Over the last two months, the deterioration in the economic data has become much more prevalent despite the ongoing hopes of the more “bullishly biased” mainstream media.
Furthermore, as I predicted early last year, the Federal Reserve likely made a mistake in hiking interest rates when the economic and inflationary backdrop were exceedingly weak. To wit:
“The real concern for investors and individuals is the actual economy. There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get out of the potential trap they have gotten themselves into without cratering the economy, and the financial markets, in the process.
It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy.”
And so…that has come to pass. Of course, for me, since I am deemed a “bear” for being a “realist”, my writings are more like a “tree falling in the woods.” The only problem is that just because no one hears it, doesn’t mean the damage to individuals isn’t just as real.
This weekend’s reading list is a compilation of articles discussing “The Awakening” by many to the real problems currently plaguing the economy, the markets, and the Fed.
While it is said “it is better to be late than never,” such sentiment doesn’t sit well with individuals when they are told after the fact what they should have known before hand. But then again, since the turn of the century, “getting back to even” has apparently become a new investing strategy.
1) It’s Time To Worry About The Economy by Matt Phillips via Quartz
“And now the brightness in the US appears to be dimming, at least a bit. The latest benchmark update on the US manufacturing sector shows activity continued to decline in January, marking four straight months of contraction. The strong US dollar—it’s up about 13% against the currencies of major trading partners—is a key culprit.”
But Also Read: Citi’s Crash Clock Is 5-Minutes To Midnight by Jim Edwards via Business Insider
But Then There Is: BofA Says Markets Poised For 24% Gain by Jeff Cox via CNBC
2) Why The Fed Must Go Negative by Ron Insana via CNBC
“But even the simple act of doing nothing, as other central banks ease further, would strain foreign exchange values, accelerate capital outflows from countries whose currencies are plunging against the dollar, and rapidly increase the debt servicing costs of those countries – like Russia, China and other emerging markets, which have heavy dollar-denominated debt loads.
In other words, if global monetary policies continue to diverge dramatically, there will likely be unintended consequences that lead to a rupture in world markets, strained by wildly fluctuating currency values, a further crash in commodity prices and a rush of capital out of the world’s weakest economies.”
Also Read: Trucks & Trains Barely Rolling by Buttonwood via The Economist
Opposing View: Taking Oil Is Just Noise by James Surowiecki via The New Yorker
And Also: The US Is Not In Recession by Econobrowser
3) Blaming The Fed by Ed Yardeni via Yardeni Research
“How did we get into this mess? Despite all the easy money provided by the Fed and the other major central banks, global economic growth is subpar. Indeed, it may be heading into a recession. Inflation remains below the 2% target of the major central banks. Commodity prices are crashing, and stock prices have been weak since the start of the year. Consider the following:
High price of easy money. Today’s problems may be traced to the termination of the Fed’s QE program on October 29, 2014 and the subsequent anticipation of a mere 25bps hike in the federal funds rate, which finally happened on December 16, 2015.
The Fed’s easy monetary policies at the beginning of the previous decade certainly contributed to the subprime mortgage mess. This time, the Fed’s easy money in recent years encouraged borrowers in emerging markets (EMs) to borrow lots of money from banks and in the bond markets to expand commodity production. A significant amount of that debt was in dollars. The prospect of the tightening of US monetary policy after so many years of near-zero interest rates caused EM borrowers to scramble to sell their own local currencies to buy dollars to pay off their dollar-denominated debts.”
Also Read: Welcome To The Profits Recession by Chris Brightman via Research Affiliates
4) Recession Risks Warn Of Severe Market Drop by Tomi Kilgore via MarketWatch
“Based on current valuations, the prices of most stocks don’t appear to have factored in a recession scenario, “hence the downside should we see a recession could be rather severe,” RBC Capital Markets’ global equity team wrote in a research note to clients.
Applying a stress test to their coverage universe, using worst-case, price-to-earnings valuations seen during the 2008-to-2009 recession, RBC analysts said they believe the shares of most companies could still fall another 50% or more from current levels.”
Also Read: Will Stocks Remain Diverged From Global Weakness by Michael Gayed via MarketWatch
Further Read: What The Next Recession May Look Like by Matthew Klein via FT AlphaVille
5) Bounce In Stocks May Be A “Siren’s Song” by Joe Calhoun via Alhambra Partners
“With no improvement in the economic outlook yet – the yield curve is still flattening, credit spreads still moving wider – the move in stocks last week may last a bit longer but I wouldn’t get too excited about it unless you still have some stock to unload. We are still in the transition period I wrote about two years ago – see here – the strong dollar positives not yet apparent. Intermediate and long term momentum is still negative; only short term indicators are turning higher and those only feebly. More monetary stimulus, wherever it is in the world, isn’t the answer for a global economy still trying to find a new growth path. Pay attention to bonds and ignore the sirens of the stock market.”
But Also Read: If It’s A Recession, Stocks Will Fall by George Perry via Real Clear Markets
And: Bonds Suggests Further Correction by Eric Bush via GaveKal Research
MUST READS
- Apple, FANG’s & Monetary Fools by David Stockman via Contra Corner
- Misdiagnosing Again? by John Sumner via The Money Illusion
- The New Normal Is Now Just Normal by Mohamed El-Erian via Project Syndicate
- How The Fed Confirmed A Recession by Tyler Durden via Zero Hedge
- There Is No Freedom Without Truth by Paul Craig Roberts
- BOJ Warning! by Michael Lebowitz via 720 Global
- The Risk Passive Investors Take On by Jesse Felder via The Felder Report
- Global Shipping Runs Aground! by Dana Lyons via Tumblr
- Dividend Cuts Are Escalating Quickly by IronMan via Political Calculations
- An Escalator Of Optimism by Salil Mehta via Statistical Ideas
“Should you find yourself in a leaky boat, devote your efforts to changing vessels rather than patching leaks.” – Warren Buffett
Questions, comments, suggestions – please email me.
Lance Roberts
Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In
