In the aftermath of comments from some Fed members, what is happening with the auto debacle, Fed, gold, and more will surprise you.
Here is what Peter Boockvar wrote today as the world awaits the next round of monetary madness: With the hoped for Fed plan to hike interest rates two more times this year and a building swell of discussion on when to start allowing balance sheet shrinkage, I’m beginning to sense a pattern on what the preferred timing might just be with this all. Bill Dudley on Friday said “If we start to normalize the balance sheet, that’s a substitute for short term hikes…and we might actually decide at the same time to take a little pause in terms of raising short term interest rates.” Fed President and voting member Patrick Harker last night said they may start the shrinkage process “possibly by the end of this year, or beginning of next year” which “would be an appropriate time.”…
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Well, if press conference meetings are truly the only ‘live’ ones (June, September and December) notwithstanding what Fed members say and they would like to possibly start letting their bond holdings run off by year end, it seems like they would want to get that 3rd hike of the year in by September so they can shift focus. Then by December or January, Janet Yellen can see the full exit from an unprecedented one decade experiment underway as she rides off into the retirement sunset. Play the violin’s.
Boom And Bust
Before those tunes are played though, they might have to watch another sequel of ‘Boom and Bust’ this time in the auto sector produced and directed by easy money. I say ‘might’ because as the writing is on the wall we’ll of course have to see how things play out. This is not tech in the late 1990’s and certainly not the housing boom/bust in the naughts in terms of dollar size but talk about sensing a pattern over the past 20 years. At $1.1 Trillion, the auto loan market is a size pretty similar to the student loan debt market which is another problem itself (See Dudley’s comments yesterday on the impact there). To move cars/trucks off the lot in March at a rate similar in size to the mid 2000’s with a US population that is much greater and at a pace last month that was the lowest since February 2015, it took incentives that totaled 10.3% of the sticker price, the highest since 2009. Days of inventory was 70 in March, the most since July 2009. We saw the stock action in US auto makers yesterday and those in Japan and Germany today are down between 1 and 3%.
Here is a chart attached overlaying the size of the auto loan market and the SAAR rate since June 2009 when the recession officially ended with sales in white and loan growth in orange:
Then in turn the potential ripple effect on growth has the 2s/10s US Treasury spread down to just below 109 bps, the lowest since the day after the US election, vs 113 on Friday and vs 122 bps three weeks ago. We need those tax cuts and we need them now.
Of course, if we don’t get the tax reform and we feel in a greater way the economic reverberations of the slowdown in interest rate sensitive areas of the economy, we won’t get two more rate hikes let alone balance sheet shrinkage.
At the end of the day, lower interest rates induced by central banks is all about encouraging leverage and disincentivizing savings. Central bankers claim nobility by believing they help to create jobs and contribute to price stability where all they do is induce excessive borrowing and higher prices. Let’s look at the Bank of England. They further ease after Brexit and the minutes today from their Financial Policy Committee meeting of a few weeks ago reveals they are now worried about excessive consumer debt. “Consumer credit had been growing particularly rapidly. It had reached an annual growth rate of 10.9% in November 2016, the fastest rate of expansion since 2005, before easing back somewhat in subsequent months. Growth had been broad based across different segments of the market. Dealership car finance had seen the fastest expansion in recent years, but credit cards and personal loans had contributed materially to the acceleration in consumer credit in 2016.” So the British citizens now have too much debt, rising inflation because of a weak pound and wages that aren’t keeping up. Thanks BoE.
Auto debacle and much more…
From legend Art Cashin: Cars, Loans And Then Politics Weigh On Morning Action But Dip Buyers Pare Losses Smartly – As the second quarter of 2017 began, U.S. stocks opened mixed.
That seemed logical, at least on the surface, as European markets were mixed in light trading; crude was unchanged and corporate news was inconclusive.
Shortly after the opening, auto sales came in a bit light. That seemed to reignite very recent concerns on auto loan delinquencies and plunging used car prices.
Automakers and auto-related stocks come under real pressure. CarMax fell over 4%.
That selling seemed to spread through the consumer discretionary area. The selling was broad and persistent but not heavy.
About 90 minutes into the game, some political buzz began to build into the backdrop as various pundits laid out the week ahead in Washington.
I alluded to that in a late morning email to some friends:
Calendar might have suggested a mild bid under stocks (new money for a new month).
Instead, the calendar that they seem to focus on is the Washington calendar, chock full of chances for the new team to shoot themselves in the foot multiple times. Hedging that possibility means reducing exposure (equities also hurt by Europe and crude to a very mild degree – above $50 okay).
Same thesis in bonds as an agenda blow-up or very lengthy delay could trim the Fed to one more for this year at best.
I got some feedback from skeptics saying things like – “Are you trying to tell me that the stock market cares that much about Judge Gorsuch?”
With all due respect to the good judge, it is not he or any single action that the market cares about. It is whether the Republicans, with theoretical control of the House, the Senate and the White House will nevertheless fumble away the agenda.
Recall the post-election rally. It was built on hopes of deregulation, tax reform and maybe even a big physical stimulus program.
Those hopes raised stocks, confidence indices and hopes for some momentum in the economy.
Then the Republicans fumbled even a draft bill on Obamacare despite the President’s active participation. The stock market was not happy and doubts grew on the agenda. Can’t anybody here play this game?
Around noon, Mr. Trump showed up in front of the cameras with Egypt’s President Mr. Al sisi. He gave things a political thumbs up and said he and Mr. Al-sisi were BFF. Gee, the event went as hoped.
Defensive selling stopped and stocks floated a bit higher, taking stocks off their lows.
The Egyptian meeting was not a cure all but it went well. Maybe every ball is not fumbled.
With the selling stalled, the buy the dip crowd began to nibble.
At first, the buying was rather passive and then after 2:15, the scarcity factor seemed to kick in and the same mild buying began to move prices a bit higher.
Stocks ended the day with minor losses. The consumer discretionary sector took the largest hit with financials also getting dinged. Healthcare and telecoms were best performers. Declines edged out advances 16 to 13. Volume was higher than recent averages. A bit of an apprehensive Monday.
Overnight And Overseas – China, Hong Kong and India are on holiday. Japan sold off on concerns about the yen and auto sales. Financials dragged down Australia.
European markets are mixed and a bit nervous (Russian terror and Washington week?). Some flight to safety puts bid under bonds and bunds. Gold sees a mild bid. Crude holds.
Consensus – We think Washington will remain center stage all week. The question is can the Republicans get things done or is the “agenda” dead?
Stick with the drill – stay wary, alert and very, very nimble.
***The KWN audio interview with Andrew Maguire has now been released and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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