Looking Backwards …
LB #1
I shouldn’t make fun, but that is kind of what I do. The relief you have waiting for people has arrived. The Fed has cut 50 basis points and for all of you shoppers that means that your credit card interest rate has been reduced from 24% to 23.5% so let’s go back to those stores and buy, buy, buy Mortimer. Do you think this is going to change much of anything? I don’t. I do think it will start to give some relief to banks that are way behind or some desperately seeking refinancing businesses, but it isn’t enough, but it is a start and it is a super-sized cut, which usually only happens when the economy is in big trouble. Powell refuted that claim and said no the economy is strong. If it is strong then why does it need cuts at all? Housing is at all-time highs, the stock market is at all-time highs and unemployment is historically very low. So why cut and why cut a panic size?
The answer is the same as always. You can’t believe them as their job first and foremost is to provide price stability and if they came out and said holy schnikes the market is about to get smoked, then it would. Misinformation is their job and when it doesn’t make sense, we try to take them at their word, and you just can’t. Some people like Trump are calling this political with a jumbo rate cut right before the election. Perhaps it was political, but we will never know if it was- as the Fed proclaims neutrality more than Ike Clanton.
This from Jessica Dinkler at CNBC, “A series of interest rate hikes starting in March 2022 took the central bank’s benchmark to its highest in more than 22 years, which caused most consumer borrowing costs to skyrocket — and put many households under pressure.
Now, with inflation backing down, “there are reasons to be optimistic,” said Greg McBride, chief financial analyst at Bankrate.com.
However, “one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” he said. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.”
LB #2
The cumulative nature of rate cuts will be important to watch as the Fed seems to be embarking on a lengthy series of rate cuts. They also seem to be in a hurry. Pocahontas herself Elizabeth Warren came out of her tipi and wrote a letter demanding 75 basis point cuts. I guess she doesn’t believe in the independence of the Fed any more than Donald Trump who wants to put himself in the rate deciding seat. He bankrupted how many companies? Now he wants a seat on the Fed, no thank you…
However, we must consider jobs in the equation as well because for some foolish reason Congress bestowed the Fed another mandate of full employment back in the 1970s. The Fed can’t control hiring, but I digress. Let’s go to Zero Hedge who might have the best insight on why this cut didn’t make any sense from a jobs perspective either, “Adjusted initial claims tumbled from 231k to 219k (lowest since May) while unadjusted claims continued to tumble to 12-month lows… While the official unemployment rate dipped modestly from three-year highs, jobless claims have crashed to near record lows.
Does that really look like an economy that needs a 50bps rate-cut?
As one market veteran pointed out to us this morning, “either The Fed is a bunch of idiots, or this data is total bullshit.”
Yun Li writes for CNBC, “The Federal Reserve projected lowering interest rates by another half point before the end of 2024, and the central bank has two more policy meetings to do so.
The so-called dot plot indicated that 19 FOMC members, both voters and nonvoters, see the benchmark fed funds rate at 4.4% by the end of this year, equivalent to a target range of 4.25% to 4.5%. The Fed’s two remaining meetings for the year are scheduled for Nov. 6-7 and Dec.17-18.
Through 2025, the central bank forecasts interest rates landing at 3.4%, indicating another full percentage point in cuts.”
So the central bank thinks we are going to cut 200 basis points on the Fed Funds rate and this won’t be stimulative aka inflationary on the economy. Perhaps that is why gold set all-time highs on Friday breaching the $2,650 level for the first time. The bond market has already priced 200 basis points into the market, but the only market that doesn’t seem to have gotten the memo is the stock market which jumped Thursday believing that good times are here again. It takes two opinions to make a market and that is what we have. The bond and gold market vs the stock market. One little last item of note courtesy of ZeroHedge, “Bear in mind that stocks have NEVER been more expensive relative to the economy (total US market cap back up to 200% of GDP…” That’s right the Buffet indicator Us market cap as a percentage of GDP is the highest in history, no wonder he sold off huge chunks of his Bank of America and Apple portfolios.
LB #3
While the markets were digesting the Fed and its crazy logic I was also flummoxed by the logic of more dumb people. Jessica Karl a columnist at Bloomberg wrote a piece this week that seems to back up what we have been saying about weather, climate, and terrible statistics. Someday, I hope to see people reset their assumptions. In her piece she quotes Mark Gongloff., “Can a flood be called a thousand-year flood if it happens every five years?” is the question on Mark Gongloff’s mind after a tropical storm dumped 18 inches of rain in 12 hours on the southern coast of North Carolina. Mathematically speaking, the answer is no. You can’t have 200 thousand-year floods in the span of a thousand years! And Mark agrees: “The moniker doesn’t quite fit when you consider similar disasters also hit the area in 1984, 1999, 2010, 2015 and 2018. Along with the latest flood, that’s five in just 25 years.”
Sometimes there just isn’t anything to add….
