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<\/a><\/p>\nThat is my office floor this morning.<\/p>\n
This week, the market plummeted, then skyrocketed. Now it’s plummeting again. Common events in a bear market.<\/p>\n
Early this week, I wrote “The BIG stockmarket bounce coming in 2019,<\/em>” detailing a bunch of reasons it would happen. Just not immediately. Click here.<\/strong><\/a><\/p>\n Yesterday I received Joel Ross’s latest Ross Rant –<\/em>– an excellent newsletter you should subscribe to. Click here.<\/strong><\/a>\u00a0I don’t go along with all his politics. But you need to read the newsletters for his financial info.<\/p>\n This latest Ross Rant contained:<\/p>\n Maybe the stock market will finally get over its nonsense panic this week. Here is some reality. 85% of trades lately have been by algos. The programs are triggered by Fed increases, oil prices, yield curve, and other things that the young traders and computer scientists programmed in, but do not necessarily mean recession or even a downturn is coming. These look at data triggers that do not take a human view of the whole picture.<\/p>\n The insanity in DC with the Dems wanting tax increases and socialistic healthcare and more regulation is not helping. Despite all this, consumer confidence is still at an all time high. Retail sales are up 5.1% over last year, sales at bricks and mortar locations grew 3.3%, and overall sales may complete the year up even more with last minute and post-Christmas shopping. That is a new record high level of sales, just under $900 billion. Amazon and Walmart are going to surprise on the upside. Consumers are not bothered by the shutdown, the market, nor the latest Fed interest rate hike. It is likely margins at retailers are improved more than analysts think.<\/p>\n While the press blathers about interest rates, reality is they are now at 2.75% on the ten year, down from 3.2% recently, despite the Fed increase. Mortgage rates are now at 4.63%, down from 4.8%. 4.6% is extremely low historically, so not a real detriment to home buyers. Despite all the negative stories about housing, multifamily starts are doing fine, causing total housing starts in November to be up 3.2%. While single family is down somewhat, it may be that many more people, especially younger people, prefer to rent anyway, and maybe there is a change in the housing market due to that. I do not know, but if young people prefer to rent, as some have suggested, then maybe single family housing is reflective of the real demand today and mortgage rates are not the determinant many suggest.<\/p>\n A total of 1.26 million new units of housing are coming on line this year, so it is not the debacle you read about, it is just that over 400,000 are multifamily. Permits for multi were up 22% in November. That is a somewhat misleading since permits fluctuate all over the place, but that suggests housing is not crashing. Single family permits are also up last month. Labor costs are not rising much, only 0.9%, but that is due to materially improved productivity due largely to technology investments. Labor costs are not creating inflation. Productivity numbers are historically inaccurate, so data is not reliable, but the pre-tax profit margins of companies are increasing, which does suggest productivity is increasing since cash wages (as opposed to labor costs) are up over 3%, which means well above inflation.<\/p>\n The combination of tax cuts, wage increases, and much lower oil and gas prices has left families with very real increases in cash income. A complete change from under Obama. Real family income is rising nicely which has led to materially increased savings, and increased spending. Most people refinanced their mortgages to much lower rates over the past few years, so mortgage payments are not the financial drag for families they were in 2008. This leaves more cash to save and spend. There are no more subprime nor teaser loans. All good for the economy.<\/p>\n Lastly, the yuan was allowed to float down a little to partially offset tariffs, so the combination of the rising dollar, producers in China eating some of the tariffs, and importers eating some, has led to end prices to consumers not rising as much as some had predicted. Good for retail and consumer spend. Banks report they are still lending and not pulling back, so credit remains available, which means there is no recession in the near term. Some analysts predict a credit event in 2019, but reality is most corporations have no material growth in interest costs, and increasing earnings has led to generally good debt coverage ratios.<\/p>\n While there is a risk that companies have taken on a huge amount of debt over the past few years, as have countries, the debt is at rates that are near historic lows at a time when earnings for many are rising. If there is a recession, then this excess level of debt could become a real problem, but earnings will have to drop a lot for there to be a major problem. With the ten year still below 3%, most real estate and corporate debt is manageable, even in a slowdown.<\/p>\n If Trump would shut up about the Fed, and if Fed officials give more speeches saying they are not set on more increases in 2019, the market would relax.