Looking Backwards …
LB #1
This last week was dramatic as we have seen earnings reports, jobs reports, and even the Fed rate decision on Wednesday which seems a month ago despite only being three days ago.
We go to Nick Timiraos and Paul Kiernan writing for the Wall Street Journal “The script is being flipped for the U.S. economy. For 2½ years, high inflation has drawn a nearly single-minded focus from the Federal Reserve and the White House as the nation’s foremost economic challenge.
But in the span of a week, punctuated by a surprisingly lackluster July hiring report on Friday that sent markets reeling, the labor market has become the locus of concern for economic policymakers in Washington…“Inflation is no longer the issue,” said Laurence Meyer, a former Fed governor, in an interview Friday. “The situation has just totally changed.”
We have talked about this market being in a bubble for some time now. We have explored the Buffet indicator showing how this is a historically high overvalued market, we have seen how the foolishness of meme stock buying, and we have seen regional bank stock act like tech stocks and go shooting higher for seemingly no reason just weeks ago. In fact if we look at a chart of the Nasdaq we seem the Nasdaq was up almost 80% versus the start of 2023. You might think that the market could take a breather and everyone would say ok ok, we deserved that, but no.
The street’s calls for rate cuts now is picking up steam fast. We go to ZeroHedge “It didn’t take long after today’s dismal jobs report to spark what Wall Street hopes will be a Fed panic. Indeed, just moments after a catastrophic jobs report which “nobody’ could have possibly predicted, well some notable exceptions, some of the biggest Wall Street analysts are already tearing up the soft landing playbook they were all pitching just, well, 24 hours ago and are urging the Fed to not just cut but panic while it’s doing it.
We start with Goldman which begins by commenting on today’s jobs report and says that “the softening in labor market conditions has now gone beyond the amount that was welcome.” As a result, Goldman now expects “an initial string of consecutive 25bp rate cuts in September, November, and December (vs. our previous forecast of cuts every other meeting)” or in other words 3 cuts in 2024 instead of just 2…But if Goldman’s 3 rate cuts is notable, then JPM’s new call for consecutive 50bps cuts is downright remarkable: that’s right, JPM chief economist Michael Feroli, also a huge bull until, well apparently this morning, decided to upstage Goldman and went a step further, predicting rate cuts in September and November, and not just any rate cuts but double, or 50bps, followed by quarter-point reductions at every subsequent meeting…Moving on to Citi economists, who were already among the most aggressive in calling for the Fed to cut interest rates this year, said they expect half-point rate cuts in September and November and a quarter-point cut in December, having previously predicted quarter-point cuts at all three meetings. The Fed will then reduce rates by a quarter point at each meeting until mid-2025, bringing the policy band to 3%-3.25%, Veronica Clark and Andrew Hollenhorst predicted.”
It seems that the economy and all the phony statistics we have been fed have finally made their way into the data that caused the market to realize that we are in a soft economy not soft landing. The market is expecting the Fed put to arrive and start saving the market. Bond yields crashed as we have found the buyers for bonds, the scared investors buying bonds almost a full point in yield lower than bond yields were offering just months ago. The market has started to panic. The key is that it is just starting. We will see how our Jedi Jerome Powell plays it because I think this is exactly what he has wanted. It just took us a damn long time to get here.
LB#2
This last 10 days was earnings week when about a third of the market cap of the S&P 500 reported earnings and they were disappointing although mixed. Google, Amazon, and Tesla disappointed while Apple and Meta seemed to be ok. The market was showing extreme volatility as individual names swung wildly as Intel missed estimates and sold off 26% in one day, its worst in 50 years, while Amazon fell almost 10% after putting up fairly solid numbers. Market sells off on Tuesday wild rally on Wednesday after Powell announced no rate cuts but maybe cuts in September after which Nvidia climbed 13% leading to a all-time record $330 billion added to market cap in a single day. It was a monster face ripping rally in stocks after a week Tuesday. Thursday would see a reversal back lower and much lower at that as manufacturing data was weak. The next two days would see a reversal and see Nvidia give back almost all of those gains. This was a wild week, but Friday was more of a dam breaker. Friday was an ohh no what has happened realization. It was like seeing an ostrich pull its head out of the sane , look around and say what did I miss?
