This week Fed Chair Janet Yellen said we won’t see another financial crisis in our lifetime... That comment may be the beginning of the end for the nine-year boom in the stock markets says Rodney Johnson, Dent Research.
The statement certainly reminds me of what we were admonished in “The
Wizard of Oz,” Pay no attention to the man (or woman) behind the
curtain! Yellen has a lot of company over the years. There was Irving
Fisher’s statement in October 1929: “Stock prices have reached
what looks like a permanently high plateau.”
John Maynard Keynes’ made this ridiculous comment in March 1929: “We will not have any more crashes in our time.”
Ben Bernanke assured us in 2007 that “the subprime crisis was contained,” just before it roared its ugly head. The Director of Research at the Fed still “painted a benign picture” in his forecast in December 2007 just as the crash and recession was beginning, pointed out Harry Dent, Dent Research.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of June 30, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news
Durable Goods Orders Down 1.1% in May… Excluding transportation, orders were almost unchanged at 0.1%, missing
expectations of 0.5%.
What it means – Diving a bit deeper, core capital goods orders dipped 0.2%, short of the expected 0.5% gain. One odd part of the report was vehicles, which gained 1.2% after last month’s 0.5% climb. With GM and other manufacturers warning of lower sales, this number should roll over in the coming months. Which means that even the positive pieces of this report aren’t harbingers of better things to come. We’re still on a slow/low glide path.
S&P CoreLogic Case-Shiller 20-City Home Price Index Up 0.3% in April… Home prices increased 5.7% for the year.
What it means – The annual price change is more important than the monthly, and it’s off 0.2% from the report in March. That’s odd. April and May are big months in real estate. That’s when most of the gains are made, which then average out over the rest of the year. But spring sales sputtered in typically hot markets like San Francisco (down 0.6%), while still plowing ahead in others like Seattle (12.9%).
I think it tells the same story that we saw last week in existing and new home sales. The real estate market remains solid because of short supply, but it’s not shooting higher like it is in Canada and Australia.
Fed Chair Yellen Notes that She Doesn’t Expect Another Crash in Our Lifetime… Chair Yellen made the comment during a scheduled speech, and was immediately compared to John Maynard Keynes and Irving Fisher, who made similar remarks during the late 1920s.
What it means – Is it willful blindness or does she know something we don’t? Just before the last crash, Fed Chair Bernanke remarked that housing would not bring down the financial markets. Congressmen and regulators told us that new regulations after 2009 would ensure greater bank transparency and less concentrated risk, yet there are fewer big banks and they all hold more assets than they did in 2008.
The economy can’t find a way to grow faster than 2%, and yet equity markets sit near all-time highs… and interest rates are near record lows.
What could possibly go wrong?
First-Quarter GDP Growth Revised up to 1.4%… Based on higher personal consumption, the Bureau of Economic Analysis increased its growth estimate from 1.2%.
What it means – The first number we get on GDP is a guess about four weeks after the end of the quarter. The second estimate comes 30 days later, and the final number shows up just before then end of 90 days. Essentially, everyone’s lost interest by that time because they are focused on GDP for the next quarter. But we can find interesting stuff by looking through the final numbers.
In the first quarter of this year, people spent a lot more on recreational vehicles than the government thought. It’s interesting that consumers did the same thing in the first quarter of 2016. This explains why companies like Winnebago and Thor Industries have red-hot earnings. But don’t expect the trend to continue forever. As we’ll discuss when we publish our updated spending waves, there’s a season for everything.
ECB President Mario Draghi Implies the Central Bank Will End Bond Buying… The comments were later qualified by an unnamed ECB source, but investors sent the euro and bond yields higher anyway.
What it means – If the ECB ends its bond-buying program, then yields on Eurozone government bonds should tick higher due to less demand. This would make holding funds in euros more profitable, so the prospect of higher yields sent the euro to 14-month highs. But it’s just a theory. As the Fed raised short-term rates in the U.S., long-term rates fell and the dollar lost ground, which goes against expectations.
And don’t forget that the ECB currently charges depositors 0.40% instead of paying interest.
Simply reducing or ending the bond-buying program is technically a form of tighter monetary policy, but it’s a long way from any sort of normalization of the markets. In a world turned upside down by central bankers, anything can happen.
Walmart Informed Trucking Companies That it Won’t Work with Those Who Move Goods for Amazon… This comes on the heels of Walmart telling companies that use Amazon Cloud Services they will be cut off.
What it means - I’m not sure it’s illegal, but such moves sure leave a bad taste in my mouth. What’s next? Customers that use Amazon won’t be allowed to shop at Walmart? Or maybe people who receive mail won’t be allowed to buy from Walmart because the U.S. Postal Service also delivers Amazon packages on Sundays? Hmm.
I don’t know where this ends, but if I had to guess, I’d think people with pickup trucks will end up as some form of Uber drivers for Amazon, giving the ecommerce behemoth one more competitive advantage.
Japanese Births Below One Million for the First Time Since the End of the 1800s… Japan recorded fewer than one million births in 2016, the lowest level since 1899 when the country recorded 979,000 births.
What it means – The current number of births is one-third the total of the peak number of children born in 1949. At this rate, the Japanese population will fall by almost 35% by 2065. But therein lies the rub. “At this rate” presumes that births will remain around one million per year. What if they drop even lower? The country will age faster, compounding their problems.
Anyone want to take a bet on Japan paying off its government debt? With a shrinking population, it’s almost impossible to imagine a scenario where Japan makes good on its bonds.
UPS Freezes Pensions for Non-Union Workers… The delivery company will transition 70,000 non-union workers to 401(k) plans.
What it means – This is where the rubber meets the road in the pension debacle. The non-union (management) workers cannot bargain with the company, so they just have to take what UPS gives them. UPS owes workers $41 billion in pension benefits, but only has $31 billion in assets.
The first step when you find yourself in a hole is to stop digging. UPS is trying to stop the pension whole from getting bigger. Unfortunately, the same remedy isn’t available to cities and states across the nation, which will have to deal with their own pension issues in the years ahead. I’ll cover this topic in more detail in the August Boom & Bust.
Next Week – U.S. markets will close on Tuesday, July 4. The short trading week brings reports on factory orders as well as the Employment Situation, and includes the minutes of the last Fed meeting.
The proof is in the planning.
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