Friday’s unexpectedly large US employment number and Fed Chairman Jerome Powell’s calming remarks sparked a monster rally in the US stock market, with NASDAQ up 4.26% and the broad S&P 500 index up 3.43%. A stronger-than-expected China services PMI also helped to dispel the fear that the world’s two largest economies were at risk of recession.
The market’s violent response isn’t surprising. After the NAPM Purchasing Managers’ Index Thursday showed the worst drop in industrial orders since 2008, hedge funds and other investors were short the market. Short-covering rallies in bear markets always are the biggest.
But is the bear gone? We don’t think so. The number of very large market moves in the past month is greater than at any time in the past six years and heavily skewed to the downside. One day’s market move up doesn’t convince us that the danger has passed.
Let’s start by translating Fed Chair Jerome Powell’s remarks into English: “During the past six years we shoved an unprecedented amount of liquidity into the market, ballooning the Fed’s balance sheet from $700 to $4.1 trillion in securities, and kept real short-term interest rates negative. The moment we propose to remove even a little bit of this liquidity, the air starts whooshing out of the stock market bubble. So we’ll ‘listen to financial markets’ for that great sucking sound and try to keep the bubble intact.”
That should not exactly be confidence inspiring. The Fed alluded to a tightening of financial conditions during the past several months, and we can see it in such basic measures of liquidity as the spread between federal funds and the interbank rate that big banks charge each other. As I reported in this space Jan. 3 (“The Specter of Deflation is Haunting Financial Markets”), oil and stocks both have traded directly with key market liquidity measures in recent weeks. The oil price collapse, in short, is not merely the result of excess supply, but the result of forced liquidation of inventories. Another ominous sign was the underperformance of real estate investment trusts, which usually trade like bonds. The market apparently fears rent deflation.
The Fed barely tapped the brakes and the car veered off the road.
The US economy isn’t crashing, but the employment report is not quite as encouraging as the headline number suggests. Forward-looking indicators like the purchasing managers’ index are showing a steep drop. The vast majority of jobs, moreover, were created in low-wage, low productivity sectors. The household survey, oddly, shows an increase of 306,000 in female employment and a decline of 132,000 in male employment. In the more commonly cited establishments survey, the composition of employment is consistent with a shift towards female employment. Education and health services account for the biggest increase (82,000) followed closely by Health care and social assistance (57,900), and Leisure and Hospitality (55,000). These three categories account for 195,000 new jobs. Add retail trade (23,800) and professional and business services (43,000), and we are at 262,000 jobs.
I also note that the female labor force participation rate is rising because more employment opportunities are available for women, and because more women wish to work (presumably because household income has stagnated for decades). It’s good that more Americans are working, but not too impressive that they are working at low-wage jobs.
We also note that the best performing stock in the S&P 100 (except for acquisition target Celgene) was Netflix, up 16.4% in the past week after an earlier nosedive. Netflix is the poster-boy for hot air valuations in tech. It presently trades at 95 times trailing earnings and 65 times expected earnings, at a time when everyone from Amazon to AT&T offers competing content-streaming services. Netflix is now a movie studio whose competitive advantage depends on a few blockbusters. It’s more like Disney (which also offers streaming content) than a tech company. But Disney trades at 15 times earnings.
Amazon, up 8% in the past week, was another top contributor to index gains. I still think (as I wrote Oct. 27) that any price above $1,200 assumes that the internet retailer will take over the US economy in the next ten years, and that isn’t going to happen.
There are plenty of good reasons to buy equity indices, but I can’t find many stocks that I want to buy – least of all the apparent comeback kids of last week.
A sharp slowdown in world trade remains the main problem in the background. I continue to believe that this is due to a sharp decline in CapEx in response to uncertainty about China-centered global supply chains – in other words, the result of an exogenous shock. In both the US and China, the domestic services economy is showing far better readings than the industrial economy.
The market is looking for an early resolution of the US-China trade war. Sadly, there is less reason to be optimistic about an early resolution of the US-China trade dispute than there was before the Dec. 1 summit meeting between Presidents Trump and Xi in Buenos Aires. Now that the dust has settled on the US attempt to persuade the world to blacklist Huawei, China is far more cautious. The erratic behavior of the US administration on this issue has left China less willing to make concessions demanded by the US. In large measure this is due to confusion about what Trump has in mind; the impression is that the Administration lacks direction.
China’s response to the lack of clarity is to go slow and act more cautiously. The US attempt to persuade its allies to blacklist Huawei convinced the Chinese that the object of US policy is not to reduce the trade deficit but to suppress China’s economic progress. The evident failure of the initiative against Huawei, moreover, has given the Chinese more confidence that the US is not in a position to box it in, even if the impact of US tariffs has hurt China’s industrial sector. The slowdown in world trade is painful, but China does not feel vulnerable in the medium term.
