Monday, October 28, 2019

Fed keeps pumping up stock market while real economy flattens out

This week, the Federal Reserve is expected to cut its benchmark interest rate by another ¼ point, down to 1.5%-1.75%. That comes on top of the Fed injecting $120 billion into the economy in repurchase agreements to make sure banks have enough money to keep operating as normal.

Those are usually the type of actions you’d see in a recession with the danger of a possible financial crisis, not in a time of 3.5% unemployment and a stock market that closed at a record high on Monday. So Mark Decambre of CBS Marketwatch asked “What’s really going on here?” in an article that was released on the same day that Wall Street record was achieved.
This current round of monetary-policy easing was described as a mid-cycle adjustment by Fed Chairman Powell earlier this year, a strategy that has been implemented in the past to preempt slowdowns and this time is being used to combat the negative effects of a nasty China-U. S. trade conflict.

Experts say that a third cut matches the definition of a mid-cycle shift and could be justified as further insurance as a recession that appears to be emerging in Europe is creeping up on the U.S.

Keith Lerner, chief market strategist at SunTrust Advisory Services, pointed to a trio of rate cuts in 1995 and 1998 as parallels for the current monetary tactic.

“Actually, both 1995 (which Powell has often talked about in a favorable light) and 1998 both saw three 25 basis point rate cuts and then the Fed stopped; these are both largely looked at as mid-cycle adjustments or for insurance reasons, especially 1995,” the SunTrust strategist said.
The stock market has certainly gotten more Bubbly in recent weeks, in the hopes that lower interest rates and Trump-generated rumors about a truce in trade with China will keep the economy goosed for the near future.

But why would we believe that things will get better than we have today? On Monday, there was more evidence that the weakness in manufacturing and trade was continuing, if not getting worse. For example, while the country’s trade deficit for goods got smaller in September, it wasn’t for the “good reason”.
The international trade deficit was $70.4 billion in September, down $2.7 billion from $73.1 billion in August. Exports of goods for September were $135.9 billion, $2.2 billion less than August exports. Imports of goods for September were $206.3 billion, $4.9 billion less than August imports.
Shrinking exports and imports is usually a trend that you see in a shrinking economy, and it comes on top of reports last week that showed September also had fewer new orders and shipments in manufacturing, along with a decline in retail spending.

We also got this report from the National Association for Business Economics that says the slowdown is becoming more widespread, both due to trade wars, and softer conditions in general.
COMMENTS: “Results from the October 2019 NABE Business Conditions Survey show that the U.S. economy appears to be slowing, and respondents expect still slower growth over the next 12 months,” said NABE President Constance Hunter, CBE, chief economist, KPMG. “Many of the survey indicators in this report are at their lowest levels in several years. It is important to note, however, that all respondents still expect the current economic expansion to continue over the next 12 months. But, on balance, panelists expect slower growth than they did three months ago. After more than a year since the U.S. first imposed new tariffs on its trading partners, higher tariffs are disrupting business conditions, especially in the goods-producing sector. Two-thirds of respondents from that sector indicate that tariffs have had negative impacts on business conditions at their firms.”

“More panelists report falling sales and anemic profit margins at their firms over the past three months than in the previous survey,” added NABE Business Conditions Survey Chair Sam Kyei, CBE, chief economist, SAK Economics LLC. “Materials costs rose, on balance, at respondents’ firms, marking a 14th consecutive quarter of higher costs. However, price increases were only slightly more common than price cuts at respondents’ firms. Hiring was far less prevalent at panelists’ firms in the third quarter, as was wage and salary growth. A majority of respondents (53%) expects wages and salaries to be unchanged over the next three months.

“Capital spending decelerated among more surveyed firms in the third quarter than in the second,” continued Kyei. “Notably, fewer respondents reported increased capital spending on equipment and information technology at their firms than at any time in the past five years.

“Panelists have a less favorable view than in the previous survey of the Federal Reserve’s easing of its federal funds rate policy. Only 35% of respondents view the easing as favorable, compared to the 50% who held this view in July.”
This is why I find myself bewildered by Wall Street still jumping whenever the Trump Administration pulls a pump-and-dump scheme claims progress in trade discussions. The overall economy isn’t doing that well, and stopping the tariffs isn’t going to solve the problem of slower demand through weaker wage and job growth. Nor will it do much to spark a full-employment economy in a country that is demographically aging.

So pumping up the stock market through easy money seems to be a sure-fire way to make what might be a natural and light recession into something much worse when things officially decline. Greedheads and Trumpists may not mind it, but those of us outside of BubbleWorld should care a lot.

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