of a monster rally on Wall Street that day. And as Jim said here yesterday, “patient” is a word pregnant with meaning in the Fed’s vocabulary. We’re bringing him back today to elaborate.
“The word ‘patient’ is Fed code for ‘no rate hikes until we give you a clear signal.’ This interpretation is backed up by the Fed’s past use of verbal cues to signal ease or tightening in lieu of actual rate hikes or cuts.”
That’s exactly how it worked in late 2014. At that time, the Fed was winding down its quantitative easing (money printing) operations. The buzz on Wall Street shifted to how soon the Fed would lift the fed funds rate from the near-zero levels imposed during the Panic of 2008.
In its every-six-weeks policy statement of December 2014, the Fed said, “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
The Fed knew the Street would latch onto the word “patient” for cues about its future intentions. Three months later, the word disappeared from its statement; rate increases were on the table from then on and the first one took effect later that year.
And so it goes now. Rate increases are off the table as long as Powell and the Fed keep dangling the word “patient” out there.
“The next FOMC meeting is Jan. 30,” Jim says. “If the Fed does not repeat the word ‘patient,’ markets could be in for an extremely negative reaction.”
The problem now is the Fed has boxed itself in. The fed funds rate currently stands at 2.5%. That’s far higher than the near-zero rates after the Panic of 2008. But it’s still very low by historical standards.
As you can see, it’s still too low to give the Fed enough leeway to lower rates again to combat a new recession. From the current 2.5%, the rate still needs to rise to at least 3.75% in Jim’s estimation.
Then again, Powell might be trying his damnedest to pull off a “soft landing” — pausing and ending the rate-raising process at just the right moment to avoid tanking the economy.
As we’ve pointed out before, among a dozen or so Fed rate-raising cycles since World War II, the Fed has engineered a soft landing only once — in 1994. And this time, the Fed is also shrinking its balance sheet — an effort never before undertaken in the Fed’s 105-year history.
Besta luck, Mr. Powell…
In the meantime, Powell’s “patience” is putting stocks on track for a third straight day of gains.
At last check, the Dow is up more than half a percent at 23,675. The S&P 500 and Nasdaq are also up, but not as strongly.
Go figure: On Thursday, the market tanked when Apple “guided lower” on its sales outlook and everyone was wringing their hands about a slowing global economy. But today, the market is shrugging off a profit warning from Samsung and dismissing those same growth concerns.
The only thing that changed in the interim? Powell’s “patience.”
Elsewhere, crude is less than a buck away from $50 again on rumors that Saudi Arabia is looking to cut exports.
Gold is down a bit to $1,283.
For whatever it’s worth, China is giving a nod to “transparency” with its gold holdings once again.
“After a hiatus of more than two years, China is adding to its gold reserves,” Bloomberg reports. The People’s Bank of China has declared a gold stash totaling 1,853 metric tons as of last month — the first increase it reported since October 2016.
Puh-leeze. The Chinese central bank has been adding to its gold stash the whole time, and it’s a lot bigger than 1,853 metric tons. Jim Rickards says China’s ultimate goal is a gold reserve as a percentage of its GDP equal to that of the United States and the eurozone.
That implies a reserve of 4,200 metric tons. By one unofficial estimate — from gold researcher Koos Jansen — they’re nearly there now at 4,000.
Sentiment among small-business owners remains near record highs —judging by the latest Optimism Index from the National Federation of Independent Business.
The index rings in at 104.4 — down a touch from the previous month, as survey respondents are curbing their expectations for real sales growth.
Asked to cite their single most important problem, 23% say “quality of labor” — a total still near a record high. Nothing else comes even close, with 14% citing regulation and 13% saying taxes.
We’re heartened to see one of Wall Street’s more prescient soothsayers lining up with our Nomi Prins.
Nomi warned us a few days ago about how weak-quality corporate debt poses the biggest risk to markets this year. Now she’s been joined by Steve Eisman.
Eisman was one of those people who bet on a collapse in mortgage-backed securities going into the Panic of 2008 — good for a prominent place in Michael Lewis’ book The Big Short. (In the movie, his name was changed to Mark Baum — the Steve Carell character.)
Today’s Financial Times reports Eisman is concerned about corporate bonds rated BBB — just one notch above junk. These bonds make up one-third of the entire corporate bond market.
