Tag Archives: interest rates

Everything Is Worse Now Than In 2007

Does anyone seriously believe that in the next global recession equity markets will not collapse? Do market participants really believe fiscal stimulus and helicopter money will save us from a gut-wrenching global bust that will make 2008 look like a picnic? Has the longest US economic cycle in history beguiled investors into soporific complacency? I hope not. – Albert Edwards, Market Strategist at Societe Generale

Friday’s 625 point plunge in the Dow capped off another volatile week. Three of the top 20 largest one-day point declines in the Dow have occurred during this month. Remarkably, the Dow has managed to hold the 200 dma 5 times in August. The SPX similarly has managed to hold an imaginary support line at 2,847, about 40 SPX points above the 200 dma. The Russell 2000 index looks like death warmed-over and it’s obvious that large funds are unloading their exposure to the riskier small-cap stocks.

The randomness of unforeseen events causing sudden market sell-offs is starting to occur with greater frequency. Friday’s sell-off was triggered by disappointment with Jerome Powell’s speech at Jackson Hole followed by an escalation of the trade war between China and Trump. Given the response of the stock market to the day’s news events, I’m certain no one was expecting a less than dovish speech by the Fed Head at J-Hole or the firing of trade war shots.

It’s laughable that the stock market soars and plunges based on whether or not the Fed will cut rates, and by how much, at its next meeting. At this point, only stocks and bonds will respond positively to the anticipation of more artificial Central Bank stimulus. And the positive response by stocks will be brief.

Morgan Stanley published a table of 21 key global and U.S. economic indices – ranging from the Market Global PMI manufacturing index to the Goldman Sachs US financial conditions index – and compared the current index levels to the same indices in September 2007. Every single economic index was worse now than back in late 2007. September 2007 was the first time the Fed cut rates after a cycle of rate hikes.

But there’s a problem just comparing a large sample of economic indices back then and now. By the time the Fed started to take rates down again in 2007, it had hiked the Fed funds rate 425 basis points from 1% to 5.25%. This time, of course, the Fed started at zero and managed to push the Fed funds rate up only 250 basis points to 2.5%. Not only is the economy in worse shape now than at the beginning of the prior financial crisis but the Fed funds rates is less than 50% as high as it was previously.  For me this underscores that fact that everything is worse now than in 2007.

The commentary above is an excerpt from the latest issue of the Short Seller’s Journal. Each issue contains economic and market analysis short sell ideas based on fundamental analysis, including ideas for using puts and calls to express a short view. You can learn more about this newsletter here:  Short Seller’s Journal Information.

Thanks Dave for the TREE recommendation. I covered in the high $200’s for a very profitable trade after it cracked finally – subscriber “Daniel”

Can Western Central Banks Continue Capping Gold At $1350?

“Shanghai Gold will change the current gold market with its ‘consumed in the East but priced in the West’ arrangement. When China has the right to speak in the international gold market, the true price of gold will be revealed.” – Xu Luode, Chairman, Shanghai Gold Exchange, 15 May 2014

The price of gold has jumped 5.8% in a little over 3 weeks. This is a big move in a short period of time for any asset. Two factors fueled the move. The first is the expectation that Central Banks globally will revert back to money printing and negative interest rate policies to address a collapsing global economy. The second factor, more technical in nature, pushing gold higher is hedge funds chasing the upward price-momentum in the Comex and LBMA paper gold markets.

The gold price was smashed in the paper gold market on Friday right as the stock market opened. 9,816 Comex paper gold contracts representing nearly 1 million ozs of gold were thrown onto the Comex in a five minute period. This is more than 3 times the amount of gold designated in Comex warehouses as available for delivery and 28% more than the total amount of gold held in Comex vaults per Friday’s Comex warehouse report.

