October 4, 2019
By Steve Blumenthal
“ There’s a way to do it better – find it.”
– Thomas Edison
” It’s kind of fun to do the impossible.”
– Walt Disney
Fresh signs of a global economic slowdown have driven equity markets lower this week and driven expectations for a Fed rate cut higher. Wednesday’s U.S. services sector activity report was the weakest in three years, prompting concerns that a manufacturing downturn is spreading across the economy. Data firm IHS Markit said its U.S. services index was 50.9 in September—slightly higher than August’s 50.7, but the third-quarter average was the weakest since the same period in 2016.
Yesterday, U.S. stocks fell sharply following the report of the services numbers but later recovered. Today, the heavily followed employment numbers were reported. They were not as bad as feared. This from my Camp Kotok fishing buddy, Sam Rines:
- This is the most inconsequentially important employment report in quite some time.
- Employment creation slowed, but nowhere near as bad as feared – a sort of middling mediocrity.
- It does not provide the Fed with a reason to cut rates faster, and it does not give them pause with a further cut.
- So, regardless of the past few days of angst, this report will unwind some of the dovishness that was creeping into the system.
- The fundamental recovery in employment is underappreciated with the prime-age employment to population data back to ’90s levels.
- A caveat: the wage growth data ticked lower. This is disconcerting, but it remains to be seen whether or not the data is reflective of underlying weakness.
Source: Samuel E. Rines, Chief Economist, Avalon Investment and Advisory
My friend, Peter Boockvar, said this in a note today (hat tip to John Mauldin):
- September payrolls grew 136,000, a little less than expected but the two prior months saw upward revisions.
- At 3.5%, the unemployment rate is now the lowest since 1969.
- There are signs of slowing. With the revisions, private sector job growth averaged 119,000 in the last three months. It averaged 215,000 in 2018.
- Manufacturing and retail lost jobs while education, healthcare and leisure/hospitality gained.
- With hiring in slowdown mode, weekly jobless claims are now the most important data to watch.
Bottom Line: Boockvar believes the jobs report won’t be a big factor at the October Federal Reserve meeting. They know it is a lagging indicator. Monetary policy is now more responsive to trade policy. A deal with China in the coming weeks would likely make the Fed hold steady, while no deal means another cut.
All eyes are on the White House, trade and the economy. It’s a pressure cooker and the temperature is rising! There is a way to do it better. What may seem impossible may not be impossible. With Walt Disney in mind, let’s embrace the fun in doing the impossible. Grab a coffee and find your favorite chair. The recession watch data follows (click on the orange On My Radar button to get to the full post). The recession charts are in the Trade Signals section and/or you can find them by clicking here. Scroll down to the Trade Signals “Select Recession Watch Indicators” section. Bottom line: No imminent U.S. recession. But as Yoda might say, “Close eye keep watch we must.” Also, good friend, Dr. Jonathan Ward, did an excellent interview with Maria Bartiroma this week. You’ll find the link below.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- U.S.-China Decoupling Will be Among the Biggest Events of the Early 21st Century – Dr. Jonathan D.T. Ward
- The Treasury’s $400 billion Emergency Piggy Bank
- Trade Signals – Fixed Income and Equity Trends Holding
- Personal Note – Red-Eye Home
U.S.-China Decoupling Will be Among the Biggest Events of the Early 21st Century – Dr. Jonathan D.T. Ward
It’s the beginning of a sea change in U.S.-China relations. I first met Jonathan in August at Camp Kotok. We rode from the Bangor, Maine airport northeast to Leen’s Lodge on Grand Lake Stream. I realized just how naive I was about China. I said to Jonathan, I believe China is the seminal issue of the day. In a few short hours, Jonathan took me to school. You can find the link to the video interview here.
And do download Jonathan’s new book, China’s Vision of Victory, and read the conclusion.
Maria Bartiromo and Dr. Jonathan D.T. Ward
The Treasury’s $400 billion Emergency Piggy Bank
I’ve written recently, and again last week in the Felix Zulauf research piece, that the Treasury is required by Congress to have a $400 billion dollar reserve to cover emergency situations such as a government shutdown or some other major shock to the U.S system. I said that the balance acts as a form of QE or QT depending on the Treasury’s actions. When the balance goes down, it is an injection of cash out of the piggy bank and into the financial system. When the balance goes up, they are putting money back into the piggy bank by taking cash out of the system (a form of quantitative tightening – QT). At the time of the writing a few weeks ago, and again last week, the reserve balance had gone from $111 billion to $194 billion. Since the Treasury is required by Congress to keep a balance of $400 billion, they would need to issue more Treasury bonds to get cash to put into the piggy bank. Roughly $200 billion more was required.
I asked my research team to pull the latest piggy bank balance data from Bloomberg. Following is the chart. The current balance stands at $335 billion. Could this large increase explain some of the recent money market crisis and equity market indigestion? I think yes.
I also wonder why the balance declined sharply last November and December (a form of QE from the Treasury). It factors into a very complex global system. My game theory neurons are firing.
Trade Signals – Fixed Income and Equity Trends Holding
October 2, 2019
S&P 500 Index — 2,924
Notable this week:
No changes in the signals this week. Both equity and fixed income trade signals remain bullish at this time. The bullish trend in gold persists.
Below we provide updated select recession charts, which do not indicate any imminent U.S. recession. The U.S. manufacturing sector, however, appears to have been in recession all year. Domestic manufacturing activity continues to deteriorate. Current data from the Institute for Supply Management shows manufacturing activity fell to its weakest level since June 2009.
ISM U.S. Manufacturing PMI (October 2018-September 2019)
The new export orders index fell dramatically to 41.0 in September, which is the lowest level since March 2009. “ISM at 47.8 is bad but new export orders at 41 is even worse,” Deutsche Bank Securities’ Chief Economist, Torsten Slok, said in a research note. “There is no end in sight to this slowdown, the recession risk is real.” (Source: Axios)
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
Personal Note – Red-Eye Home
“When you are inspired by some great purpose, some extraordinary project, all of your thoughts break their bonds. Your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great, wonderful world.”
I’ve been feeling inspired of late and boy does the world feel wonderful; especially when I turn off CNN and Fox News. That world does little to lift the spirits so I try my best to ingest in small doses.
I flew home from LA on the dreaded red-eye with hopes of getting some shut-eye. With headphones on and Bruce Springsteen’s “Drive All Night” “just to buy you some shoes…” played and with a smile on my face and love in my heart, my thoughts, as they often do, turned to Susan. I was sure I’d drift to sleep in no time. However, neither Bruce, nor John Denver, nor Simon & Garfunkel, nor the great Louis Armstrong did the trick. About an hour into the flight I opened my laptop and caught up on some reading.
No complaints – I feel deeply engaged in some important work that finds me in a new, great, wonderful world. And I hope you do too.
The above quote is attributed to Patanjali. A quick google search and I learned his writings are about living an ethical, just and compassionate life of honesty, moderation, generosity, contentment, discipline, self-awareness, surrender and trust and more.
I believe we all desire love, light and joy in our lives. Most people anyway… even the republicans and the democrats though gloves are off and knuckles are bloody in that messy, yet important world. So with Patanjali top of mind, here’s a toast to life, to inspiration, to great purpose and the extraordinary project that helps you and me transcend limitations. And to seeing our world great even when in moments of time it looks less.
Trips to New York City follow the next two weeks. Trains are better than red-eye planes.
Wishing you and your family the very best!
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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