“But size is not the problem,” says the FT, channeling Eisman’s thinking. “Rather, he says, it is that big banks have cut their trading inventories of BBB bonds by about 80%, to $20 billion, as they try to comply with tougher rules on capital and liquidity.
“With the traditional market-makers on the sidelines in the next recession, Mr. Eisman says, the only way to sell BBBs will be at painfully deep discounts — forcing big marked-to-market losses on funds holding them.”
Yes. Unless the powers that be lean on the rating agencies like S&P and Moody’s to keep the bonds rated BBB. Can’t rule that out…
“It’s amazing how accurately you have described my immediate family and friends. We are virtually ready to start shooting,” reads the first of many responses to our “New American Civil War” episode yesterday. There’s no way we can include all of them.
“I told my wife just a few days ago… I don’t fear, hate or want ill will against the Russians or the Chinese but I hate and am ready to fight and eliminate the political left in this country — who I consider my enemy and a threat to my way of life, liberty and the pursuit of happiness.
“I am not alone in this thinking. Let’s hope it doesn’t materialize.”
If you agree with the hypothesis of a new American civil war, an early skirmish (like Lexington and Concord, 1775) was Occupy Wall Street.
“The government reaction included aggressive force, obstructing the press and baseless arrests. “It is scary to consider the possibility of a civil war, but with growing debt burdens on families (school loans, car loans) and growing income disparity it could happen.”
“I think this scenario is more likely in 2021 soon after the elections.
“The U.S. is more like Europe during Reformation. The federal government is like the Catholic Church dictating its rule on the nation-states. Let’s hope it doesn’t take a Thirty Years’ War to settle this.
“If cooler heads prevail, we can create a series of regional states that cater to the various political points of view at the cost of great upheaval and migration but better than war.
“Somebody better be making plans for some kind of solution because there aren’t any out there. Protestants and Catholics live side by side in Europe today without giving it a thought. Can progressives and conservatives do the same in five years?”
“I do think secession of various kinds will occur.
“Personally, as a physician, I am about to drop out of a collapsing system and practice government- and insurance-free. We’ll see how it goes.”
“There is a lot of hatred building up on both sides, by the ‘ oppressed’ and, conversely, by the ‘ oppressors’ who are fed up with the mooching and grifting done to and by our government.
“With over 350 million guns out there (does that number include illegal weapons?) this will not end well. All it will take is a spark to the already stressed-out proletariat. With 70% of households living week to week, a deep recession in 2019 will be catastrophic.
“I hope I’m wrong.”
“In regard to what we’re planning, we’ve been trying to implement everything that Jim Rickards and other sources have discussed over the last five years.
“We’ve purchased some guns/ammo and three months of emergency food for the apocalypse scenario. We’ve also purchased gold and silver to maintain the 10% of investable assets rule that Jim recommends. We also continue to be maxed out in the company 401(k) for the hope that things will not degenerate into chaos.
“We’ve learned from many issues of The 5 to listen to all the advice to make the most informed decisions. Thanks for all your help!”
“The hatred level between Red and Blue is worse than the North/South issues in the Civil War era,” writes our final correspondent today.
“What escapes the ill informed is that ‘hatred corrodes the container it is carried in’…
“How to prepare?? Stop listening to politicos. They always have grandiose solutions.
“My plan? Be fiercely independent, have no debt, evaporate (no social media presence), live in a low-population area and own firearms and know how to use them. Have a stash of junk silver and gold.
“From the tomb Lyndon Johnson tells us, there are times in life when you have to hunker over like a jackass in a sleet storm.”
The 5: The last two items in the mailbag prompt us to look up some remarks Jim Rickards made to us when he came aboard Agora Financial in 2014.
“I travel, I give speeches, I still live my life.” That’s despite the financial “avalanche” he expects could be triggered by any one of dozens of individual “snowflakes.” He too has addressed the prospect of a “new civil war,” albeit mostly to his paying subscribers.
Elsewhere he’s said, “I don’t believe you need to hunker down in a safehouse with years worth of canned food and enough guns and ammo to outfit a small army.”
Awareness and understanding are key.
“Keep the discussion going,” one reader implored us after reading yesterday’s 5. “Let’s keep the conversation going,” said another.
We will. We promise.
The 5 Min. Forecast
P.S. Also interesting: Out of nearly 3,900 words readers submitted to the mailbag overnight, the proper name “Trump” appeared only five times.
Whatever’s brewing is about a helluva lot more than “MAGA” versus “Orange Man Bad.”
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