Judging from the latest Commitment of Traders Report, which shows the Comex bank net short position growing rapidly, there’s no question that Friday’s activity was an act of price control. Furthermore, it’s common for the price of gold to be heavily managed on summer Fridays after the physical gold buyers in the eastern hemisphere have retired for the weekend. The motivation this Friday is the fact that the gold price had popped over $1350 on Thursday night. For now $1350 has been the price at which price containment activities are readily implemented.

The price of gold is most heavily controlled just before, during and after the FOMC meeting. The next meeting begins tomorrow and culminates with the FOMC policy statement to be released just after 2 p.m. EST. The event has become the caricature of a society that takes official policy implementation seriously. This includes the journalistic and analytic transmission of the event, which is literally a Barnum and Bailey production.

It seems the number one policy goal of the Fed and the Trump Administration is to keep the stock market from collapsing. But the Fed has very few rate cut “bullets” in its chamber to help accomplish this policy directive. Moreover, a study completed by the Center for Financial Research and Analysis showed that the S&P 500 Index fell 12.4% in the first six months after cuts started in 2007. The drop broke a post-World War II record decline of 9.5% set in 2001, when the Fed’s previous series of rate reductions got under way. Declines in the S&P 500 also followed moves toward lower rates that began in 1960, 1968 and 1981.

This suggests to me that the Fed will have to start printing more money. The only question  is with regard to the timing.  Judging from the steady stream of negative economic reports – a record drop in the NY Fed’s regional economic activity index released today, for instance – it’s quite possible the printing press will be fired up before year-end.

The rapid price rise in gold from $700 to $1900 between late 2008 and September 2011 was powered by global Central Bank money printing and big bank bailouts. We know money printing is on the horizon. But so are bank bailouts – again. The curious and highly opaque announcement that Deutsche Bank was going to create a “bad bank” for its distressed assets, which are losing half a billion dollars annually, suggests that the German Government and/or ECB is prepared to monetize DB’s bad assets while enabling the bank’s basic banking and money management business survive on its own.

This is just the beginning of what will eventually turn out to be a period of epic money printing and systemic bailouts by Central Banks in conjunction with their sovereign lap-dogs. Only this time the scale of the operation will dwarf the monetization program that began in 2008. The price of gold more than doubled with ease the first time around. In my mind there’s no question that the $1350 official price-cap will fail. At that point its anyone’s guess how high the price will move in U.S. dollars. But the price of gold is already breaking out in several currencies other than the dollar.

Utter Insanity…

That’s the only way to describe this stock market. It won’t end well for the hedge funds whose algos are chasing price momentum nor for the retail daytraders playing the game of “greater fool.” Apparently CSCO and WMT’s “beat” triggered a multi-hundred point spike in the Dow on Thursday. Funny thing about that. CSCO’s one-cent “beat” has been routine since the late 1990’s.

Walmart also “beat.” But for Walmart, the numbers below the headline sucked. The 1.1% revenue growth was well below 1% if you strip out gasoline price inflation from Sam’s Club numbers. Speaking of Sam’s, membership revenue was down 7.9% (these are FY Q1 vs Q1 last year). Operating income was down 4.1%. The “beat” was manufactured by one-time “other gain” that was not defined in the 8-K. This enabled WMT to generate the headline “beat.” Cash flow provided by operations dropped from $5.1 billion last year to $3.5 billion this year – not good. Despite the deteriorating financial fundamentals, the stock market added over $7 billion to WMT’s market cap.

But that’s a tempest in a teapot compared to the the IPO valuations of companies like Lyft, Uber and WeWork. These companies not only have never made a dime of profit, but they bleed billions negative cash flow. Yet, a $50 billion stock market valuation set by the underwriters is greedily bought into by hedge funds. That’s your pension money at work, folks. It’s amusing to watch the hand-puppets on financial cable tv frown when stocks like Uber and Lyft drop a quick 20% from the IPO date.

The prized “jewels” in the stock market – i.e. the stocks with the best performance over the last 4 months – are the ones with escalating operating losses on increasing revenues. But the stocks soar when the earnings announcement hits the tape with the phrase “beat estimates” – which means the company lost slightly less money than forecast by Wall Street’s brightest.

