Market Analysis

Something Smells

New highs every day or so now. Investors are chasing the new highs, the president celebrates on twitter almost every day. Things are great. Melt-up talk is the rage.

Hate to be the seemingly lone voice of caution here, but something smells. Look, I get narratives are changing all the time to suit the price action of the day, but I distinctly remember how no weakening data has mattered this year as people kept citing how strong the consumer remains despite all the trade war uncertainties and the manufacturing recession.

And even just during the recent rate cut meeting in October Jerome Powell insisted that the U.S. consumer continues to stay strong and that the economy is in a good place. Seems a bit optimistic with a mere 0.73% Q4 GDP growth downward projecting coming out today by the New York Fed Nowcast. But hey.

This week the Fed’s Barkin had something similar to say (with a little qualifier added) and as markets jumped to new highs I noted a curious divergence on the side of the consumer sector:

Let’s dig a little deeper and update the charts.

Firstly here’s the $XLY now, it has formed a bear flag and actually broke below this week:

As I noted in the tweet $XLY has not participated in the market rally to new highs, in fact it has put in a series of lower highs.

The disconnect to $SPX is very pronounced on this latest rally to new highs:

Note how the consumer sector has led the past rallies in 2019, and now it is distinctly lagging.

But it’s not only $XLY. Who else is massively involved in the retail trade? $AMZN of course.

New market highs without $AMZN? Unthinkable, being one of the key $FAANGs. But no, $AMZN is showing the same sudden weakness:

Something smells and the stench may come from the consumer.

And it’s not just a few days of relative weakness, look at $XLY on a long term weekly chart:

Massive MACD blow-off top in January 2018, then progressive weakening from rally to rally even this year as $XLY made new highs earlier in the year. But then $XLY broke its 2019 trend and the weekly MACD points straight down. Not a lot of strength evident there, which would be fine if the market were correcting, but in context of new market highs this development is notable.

So what’s up?

Well, if the consumer is so strong as the Fed insists what’s up with these data points:

Not so impressive.

And then there are subprime delinquencies in the auto sector:

Other signs of potential trouble: Consumers have been busy loading up on credit card debt in the past couple of years and even more so this year:

While at the same time credit card interest rates have jumped to the highest levels while the bank prime loan rate has meandered near historic lows compared to previous cycles:

The Fed’s three successive rate cuts may have put a ceiling to these credit card interest rates for now, but clearly they remain sky high. Record credit card debt and record interest rates, what a winning combination! All this with the Fed only 6 rate cuts away from zero. Sounds like consumers are getting screwed.

And perhaps this is what we’re seeing in these consumer related charts that are suddenly lagging markets in a very profound way.

In 2018 the Fed insisted things were looking so good they could raise rates further this year and maintain their balance sheet roll-off on autopilot. The Fed was of course completely wrong and now has cut rates 3 times and has increased their balance sheet by over $270B:

And now in 2019 the Fed insists the consumer is strong. We’ll see about that. The charts suggest something smells.

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Categories: Market Analysis

18 replies »

  1. Does anyone know if the market is still open? I’m going out all day at the moment as no point in keeping track, but today nothing has moved.

    Do you think they’ve all left for permanent retirement in the Hamptons or gone on retreats in Bali for misunderstood billionaires and forgot the computer on in Wall Street by mistake?

  2. Great article. Thank you. Hitting the nail on the head, so to speak. Here’s why consumer spending matters in the age of Keynesian economics.

    So, here’s the thing. The Federal gov’t. via it’s agent the Fed, can run up virtually unlimited debts and deficits. These are now beyond astronomical, since for example, there are only about 250B stars (give or take) in our home Milky Way galaxy. Compare this to the current U.S. national debt at $23T. Now, from any planet or solar system in our humble galaxy, that’s a lot! My point is that the gov’t. can create virtually unlimited debts; paid for by “out of thin air”, ex nihilo, dollars. BTW, buying sovereign bonds with “printed” money is called debt monetization, which is a hallmark of banana republics. Remember that when the Fed says it’s “not QE”, because the Fed would never lie, right?

    “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” – Ben Bernanke

    1) Now, while the U.S. gov’t. can generate huge steaming piles of debt, apparently without limit (until it can’t), the lowly U.S. consumer (aka highly indebted U.S. citizen) has to live within the constraints of a “budget” and can’t deviate too far from a somewhat healthy “balance sheet” without facing dire consequences of bankruptcy and related bad things.

    2) It’s widely accepted that the U.S. consumer contributes approximately 2/3 of U.S. economic activlty, as measured by GDP. So, if said consumer is currently reaching “debt saturation” because of real world finite debt and balance sheet limits, then this major force of “growth” in the economy will start to fade. I think this is starting to happen now, as you’ve so clearly described in this article.

