Stock market’s eerie parallels to September 2007 should raise recession fears
“Since last year real GDP growth in the U.S. has been slowing. The chair of the Federal Reserve has been signaling that while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including an inverted yield curve, have been ignored and stock markets continued to make new highs in July. In August a correction took a place and subsequently a rally ensued into early September. On September 18 the Fed cut rates. Sound familiar? It fairly describes market and economic conditions in the U.S. over the past couple of months. Except that this paragraph would be as true for the U.S. economy and stock market in September 2007 as it is today. Consider that 12 years ago the yield curve was inverted and U.S. economic growth was markedly slower than it had been in 2006. Yet the Standard & Poor’s 500 made a new high in July 2007 (same as 2019), there was an August correction (same as 2019), and then the Fed cut rates on September 18 (ditto – same day even). U.S. stocks proceeded to make another marginal high that October – and that was it. Lights out. We all know what happened next. It seems we are at a curious moment in time. Parallels to late 2007 are running through the markets now. This doesn’t mean the market’s fate will play out as it did then, but the ingredients are there and all that’s needed is a trigger….According to a November 2007 Reuters report, Bernanke told a congressional committee: ‘Our assessment is for slower growth, but positive growth, going into next year.’ The U.S. economy entered recession in December 2007. Does this not sound eerily similar to what Fed Chairman Jay Powell has been saying? Here’s Powell on September 6: ‘We’re not forecasting or expecting a recession,’ he said….What does all of this suggest? For starters, the Fed will not tell you when a recession starts. They can and will be in total denial until after the fact.”
Why is the NY Fed pumping billions into the money market?
Source: Yahoo Finance
“For the first time in more than a decade, the US central bank this week stepped into financial markets to keep interest rates on short-term lending from popping above its target range. The New York Federal Reserve Bank conducted money market interventions on Tuesday and Wednesday and planned another for Thursday morning, as a cash crunch drove up the cost of borrowing for banks that need to replenish the reserves they hold at the central bank. Financial institutions use money markets to borrow for very short periods, from one day to a year, a crucial function to keep the gears of the economy running. In so-called repurchase or ‘repo’ agreements, banks borrow by putting up assets like Treasury notes as collateral and then repay the loans with interest the following day….The reasons behind borrowers’ sudden demand for cash were attributed to a host of technical conditions that converged to drain money out of the system…’It looks like a lot of cash left the system in recent days and that demand for dollars was greater than the number of dollars in circulation,’ said Gregori Volokhine of Meeshaert Financial Services.”
3 Reasons Why There’s Further Upside Potential for Gold Prices
“Gold may be off its 52-week highs, but the precious metal is still up more than 15 percent for the year through September 17. This appears to put gold on a path for its best year since 2010, when it gained just under 30 percent. I believe buying the dips in gold right now could turn out to be a wise investment decision. I see a lot happening at the moment – from an unprecedented $17 trillion in negative-yielding bonds worldwide to heightened geopolitical threats – that might boost investors’ appetite for the metal, which has a history of holding its value in times of crisis. Read on for three reasons why I believe there’s further upside to gold prices… #1 U.S. inflation is finally starting to heat up…In the past, faster inflation has been constructive for gold prices. That’s because inflation, by its nature, destroys your purchasing power, and to limit these losses, investors have traditionally turned to the yellow metal as well as gold mining stocks. #2 Negative yields in the U.S.? $17 trillion in debt around the world…has recently pushed the price of gold to new all-time highs in a number of currencies, including the British pound, Japanese yen and Canadian and Australian dollars…It could only be a matter of time before U.S. fixed-income yields turn subzero – especially if Trump gets his way. #3 Geopolitical and economic risks raise the demand for a safe haven. There are a number of geopolitical and economic risks right now that have triggered gold’s ‘fear trade’ Economic growth is slowing worldwide as a result of trade tensions….Other geopolitical concerns, including unrest in Hong Kong as well as last Saturday’s attack on Saudi Arabia’s oil facilities, have helped support gold demand.”