But these companies all share a common trait: a tragically flawed business model in which the only way to grow revenues is to charge the end user a price that does not cover the all-in cost of producing the product or providing the service but which attracts end-users because the price is lower than the competition. Despite eventual financial doom from the start, the stock market currently values this type of business model over companies that generate bona fide cash/economic profits.

I’m reviewing a company in my next issue of the Short Seller’s Journal which trades at a price/sales multiple that is 15-times higher than the industry average. Its operating losses grow at a double-digit rate every quarter sequentially and double every quarter year-over-year. We can’t use any of the other tradition valuation metrics because the company has negative cash flow, massive net losses and negative forward earnings. This is all nothwithstanding the fact it operates in a highly cyclical industry with declining sales.

I mention this to illustrate just how far off the rails the stock market has traveled. The current stock market bubble is at an historical extreme. It’s worse than 1999 or 1929 – I don’t care what the manipulated GAAP p/e ratio comparison shows. I was trading tech stocks in the late-90’s bubble and this current one is worse. IT’s utterly insane…

Larry Kudlow Wants A 50 b.p. Cut In Fed Funds – Why?

The stock market has been rising relentlessly since Christmas, riding on a crest of increasingly bearish economic reports. Maybe the hedge fund algos are anticipating that the Fed will soon start cutting rates. Data indicates foreigners and retail investors are pulling cash from U.S. stocks. This for me implies that the market is being pushed higher by hedge fund computer algos reacting to any bullish words that appear in news headlines. For example, this week Trump and Kudlow have opportunistically dropped “optimistic” reports connected to trade war negotiations which trigger an instantaneous spike up in stock futures.

“U.S. economy continues to weaken more sharply and quickly than widely acknowledged” – John Williams, Shadowstats.com, Bulletin Endition #5

The real economy continues to deteriorate, both globally and in the U.S. At some point the stock market is going to “catch down” to this reality.

The graphic above shows Citigroup’s Economic Data Change index. It measures data releases relative to their 1-yr history. A positive reading means data releases have been stronger than their year average. A negative reading means data releases have been worse than their 1-yr average. The index has been negative since the spring of 2018 and is currently well south of -200, its worst level since 2009.

The Treasury yield curve inversion continued to steepen last week. It blows my mind that mainstream media and Wall Street analysts continue to advise that it’s different this time. I would advise heeding the message in this chart:

I’m not sure how any analyst who expects to be taken seriously can look at the graphic above and try to explain that an inverted yield curve this time around is irrelevant. As you can see, the last two times the Treasury curve inverted to an extreme degree, the stock bubbles began to collapse shortly thereafter.

The data in the chart above is two weeks old. The current inversion is now nearly as extreme as the previous two extreme inversions. This is not to suggest that the stock market will go off the cliff next week. There’s typically a time-lag between when the yield curve inverts and when the stock market reacts to the reality reflected in an inverted curve. Prior to the great financial crisis, the yield curve began to invert in the summer of 2006. However, before the tech bubble popped, the yield curve inversion coincided with the crash in the Nasdaq.

Another chart that I believe reflects some of the information conveyed by the inverted yield curve is this graphic from the Fed showing personal interest payments. Just like in 2000 and 2008, households once again have taken on an unmanageable level of debt service expense:

Obviously the chart above is highly correlated with stock market tops…

The Conference Board’s measure of consumer confidence dropped in March, with the Present Situation index plunging to an 11-month low. It was the biggest monthly drop in the Present Situation index since April 2008. What’s interesting about this drop in confidence is that, historically, there’s been an extraordinarily high correlation between the directional movement in the S&P 500 and consumer confidence. The move in the stock market over the last three months would have suggested that consumer confidence should be soaring.