China is prepared to make substantial concessions on purchases of American products, but that has been its position from the beginning. But our sources anticipate a very hard and slow negotiation on other issues. China is NOT prepared to make concessions on WTO surveillance of its industrial policy, as the US has demanded in the past.
There is also a problem of timing; Trump and Xi had something of an agreement in principle at Buenos Aires Dec. 1 but the Huawei arrest and subsequent actions put that on hold. Now time is running short.
A low-level US delegation is en route to China headed by Deputy Trade Negotiator Jeff Gerrish and Treasury Undersecretary David Malpass. China will shut down for two weeks starting Jan. 31 for the Lunar New Year holiday and it seems unlikely that anything substantive will be achieved before then. That eliminates the first half of February. That leaves only two weeks before the National People’s Congress on March 1, and Xi will not go before that Congress appearing that he has been intimidated by the US. Our sources emphasize that the People’s Congress is not a rubber stamp exercise: It is the key annual event at which the leadership mobilizes its troops.
That takes us perilously close to Trump’s March 31 deadline, and it seems likely that Trump will go into “Art of the Deal” mode and threaten to impose the 25% level of tariffs.
All those jobs are catering to retiring Babyboomers who are refusing to die and sucking all resources. China will no longer budge like before. Post Mao through pre-Xi era, China was run by all engineers and U can see the results that every problem was resolved or compromised. Xi is a lawyer. Has anyone gotten a good deal from a lawyer? While Trump is failed business man born with silver spoon and his business was rescued by a HK Fengshui fortune teller in NY Chinatown basement. hahahaha
Anyway, we all know Trump isn’t in charge but the Deep State, most likely with Mike Pence and Bolton as their key player. These war mongers actually think they can win against China and Russia at the same time and they’re upping the brinkmanship by kidnapping woman with China doing the same. Now imagine one of them mysteriously dies in custody. Hope at one least one psychopath in charge can remember what happened las time that nearly ended all major powers.
All those jobs are catering to retiring Babyboomers who are refusing to die and sucking all resources. China will no longer budge like before. Post Mao through pre-Xi era, China was run by all engineers and U can see the results that every problem was resolved or compromised. Xi is a lawyer. Has anyone gotten a good deal from a lawyer? While Trump is failed business man born with silver spoon and his business was rescued by a HK Fengshui fortune teller in NY Chinatown basement. hahahaha
Anyway, we all know Trump isn’t in charge but the Deep State, most likely with Mike Pence and Bolton as their key player. These war mongers actually think they can win against China and Russia at the same time and they’re upping the brinkmanship by kidnapping woman with China doing the same. Now imagine one of them mysteriously dies in custody. Hope at one least one psychopath in charge can remember what happened las time that nearly ended all major powers.
Also right on Netflix puff of hot air. Don’t know why anyone would pay for old crap when they’re readily available all over the place.
Also right on Netflix puff of hot air. Don’t know why anyone would pay for old crap when they’re readily available all over the place.
No doubt there will be a “BEAR” market. China must plan for the worst and hope for the best. The US has become unpredictable and policies changes from twitter to twitter message from President Trump. The US is in big financial problems with huge debt and TRILLION-dollar deficits in the foreseeable future.
China is not the only nation that have trade problems with the US, so has Russia, Iran, Venezuela, Syria, and even the closes neighbors and allied. It seems everyone is tired of the US bullying and threats. The US influence in Asia and Europe is diminishing. Europeans is tired to follow President Trumps every whip and costly ideas to buy LNG from US and not from Russia.
So, what is next? Most likely there will be a worthless trade deal. US will experience the entire world is looking for non-US suppliers. China will increase their economic activities along the “New silk road”, neighboring countries, ASEAN, and the Middle East will be great markets as soon as the US has left the continent.
Chinese companies will experience great export problems to the US and nations participating in the “Five Eyes” extended intelligence cooperation, even with a trade agreement. The bullying of ZTE, Huawei, and other Chinese companies has been going on for more than a decade! But China is in the US MSM portrayed as the big trade villain. LOL. Huawei has lost several BILLION-dollar contracts with AT&T, US Sprint, and a lot of other companies due to interference from US Intelligence and the US Federal Government. Due to unsubstantiated concerns of “national security” US and US allies must buy more expensive and substandard products and services from other suppliers.
In 2019 we will see most markets suffer from official and the “hidden” trade wars. I will not be surprised if the markets lose 50% of it’s value from today’s levels, in the comming bear market.
No doubt there will be a “BEAR” market. China must plan for the worst and hope for the best. The US has become unpredictable and policies changes from twitter to twitter message from President Trump. The US is in big financial problems with huge debt and TRILLION-dollar deficits in the foreseeable future.