How an Oil Price Surge Could Hurt Consumer Spending, and the Economy
Source: New York Times
“For months, American consumers have kept the economy humming. While businesses pulled back, shoppers continued to spend. But a prolonged surge in gasoline prices after the attacks on oil production facilities in Saudi Arabia could undermine that phenomenon and increase the risk of a recession. ‘It’s clearly not a positive, and it adds a negative to the outlook,’ said Steve Blitz, chief United States economist at T.S. Lombard, an independent research firm. ‘It’s another straw on the camel’s back.’ Monday’s nearly 15 percent spike in oil prices to $62.90 a barrel isn’t big enough to bring on a recession – it only returns crude prices to where they were this spring. Monday’s jump is expected to add roughly 20 cents to gas prices, which now average $2.56 a gallon nationally, said Tom Kloza, global head of energy analysis for the Oil Price Information Service. But a shock in the form of a rapid $20 or $30 a barrel jump in oil prices would have a bigger economic impact. ‘At that level, the consumer takes a significant hit,’ said Ethan Harris, head of global economics and research at Bank of America Merrill Lynch. A $25 a barrel increase in oil prices, the kind of move analysts cite as a potential threat to the economy, would add 50 cents to the cost of each gallon of gas. That would mean an extra $45 in monthly spending for the typical family….The biggest risk to consumers – and the economy itself – would be a significant military conflict between the United States and Iran. Businesses, already cautious about spending, would pull back further. Consumers would likewise retreat.”
Should You Spend, or Save, as if You’ll Live Forever?
Source: New York Times
“Older people’s ability to proclaim their youth, strength and all-around-great lives appears to be thriving. But the age you feel, as opposed to the years you’ve accumulated, affects how you think about your money, many experts now believe. They say it influences how people save, spend, donate and plan what to leave to heirs. This effect isn’t confined to people who are just comfortably upper middle class. Chip Conley, founder of the Modern Elder Academy, said research had found that as long as they are in good health, even those in the lower middle class reassess their finances in their 50s to prepare for longer lives than they might have expected….People who feel fit are acting much differently, working longer or taking on side projects to supplement their savings. They’re doing this while traveling and enjoying themselves. In a sense they’re doing what twenty-somethings can do without fear. ‘We try to help people understand the way we live today you’re going to have a lot of adult life ahead of you, so don’t get caught up on how Social Security is going to support you,’ Mr. Conley, 58, said. ‘You’re not going to retire at 65. You’re going to have part-time work by desire or need.’ ‘To encourage people to think of working way into their 70s, we talk about how retiring can be bad for your health,’ Mr. Conley said, mentioning research on longevity rates and retirement. ‘People need to build skills that allow them to build money. They could be an Airbnb host with a cottage in their backyard, plus $20,000 from Social Security and then part-time consulting at $20,000. That’s enough to live for a very long time.’….Old age is a new thing, and that requires people to reimagine how they’re going to pay for it.”
The Fed’s Mandate Is Up to Congress and the President
Source: Sheldon/Wall Street Journal
“The role of the Federal Reserve as an instrument of public economic power could use some clarification. The central bank’s status as an independent agency derives from an act of Congress in 1913, and is reinforced by oft-invoked references to its statutory ‘dual mandate’: to achieve stable prices and full employment. But the Fed’s job description is more complicated than people usually think. Its purposes have evolved through various legislative changes over the decades, the most notable of which was imposed by Congress in 1977. The Federal Reserve Reform Act, which gave the central bank its current, explicit mandate, named three goals rather than two. The legislation as amended states: ‘The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’….It would be appropriate and constructive for the Fed to consider international monetary stability in its interest-rate decisions. In an era of world-wide currency exchange, America’s central bank should not ignore the effects of movements spurred by other major central banks. With no consistent free-trade principles governing global monetary policy, the Fed must take proactive steps to ensure that the U.S. can compete successfully. It would be in keeping with its historical mandate if the Fed were to pursue a more coordinated relationship with both Congress and the president. When it comes to fulfilling the economic goals authorized by legislative decree, it isn’t seemly for a government agency to be selective.”
Global Markets Slide, S&P Futures Back Under 3000 On Oil Chaos, China Slowdown
Source: Zero Hedge
“On the 11th anniversary of the Lehman default, global stock markets and US equity futures are broadly lower after this weekend’s drone attack on Saudi oil facilities resulted in the biggest oil price surge in history. State energy producer Saudi Aramco lost about 5.7 million barrels a day of output on Saturday after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-largest oil field in Khurais….Iran-backed Houthi rebels in Yemen claimed credit for the attack, but President Trump has already said that the US is ‘locked and loaded depending on verification’ that Iran staged the attack, an assertion also made by his secretary of state Mike Pompeo and backed by administration officials….’We have never seen a supply disruption and price response like this in the oil market,’ said Saul Kavonic, an energy analyst at Credit Suisse Group AG. ‘Political-risk premiums are now back on the oil-market agenda.’ The shock collapse in Saudi oil output pushed S&P futures back under 3,000 and yields on 10Y Treasurys down 8bps to 1.81%, while the dollar shortage has returned, sending the Bloomberg Dollar index to session highs. Adding to the downward pressure on risk assets was the latest dismal news from China which saw the country’s economic slowdown deepen in August as core data missed across the board and industrial production tumbled to its weakest 17-1/2 years as reported last night….On Sunday night, President Trump tweeted there is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack and under what terms to proceed, while he tweeted that there is plenty of oil and suggested it is fake news he is willing to meet with Iran without conditions.”