The Cass Freight Index for February declined for the third straight month. Even the perma-bullish publishers of the Cass newsletter expressed that the index “is beginning to give us cause for concern.” The chart of the index has literally fallen off a cliff. Meanwhile, the cost of shipping continues to rise. So much for the “no inflation” narrative. The Cass Index is, in general, considered a useful economic indicator. Perhaps this is why Kudlow wants an immediate cut in the Fed Funds rate?

FOMC Statement: Reading Between The Lines

“No more rate hikes period…rate cuts to begin sometime this spring…tapering the balance sheet taper starting in May…QT ends in September even though our balance sheet has only been reduced by roughly 10% of the amount of money we printed…Quantitative Easing  aka “money printing” to resume in October…our hidden dot plot shows that you should buy as much physical gold as you can afford and keep it as far away from any custodial safekeeping as possible.”

Just for the record, the Fed’s “Dot Plot” has to be one of the most idiotic props ever created for public consumption. It far exceeds the absurdity of the “flip chart” that Steve Liesman uses.

Gold And Silver Are Feeling Frisky

I sourced the chart below from a blog called The Macro Tourist. I added the title and the two yellow trend lines. The chart shows the daily price of gold since the inception of the bull market in 2000-2001. Last Friday (March 8th) gold popped $12 +/- (depending on the time from which you measure). I mentioned to some colleagues that “gold may be starting something special.”

The price of gold retested the $1300 level last week.  Aggressive futures short-selling on the Comex took the price of gold below $1300 on Thursday last week. The price ambush failed to keep gold below $1300, as strong Indian demand and a growing expectation that the Fed will stop its balance sheet liquidation and eventually re-start QE.

A lot of current precious metals and mining stock investors were not around for the 2008-2011 bull run and even less were around for the 2001-2006 bull run. The move from January 2016 to July 2016 was a head-fake that was part of the long period of  consolidation shown in the chart above. Many of you have not experienced how much money can be made investing in junior mining stocks when a real bull move takes place.

The chart above shows how cheap gold is vs. the SPX. Similarly, the mining stocks in relation to the priceof gold are almost as cheap as they were in 2001 and the end of 2015. In 2016 the GDXJ ran 300% from January to July. But in 2008, the HUI ran from 150 to 300 in 60 days and then from 300 to well over 600 over the next 2 1/2 year. Many juniors increased in value 10-20x. The move from 2001-2006 provided the same type of excitement.

I believe the long period of consolidation in the precious metals sector is finally ending. While there’s always the possibility that it could drag on longer, the risk/reward for investing in the juniors right now is as highly skewed toward “reward,” as it was in 2001 and 2008. The market will not go straight up and there will be some gut-wrenching, manipulated sell-offs. But I believe patience will be rewarded. This means not going “all-in” all at once but wading in slowly over time.

Trump’s Trade War Tweets, Buybacks And A Short-Squeeze

Someone last week suggested that Trump sees the stock market as the barometer measuring the success of his Presidency. I think his behavior, tweets, press comments, etc with respect to the stock market validates that assertion.

The Dow trended lower all week last after Monday’s close. Whenever the stock market faded from an early run-up or began a rapid sell-off, a Trump tweet or press statement would pop up proclaiming that the trade war negotiations were “progressing.” It seems, though, this manipulation tonic is starting to lose strength. The index of stocks with large buyback programs actually finished the week lower. But the “most shorted” stock index closed higher on the week again. This is why the SPX, Naz and Russell outperformed the Dow this past week.

Market tops are a process – While I’m getting impatient for this market to rollover, market tops are a process. This chart certainly provides something to contemplate:

The chart above overlays the SPX from April 2018 to present on top of a chart of the SPX over a similar period in 1936-1937. The correlation is surprisingly high up to this point. No one can predict if the SPX will follow the same path for the rest of 2019 that it took in 1937, but the two periods of time have many economic, financial and geopolitical similarities. There’s certainly a case to be made that the current stock market might unfold in a manner that “rhymes” with the large decline that occurred in 1937.