China is not the only nation that have trade problems with the US, so has Russia, Iran, Venezuela, Syria, and even the closes neighbors and allied. It seems everyone is tired of the US bullying and threats. The US influence in Asia and Europe is diminishing. Europeans is tired to follow President Trumps every whip and costly ideas to buy LNG from US and not from Russia.
So, what is next? Most likely there will be a worthless trade deal. US will experience the entire world is looking for non-US suppliers. China will increase their economic activities along the “New silk road”, neighboring countries, ASEAN, and the Middle East will be great markets as soon as the US has left the continent.
Chinese companies will experience great export problems to the US and nations participating in the “Five Eyes” extended intelligence cooperation, even with a trade agreement. The bullying of ZTE, Huawei, and other Chinese companies has been going on for more than a decade! But China is in the US MSM portrayed as the big trade villain. LOL. Huawei has lost several BILLION-dollar contracts with AT&T, US Sprint, and a lot of other companies due to interference from US Intelligence and the US Federal Government. Due to unsubstantiated concerns of “national security” US and US allies must buy more expensive and substandard products and services from other suppliers.
In 2019 we will see most markets suffer from official and the “hidden” trade wars. I will not be surprised if the markets lose 50% of it’s value from today’s levels, in the comming bear market.
"The household survey, oddly, shows an increase of 306,000 in female employment and a decline of 132,000 in male employment."
Read another way, there is a decline in higher paying jobs and an increase in lowere paying jobs. This possibly reflects a decline in full time employment and an increase in part timers. This is certainly bad news for the future prosperity of the country.
The Chinese are right that it is not about the trade deficit.
"The household survey, oddly, shows an increase of 306,000 in female employment and a decline of 132,000 in male employment."
Read another way, there is a decline in higher paying jobs and an increase in lowere paying jobs. This possibly reflects a decline in full time employment and an increase in part timers. This is certainly bad news for the future prosperity of the country.
The Chinese are right that it is not about the trade deficit.
As I have said many times before, you are only looking at the symptoms and not the disease. Its like treating symptoms of cancer without identifying and applying chemoteraphy to get rid of cancer. US economy will not recover until US interest is kept in mind not Israeli interest. US will never ever recoup, in Middle East, Afghanistan or stand up against China or Russia as long as its focus is Iran. By locking up its interest with Israel and Saudi’s, they have missed the Golden opportunity to revamp their economy and cut of the life lines of China and Russia and parterning with Iran. The big failures in Afghanistan after 17 years, 6 years of Syrian war and 4 years of Yemen war shows how they have misrably failed to engage with Iran. There is no better natural partner for US interest and Europe (secondary beneficiary) than Iran. US is in swamp and Iran is their only life line (and vice versa). Either the disease of Saudi/Israeli will kill them or they come to their senses and cut of the tumor.
As I have said many times before, you are only looking at the symptoms and not the disease. Its like treating symptoms of cancer without identifying and applying chemoteraphy to get rid of cancer. US economy will not recover until US interest is kept in mind not Israeli interest. US will never ever recoup, in Middle East, Afghanistan or stand up against China or Russia as long as its focus is Iran. By locking up its interest with Israel and Saudi’s, they have missed the Golden opportunity to revamp their economy and cut of the life lines of China and Russia and parterning with Iran. The big failures in Afghanistan after 17 years, 6 years of Syrian war and 4 years of Yemen war shows how they have misrably failed to engage with Iran. There is no better natural partner for US interest and Europe (secondary beneficiary) than Iran. US is in swamp and Iran is their only life line (and vice versa). Either the disease of Saudi/Israeli will kill them or they come to their senses and cut of the tumor.
I AGREE TO A POINT ,BUT CHINA AND RUSSIA ARE BOTH IN THE CROSSHAIRS OF THE NEOCON AGENDA MILITATILY. THATS WHAT THE DEAL IS IN BOTH CASES AND IRAN IS AS WELL AND MORE .ISRAEL WANTS IRAN DESTROYED LIKE IRAQ; YEMEN; LIBYA; SYRIA AND AFGHANISTAN.THE CANCER OF ZIONISM IS ERODING THE LIFE OUT OF THE US. AND THE ENTIRE WESTER NATO ALLIANCE
I AGREE TO A POINT ,BUT CHINA AND RUSSIA ARE BOTH IN THE CROSSHAIRS OF THE NEOCON AGENDA MILITATILY. THATS WHAT THE DEAL IS IN BOTH CASES AND IRAN IS AS WELL AND MORE .ISRAEL WANTS IRAN DESTROYED LIKE IRAQ; YEMEN; LIBYA; SYRIA AND AFGHANISTAN.THE CANCER OF ZIONISM IS ERODING THE LIFE OUT OF THE US. AND THE ENTIRE WESTER NATO ALLIANCE