Allison Ostrander, Director of Risk Tolerance at Simpler Trading kicks off today with comments on the big down day for FedEx shares on the back of Amazon advising its sellers to avoid using the company for holiday shipments. We also look at the overall health of the US markets for 2020. Politics plays a roll but so does market liquidity.
Mr. Jerome Powell and his mates sat on their hands today — no rate cut:
The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions and inflation near the Committee’s symmetric 2% objective.
Nor does “the Committee” intend to cut rates next year. But what of possible rate hikes?
Only four of 17 members anticipate a quarter-point raise in 2020.
Of course… the Committee hooked the standard disclaimer to their announcement:
The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
The stock market greeted the news with a general shrug of the shoulders. It was, after all, expected.
The Dow Jones gained 29 points on the day. That is, it barely made good yesterday’s 28-point loss.
The S&P scratched out a nine-point gain. The Nasdaq fared best — up 38 points today.
The world jogs on.
But let us take a brief canvas of the overall economic condition…
Stocks presently summit new heights, unemployment presently plumbs old depths, consumer confidence is presently up and away.
Meantime, the Organization for Economic Cooperation and Development (OECD) claims the global economy has swung 180 degrees since October.
That is, the global economy has swung from contraction to recovery since October.
Stable growth momentum is anticipated in the euro area as a whole, including France and Italy, as well as in Japan and Canada. Signs of stabilizing growth momentum are now also emerging in the United States, Germany and the United Kingdom, where large margins of error remain due to continuing Brexit uncertainty. Among major emerging economies, stable growth momentum remains the assessment for Brazil, Russia and China (for the industrial sector).
If October did represent an actually inflection point, investors can prepare for a merry run…
Reports Saxo Bank’s Peter Garnry:
Our business cycle map on country level going back to 1973 suggests that if the turning point came in October, then we are entering the most rewarding period for investors in equities relative to bonds. The average outperformance for equities versus bonds in USD terms has been 9.4% for every recovery phase.
Look close. You can almost see the erring stars returning to their courses… the angels returning to their posts… the Perfections returning to view.
But as we have noted before:
While bad news frightens us… good news terrifies us.
Too many animal spirits are unchained, too many guards go down, too many fools rush in.
Have they forgotten the trade war? Are global debt levels falling? Is a white age of peace suddenly upon us?
And we might remind the chronically hopeful of this capital fact:
Recession is a menace that often arrives unannounced, like an influenza… or an unexpected visit from a mother-in-law.
Periods of seemingly incandescent growth may immediately precede it.
Please consult the following dates. Each reveals the real economic expansion rate — that is, the economic growth rate adjusted for inflation — immediately before a recession’s onset:
- September 1957: 3.07%
- May 1960: 2.06%
- January 1970: 0.32%
- December 1973: 4.02%
- January 1980: 1.42%
- July 1981: 4.33%
- July 1990: 1.73%
- March 2001: 2.31%
- December 2007: 1.97%.
(We doff our cap to Lance Roberts of Real Investment Advice for providing the data.)
You are immediately seized by a strange and remarkable fact:
Recession has followed hard upon jumping growth rates of 3.07%, 4.02%… and 4.33%.
The quote of our co-founder Bill Bonner springs to mind:
“It is always dawnest before the dark.”
Let the record further reflect:
Growth ran 2% or higher immediately prior to five of nine recessions listed.
“At those points in history,” Roberts reminds us, “there was NO indication of a recession ‘anywhere in sight.’”
Once again… here we refer to real growth, which minuses out inflation’s false fireworks.
Now come home…
Third-quarter 2019 GDP came ringing in at 2.1%. And the Federal Reserve projects 2019 will turn in 2.2% growth when the final tally comes in.
What was GDP before the last recession — the Great Recession?
1.97% — a general approximation of the rate presently obtaining.
Shall we enjoy a belly laugh at Ben Bernanke’s expense?
Granted, it is nearly too easy — like guffawing at a justice of the Supreme Court who slips on a banana peel… or whose toupee is carried off by a sudden gust.
