..Just how long can the Consumer keep US economy in place? The Fed can inject more liquidity to ensure banks keep lending but that is just controlling supply, and you can lower rates so much more only to keep demand for loans but AS SOON as consumers (yes ordinary folks like us) start feeling less confident about job prospects (e.g if the COVID-19 protracts and other risk factors) they are likely to hunker down their spending regardless if the banks want to lend and/or rates going further south. It is easier to control Supply than it is to control Demand. And yes in a state controlled economy like China, you can build houses nobody wants to stimulate the economy but in a free enterprise economy, that is not so.
The markets, in their own bubble and merry making, has yet to wake up to this. There is still time to be Ahead of the Curve.
The time is NOW or SOON.....
How much of an impact could the economic effects of the virus have on U.S. GDP?
Today, former Wall Street insider Nomi Prins shows you the answer. And also, how problems in the “repo” market are getting worse, not better.
February is half over, and we’re that much closer to spring.
As far as the markets go, this past week has been driven by a lackluster set of new economic data and heightened concerns about whether the coronavirus is contained or not, whether the Chinese have downplayed the figures or not and what the real economic impact in China and around the world might be.
But we could already be feeling the effects here at home...
The latest information reveals that consumer spending dropped substantially in January. And core retail sales dropped off.
Clothing sales, for example, dropped 3.1% last month. That’s the largest month-over-month decline since March 2009.
U.S. factory output also slackened. Manufacturing output slipped 0.1% from December, mostly due to Boeing’s ongoing production halt for the 737 Max.
Export demand is also a source of concern, as the coronavirus could affect critical supply chains and hamper demand in the weeks and months ahead.
Meanwhile, weak corporate investment could also put a drag on growth.
All these factors may combine to put a big dent in this quarter’s growth...
A new CNBC survey of 11 economists projects that first-quarter 2020 GDP growth will drop dramatically to 1.2%, far below the 2.1% rate from Q4 2019.
A Bloomberg survey is somewhat better, but not much. These economists project a 1.5% growth rate.
While these numbers are weak, economists surveyed by Bloomberg don’t believe the Fed will be cutting rates soon. But they do believe the drop-off in personal consumption makes the economy vulnerable to “exogenous shocks”:
While the economic outlook remains strong enough for the Fed to keep interest rates on hold, personal consumption moderating from last year’s robust pace makes the economy vulnerable to exogenous shocks, such as the halt in production at Boeing and potential supply chain disruptions stemming from the coronavirus.
Since consumer spending is about 70% of GDP, a downturn in spending could hit the U.S. economy hard.
Federal Reserve Chairman Jerome Powell spoke at his regularly scheduled testimony before Congress this week.
What did he have to say?
The upshot was he reconfirmed the fact that the coronavirus would have an economic impact, but it was too soon to tell the extent of it. So he left it as an excuse, in my opinion, to ease policy if needed down the road.
If the coronavirus threat continues into the second quarter and beyond, he may not have a choice.
What about the ongoing trouble in the “repo” market?
When you add up all the Fed’s support for the “repo” market since September, it comes to over $6.6 trillion.
When pressed by Congress about whether he saw financial risks in the banking system, he pointed to how well the Fed’s bank stress tests have been working.
That’s great, but it seems the liquidity issues are getting worse, not better. The Fed’s latest repo operations were three times oversubscribed, meaning the demand for fresh funding in the repo market far exceeded the supply.
Although the Fed won’t make the information publicly available, the ongoing problems suggest that one or more trading houses on Wall Street are having problems.
The Fed has basically said these loans will continue “at least” through April. But they could continue longer. At the going rate, total loans would reach $29 trillion by the middle of the year.
That would equal the $29 trillion bailout the Fed handed out between 2007 and 2010.
When you add everything up, the economic effects from the coronavirus coupled with ongoing problems in the repo market, things can get really shaky this year.
Below, my colleague Dan Amoss shows you why you need to beware of a major recession indicator that has accurately foretold every recession going back 60 years. Read on.
Beware the Yield Curve
By Dan Amoss
You’ve probably heard of the “yield curve,” and an “inverted yield curve.” A yield curve inversion is a classic recession warning signal. This is a very powerful indicator because it has preceded every recession of the last 60 years.
That means an inverted yield curve has preceded recession on seven out of seven occasions for the past 60 years.
Only once did it give a false positive, and that was in the mid-1960s.
And when recessions hit, stocks are vulnerable to crashes. An inverted yield curve has provided warning of every major stock market “event” of the past 40 years.
