Market recovery

Stephen Crowder discusses the stock market rally under president Trump.

Trump abuses Fed Chair Powell

Maybe abuse is a little harsh, but he certainly criticizes Fed Chair Jerome Powell.  His criticisms are valid - without the aggressive rate hikes GDP certainly would have hit 4% and possibly even stretched to 5% for 2018.  And the stock market would have definitely responded with more strength than it has shown.  The fact that they are considering a rate cut only proves it.

Conversely, without the rate hikes we may have seen inflation but the preemptive nature of  the rate hikes was definitely too aggressive.  The president's criticisms of Powell while perhaps a bit strong, are not at all unfair.

Why the stock market is fine: jobs and taxes

More growth lies underneath.

Via Yahoo:

WASHINGTON (Reuters) - The number of Americans filing for unemployment benefits unexpectedly fell last week, dropping to its lowest level in nearly 45 years as the labor market tightened further, bolstering expectations of faster wage growth this year.

...The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. The tighter labor market is starting to exert upward pressure on wage growth.

In another article on Yahoo:

President Donald Trump's $1.5 trillion tax overhaul, touted as major tax relief for individuals and corporations, is showing up in bigger paychecks and bonuses awarded to workers by companies whose tax bills are being slashed.

Despite the Yahoo spin, interviewing people who appreciate the cuts but still do not like president Trump, the underlying fundamentals are this: the job market is historically strong, wages are growing, companies are doing well and the tax cuts are making a difference.

The stock market correction is not unexpected, but the boom is just starting and therefore the stock market will be fine. I said it before and nothing has changed since; this is going to be a strong economic year, even as the bond market and hence investors adjust to the potential for inflation, the market will continue to grow.

The stock market is fine

Rush Limbaugh today said that the reason for the market volatility (yesterday the Dow Jones Industrial Average (DJIA) plunged over 1000 points) is a fear that they are trying to topple the Trump presidency.  I disagree.  While the Democrats may still be invested in ending the Trump presidency, the market is suffering a setback in that it has become, to a small extent, a victim of its own success.

The Trump presidency has seen a meteoric rise in the stock markets over the past year, and it's been accelerated by the passing of the Trump tax cuts.  When something changes so rapidly there is always a reverberation effect.  The stock market was due for a correction, but not a change of course.  True, the DJIA rise and the tax changes are likely going to have an inflationary effect, on wages, on interest rates as a result and then of course bond rates as a result of that.  That means money will shift towards the 10 year bonds (and others) with a better rate for those more interested in a secure long term investment.  That money has to come out of the stock market, therefore there's going to be a sell-off.  This is a temporary market correction, not a collapse.  Paul Krugman might try to convince his readers that the sky is falling like he did on election night in 2016.  It's not.

As the reverberation works it's way into the market, the buying will return, slowly at first but eventually once again apace.  The market cannot continue to rise at the rate it currently has been, corrections are necessary as is an eventual slowing of the torrid pace.  What is not necessary for investors is panic.

Now is the time to play hardball with China

In brief:

Remember back in 2010 when China joined Russia in dropping the U.S. dollar as the medium of bi-lateral trade? And again in 2014 when the two nations teamed up to kill the dollar? Remember China hacking U.S. government and corporate secrets, pretty much always. China has a pretty lengthy history of aggressive, bad neighbor behavior.  And now their stock market is in deep trouble. It's in free fall and could be at the start of a crash.  True or not, make no mistake, there's underlying trouble.

Never let a crisis go to waste, right?

Now is the time to play hardball with China.  It's the perfect time to do something to prevent job offshoring, to remove Most Favored Nation status for China and to repatriate jobs to America.  It's an opportunity to not just knuckle under to China's belligerent rise as a world power. Strike them economically when they cannot afford it.  Why not?  They've been trying to do it to America for years.

Is nobody asking this question about the stock market?

I'm no expert at the stock market watch, but this latest September-October downturn, while by no means on the scale of the 2008 crash, looks pretty bad. yet you go onto market watch TV shows and you see people arguing about whether this is a correction or nothing to worry about. With Japan slumping and now Germany and perhaps the rest of Europe slumping into recession territory, Chinese GDP getting softer, is it time to wonder whether there is another recession looming if not yet actually present?

Or is this just another case of protecting the president pre-midterm elections? I'm wondering why there isn't a healthy dose of skepticism here. Rose-colored glasses seldom work out.

I'm not suggesting that either protecting the president or unjustified optimism is the case but the level of optimism among the wealth-and-trading pundits does make it seem that they are trying to talk us into believing there's nothing to see here. Or perhaps it's themselves they are trying to convince.

Or maybe I've just been reading ZeroHedge too much lately.

UPDATE: As it turns out, not everyone thinks this is worth ignoring.

Now, in the last two weeks the stock market has undergone a substantial correction that may yet turn into a full blow crash. The Dow Jones Industrial Average has dropped by about 1300 points since October 1, falling from around 17,200 to 15,900 as of late afternoon on October 15. The S&P 500 and NASDAQ have fallen by similar proportions. All told, the U.S. stock markets have lost close to $1.6 trillion in wealth in the past two weeks. By all appearances, the correction has not yet run its course. The markets could fall still further on worries about slow growth in Europe and the United States, and a general sense that events are spiraling out of control.

So there's that.

Where is the stock market going next?

According to Stealth Stocks, the markets are in trouble, because the economy is in trouble;

This Friday, we will get the revised GDP report for the second quarter. Estimates are for this to be revised lower from 2.4% down to 1.2%. Next month, the final revision could below 1% and pushing near zero, so it should be no wonder the bulls are having a hard time mustering any kind of offense.