But in January 2008 Mr. Bernanke stood proudly before the world and exulted:
“The Federal Reserve is not currently forecasting a recession.”
Below, Jim Rickards shows you why one the Federal Reserve begins intervening in markets, it cannot stop. Where will it take us? Read on.
Managing editor, The Daily Reckoning
I am happy to introduce Peter Hanks, Analyst at DailyFx. Peter and I take a look at the big picture for the markets and money flows. This includes trade updates, central banks policy and the moves so far this year in US markets compared to the safe assets. We also look ahead to 2020 and assess the likelihood of a recession as well as the major driving factors for the markets.
This first hour is full of extended segments with topics ranging from overall US markets health to opportunities in depressed markets, and of course comments on the resource sector. It’s fascinating to see three different types of investors and money managers all have similar outlooks for risk on and risk off assets.
Please feel free to share your thoughts by commenting or emailing me at Fleck@kereport.com.
- Segment 1 – Jesse Felder, Founder of The Felder Report kicks off the show with an extended conversation starting with a discussion on distinguishing between a bubble and a mania. We then look to some of the sectors that Jesse sees as offering great value for investors.
- Segment 2 and 3 – Rick Bensignor, Founder of Bensingor Investment Strategies shares his thoughts on the US markets, Emerging Markets, copper, and gold.
- Segment 4 – Matt Geiger, Managing Partner at MJG Captial focuses on the resource sector. We chat about the weakness in the USD and how that could impact the metals; how he is positioning his fund for tax loss selling season; and what he thinks will finally drive M&A activity in the sector.
Exclusive Company Interviews This Week
- Great Bear Resources – Summarizing The Overall Scale Of The Dixie Project
- Great Bear Resources – A quick discussion on the strategy behind spinning out a 2% NSR
- Gatling Exploration – A New Exploration Company With a 35,000 Meter Program Underway In The Abitibi Belt
- Skeena Resources – The recent drill result of 314g/t AuEq over 2.21 meters is more exploration than infill drilling
This weekend you get a full two hours of market and economic commentary. In the first hour I focus on the many predictions of a recession occurring in 2020. We also discuss the trade war developments from this week and how it all relates to overall market direction.
The second hour of the show is focused on resource investing. Be sure to check out that posting under “Hour 2”.
Please let me know what you think of this weekend’s show. I love hearing from all of you and do my best to get back to your emails. My email is Fleck@kereport.com.
- Segment 1 & 2 – Mike Larson, Editor of The Safe Money Report kicks off the show with his thoughts on a possible 2020 recession. We look to the recent IPO market failures and the comments made by Powell earlier this week.
- Segment 3 – Chris Temple recaps the market moves at the end of the week on the back of the trade developments. The move to risk on was drastic at the end of the week.
- Segment 4 – Jeff Christian, Managing Partner at the CPM Group distinguishes between a recession and full on financial collapse that some are predicting. From an investing perspective this is very important for when the large correction hits.
Dear Rich Lifer,
Although the U.S. economy continues to grow and add jobs, talk of the dreaded “R” word is on the rise due to a number of worrying signs.
Yes, I’m talking about a “Recession”.
Between the ongoing trade war with China, an inverted yield curve, and the Federal Reserve lowering short-term borrowing costs, investors are starting to get spooked.
A question I get asked a lot is what should retirees do with their money when a recession is looming?
When the market crashed in 2008, an estimated $2.4 trillion disappeared almost overnight from Americans’ 401(k)s and IRAs.
The fear of losing everything to another recession is sending a lot of investors running for the hills.
However, there are steps you can take today to minimize losses during a recession, no matter your age or financial situation.
Here’s a checklist you can follow so that your investments and savings can weather any financial storm.
1. Start tracking your cash flow.
Step one in preparing for a recession is knowing where you stand. The best way to figure this out is by calculating your cash flow, or how much money you have coming in versus going out.
Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty should there be an economic downturn.
If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last.