Saudi Oil Attack Is the Big One
Source: Wall Street Journal
“Saturday’s attack on a critical Saudi oil facility will almost certainly rock the world energy market in the short term, but it also carries disturbing long-term implications. Ever since the dual 1970s oil crises, energy security officials have fretted about a deliberate strike on one of the critical choke points of energy production and transport. Sea lanes such as the Strait of Hormuz usually feature in such speculation. The facility in question at Abqaiq is perhaps more critical and vulnerable. The Wall Street Journal reported that 5.7 million barrels a day of output, or some 5% of world supply, had been taken offline as a result….The attack could build in a premium to oil prices that has long been absent due to complacency. Indeed, traders may now need to factor in new risks that threaten to take not hundreds of thousands but millions of barrels off the market at a time. U.S. shale production may have upended the world energy market with nimble output, but the market’s reaction time is several months, not days or weeks, and nowhere near enough to replace several million barrels. After the smoke clears and markets calm down, the technological sophistication and audacity of Saturday’s attack will linger over the energy market.”
Drone Attack on Saudi Oil Field Seen as Realizing Worst Fears
“For many of the national security teams that monitor threats on the U.S., the apparent drone strike Saturday on the heart of Saudi Arabia’s oil production facilities was the realization of their worst fears. Houthi rebels battling Saudi Arabia in Yemen took responsibility for the attack and said they used drones, though U.S. officials have said Iran was behind the attack and that at least some cruise missiles may have been used. The attack underscored fears raised by U.S. security officials and experts in terrorism about the rapid evolution of technologies that could have allowed inexpensive devices to pierce Saudi defenses in a way that a traditional air force could not: flying long distances to drop potent bombs that apparently set vast portions of the Saudi petroleum infrastructure ablaze….The implication of Saturday’s attacks are enormous, Price said. They not only highlight the growing technical capability of rebel groups, but could also serve as inspiration for home-grown terrorists in the U.S. who may be motivated by the Islamic State or al-Qaeda, he said. ‘Flying a drone, that puts a new spin on things,’ he said. ‘It enables attacks that previously weren’t able to be conducted with that level of stealth and detachment from the attacker.'”
ECB Launches Major Stimulus Package, Cuts Key Rate
Source: Wall Street Journal
“The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for what is likely to be a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump….It is the ECB’s largest dose of monetary stimulus in 3-1/2 years and a bold finale for departing President Mario Draghi, who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years. The euro fell against the dollar after the decision was announced, down 0.4% at $1.10…In a tweet, Mr. Trump said the ECB was ‘trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.’….’The final showdown has started with a big bang,’ said Carsten Brzeski, an economist with ING in Frankfurt.”
Gold’s Rise Looks Unstoppable. It Could Hit $2,000, Analyst Says.
“Citigroup Senior Commodities Strategist Aakash Doshi thinks gold may top $2,000 an ounce in the next year or two, a gain of about 34% from its current price…’We now expect spot gold prices to trade stronger for longer, possibly breaching $2,000 an ounce and posting new cyclical highs at some point in the next year or two,’ Doshi wrote. Bullish factors cited by Doshi include ‘lower for longer nominal and real interest rates, escalating global recession risks – exacerbated by US-China trade tensions – heightened geopolitical rifts and amid rich equity and credit market valuations, coupled with strong central bank and investor buying activity.’ Doshi boosted his fourth-quarter gold forecast by $125 an ounce to $1,575 and his calendar 2020 projection to $1,675, while noting an ‘increasing probability’ that bullion markets ‘retest’ their highs from earlier in the decade. In a recent interview, Jens Nordvig, the founder and CEO of Exante Data, said that, given the ‘extreme bull market in bonds, gold will be very well supported.’ He noted that central banks have boosted their purchases of gold and said, ‘Nobody’s crying when gold goes up, so there’s really no anchor on how high it can go.'”
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