Looking Forwards…
LF#1
Back in June we discussed False Assumptions, and we questioned why Trump should even want to win this election. As we are discussing on Bygone Relics in our Great Depression analysis, I believe the winner of this election will be the big loser for the next two decades as this entire debacle will be pinned on them like a Scarlet A. ZeroHedge makes a more recent case with the newly data released in August. They also entertain me with their unique economic descriptors. “2024 was the year when the runaway US budget deficit was supposed to gradually normalize, and after two crisis-years, the US was supposed to end its drunken sailor spending ways. And for a while there, it seemed touch and go, with the cumulative US deficit initially overtaking 2023 – forget about the batshit insane 2021 and 2022 when the deficit hit a mind boggling 18% of GDP… … when THIS happened: an August budget deficit of a staggering $380 billion, up more than 50% from the $243 billion in July, and up more than 55% from July, and up 66% from last August… oh, and almost $100 billion more than the median estimate of $292.5 billion, which may be why the Treasury quietly snuck the number out by leaking it after 5am ET when everyone was sleeping, not at its regular time of 2pm ET.” I want to jump in here to note that they released it at 5am ET instead of at its regular time. What in the world is going on when nobody is yelling, Over here! Look over here! Back to ZeroHedge “… and the stunning punchline is that as of today, gross interest on US debt has surpassed not just Defense spending, but also Income Security, Health, Veterans Benefits and Medicare, and is now the second biggest outlay of the US government, second only to Social Security, which is roughly $1.5 trillion annualized. But wait, there’s more: the latest numbers confirm that we are well on our way to hitting our other forecast from April 1, of the US hitting an insane $1.6 trillion in interest expense by the year-end… … which mean interest expense will soon surpass Social Security spending and become the single largest outlay of the US government, some time in late 2024 or early 2025 at the earliest.
In other words, game over.
Which begs the question: why would Trump even want to be in charge when the house of cards finally comes crashing down. Let Kamala have it…”
Folks, it’s one thing if I say it, but when a heavy hitter like ZeroHedge says it then it needs to be thought about. Would Trump dump? Would he lose on purpose to help his party? I have no love for either party, but quite frankly if you wanted to theorize about how to truly fix this problem. We need real solutions, and to get them we need someone with the right ideas to take charge and push us through 400 yards of sewer to emerge outside Shawshank and then bathe us in the storm with a bar of soap. That can’t be done with a gridlocked Congress. That needs a mandate and that is the only solution to the problem. I’d rather have the Republicans try and fix it versus the Democrats because when they got their chance in 1933 they stomped on the Constitution and I am naively thinking the Republicans might be able to do better.
LF#2
Last week we discussed the Russian red line regarding long range missiles with Western technology. These were not to hit Russian soil or they would consider that a provocation to engage NATO and thus the US in war. Thankfully there have been little change in giving the green light to use these weapons against Russia despite Zelensky clamoring for them. However the US did scramble troops to a remote island in the Alaska Aleutian chain due to reports of Russian activity. Thankfully, nothing has changed dramatically in this conflict, but the same can’t be said for the Middle East.
On Wednesday at 3:30 local time Hezbollah pagers started blowing up across Lebanon. The pagers were old school technology being used because Hezbollah was concerned that Israel had hacked their more sophisticated technologies. Hands, arms, abdomens, and testicles were blown off as thousands were wounded and 37 were killed. This pushed Hezbollah to use walkie talkies and abandon their pagers. The very next day walkie talkies and even some mobile phones exploded causing further chaos and forcing Hezbollah to meet in person. When they did on Friday, Israel fired missiles on the building and killed the leader of the elite Radwan Force, Ibrahim Aqil and several other commanders. On Saturday, another air strike got another senior commander. This intelligence, this planning, and this attack was sophisticated, well-thought out- and tactically brilliant. They have crippled Hezbollah leadership and communications. This from the Economic Times, “On Friday the UN’s High Commissioner for Human Rights, Volker Turk, told the Security Council the attack on Hezbollah communications devices violated international law and could constitute a war crime.
The pagers and walkie-talkies exploded as their users were shopping in supermarkets, walking on streets and attending funerals, plunging Lebanon into panic.
“I am appalled by the breadth and impact of the attacks,” said Turk, adding that it “is a war crime to commit violence intended to spread terror among civilians.”
I think the conflicts are starting to spill over into war despite Anthony Blinken, US Secretary of State, making his 10th trip over to the region since Oct 7 when Hamas attacked Israel killing 1,205 people. So far Israel has killed 41,272 people in Gaza, most of them civilians.
LF#3
Also underreported this week is that Boeing workers are going on strike. Over 33,000 unionized workers will go on strike after over 96% voted to strike. This could have serious consequences on their debt rating, and they are starting to furlough workers already. ZeroHedge reports, “Credit rating agencies Fitch and Moody’s warned Friday that a downgrade of Boeing’s credit rating into junk bond status is just ahead. Standard & Poor’s had already warned that a downgrade would likely occur after the strike materialized.
Moody’s noted that prolonged labor disruptions could undermine Boeing’s commercial airplanes recovery, complicating liquidity as $12 billion in debt matures through 2026. The strike may lead to a downgrade if Boeing’s liquidity deteriorates significantly or if it fails to generate sufficient free cash flow, which remains constrained through 2025 due to production challenges and cost pressures.
The last time Boeing machinists went on strike was September 7, 2008. At the time, the strike was over job security, outsourcing, pay, and benefits. This caused a $1.2 billion hit to the company’s net income. This could be much more costly today.”
If they lose their credit rating that would mean certain institutions might not be able to own their stock and would be forced to liquidate their holdings. This is bad from a stock perspective, but the other big factor is that Boeing has a massive supply chain that would grind to a halt. This would massively affect the US and world economy. Is this the Black Swan that pushes us over the edge, was this part of the reason why the Fed decided to go 50 basis points like a crisis would suggest? Air travel will get a lot more crowded and fun in the months ahead. I will keep my tray table and seat locked in the upright position and prepare for landing.
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading …at 42,063.
The 10-year Treasury bond is at …at 3.74%
The price of Brent Crude is … at $74.49 per barrel.
The price of gold is … at $2,647/oz.
The price of silver is … at $31.49/oz.
I leave you with this from the information superhighway, What is the difference between a hippo and a Zippo. One weighs a ton and the other is a little lighter.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.