Sorry no weekend video this weekend, instead I just wanted to offer some commentary on some of the macro charts I recently posted on twitter. The larger message of all of these charts: Intervention is ultimately coming be it in the form of rate cuts and/or QE. It’s just a matter of the how and the when. Intervention is needed as the macro wheels are turning. Like it or not intervention remains the lifeblood of these markets, they just can’t do without and every bull case in the past 10 years has remained entirely dependent on it.
To perhaps most succinctly summarize the state of markets:
Support of equities and remaining in control so far: The Fed, buybacks and political jawboning. Going against equities: Macro reality. Upside triggers this year: Potential miracle saves in form of a China deal and somehow a Brexit deal by the end of October perhaps with new political leadership. Potential downside triggers this year: The weight of the emerging macro picture wrestling control away from the forces of intervention.
And this macro reality is painting a consistent picture across the board and I’m just highlighting a few of these:
Durable goods year over year:
No expansion, regressive growth similar to the lead up to the 2008 recession.
Median sales prices of homes sold year over year:
It’s the 3rd largest reversion to negative since 1970, the previous 2 examples of this magnitude coincided with recessions.
Real retail sales growth year over year:
Anemic and regressive, there’s no evidence of expanding growth, rather it’s flirting with negative territory.
Blame the $AMZN factor all you want, but note the above data also correlates with jobs in the retail trade:
It’s also flirting with recessionary precedent.
Real gross private investment year over year:
There’s zero evidence that tax cuts have supported any investment growth at all. It remains weak and shows no expansion. We all know where the tax cut money went: Buybacks.
Who benefited from tax cuts? Check the data:
If you’re still wondering who really got a tax cut….. pic.twitter.com/lb2h3ubCt6
— Sven Henrich (@NorthmanTrader) May 25, 2019
So consumers are not expanding their sales activities and businesses are not expanding their investments.
But unemployment is so low, isn’t that great?
Yes it is at the moment, but it’s always great at the end of a cycle. The problem with the lowest unemployment rate in 50 years is that there is no history that suggests it can last for an extended period of time. If you’re lucky maybe a year or 2, maybe, if you’re very lucky.
Cycles end, that’s a fact of life. Also a fact: 99.9% of time unemployment is higher than the current data point which means the next big move in the data is up not down.
And where exactly is the great expansion in employment growth? Considering all the supposed tax cuts and ‘greatest economy ever’ it all looks rather muted and stalled:
Where is the net employment growth to come from? It’s not from demographics, in fact demographics are a ticking time bomb:
Not only has the growth rate been declining for years it’s dropped to negative. Without population growth the entire growth curve is running into trouble. You think it’s an accident that real growth has continued to decline for decades from cycle to cycle?
No, it’s no accident. Demographics are the big thing driving it all. Scream curbing immigration all you want, but the fact is fertility rates are dropping hard. 2018 saw the lowest birth rate in 32 years. Blame technology, blame economics and housing prices, blame whatever, but the fact is birth rates are declining, working population growth has been declining and is now negative. Best of luck financing entitlements, pensions, social security, the whole works.
You know what this all means. You do, because you’ve already seen the impact of these long term trends. In order to keep the growth illusion alive ever more debt has to be taken on to sustain it all. Hence you have this:
Ever higher debt to GDP and again expanding deficits which will balloon much higher when the next cycle turns in earnest.
Slowing growth, expanding deficits, regressive population growth models, vast debt expansion and it’s reflected in the data everywhere:
The world has run into a growth wall with no central bank having been able to normalize policy. It’s an epic historic failure the consequences of which will come to bear on the world in the years to come.
How to handle the next economic crisis? Frankly I don’t think anybody knows and nobody wants to see it happening on their watch, hence all the desperate efforts to extend the cycle with easy money.
And all of this is happening with rates still a historic low. And when I say historic, here’s a broader context of the absurdity of it all:
There is ZERO evidence that any of these markets can sustain themselves on an upward trajectory without intervention. And this too we already know, because we’ve seen it time and time again:
General aside comment on the chart above: If price can stay above the middle trend line, bulls should be ok for now, see a sustained close below it: Watch out.
But now we are at the end of a long cycle and they’ve done their best to re-inflate asset prices following the December correction.
Yet the data sets above are overtly flirting with recessionary territory.
And so are some of the yield curves:
And markets so far this year: New highs in select indices on negative divergences with a MACD cross-over looking to fail into month end (unless we see a big mark-up rally) coinciding with a rejection of the 2009 trend line, while the 10 year is dropping despite new highs with unemployment at a cycle low:
Why does it matter? Because that too happens at the end of each cycle:
Relative to the January 2018 highs most market indices remain weak:
And recent highs on $SPX and $NDX have masked the pronounced weakness in equal weight:
What we’re witnessing now is a battle for control of price. Remember: Supportive of equites: The Fed, buybacks and political jawboning. And these forces all want equities higher, because they need them higher.
And hence perhaps it’s no accident that $SPX once again closed the week right at the monthly 5 EMA a key pivot of support, but also note the the monthly bearish engulfing candle.
Close May above the monthly 5EMA and the June/July seasonality window may once again drift markets higher and fill some of the open gaps above.
Close May below the monthly 5EMA, or worse, below 2800 on $SPX and more weakness may unfold that could set off technical patterns with much further downside to come, i,e. the 0.5 fib, the implied technical target of this potential pattern:
Such a move would represent macro reality asserting control. But, by that time, be assured that the screams for intervention would be deafening.
Bottomline: The macro data is stating clearly the slowdown did not end in Q1. It has extended into Q2. GDP looks to have a 1% handle. Without a China deal uncertainty will remain, given the negativity surrounding such a deal a positive resolution would trigger a massive rally, without such a deal equity prices may have to contend with further downside if certain levels break to the downside. But China deal or not and with apologies to Tina Turner: The larger macro wheels are turning, markets keep on burning, and before you know it they’re rolling, rolling toward the next round of intervention.
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Categories: Weekly Market Brief