LB #3
What our not so friendly and borderline mean long necked friend missed was I have been trumpeting for months. Let’s go to Gunjan Banerji writing for the Wall Street Journal, “A slate of data this week abruptly punctured some of those hopes. Weakening employment, manufacturing and construction data triggered a selloff in stocks and other risky bets Thursday. The rout worsened Friday after the latest jobs report showed that the U.S. economy added 114,000 positions last month, well below what economists had expected, while the unemployment rate rose to the highest level in nearly three years… The moves in the bond market have been equally dramatic. The jobs report spurred a rush into government bonds and sent the yield on the 10-year Treasury note to 3.795%, capping its biggest weekly decline since the start of the Covid-19 pandemic. The yield on the 2-year Treasury note, which is especially sensitive to interest-rate expectations, fell to 3.871%.
“Maybe things weren’t as rosy as we thought they were,” said Eric Merlis, co-head of global markets at Citizens Financial Group.”
Yes, Eric I would say so. Now a bad week does not a bear market make. There are some who think this still.. From Banerji’s article again, “It is unclear if the weakening data this week is the start of a more prolonged downturn, said Parag Thatte, a strategist at Deutsche Bank.
“This is a period of clear slowing in the data,” Thatte said. “We don’t think this is the start of something bigger.”
This is going to be a problem when there are so many analysts that are under 50 and have never seen a real bear market. Even in 2008, the bailouts started and helped the US avoid the pain of what should have been a much much worse great financial crisis. I would say it was a run of the mill crisis versus what it could have and should have been. This crisis is bigger and most importantly and if the government tries to bail us out of it, we have inflation ready to take off like a shot. They are corralling inflation right now and we are heading to a nasty recession. Which is what the business cycle needs, not wants but needs. We will see if the political pressure and media pressure allows it.
Looking Forwards…
LF#1
Now with the rally in bonds, yields decreased sharply and one place that needs to see that is commercial real estate. We go to ZeroHedge “The commercial real estate downturn is still underway, posing significant risks for investors across financial markets. CRE-linked equities, corporate credit, structured credit, and private markets all feel the impacts of major unwinds as property prices plunge.
While headwinds from high interest rates may diminish in the coming quarters, with rate traders pricing in the possibility of the first 25bps cut as early as the mid-September FOMC meeting, the critical question is whether these projected rate cuts will be adequate to cushion the landing.
Office tower valuations remain sloped in a downward trend, plummeting in many cases, as vacancy rates soar as remote work trends keep white-collar workers out of the office and at home. These imploding values remain a massive threat to regional banks, with the CRE crisis likely to persist through 2025.” This is concerning enough but then they listed Triple Net Investor’s twitter which showed just how prevalent this was and let me read you a few examples of the carnage that is happening, just not on your TikTok feed White Marsh Mall in Baltimore appraised at $80 million down from $300 million in 2013, Brookfield’s Gas Company Tower which we have talked about being valued at $214.5million down from $632 million just 3 years ago, 777 Figueroa in downtown LA was bought by a Chinese investor for $120 million or $170 million less than what was owed by Brookfield, Donald Turmp sold off the Trump Internation Hotel in Washington DC and the buyer has defaulted on a $285 million loan, 518 apartments in Dallas are being defaulted on, default on 33 story McGraw Hill skyscraper in Hell’s Kitchen Manhattan, Goldman Sachs and Ballast are defaulting on 82 apartment buildings, not apartments, but 1200 units in San Francisco after defaulting on loans for $687.5 million, Parkmerced a 3,200 unit complex in San Francisco was also just defaulted on, The Bluffs apartment complex in LA defaulted on $271 million, and even the tallest building in Birmingham Alabama the Shipt Tower has been placed in receivership. Every single one of these is a 9 figure loss for someone.
