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Thursday, December 20, 2018

A turn in the tide

James Grant writes:
 
Thursday’s Wall Street Journal editorial condemning Wednesday’s rate hike ran out under the headline, “Powell to Markets: Take That.” It reminded us of a Journal editorial from Oct. 25, 1929, whose headline we reprint above. 
 
The stock market had already crashed when William Peter Hamilton, the Coolidge-era editorialist, started typing. He wrote to observe that the Dow Jones Railroad Average had fallen to confirm a prior decline in the Industrials, thus, under Charles Dow’s technical theory, signaling a bear market. 
 
The final two paragraphs of Hamilton’s comment seem particularly timely reading today. Thus: 
 
There are people trading in Wall Street and many from all over the country who have never seen a real bear market, as for instance, that which began in October, 1919, and lasted for two years, or that from 1912 to 1914 which predicted the Great War if the world had then been able to interpret the signs. What is more material is that the stock market does forecast the general business of the country. The big bull market was confirmed by six years of prosperity and if the stock market takes the other direction there will be contraction in business later, although on present indications only in moderate volume. 
 
Some time ago it was said in a Wall Street Journal editorial that if the stock market was compelled to deflate, as politicians seemed so earnestly to wish, they would shortly after experience a deflation elsewhere which would be much less to their liking. 
 
Hamilton was not forecasting a great depression; nor, certainly, are we. Neither are we equipped to read the tea leaves of stock-price action. What we do mark is that the Powell Fed, professedly “data-dependent,” yesterday chose to continue to tighten in the face of the real-time data of falling share prices, widening credit spreads, a plunging oil price and a flattening yield curve. 
 
In a CNBC panel discussion following the Powell press conference, a commentator insisted that there had been no “policy error,” adverse market reaction notwithstanding—it was obvious, he said. But if policy errors were obvious at the time they were perpetrated, our policy-makers would never err. 
 
A decade’s worth of interest-rate suppression has led to an outpouring of new credit. Arguably, given the artificially low borrowing costs in place, much of this debt was mispriced at inception. Perhaps the message of the markets is that Corporate America is dependent on negligible real interest rates only and is ill-equipped to deal with substantially higher ones. If so, 2019 may feature a U-turn in monetary policy and a, perhaps, long overdue reappraisal of the judgment and operating methods of our omnipresent central bank.  

Northern exposure

Is a course reversal underway in the Great White North?  On Monday, The Canadian Real Estate Association reported that existing home sales dropped 12.6% year-over-year in November, while the average home price of C$488,000 represented a 2.9% decline from November 2017.  
 
The epicenters of the long-running Canadian housing bull market have likewise seen their fortunes turn, as existing home sales in Toronto slumped by 15.2% year-over-year, outpacing the broad decline, while such transactions in Vancouver cratered by 42.3% from a year ago. 
 
Then, too, the sharp recent decline in energy prices is making an impact on Canada’s economic picture. November CPI showed a 4.8% sequential and 1.3% decline in the energy component, helping to push headline price growth to 1.7% year-over-year, below the 1.8% consensus and down from 2.4% in October. Pain in the Canadian energy patch is severe enough that the energy and trade ministries announced a C$1.5 billion loan package for the oil and gas sector, with a bulk of those funds earmarked for exporters with “working capital needs.” 
 
While the housing market sputters and the oil industry struggles, Canadians remain in hock. Last Friday, Statistics Canada reported that the ratio of household debt to disposable income rose to 173.8% for the third quarter, up 60 basis points sequentially and near 2017’s record 174.4%. By comparison, that figure stood at 109% in the United States last year and topped out at 144% during the prior cycle in 2007.  
 
The heavy debt load is taking a toll, as the Office of the Superintendent of Bankruptcy reports that consumer insolvencies jumped 9.2% year-over-year in October, the biggest jump since the 2016 oil-bust aftermath.  Ted Michalos, licensed insolvency trustee at Hoyes, Michalos & Associates, Inc., tells Bloomberg that: “The tide has turned, and the water’s starting to rise. Now it’s just a question of how quickly does it rise.”
 
Ominous economic developments and inflation downtick aside, Bank of Canada governor Stephen Poloz stayed on message in a recent interview with CTV news, stating that “The Canadian economy begins the new year in solid shape. Our fundamentals are quite solid.”  
 
Of the BoC’s 1.75% overnight rate, Poloz indicated that he sees a target range of 2.5% to 3.5%, but gave himself plenty of rhetorical wiggle room: “Getting there, it’s a journey and we expect over time to get there. But it can be interrupted or it can be sped up, depending on how the economic data evolve.”
 