An easy way to begin tracking cash flow is with free mobile apps, like Mint or Personal Capital. You simply connect your bank accounts to these apps and the software tracks your transactions and categorizes your spending.
This way you know where your money is going each month and you can start setting budget goals or identifying expenses that can easily be cut in the future.
2. Top up your emergency fund.
Your best defense against economic hardship will be a well-funded emergency fund. Rather than rack up high-interest debt, you can tap your savings to cover basic living expenses.
As a general rule-of-thumb, I recommend building an emergency fund of 3-6 months worth of expenses. With talk of a nearing recession, however, it’s best to err on the conservative side.
The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.
If you’re retired, you won’t have to worry about getting laid off, but you’ll still need an adequate amount of accessible cash in case your retirement accounts or pension take a hit.
3. Pay off outstanding debt.
With talk of a recession happening in the next year or so, it’s a good time to start aggressively paying down any bad debts you owe.
Should a recession strike, you’ll want your income going toward monthly living expenses and not paying the bank.
Plus, if you miss too many payments you could end up wrecking your credit score, which will make your life even more challenging when the economy recovers.
Also, whatever you do, don’t dip into your 401(k) to pay off debt, especially if you’re not yet retired. Start with high-interest debt first, like credit cards and build debt payments directly into your budget so you don’t forget.
4. Rebalance your investment portfolio.
Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investments.
If you’re already retired or close to retirement, you’ll want to mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation.
Traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification.
The reason being that retirees are now living longer, which means your portfolio needs more room for growth. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.
5. Manage your 401(k) wisely
If times get really tough, it can be tempting to want to sell or make significant alterations to your 401(k). My advice: don’t touch it.
Most likely, your 401(k) is part of your long-term financial plan, which means economic downturns are part of the deal. You don’t want to jeopardize any long-term gains by panic-selling the moment markets start dropping.
Lastly, if you’re not already maxing out your 401(k) contributions or taking advantage of any employer-match programs, make sure you do. That’s your money to keep.
Finally, understand that recessions are a normal part of the economy. They’re cyclical in nature and notoriously hard to predict. Control what you can by heeding the warning signs and preparing best you can.
To a richer life,
Eddie Ghabour, Co-Owner of Key Advisors Group shares his thoughts on the potential of a recession in the next 12 months while also balancing US market moves. Even though Eddie does not see a recession in the next year he is shifting his clients into a more defensive position for their portfolio by focusing on dividend stocks and shifting into cash. We also discuss how the election could play a roll in delaying a major recession.
Ed Moya, Senior Market Analyst at OANDA joins me to share his thoughts on the US markets and all the recession fears that are on investors minds. Most importantly for this week we look ahead to major events that could drive markets, these include the Jackson Hole meeting and the G7 summit over the weekend.
Sean Brodrick, Editor over at Weiss Ratings joins me to address the growing fears for a recession. While we have heard a recession is right around the corner for a couple years but now more factors are lining up that support this argument. We discuss the places Sean is viewing as the best investment opportunities.
This post Free-Riding Investors Set up Markets for a Major Collapse appeared first on Daily Reckoning.
Free riding is one of the oldest problems in economics and in society in general. Simply put, free riding describes a situation where one party takes the benefits of an economic condition without contributing anything to sustain that condition.
The best example is a parasite on an elephant. The parasite sucks the elephant’s blood to survive but contributes nothing to the elephant’s well-being.
A few parasites on an elephant are a harmless annoyance. But sooner or later the word spreads and more parasites arrive. After a while, the parasites begin to weaken the host elephant’s stamina, but the elephant carries on.
Eventually a tipping point arrives when there are so many parasites that the elephant dies. At that point, the parasites die too. It’s a question of short-run benefit versus long-run sustainability. Parasites only think about the short run.
A driver who uses a highway without paying tolls or taxes is a free rider. An investor who snaps up brokerage research without opening an account or paying advisory fees is another example.