The Fed is under the belief that it’s ZIRP (Zero interest rate policy) will prevent a double dip recession from occurring, based on historical precedence.

“The economy has never contracted with the difference between short- and long-term Treasury yields as wide as it is now. That gap, at 2.11 percentage points for 2- and 10-year notes, signals a 15.5 percent chance of a recession in the next year, according to the Federal Reserve Bank of Cleveland.”

This is deceptive and illusory.

It assumes that banks will lend money because rates are so low. The reality is banks are in terrible shape.

Banks are a canary in the coal mine for the broader stock market! Housing and commercial real estate loans continue to be a nightmare for them.

Whether or not you want to blame President Obama or President Bush or someone else entirely for the current state of affairs, there is clearly zero indication that the current policies have done nothing to mitigate the problems. It can be argued that the efforts of the recovery act ARRA (the stimulus) have exacerbated the problem. Certainly the anti-business agenda has not solved the problem and in fact over the mid term may deepen the problem.  No matter what your political stripe you can't argue that the Democrats have done the job on the economy.  They have failed.  They have failed by the standards they set for themselves, and they have failed by any reasonable measure that is used.  Jobs saved is illusory.  Imagine how bad it would have been if we hadn't acted, is not exactly a winning argument.  Imagine how great things would be if you stayed out of the way and let the economy correct itself.  Perhaps then a real recovery would be underway.

Herd Mentality on Wall Street

The Dow Jones is soaring today - up at last check over 400 points.  This is all because of the Euro $1 trillion bailout of Greece. The Wall Street Journal captures the sense of momentum.

NEW YORK—U.S. blue-chip stocks barreled toward their biggest one-day point gain of the year on Monday as a new nearly $1 trillion bailout package to help stabilize Europe lured investors back into riskier assets.

The Dow Jones Industrial Average climbed 350 points, or 3.4%, to 10732 in early trading, on pace for its biggest one-day gain of the year.

There - it's all fixed. The underlying problem of profligate Greek spending on an unsustainable model, all fixed too. Right? Otherwise the market that was dropping last week would not have found some new buoyancy. And now President Obama can claim that the underlying market fundamentals are sound. No doubt, thanks to him.

This herd mentality in the rush to bid up prices based on a solution just seems a little premature.

Market rebound: real? Obama's?

A lot of people are wondering if the stock market rally or rebound of the last six weeks is real or not.  Not real in the sense of 'did it actually happen?' but rather in the sense that is it sustainable?  Is it a bear bounce (a blip on a downward trajectory)?

Or is it just this?

Or rather, is it really the beginning of a sustained recovery?  There's valid points to be made for both sides.  There are signs that the worst is past, and signs that the worst is yet to come.  If you had a crystal ball right now you could make yourself quite wealthy.  The truth is no one knows for sure.  Economics has been described as trying to drive your car using only your rear view mirror as your visual input.  You can tell what happened, but you don't know for sure if there's a big curve up ahead.  You have to react to clues from the past.

But there's a political point that is critical not to be overlooked.  If the recovery has started already then how did it happen?  All that you can be sure of is this - it wasn't because of the stimulus package (the American Recovery and Reinvestment Act).  Most of that money hasn't made it anywhere yet.  So if the recovery kicks into high gear, it won't be because of anything the Democrats and the President have done.  That's important to understand and to remember, because they will surely try to take credit for it.  

The BIG financial corollary to this point is that if the ARRA money is not needed, kill it before that money makes it's way into the system and stimulates massive inflation and tilts the economy into another problem.  There is a huge risk here that the Democrats will be undoing the decades of low stable, inflation rates that managed to be achieved during the Reagan administration and stayed quite stable through the Bush 41 administration, 2 Clinton terms, and 2 Bush 43 terms.

The market is up over 20% in the last month and a half.  If it's a bear bounce, it's a substantial one.  Recovery may be on it's way.  After all the conventional wisdom is that steep recessions are shorter than shallow recession.  This one was certainly steep - at least by the time it became known (arguably the recession started in 2007).  The most important thing to remember however is that if that is the case, the recovery pre-dates Obama's massive spend.  And if that's true he must be denied credit for it or it will just lead to more of the same spend your way to recovery thinking.

Ironically, America does need change.  The problem is that it is still somewhat blind to the type of  change that is really needed.  The President believes his change is the right change but what America needs changing is in it's thinking.  It needs in many quarters to lose it's sense of entitlement.  It needs jobs. It needs manufacturing.  It needs to have a better mix of consumer, investment and research and development spending.  It needs to curb it's current account deficit with real and fair free trade deals and competitive domestic products.  It needs to mitigate it's dependence on foreign energy through use of domestic drilling, nuclear power, natural gas, and clean coal technology.  Sure throw in solar, battery, geothermal, and wind power but don't expect them to pay off by 2012 or 2030 - they won't.  

Most importantly America needs to slash it's government debt at all levels.  This will not get done with trillions more in federal debt. It requires the killing or massive overhaul of discretionary and non-discretionary spending.  In other words Medicare, Medicaid, Social Security and possibly defense spending (though preferably not the latter).  All that incremental Obama debt might do effectively is potentially reduce state debts. In case some states decide they want to secede from the mess the union is in a few years down the road, they'll be in a healthier position to do so.  Wonderful.  What a great way to destroy America from the inside.  Maybe that's been the plan of the ultra-left all along?  Nah, couldn't be.