Another interesting indicator is the AAII Sentiment Survey. The AAII is the American Association of Individual Investors. The weekly survey measures the relative bullishness and bearishness of individual investors. Retail investor sentiment is considered a fairly reliable contrary indicator. Currently the bullishness is now over the 40% level and the bearish level is 20% (the rest are “neutral”) – a level of bullishness that has signaled a market top in the past. In contrast, a bullish level of 20% and a bearish level of 49% on December 13th was registered nine days before the stock market bottomed.

The highest the bullish sentiment level has reached in the last 5 months was 45% in the first week of October (25% bearish). The stock market entered a big decline on October 3rd. In isolation, this indicator may or may not be reliable. But given the number of other indicators associated with a market top, now would be a good time to take profits on any long positions you might have put on in the last 2 months. Given the deteriorating fundamentals of the economic and financial system, the probability that the market will rise a meaningful amount from here is quite low.

The “US Macro” index measures the difference between consensus expectation vs the actual number reported for a wide array of economic reports. As you can see, the stock market has dislocated from economic reality by a substantial margin. At some point, unless the economic reports begin to improve, the stock market will “catch down” to reality. How long it will take for this to occur is anyone’s guess, but it is likely that the “adjustment” will be abrupt.

Many indicators are reflecting a sharp fall-off in consumer demand. Wholesale inventories are soaring and the inventory to sales ratio is significantly higher than a year ago. The CEO of a logistics warehouse in California remarked in reference to the inventory stored in company warehouses, “in 30 years I’ve never seen anything like this.” This includes inventories of durables and non-durables targeted for domestic distribution.

Confirming the pile-up in manufactured goods relative to demand, the Cass Freight index has declined on a year-over-year basis two months in a row. The index had been rising each on month on an annual comparison basis since Trump took office.

Consumer sentiment is also falling. The latest U of Michigan consumer sentiment survey fell well below the Wall St consensus expectation, with some components falling to their lowest level since the 2016 election (recall that hope soared after the election). Apologists are blaming the trade war and the Government shutdown. However, historically there’s a near-100% correlation between the directional movement of the stock market and consumer sentiment. Any negative effect from the shutdown should have been offset by the sharp rally in the stock market. Contrary to the obligatory positive spin put on the data, the sentiment index likely reflects the fact that the average household has largely tapped out its ability to take on more debt in order to keep spending on anything above non-discretionary items.

Insider selling during February has accelerated. Insiders sold more shares in the first half of February relative to shares purchased than at any time in the last 10 years. The size and volume of insider stock sales the last three days of February – per SEC filings – was described by one analyst as “off the charts.” The Financial Times had an article discussing the fact that America’s CEOs are leaving their posts at the highest rate since 2008. It’s likely the departures reflect a bearish outlook by insiders both for business conditions and the stock market.

Homebuilders, despite the small rise in homebuilder optimism, must be sensing the fall-off in the economy and a decline the pool of potential new homebuyers. Housing starts in December dropped 11.2% from November. The decline would have been worse but November’s number was revised lower. The number reported for December was 14.4% below the consensus estimate. The numbers are SAAR (seasonally adjusted annualized rate) in case you were wondering about seasonality between November and December. But just to confirm, the December 2018 number was 11% below December 2017. Also, the Census Bureau releases the “unadjusted” monthly numbers, which showed a 12% drop in starts year-over-year.

Over the next several weeks there will be a lot of excuses for the deteriorating economic fundamentals:  trade war, Government shut-down, cold weather in January and February, low inventory in low-price homes, the dog ate my homework.

But the truth is that the average household in the U.S. is running up against debt limitations – the ability to take on and service additional debt.  Just one indicator of this is rising credit card and auto loan delinquencies.  The U.S. economy for the last 8 years has been primed and pump with printed money and debt.  Debt at every level of the system is at all time higher – both nominally and as a percentage of GDP.