    If in fact the consumer is slowing – which I also think that they are – then there’s really nothing the Fed can do to reverse the trend, short of “helicopter money”, which again would come from ex nihilo dollars. I believe the Fed is “pushing on a string” here. “The Everything Bubble” has been fully inflated as markets gorged themselves on cheap credit; asset prices across the board are at or beyond peak bubble, and are now declining, at various stages, depending on the asset class. The credit cycle (which has now replaced the business cycle) has run its course. Even the stock markets have to answer to earnings at some point (at least until the Fed starts buying equities outright).

    While the health of the consumer and so the economy remains to be seen, it’s looking likely that things are going to get interesting from here.

    Humpty Dumpty.

    “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

  3. correct….the final thing they could do to kick the can a little further is helicopter money. After that, it’s “system collapse” and this means a crisis that is MUCH worse than 2008.

  4. Sven,

    At this point in time one has to consider the Fed’s end goal might be a complete destruction of capitalism, with a replacement of MMT that the fed can control as a new future fed mandate. Call it “helicopter lite”, “helicopter One”, “helicopter forever”, or “Helicopter Easing”, so lets just call it “HE” instead of “QE”. The fed knows at this point, with 100% confidence, that Zirp, Nirp, and various forms of “QE” have created, and will continue to expand, the greatest American wealth inequality since prior to the great depression. This is not something that can be denied, looking at the data. And how was this inequalitiy created? Almost solely through the stock market. Want data? Look at 2006 vs 2nd Q 2019, we are now at the point where the top 1% has almost the same net worth at the 50% to 90% range of the US population. Note it was the stock market that created most of this shift, as it can be seen here visually via this Bloomberg article charts (scroll down to the charts mid article):

    So what drives the fed to get out of bed and control seven billion people’s lives daily? The Fed knows there is a mathmatical end game when the top 1% own 99.999999% of everything. What logic, or emotions, controls the fed game theory???

    TINC – There IS NO Choice – Fed is “saving” the world via current policies, the lesser of all evils from their elite perch that has the unfortunate consequence of creating unbearable inequality, and thus they will deal with MMT in the future and attempt to control the flow and transition to MMT if possible.
    The Fed is a puppet for the financial elites, and are forced to do their bidding at all costs. This is assuming that the finacial elites have an escape plan avoid the inevitable fallout. Mars might work, so better speed up those efforts Trelon, LOL!
    The Fed is a dumber than a box of rocks, unable to comprehend that they sow the seeds of finacial destruction via current policies. The fed actually believes they are saving the poor by creating jobs that pay minumum wage, etc.
    The Fed is using a quatum computer A.I. that has a secret algorithm model which will ultimately lead us all to finacial bliss, predicting the future of capitalism infinately more wiser than allowing seven billion humans to do it naturally.

    You get the point, as I challenge anyone to give a reason that makes both logical sense, and will result in a better future for ALL of humanity. At this point, I am confident that both the economic and history books will need to be updated over the next few decades, due to the actions and inactions of a few global individuals who are currently attemping to control an uncontrollable plantet once again, just like previous documented failed attempts throughout all of human history. Dalio had it right, “The world had gone Mad”, yet the majority know that the system is not only broken, but the current capitalism system is also rigged. And that is the real danger, the majority has been awoken and will enact their own forms of illogical, emotionally driven madness to survive…


      The last Bloomberg wealth and age chart shows 74 million boomers have 1,000% more wealth than 71 million Millennials, and 300% more wealth than 65 million Gen X. Boomer house values went exponential, their stocks went exponential, they actually have something called a pension, and the rest are left with the scraps. Infinite, never ending GDP has created a lot of inequality for those lucky and old enough, not so great for the other 66% of Americans or for a stable climate, not that the boomers have to worry long term about that. Good luck for you boomer, having your homes go from $30,000 to $300,000. Unfortunately, the rest of us ain’t got the money to cash you out. Good luck to you boomer, having your pensions, entitlements, and stock go exponential. Unfortunately, the rest of us ain’t got the money to cash you out.

      See ya at the polls Boomers, as Millenial and Gen X pass one crazy socialism policy after another in order to survive. Sure blame us, as we are simply lazy for not being born when capitalism was fair, with a 70% top income tax rates and a gold backed dollar to keep inequality from destroying capitalism as we once knew it. Reagan started this mess with trickle down policy, and the Feds are most likely going to accidently end it for us all. Yes all of us, boomers, millennials, and gen x alike will have to deal with the devastating consequences. Yes we all played a role, but you can not blame what happenned before we were born. Yes we will most likely make mistakes also, but this one is on ya boomers. Now do you understand?

      OK Boomers?

      View the last graph, Age and Wealth, at

    • Thanks for highlighting the $XYL chart. I’m a seller on that formation: beauty 2-top followed by 2 lower highs and then a breakdown thru a rising wedge. Good stuff sir…thanks again. warren

  5. who wants to live in a “system” that still only works for the top 1% …while our beautiful is being destroyed because of the “growth/profits at any cost” obsession

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