LF#2
A very quiet part of the financial picture that wasn’t talked about enough in my opinion was the Fx markets, the biggest markets in the world. The Japanese Yen has been weakening for the last couple years from 103 yen equaling a dollar 3 years ago to 160 just weeks ago. That is an extreme move when comparing two of the most respected currencies in the world. Now this has business implications. When the yen is weak, Japanese products are cheaper for foreigners to buy and that is good for their business and their stock. The Japanese stock index, The Nikkei, rallied from 16,000 after Covid to over 40,000 recently as their currency has weakened. The currency has largely weakened because unlike the US, the Japanese have not raised interest rates like the US. However, recently the Japanese are having an inflation problem as their currency gets weaker and weaker their people need more yen to buy the same products so finally the pressure became so great that they raised rates ever so slightly last week. The result was terrifying in their stock market. We go to Zero Hedge “We warned yesterday that the BoJ has boxed itself into a corner – forced to decide between a crashing currency or a crashing stock market – and overnight it appears traders put policymakers to the test to see what their reaction function might be.
Yen strength exacerbated an ugly US session and dragged Japanese stocks down further overnight as Japan’s Topix Index entered a technical correction in its worst two-day rout since 2011… Nicholas Smith, Japan equity strategist at CLSA, said, “I think markets globally are having a headless chicken moment,” with investors excessively worried about the change in currency rates.
“Stocks getting hit hardest are the ones that surged this year,” he said.
Japan’s benchmark Nikkei Stock Average on Friday recorded the second biggest daily drop in its history, as stocks extended losses following a sell-off in New York overnight.
The index plunged to 35,909.70, down 2,216.63 points, or 5.81%, marking its lowest close since Jan. 26.
Friday’s decline was the second largest in the index’s history after the Black Monday crash of October 1987, when global markets sank and the index cratered by 3,836.48 points.”
With my apologies to Nicholas Smith and his headless chicken analogy I am sticking with my ostrich with his head in or up something. The market reaction is the same however. Japan is the largest holder of US bonds I might remind you. When we see huge rallies in our bond market, it would seem that a natural place to look for source would be the Japanese and if scared equity investors in the Nikkei just bought US bonds, then that might explain part of the price action as our financial world’s are far more interconnected today than yesteryear.
LF#3
Collin Eaton has a story out this week in the Wall Street Journal explaining how one of the stalwarts of California is moving to Texas. “Chevron is relocating to Texas, deserting California, its home state for more than 140 years, where the business climate has soured for oil companies.
The second-largest U.S. oil company said Friday it plans to move its global headquarters to Houston, the U.S. energy industry capital. Chevron has built a stronghold of about 7,000 employees there, partly from a matriculation of executives and white-collar workers decamping from California.
The relocation plans come weeks after billionaire Elon Musk said X and SpaceX would move their headquarters to Austin, out of California. Musk had moved Tesla’s headquarters to Texas a few years ago. Several other large U.S. companies, including Hewlett Packard Enterprise and Oracle, have moved from blue states such as California to red states such as Texas.”
This is a good thing as companies should go where they choose to. However, I want to point out something that could potentially be a big big problem not just economically but socially. California is going broke. We have talked about their $73 billion budget gap and what do you think is happening when all of these companies relocate? What about all of the empty buildings in La and San Fran we just talked about? It gets worse. We will soon see another bailout package being floated and it will be to bailout these shitty states like California and Illinois and this will create even more friction from states that aren’t run by the progressive left. The successful states that don’t have their heads in the sand or up their asses like our ostrich counterpart does. History tells me that money will be borrowed and spent to subsidize terrible policies, and I will be watching to see if that borrowing finally breaks the bond market. As I have said the rush to safety is on in bonds, but what happens when the world realizes that the risk free instrument isn’t risk free. That is the biggest risk.
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading …at 39,737 down 610 points on Friday.
The 10-year Treasury bond is at …at 3.799% down 17.8 basis points on Friday
The price of Brent Crude is … at $76.81 per barrel.
The price of gold is … at $2, 486/oz.
The price of silver is … at a $28.68/oz.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.