The next round of QE, regardless of the scale, will do nothing to re-stimulate economic activity unless the money is used to re-set (i.e. pay-off) creditors on behalf of the debtors. This was how the last reset was engineered after the financial crisis but this time it will have to be a bailout in size that is multiples of the last one.

The stock market is beginning to rollover again, as the gravity of economic fundamentals begins to exert its “pull.”  I’m sure it won’t take long before we start to hear complaints about the hedge fund computer algos again.  But the best advice is to take your money off the table and get out of the way.

MMT (Modern Monetary Theory) Thoroughly Disemboweled

The best I can figure is that some very liberal, trust-fund Phd Sociologist professors at Bennington hooked with a group of radical Public Policy students from Harvard somewhere in a cabin in Vermont and did a group analysis of John Maynard Keynes’ “The General Theory of Employment, Interest and Money” after ingesting copious quantities of LSD. From out of that drug-addled assemblage, MMT sprung to life in “socially correct” political circles in NYC and DC.

Short of that explanation for the current obsession with MMT – also known as “Magical Money Tree” –  among the elitist intellectual trust-fund liberal political class, I have a hard time explaining the enthusiasm for this comic book version of economics.

A good friend of mine, who happens to be highly intelligent and obsessive about research, is thoroughly confounded by the idea anyone in their right mind would consider MMT as a serious policy tool other than as a mechanism to accelerate the confiscation of wealth and liberties from the public.

The best I could offer is that legitimizing MMT with academic endorsements is a precursor to the next round of QE, which will have to be Weimar in scale.  Occam’s Razor applies here. It’s that simple.  A Government unable  slow down its spending deficit has no other means of paying its bills other than to raise taxes to a level that will trigger mass revolt or use its printing press.  You see where this is going…

Interestingly, a writer/analyst who springs from the left, and who otherwise I would have thought to have been a proponent of MMT, thoroughly explores and disembowels the concept.  You can literally sense the author’s struggle to find a use for MMT:

We have a private economy driven by exploitation, overwork, asset stripping, and ecological destruction. MMT has little or nothing on offer to fight any of this. The job guarantee is a contribution, though a flawed one, and it’s not at the core of the theory, which proceeds from the keystroke fantasy. That fantasy looks like a weak response to decades of anti-tax mania coming from the Right, which has left many liberals looking for an easy way out. It would be sad to see the socialist left, which looks stronger than it has in decades, fall for this snake oil. It’s a phantasm, a late-imperial fever dream, not a serious economic policy.

Ordinarily I would have briefly skimmed through this essay. But if you are making an effort to be open-minded and understand the genesis, history and follies of MMT, it’s worth spending the time to read this piece in its entirety – then you can have a good laugh:  Modern Monetary Theory Isn’t Helping by Doug Henwood

Modern Monetary Theory isn’t just an insult to one’s intelligence, it’s a complete affront to common sense.

Gold Is Historically Cheap To The Stock Market

“The monetary authorities running the paper-money schemes of the present are anxious to forestall significant rises in the paper price of gold, because such rises would diminish confidence in the lasting value of the paper money in use today.”Hugo Salinas Price

The price of gold was victimized by yet another raid on the Comex paper gold market on Friday. The pattern has been repetitive over the last 15-20 years:  hedge funds push the price of gold higher accumulating a massive net long position in gold futures while the Comex bullion banks feed their appetite, building up a mirror-image large net short position.

A raid is implemented typically on a Friday after the rest of the world has shut down for the weekend, the Comex banks begin bombing the Comex with paper, which in turn sets-off hedge fund stop-losses set while the market is moving higher. This triggers a “flush” of hedge fund long positions which the banks use to cover short positions, booking huge profits.

