Despite recent market highs, there are many signs of economic weakness at home and abroad, writes Landon Whaley.
Last Wednesday, everyone’s favorite benchmark and portfolio proxy (the S&P 500) minted a brand new all-time high at the same time the Federal Reserve was laying a policy egg, the combo platter of which reminded me of a great quote. Machiavelli once said, “For the great majority of mankind are satisfied with appearances, as though they were realities, and are often more influenced by the things that seem than by those that are.”
This letter is for those investors satisfied with the appearance Wall Street perpetuates that it’s always a good time to buy stocks rather than the Fundamental Gravity-driven reality that you need to pick and choose your spots. This commentary is also for those investors more influenced by the countless Trump tweets about a bean deal with China rather than the way things are, from a Fundamental Gravity perspective.
Say what you will about China, and their propensity to make up the data, but there won’t be a global economic recovery without those folks. As far as that goes, last week’s Chinese data dump was brutal. The government’s official Purchase Managers Index (PMI) reading fell yet again in October and has now been in outright contraction for nine of the last 11 months. The service PMI also slowed for the fourth time in the previous five months. Keep in mind; this is October (Q4) data that is following a Q3 GDP growth rate, which was the lowest in 30 years.
If these are the fake numbers that the Communist Party allows to hit the airwaves, can you imagine how bad the real data looks?
Not only that, but Chinese officials are withdrawing liquidity from the system at an alarming pace. They drained $85 billion from the repo market last week alone, and their medium-term lending facility contracted 32% during October. The Chinese bottom line is that growth has been slowing since 2017, the deterioration is continuing here in Q4 2019, and the Chinese government isn’t doing a dadgum thing to stop it.
Here in the United States, the Federal Reserve cut a measly 25 basis points and then paved the way for a prolonged pause by omitting the statement from recent months to “act as appropriate to sustain the expansion” and replacing it with their desire to monitor incoming information as it “assesses the appropriate path” of interest rates.
Given the incoming U.S. data stream, like the October ISM Manufacturing PMI contracting for the second straight month, or last month’s year-over-year nonfarm payroll growth slowing to a two-year low (I know, everyone talked about how great this number was), the Fed just made a huge policy mistake.
My call since the first cut is that this is not a “mid-cycle adjustment,” but rather, the Fed will cut multiple times and won’t stop until the Fed Funds rate hits zero. Given last week’s developments, I’m more convinced than ever that the Fed is in the throes of a full-on rate cut cycle (despite their unwillingness to accept this fact) and that they will be forced by the data in coming months to cut interest rates to the bone, and possibly deeper. If those unelected officials aren’t careful, they’re going to help orchestrate the first U.S. recession in over a decade.
Those of you who’ve only been on the Whaley Global Research train for the last year and a half, probably think I’m a perma-bear on the order of Dr. Gloom, Boom and Doom, but this couldn’t be further from the truth. Instead, I’m perma-data dependent, perma-process driven, and perma-risk conscious.
If you want to buy the S&P 500 at all-time highs against a backdrop of a U.S. earnings recession, global and domestic growth slowing and a Fed that is woefully behind the rate cut 8-ball, then be my guest. I and anyone following my lead will continue to buy the things that have gotten us paid handsomely over the last year: utilities, Treasuries and REITs.
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