<\/strong> (Harry’s bolding.)<\/p>\n As always, you have to look at the real underlying data, and not rely on the histrionics of analysts and the press. The economy remains very good, and while GDP will grow more slowly in 2019 than 2018, it will still grow at 2.7%, or around that. That is still good, and earnings will still grow well, 8%-10%, meaning stock prices will recover. A survey of analysts found almost nobody is really projecting a recession in 2019, and many of the grown-up money managers think 2019 stock prices will rise. The government shut down will end soon, and nobody really cares. We all just chalk it up to the usual stupidity of DC.<\/p>\n In summary, the market has panicked and is oversold, and possibly that is because 85% of trades are executed by algorithms. It is unclear, but if you just hang in, you will be fine, unless you are a short term investor.<\/p>\n All my learned stock gurus tell me the stock market usually doesn’t care who’s in the White House. Except for maybe this time. In fact clearly this time. How bad is it in Washington? The answer is pretty bad. The best (or worst) summary of what’s happening is in profiled in this strong piece from the New York Times<\/em>\u00a0 of three days ago:<\/p>\n Economy Is Strong. Leadership Is Shaky. Which Will Win Out in 2019?Economy Is Strong. Leadership Is Shaky. Which Will Win Out in 2019?<\/strong> Sometime in the last couple of months, predictions of a major economic downturn or recession in 2019 went from being a crank view to the conventional wisdom.<\/p>\n It is true that the global economy is sputtering, and that the stock market is in its worst pullback in a decade, with the Standard & Poor’s 500 index down more than 19 percent since Sept. 20 as of Monday’s close. But this sense of gloom and pessimism has gotten ahead of the facts on the ground, especially concerning the United States economy.<\/p>\n The real risk is not that insurmountable challenges knock the economy off course. It is that poor leadership converts moderate economic shocks into a crisis.<\/p>\n The combination of erratic behavior from the president and a thinly staffed government in the United States; the potential crises facing other major economies; and the lack of trust amid allies and major trade partners could make routine economic challenges turn into something worse.<\/p>\n Surveys show rising pessimism among top corporate executives. And over the weekend Treasury Secretary Steve Mnuchin called bank C.E.O.s to seek assurance that their institutions were sufficiently liquid to keep lending to consumers and businesses, according to a Treasury announcement.<\/p>\n It was the kind of disclosure that risked causing more damage than it was intended to prevent. If a top health official announced that he had convened conversations with top pharmaceutical C.E.O.s and was pleased to learn there were no drug shortages, your first response would not be relief but to ask, “Wait, we need to worry about drug shortages?”<\/p>\n Then there are the president’s repeated attacks on a Federal Reserve led by his own appointees. Just in the last three days, that has included reports that President Trump has discussed the legally dubious move of trying to fire the Fed chairman Jerome Powell, efforts by administration officials to play down that possibility, and a renewed presidential Twitter attack Monday morning.<\/p>\n It all raises the possibility that if things do get worse, the United States government will be an agent of chaos rather than the source of steadiness and calm it is normally known for during crises.<\/p>\n It is a lack of confidence in global leadership that explains this paradox: an economy that is doing this well and yet widespread conviction that things are about to turn bad.<\/p>\n The unemployment rate is near a five-decade low, as is the rate at which people are filing new jobless claims. The American consumer appears strong; this is looking to have been one of the strongest holiday sales seasons in many years.<\/p>\n Surveys of supply managers, which act as an early warning system for slowdowns in business activity, are in strongly positive territory. In the Institute for Supply Management’s surveys, an index above 50 indicates the economy is in expansion; its most recent reading was 62.1 for the manufacturing sector and 60.7 for services.<\/p>\n The most concrete warning signal is coming from financial markets. But the bond market is generally more closely tethered to economic ups and downs than the stock market, and while it is suggesting slower growth ahead, it is not at recessionary levels.<\/p>\n For example, the two-year Treasury bond yielded 2.56 percent at Monday’s close. That’s still higher than the roughly 2.4 percent where the Fed’s benchmark overnight rate now sits. You would expect that if a recession were imminent, the two-year yield would fall lower, reflecting expectations of Fed rate cuts to combat the downturn.<\/p>\n At this point in December 2007, which we now know was the beginning of the Great Recession, the Fed’s target interest rate was 4.25 percent. But the bond market was already pricing in more cuts in the years ahead, with the two-year yield ending the year at 3.12 percent.