As evidence, the preliminary Comex open interest report based on Friday’s activity shows the gold contract o/i dropped 14,316 contracts. For the week, gold contract o/i is down over 26,000 contracts representing 2.9 million ozs of paper gold. This is 8x the amount of “registered” – available for delivery – gold in the Comex gold warehouse.  I call this “a Comex open interest liquidation raid” by the bullion banks.  When the CFTC finally releases a COT report to reflect Comex trading activity for this past week, it will likely show a large drop in the net short position of the banks and a concomitant large drop in the hedge fund net long position.

Trump was out flogging the Fed on Friday for holding the dollar up with interest rates – interest rates that the Emperor of DC has declared “too high.” This likely signals a political campaign to drive the dollar lower, which will be bullish for gold.

Trevor Hall and I discuss on our Mining Stock Daily podcast why we believe the current sell-off in the price of gold will lead to higher prices. I also present a couple junior mining stocks I believe will be acquired in the escalating wave of gold mining company M&A transactions (click on the image or HERE to listen to the podcast):

***********************

You can learn more about the highly undervalued junior mining stocks mentioned in the podcast plus many more in the Mining Stock Journal:  Mining Stock Journal information

As The Fed Reflates The Stock Bubble The Economy Crumbles

I get a kick out of these billionaires and centimillionaires, like Kyle Bass yesterday, who appear on financial television to look the viewer in the eye and tell them that economy is booming.  Kyle Bass doesn’t expect a mild recession until mid-2020. Hmmm – explain that rationale to the 78%+ households who are living paycheck to paycheck, bloated with a record level of debt and barely enough savings to cover a small emergency.

After dining on a lunch fit for Elizabethan royalty with Trump, Jerome Powell decided it was a good idea to make an attempt at reflating the stock bubble. After going vertical starting December 26th, the Dow had been moving sideways since January 18th, possibly getting ready to tip over. The FOMC took care of that with its policy directive on January 30th, two hours before the stock market closed. Notwithstanding the Fed’s efforts to reflate the stock bubble – or at least an attempt to prevent the stock market from succumbing to the gravity of deteriorating fundamentals – at some point the stock market is going to head south abruptly again. That might be the move that precipitates the renewal of money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

For me, this graphic conveys the economic reality as well as any economic report:

The chart above shows the Wall Street analyst consensus earnings growth rate for each quarter in 2019. Over the last three months, the analyst consensus EPS forecast has been reduced 8% to almost no earnings growth expected in Q1 2019. Keep in mind that analyst forecasts are based on management “guidance.” The nearest next quarter always has the sharpest pencil applied to projections because corporate CFO’s have most of the numbers that go into “guidance.” As you can see, earnings growth rate projections have deteriorated precipitously for all four quarters. The little “U” turn in Q4 is the obligatory “hockey stick” of optimism forecast.

Perhaps one of the best “grass roots” fundamental indicators is the mood of small businesses, considered the back-bone of the U.S. economy. After hitting a peak reading of 120 in 2018, the Small Business Confidence Index fell of a cliff in January to 95. The index is compiled by Vistage Worldwide, which compiles a monthly survey of 765 small businesses. Just 14% expect the economy to improve this year and 36% expect it to get worse. For the first time since the 2016 election, small businesses were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment.

The Vistage measure of small business “confidence” was reinforced by the National Federation of Independent Businesses confidence index which plunged to its lowest level since Trump elected. It seems the “hope” that was infused into the American psyche and which drove the stock market to nose-bleed valuation levels starting in November 2016 has leaked out of the bubble. The Fed will not be able to replace that hot air with money printing.

I would argue that small businesses are a reflection of the sentiment and financial condition of the average household, as these businesses are typically locally-based service and retail businesses. The sharp drop in confidence in small businesses correlates with the sharp drop in the Conference Board’s consumer confidence numbers.

The negative economic data flowing from the private sector thus reflects a much different reality than is represented by the sharp rally in the stock market since Christmas and the general level of the stock market. At some point, the stock market will “catch down” to reality. This move will likely occur just as abruptly and quickly as the rally of the last 6 weeks.