Actually, free-riding problems appear in almost every form of human endeavor. The trick is to keep the free riders to a minimum so they do not overwhelm the service being provided and ruin that service for those paying their fair share.
The biggest free riders in the financial system are bank executives such as Jamie Dimon, the CEO of J.P. Morgan. Bank liabilities are guaranteed by the FDIC up to $250,000 per account.
Liabilities in excess of that are implicitly guaranteed by the “too big to fail” policy of the Federal Reserve. The big banks can engage in swap and other derivative contracts “off the books” without providing adequate capital for the market risk involved.
Interest rates were held near zero for years by the Fed to help the banks earn profits by not passing the benefits of low rates along to their borrowers.
Put all of this (and more) together and it’s a recipe for billions of dollars in bank profits and huge paychecks and bonuses for the top executives like Dimon. What is the executives’ contribution to the system?
Nothing. They just sit there like parasites and collect the benefits while offering nothing in return.
Given all of these federal subsidies to the banks, a trained pet could be CEO of J.P. Morgan and the profits would be the same. This is the essence of parasitic behavior.
Yet there’s another parasite problem affecting markets that is harder to see and may be even more dangerous that the bank CEO free riders. This is the problem of “active” versus “passive” investors.
An active investor is one who does original research and due diligence on her investments or who relies on an investment adviser or mutual fund that does its own research. The active investor makes bets, takes risks and is the lifeblood of price discovery in securities markets.
The active investor may make money or lose money (usually it’s a bit of both) but in all cases earns her money by thoughtful investment. The active investor contributes to markets while trying to make money in them.
A passive investor is a parasite. The passive investor simply buys an index fund, sits back and enjoys the show. Since markets mostly go up, the passive investor mostly makes money but contributes nothing to price discovery.
The benefits of passive investing have been trumpeted by the late Jack Bogle of the Vanguard Group. Bogle insisted that passive investing is superior to active investing because of lower fees and because active managers can’t “beat the market.” Bogle urged investors to buy and hold passive funds and ignore market ups and downs.
The problem with Bogle’s advice is that it’s a parasitic strategy. It works until it doesn’t.
In a world in which most mutual funds and wealth managers are active investors, the passive investor can do just fine. Passive investors pay lower fees while they get to enjoy the price discovery, liquidity and directional impetus provided by the active investors.
Passive investors are free riding on the hard work of active investors the same way a parasite lives off the strength of the elephant.
What happens when the passive investors outnumber the active investors? The elephant starts to die.
Since 2009, over $2.5 trillion of equity investment has been added to passive-strategy funds, while over $2.0 trillion has been withdrawn from active-strategy funds.
The active investors who do their homework and add to market liquidity and price discovery are shrinking in number. The passive investors who free ride on the system and add nothing to price discovery are expanding rapidly. The parasites are starting to overwhelm the elephant.
There’s much more to this analysis than mere opinion or observation. The danger of this situation lies in the fact that active investors are the ones who prop up the market when it’s under stress. If markets are declining rapidly, the active investors see value and may step up to buy.
If markets are soaring in a bubble fashion, active investors may take profits and step to the sidelines. Either way, it’s the active investors who act as a brake on runaway behavior to the upside or downside.
Active investors perform a role akin to the old New York Stock Exchange specialist who was expected to sell when the crowd wanted to buy and to buy when the crowd wanted to sell in order to maintain a balanced order book and keep markets on an even keel.
Passive investors may be enjoying the free ride for now but they’re in for a shock the next time the market breaks, as it did in 2008, 2000, 1998, 1994 and 1987.
When the market goes down, passive fund managers will be forced to sell stocks in order to track the index. This selling will force the market down further and force more selling by the passive managers. This dynamic will feed on itself and accelerate the market crash.
Passive investors will be looking for active investors to “step up” and buy. The problem is there won’t be any active investors left or at least not enough to make a difference. The market crash will be like a runaway train with no brakes.
The elephant will die.
for The Daily Reckoning
The post Free-Riding Investors Set up Markets for a Major Collapse appeared first on Daily Reckoning.