<\/p>\n Most economic and financial indicators are not pointing toward some economic collapse in 2019, but rather to a return to the kind of moderate economic growth that was completely normal from 2010 to 2017.<\/p>\n In this story, 2018 has been the aberration – fueled by a commodity boom and the temporary effects of tax cuts. To the degree there is a market correction and adjustment in business sentiment, it is about realizing that we’re returning to the old new normal.<\/p>\n There are some rumblings of things that could go wrong in the financial system. Companies that loaded up during the era of ultralow interest rates are facing high debt burdens. Some may find themselves in bankruptcy. Oil prices have fallen enough that it seems it will be a tough 2019 in energy-producing areas.<\/p>\n But the biggest worry for 2019 is not so much that any of these disruptions proves so large as to cause a recession. The real fear is that shaky policy allows small shocks to create a broader crisis of confidence.<\/p>\n Beyond the attacks on the Fed and odd communication from the Treasury, there are other risks from Washington. Further escalation of the trade war – including into the economically consequential automobile industry – remains a distinct possibility. Divided government could lead to paralysis.<\/p>\n Major nations worldwide are facing profound challenges, including a potential Brexit disaster in Britain, protests in the streets in France, budget standoffs between Italy and European leadership, and some signs that the leadership of the Chinese president, Xi Jinping, is being challenged because of the trade war with the United States.<\/p>\n It is quite a contrast with the 2008 crisis, when the United States government was stocked with highly experienced economic policymakers and a president who trusted their judgment, when no one had heard of Brexit, and when a trade war seemed unfathomable.<\/p>\n At a crucial juncture in October 2008, finance ministers of the Group of 20 major economies issued a statement at a meeting in Washington in which they “committed to using all the economic and financial tools to assure the stability and well functioning of financial markets,” and to “ensuring that actions are closely communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole.”<\/p>\n It was a key moment in ending the 2008 crisis. Given geopolitical developments since, it is hard to imagine that harmony happening today. It’s easier to imagine conflicting signals and an every-nation-for-itself breakdown of communication.<\/p>\n But we’re not there yet. And throughout the expansion of the last nine-plus years, the United States economy has proved stubbornly resilient to challenges, whether the chaos of the eurozone crisis in 2010 or a commodity collapse in 2015.<\/p>\n The boom year of 2018 may be unlikely to repeat itself, but if leaders in the United States and overseas keep their wits about them – far from a guarantee given recent events – there’s no reason 2019 needs to be a bad year.<\/p>\n The question is which will prove more important, the economic fundamentals or leadership. And to be an economic optimist means counting on the fundamentals to prevail.<\/p>\n The above New York Times<\/em> piece was written by Neil Irwin who is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.”<\/p>\n My personal strategy<\/strong><\/span><\/p>\n My thinking: Stock prices since Trump came in have been fueled by three factors:<\/p>\n The tax cut is over. Buybacks have lessened, All the talk about FANG, the cloud and digital has died.It’s been replaced with fears of Washington’s economic mismanagement — the latest being the government shutdown — the first in American history caused by a President throwing a temper tantrum over a toy he wants. (I watched a few of these with the grandkids in the last few days). My grandkids range between 1 and 5. If they throw a temper tantrum, they usually don’t get what they want.<\/p>\n None our President’s temper tantrums is good for certainty making. The markets don’t like uncertainty.<\/p>\n Eventually things will be resolved. Which is why I’m confident that share prices will be up in 2019.<\/p>\n But meantime, we’re going to have to live with more of Trump’s Sturm and Drang.<\/p>\n What a horrible thought<\/strong><\/span><\/p>\n In 2013,\u00a0Jay Leno said the real problem is that politicians eventually figure out how to get the government going again.<\/p>\n Dangerous spam<\/strong><\/span><\/p>\n I received these emails within minutes of each other. You can tell they’re spam for two reasons:<\/p>\n They look the same. The BIG tip is the originating email address — it bears no relationship to either Amazon or Walmart. It just looks phony.<\/p>\n Had I clicked on “See Details<\/strong>,” I’m sure my computer would be infected and my life ruined!<\/p>\n Nice holidays<\/strong><\/span><\/p>\n Stop your family bugging you about getting married<\/strong><\/span><\/p>\n<\/a><\/p>\n<\/a><\/p>\n
\nMoves like Mnuchin’s phone calls to bank C.E.O.s could create a broader crisis of confidence.<\/em><\/p>\n\n
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