The Cavalry may not Arrive on Time

February 28, 2019

A vast amount of economic data had been delayed due to the government shutdown that lasted 35 days from December 22nd to January 25th. But now, unfortunately for the Wall Street shills, it is all coming out—and, for the most part, it is downright ugly. At the end of the day, you are going to invest either by using data and math or by feelings and misguided momentum chart chasing. I prefer the former to the latter.

So, what does the data say? Core capital goods dropped 0.7% in December, Housing starts plunged 11.2% in December month/month and tumbled 10.2% year/year. Leading Economic Indicators for January are declining; The Philly Fed Index dropped into negative territory for the 1st time in 3 years at–4.1% in February. Again, please note this was a February reading after the shutdown ended. Existing home sales in January fell to their lowest level since November of 2015. Pending Home Sales for January were reported to be 2.3% lower than a year ago, making the January reading the 13th straight month of year-over-year declines in future home purchases. Finally, US GDP for Q4 came in at a 2.6% annual rate, which was lower than the Q3 growth of 3.4% and significantly less than the Q2 growth rate of 4.2%. Yet, still better than the 1.2% growth rate for Q1 of this year predicted by the NY Fed.

Meanwhile, the data outside the US is even worse: German and Italian Purchasing Manager’s Indexes’ (PMI) both indicate that the European Union (EU) is heading into a recession, if not already in one. If you want to know how bad the core of Europe is doing, German PMI manufacturing index hit a 74-month low in February at 47.6. And it is the same story for Japan. And so much for China’s ability to boost growth by re-leveraging its already massively overleveraged economy. The communist nation’s official manufacturing purchasing managers’ index in February decreased to 49.2, data from the National Bureau of Statistics showed. It was the lowest reading in three years.

So, the question is how bullish do you want to get at this time now that the major averages have climbed all the way back to being close to all-time highs? Especially while GDP growth is slowing sharply, earnings growth has turned negative, and margins have peaked. And, especially when you consider that central banks have mostly run out of bullets to fight the falling business cycle.

Quantitative Easing (QE) works with a lag and is not a panacea for economic growth by any stretch of the imagination. But it does boost asset prices if it is both massive and protracted. Neither one of those conditions are prevalent today as they were from 2009 thru the start of 2018. And there is zero room left in Europe and Japan to reduce interest rates to relieve debt service payments and spur more borrowing to boost consumption.

Global economic data is crashing, and there is a pervasive and errant belief in investors’ minds that global central banks have now gone all-in on easing monetary policy and that it will very soon produce a synchronized global economic recovery once again. That notion, the carnival barkers in the Main Street Financial Media would have you believe, is highly unlikely to occur anytime soon. First, the European Central Bank (ECB) and the Bank of Japan (BOJ) already have negative interest rates. And the Fed only has less than 250 bps to lower rates. However, it usually takes at least 500 bps to pull an economy out of a recession.

QE not only does little to nothing in the way of improving growth it also is not any guarantee of perpetually higher stock prices. The Nikkei Dow is just about 3% higher today than it was back in August 2015, even after pouring in trillions of yen starting in 2013 that is continuing to be poured in today. The ECB just ended QE in December of 2018 after printing trillions of euros since 2015. But the German DAX is at the same value today as February 2015. It is the same with Italian and French exchanges. The truth is that stocks have gone nowhere in Europe for the past few years.

And despite all that QE there still is a recession in Italy, 0% GDP growth in Germany and 0% growth in Japan.

In the US, QE ran from the start of 2009 thru October 2014. However, real GDP averaged a pitiful 1.36% throughout this period.  The ECB QE program ran from 2015 thru the end of 2018. But despite negative interest rates along with a massive QE program, German growth was just 1.5% in 2018 the weakest in five years and was 0% in Q4 of last year. All that central bank money printing didn’t help Italian GDP; it was negative in the previous two quarters of 2018. And in Japan, its Qualitative and Quantitative unprecedented counterfeiting spree was only able to produce 0.0% GDP growth in Q4 of last year over the year-ago period.

QE does nothing to help the real economy in a viable manner and can only help push stocks artificially higher if it is both massive and infinite in nature. But neither of those conditions have become manifest in Europe and especially in the US at this time. In fact, the Fed is still in the process of selling around $40 billion of its asset each month off its balance sheet.

Therefore, there should soon be a significant selloff in the global averages as investors slowly realize the conveyor belt of bad data continues but global central banks have yet to commit to permanent money printing.

Remember, all of this central bank intervention was supposed to be temporary due to a worldwide economic emergency. Hence, going back into QE now would be an admission that QE can never end, and asset bubbles along with inflation will be allowed to run intractable. This is because nominal rates will forever be stuck at around 0% and real interest rates and will sink further and further into negative territory for as far as the eye can see.

Therefore, our central bank will be loathed to admit this and should be reluctant to put itself in such a position. This is because such an absurd monetary policy stance will put a death sentence out on the American middle class and set the economy firmly down the path of perdition. Again, I do not doubt that major global central banks will end up in that dreadful position. However, the Powell Put probably won’t become fully in effect in time to save the stock market from another massive selloff.

So, you might ask, what was the primary outcome of all this money printing? The 400 wealthiest Americans own more of the country’s riches than 150 million adults in the bottom 60%. That unbalanced condition will grow massively worse if the Fed goes back into QE from this point. The Fed is now even contemplating making up for the years following the Great Recession when inflation was below that magical official government measure of 2% CPI. In other words, the Fed will most likely seek to push inflation above 2% for at least seven years. Not only this, but the new economic fad is to push for something called the Modern Monetary Theory. Basically, a belief that governments should be allowed to spend unlimited amounts of money and have central banks print it all. God help us all!

What this all means is that if you are not investing with the inflation, deflation and economic cycle dynamic in full view you are virtually assured to either lose a massive amount of your principal; and/or risk even more losses in terms of your purchasing power through inflation. The goal of PPS is to ensure that in the long-term the exact opposite of that outcome is realized.