Market Update

What’s going on?

Economics…

Interest rates have risen, and while there is a pause, more increases are supposed to follow.

The US unemployment rate has increased from 3.7% in November to 4% in January.  The difference represents 500,000 fewer people in the workforce.

Trump has continued his trade war with China.

The USA is borrowing over $1 Trillion this year – with no end to the borrowing in sight.

GDP growth in the USA in the fourth quarter of 2018 has been revised down from 2.5% to about 1.7%.

The USA is becoming a retail apocalypse, with chain after chain closing their doors, forever.

Housing bubbles are starting to burst – Canada, Australia, China.

Brexit is almost upon us…with no deal.

Politics…

Venezuela has experienced the greatest refugee migration in the history of that continent.

The USA and China are likely heading for a confrontation in the South China Sea.

Trump will try to solve North Korea again – this gambit is risky in the extreme.

France continues to be rocked by turmoil.

Trump may be about to face the Mueller Report, that could also rock his presidency.

And yet, the S&P 500 is up about 20% since it reached a bottom in December, 2018.  It is within striking distance of its early 2018 high of 2872. The CNN Greed and Fear Index, which hit a low of 2 out of 100 in December, is now at 70 only eight weeks later. It is “Buy, Buy, Buy!” all over again! 

But who is really buying?

Central banks worldwide bought government treasuries and other assets like mortgage-backed securities for almost a decade after the Great Recession in 2007 – 09. They started selling these assets in mid-2018 at the same time that most of them started raising interest rates.

The effect of this twin policy of dumping assets and raising rates had a significant negative effect on prices.  Bond prices fell, meaning the yields on these assets rose which pulled investment from the stock market back to bonds at about the same time that the buy-back splurge prompted by Trump’s tax cuts was coming to an end (NB - We now know that the market was pumped last year almost exclusively by companies buying back their own stocks.)  

This caused a massive pull-back in stock prices last fall which put many pension funds in the USA into a dire situation, as they had invested heavily in equities instead of bonds owing to the very low returns that bonds paid for about a decade – some face insolvency and their pensioners face destitution. Many prognosticators, including Trump, called for central banks to stop raising rates as a result of this fall in the prices of equities.

You can see the relative economic chaos that we have right now. While the US economy is “booming”, cracks have started to appear and many analysts are predicting a 2020 recession – just over 10 months from now.

And so, again, who is buying stocks?

Central banks have continued selling assets, although the head of the US Fed – Powell - has indicated that the rate of increase in interest rates will slow. 

Query – Are central banks taking the cash the receive from asset sales, and using it to buy equities?  This would kill two birds with one stone – 1. get assets off their books, while 2. preventing a further drop in the stock market and impending problems with the US pension system.  

That would be a great solution, except that buying equities would mean they may have even more assets on their books…so all they would really be doing is pumping the value of the stock market to ward off pension fund insolvency, just as the Japanese Central bank has done for years now.

We know the central banks have increased their purchases of the “barbarous relic” recently, which no one saw coming. Is central bank buying of equities really so far-fetched...especially if what they are doing is allowing pensions funds to get out of equities and back into bonds now that rates have moved up? 

But if true, what does that say about “free markets”?

In short, there aren’t any.