Talk aside, investors are increasingly certain that the BoC will back off after five rate hikes in the past 18 months, followed by a status quo result at the Dec. 5 meeting. According to interest rate futures data provided by Bloomberg, the odds of a rate hike at the Jan. 9 meeting have collapsed to 2.5%, down from 70% a month ago. 
 
Whether BoC follows the Fed higher or follows the newly dovish route now expected by the markets, the Canadian dollar looks vulnerable. Continued tightening by Poloz and Co. would add additional strain to an economy whose dual pillars of housing and energy are both under duress, while a more dovish approach would likewise be negative for the Loonie thanks to the widening yield differential with the U.S.  
 
 
Canadian dollar/U.S. dollar cross, three-year view.  Source: The Bloomberg
 
Meanwhile, the accelerated carnage in asset prices after yesterday’s Fed funds-rate hike has led some investors to rethink the recently unthinkable. Futures currently price 1.5% odds of a U.S. rate cut by the Dec. 11, 2019 meeting, up from 0.0% one week ago. 

QT Progress report

A $5 billion sequential downtick left the Fed’s portfolio of securities held outright at $3.892 trillion this week, with Treasury securities comprising about 57% of the remaining portfolio.  Compared to the trailing four-week average, today’s figure is down by $13 billion, split evenly between Treasurys and mortgage-backed securities. 
 
Since the start of QT on Oct. 1, 2017, the Fed’s total balance sheet is down by 8.34%. 

Recap Dec. 20

A 1.5% drop in the S&P 500 left the broad index about 16% off its September high water mark, while the Russell 2000 and Dow Transports fell by a similar percentage. The NYSE FANG+ Index lost 3.5%, and is now negative year-to-date.  
 
But perhaps the wilder action was in the bond market, where we saw three-month Libor briefly exceed the 10-year Treasury yield this morning, while the 30-year long bond rallied to push the yield as low as 2.96% before a late reversal left yields higher across the curve. Speculative grade corporate debt was hammered, with the iShares iBoxx High Yield Bond ETF falling to its lowest since that 2016 winter of discontent, while the Invesco Senior Loan ETF finished the day at a 1.3% discount to its net asset value, the biggest since at least 2011. 
 
- Philip Grant

Friday, May 22, 2020

Angel eyes
Misery loves company.

Recap May 22

Thursday, May 21, 2020

Yellow ledbetter

Wishing well
These coins must have fallen through the couch cracks.

QE progress report

Recap May 20

Wednesday, May 20, 2020

Risk management 2.0

Paper pushers

Northern exposure
Now they tell us.

Recap May 20

Tuesday, May 19, 2020

Pounded dough
The mouse is out of the house.

57 days later
The undead are dancing.

Recap May 19

Monday, May 18, 2020

Noises off

Depreciation day
Grading on a curve, writ-large.

Correction:

Recap May 18

Friday, May 15, 2020

Shelf life
Today, biotech company Sorrento Therapeutics, Inc.

King me
Debt monetization is here.

Recap May 15

Thursday, May 14, 2020

She said it

Rock center
It's good to be king.

QE progress report

Recap May 14

Tuesday, May 12, 2020

Some type of synergy

Liquid courage
A brave new world.

Recap May 12

Monday, May 11, 2020

Bed check

A ripple in the desert
This morning, the Kingdom of Saudi Arabia announced

Recap May 11

Friday, May 8, 2020

He said it

Break on through
A step closer to the other side.

Recap May 8

Thursday, May 7, 2020

Mr. Market's Wild Ride

QE progress report

Recap May 7

Wednesday, May 6, 2020

Learning by doing

Solar city
From the counter-cyclical chronicles:

Pressed juice
What's old is new again.

Recap May 6

Tuesday, May 5, 2020

Green thumb
A closer look at "whatever it takes."

Just add water
The Mortgage Bankers Association

Recap May 5

Monday, May 4, 2020

Model X
Call it Uber diets.

Recap May 4

Friday, May 1, 2020

Thanks for nothin'

Codependency credit
Torrents of red ink down Mexico way.

Recap May 1

Thursday, April 30, 2020

Credit check

Security master
This morning, the Federal Reserve announced it will expand the scope

QE progress report

Recap April 30

Tuesday, April 28, 2020

State of nature
Yesterday, New York governor Andrew Cuomo

Recap April 30

Monday, April 27, 2020

Liquidity check

Something shiny

Smoke 'em if ya got 'em
On April 17, Howard Willard, CEO of tobacco giant Altria Group

Recap April 27

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