Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Maybe The Economy Is Too Good For Investors

Economics / US Economy Mar 03, 2018 - 03:01 PM GMT

By: WMA

Economics

In the early 19th century, London financier Nathan Rothschild said “buy on the sound of cannons, sell on the trumpets”.  The cannons referred to the start of war (valuations are therefore attractive as disorder begins) and the trumpets refer to the peace treaty ending the conflict (at which time timid investors pile back into risky financial assets). Warren Buffet has often reiterated the same idea first enounced by Rothschild saying “buy when there is blood in the streets” (eg, when valuations are very low).  


Friends, there is no blood to be seen in the economy or financial markets, as of yet. Some commentators are still even painting a rosy picture of the economy: the Fed remains friendly, inflation is contained, U.S. corporate tax cuts will boost company earnings, Trump will have the economy growing above trend, etc.  On financial markets, investor sentiment indicators (prior to February’s selling) hit cycle highs. Our own WMA Market Sentiment Indicator hit a multi-year high of 90 (in the Extreme Optimism zone) in January before melting back down to a neutral rating of 65 at of March 2.

As for the economy, despite the longevity of the economic expansion, no one dares to predict a precocious end to cycle. New Fed Chair Jerome Powell who delivered the Fed’s semi-annual testimony to Congress this week, told lawmakers that the next two years will be “good” ones for the economy. If he’s right, he’ll be at the controls when the current U.S. expansion becomes the longest on record. Just given the Fed’s track record of economic forecasts, we’ll be amazed if the next recession does not hit before 2020.

Powell is hoping to pull off an unparalleled soft landing of a U.S. economy with a rock-bottom unemployment rate.  Our problem is reality: history has shown that it is very hard to soft land an economy once you’re below full employment.  The difficulty for the central bank is trying to slow economic growth enough to edge up unemployment but not so much as to trigger a contraction in gross domestic product. It’s going to take some real good policy making and lots of LUCK to avoid a recession before 2020. At 4.1% in January, unemployment is already below Fed officials’ 4.6% estimate of its long-run sustainable rate, according to the median projection of policy makers in December. As shown in the chart below, once unemployment gets below full employment (estimated to be 4.5% - 5.0% unemployment today), it’s hard to being the economy back from the edge. The January jobless reading is the lowest since 2000. Back then, the Fed under Alan Greenspan was raising interest rates to try to bring a red-hot economy off the boil. The tighter credit ended up contributing to a recession the following year as the Nasdaq stock market bubble burst.



To soft land the economy, Powell opened the door to the Fed raising rates four times this year as he acknowledged stronger economic growth may prompt policy makers to rethink their plan for three hikes. His comments sent equity prices skidding and bond yields higher this week.

Indeed, this has an air of déjà vu from the Housing Bubble of 2001-2006, brought on by Greenspan’s decision not to bring rates up quickly after the 2001 recession. Is it possible the Fed has not learned its lessons of the past?  Leaving interest rates below equilibrium levels creates financial market distortions (bubbles) which cause greater pain than the economic woes that Band-Aid policy was attempting to smooth over.

The chart below illustrates the Fed’s policy rate and the path of home prices as measured by the Case-Shiller 20-City Home Price Index. Two years of a below 2% Fed Funds rate dragged 30-year mortgage rates down to 5%, which was low in a non-QE economy. Of course in the end the Fed had to raise rates (too late) to check out-of-control speculation in the housing market, pricking the bubble and setting up the Great Recession.


Conclusion

So where is the economy today?  Not only do we have an economy that is growing at an above-trend pace -- at a time when the labor market is already quite tight -- but the economy will be getting an extra boost in 2018 and 2019 from the recently enacted tax legislation.  Essentially we are getting fiscal stimulus, on top of eight year of continual monetary policy stimulus…all in the ninth year of the expansion. Economist Larry Summers speculated this week that the next recession will be particularly severe, especially if the Fed does not get rates higher before the next recession arrives. Both the Fed and the Federal government (fiscal policy) have fired all of their bullets off during the expansion! Summers introduces a legitimate concern: with rates already low and the tax cuts/spending measures already enacted, what tools do policy makers have left to enact counter-cyclical policy during the next recession? (Please don’t answer more QE). We don’t have an answer, and worse, we don’t believe our policy makers do either.

By Williams Market Analytics

http://www.williamsmarketanalytics.com

We provide insightful market analysis and account management founded upon our very successful systematic, disciplined approach to investing. Our investment analysis revolves around two inputs: company valuation and our  quantitative, market-based indicators. Learn more about our approach and our strategist.

© 2018 Copyright Williams Market Analytics - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in