That’s why several different measurements of the yield curve are important to monitor. The most-cited yield curve calculation is the 10-year U.S. Treasury yield minus the 2-year U.S. Treasury yield.
But a market crash is not an immediate reaction to a yield curve inversion. During the last two major bear markets, for example, the worst of the selling didn’t start until a few years after the yield curve hit zero or negative. So when you hear that the yield curve has inverted, it doesn’t mean you have to run out and sell all your stocks. It can be a very long time before it shows up in the stock market.
But you should watch the Fed. During these bear markets, the selling of stocks coincided with a panicked series of rate cuts from the Fed.
If investors become risk averse and fear an imminent recession, Fed rate cuts cannot stop investors from selling stocks and de-risking their portfolios. It’s important to realize that Fed interest rate policy can only exert control over the stock market if investors maintain a strong appetite for risk.
The message from a different measure of the yield curve — like the 10-year Treasury yield minus the 3-month Treasury yield — is similar. Incidentally, the Fed places more importance on this part of the bell curve than the 10-year/2-year part of the curve.
The change in this yield curve, shown in the green line below, has been substantial thus far in 2020:
If these two yield curves remain near zero (or below zero) for an extended period of time, then the machinery of bank credit creation can grind to a halt. That’s why anytime the yield curve gets too depressed, the Fed tends to react by cutting short-term rates. Lower short-term rates in turn “re-steepen” the yield curve. In other words, it’s an attempt to restore the normal shape of the yield curve.
It’s no wonder the fed funds futures market has boosted its probability of a 25 basis point Fed rate cut at the June 2020 meeting from about 15% to 37% in just the past few weeks.
Far ahead of this move in the futures market, my colleague Jim Rickards predicted that the Fed would cut rates 25 basis points at the June meeting in an effort to re-steepen the yield curve. If the Fed doesn’t cut rates soon, then the supply of bank loans is likely to tighten in the months ahead.
Having described these trends, we need to ask: How does the yield curve affect the real economy?
During credit booms, banks are happy to make new loans because the interest rate on loans generally exceeds the cost of funding those loans (through deposits and the like). And when banks create those loans on the asset side of their balance sheet, they simultaneously create new money supply on the liability side of their balance sheet.
A growing money supply usually means there’s plenty of money flowing through the economy. As this money flows from consumers to producers, it can be used to service outstanding debts that have been made in the past.
U.S. government deficits and Fed balance sheet expansions also add to the money supply, but most of today’s money supply (the so-called “M2” supply) was loaned into existence by the banking system.
As banks’ “net interest margins” compress, they tend to get pickier about what loans they make. And as loan growth slows, money supply growth slows.
The yield curve foreshadows the trend in future bank profit margins, and it doesn’t look bullish.
If banks aren’t earning decent profit margins on new loans, that’s a problem for a highly indebted economy with many borrowers that must constantly refinance their loans.
Within a matter of months, loan defaults can spike. When defaults get bad enough to threaten the banking system, the Fed panics and cuts rates. We haven’t seen many defaults in recent bank earnings reports, but there are concerning trends in credit card defaults.
This credit cycle has lasted an extraordinarily long time because the Fed kept emergency-style monetary policy in place from 2008 up until it started timidly hiking rates in December 2015.
Super-easy policy has allowed an epic boom in credit — especially in corporate bonds — to hit unprecedented heights. The burden of bank debts and bond debts is as big as ever, so the U.S. economy has become less tolerant of a flat yield curve over time.
Many investors have been waiting to sell stocks and de-risk portfolios until six or 12 months past the point of yield curve inversion. Such investors are confident that we’re in the equivalent of 1999 or 2006 in the cycle, so they expected one last “melt-up.”
The sharp rebound in stocks since December 2018 certainly looks like a melt-up, despite the latest concerns about the coronavirus, which have affected the stock market. But the market’s still at or near record highs, depending on the day.
Maybe the market has more room to run. But most stocks have risen long past the point of being supported by valuations and are dependent on more and more new buyers entering the market to continue rallying.
But with each economic cycle, the heavily indebted U.S. economy clearly has less tolerance for tight monetary policy, yield curve inversion and slowing money supply growth.
Corporate profits have been getting squeezed for several quarters, but investors largely have not cared. They only care that the Fed reversed its policy course rapidly in 2019, switching to radical easing.
Could another 25 basis point cut in mid-2020 rekindle another wave of speculation?
Perhaps. But the next Fed rate cut would likely be in response to deteriorating credit conditions. And stocks rarely rise under such conditions.
