Bubbles Popping On Wall Street This New Year’s Eve – Ep. 127

  • Let me begin my final podcast of 2015 by wishing all of my listeners a Happy New Year
  • It certainly wasn’t a happy New Year’s Eve Day on Wall Street
  • Normally the last day of the year is a positive one; you normally have a Santa Clause rally and it continues on to New Year’s Eve
  • That wasn’t the case today.¬† The Dow Jones finished its first down year since 2008 – down 178 points
  • The S&P also negative on the year, the NASDAQ managed to gain about 5% or so
  • I’m hearing a lot of people blaming the weakness on oil prices
  • The transports were the weakest index of the year, I think they were down about 17% and this index stood to gain the most from low oil prices
  • So clearly, if transports are the weakest index, the overall weakness can’t be solely because of oil prices
  • It has to be another reason, and I think it has to be the economy
  • Oil is being affected by weakness in the economy
  • Another interesting observation about today’s selloff – the market not only closed on the lows, but made its lows on the close
  • We’ve been seeing this volatility – all of this selling into the close says that something big is going on here
  • You get more professionals selling when you sell market on close, and I think this is what is going on here
  • People are bracing for a very weak 2016
  • The Fed had interest rates for all of 2015 – it didn’t raise rates until the waning weeks of the year
  • Imagine how the Dow will contend with the threat of rising interest rates as 2016 continues
  • But the other problem for 2016 is the economy and we got more evidence of an extremely weak economy
  • I mentioned before the the Atlanta Fed GDP Now has Q4 GDP estimate down to 1.3
  • Based on the numbers we got today, they are going to ratcheting those estimates down again
  • First, we got the weekly unemployment numbers, which have been low for a long time – We got the biggest unemployment claims numbers in one week in 10 months
  • The 4-week moving average is also the highest it has been in 5 months
  • Remember, when Yellen raised interest rates, the basis for the decision was supposed to be the strength in the labor market
  • No sooner did the Fed raise rates based on the labor market, but now the labor market is rolling over.
  • Unemployment is a lagging indicator
  • What is more indicative of what is coming, is the Chicago PMI number which came out a little later in the morning, which was abysmal
  • One of the worst economic reports of the entire year
  • Last month, we got 48.7, which was below expectation
  • They were looking for a December bounceback to 50
  • Instead, the index crashed down to 42.9
  • This is the lowest number since 2009
  • Order backlogs has been down for 11 months in a row, and this is the worst performance since 1951
  • The only time we’ve been at this level is during a recession
  • It is possible that we are in a recession
  • It is possible that they will originally report Q4 GDP as positive and then go back later in the year and revise the data to show we were in a recession
  • That’s what they did with the Great Recession
  • Another reason I believe the economy is weaker than the numbers suggest is because the inflation rate is being under-reported
  • If the inflation rate is higher than the GDP deflator, then obviously we are in a contraction during most of this recovery
  • I am looking at what is happening in the economy not in what the government says about the economy
  • As bad as the numbers¬† were, it did not promote any reaction in the the markets
  • My guess is that if we had had a big drop in unemployment claims or a really good PMI number the dollar would have spiked up and gold would have sold off, but we get horrible numbers and nobody seems to care
  • No matter how bad the data is, the Fed doesn’t acknowledge it
  • No one will believe the economy is weak until the Fed comes out and admits it
  • The only data the markets won’t ignore is the non-farm payroll data, because jobs are all the Fed seems to talk about
  • Once we see the official confirmation of all the other data with the backup of unemployment, which may have started already, might be the beginning of the new upward trend
  • This will add to the evidence of a weakening economy and it is ironic that the Fed waited until the economy was at its weakest to raise rates
  • This proves that the Fed was never data dependent; they were calendar dependent
  • They were running out of time – they had been talking up the economy’s prospects all year, and by the end of the year, they were afraid to leave rates at zero, acknowledging they have been wrong about the strength of the economy
  • I said I did not think the Fed would not raise rates because they would lose credibility if they had to back rates down when the economy worsened, admitting a mistake
  • I do agree we need to raise rates, and that the result will cause problems, but those problems are the beginning of the solution: no pain no gain
  • I have always said, if they do raise rates, they would have to reduce them and lose credibility
  • All along, I said that if the Fed raised rates, per my most recent podcasts, they would have to reverse course, and if that does happen, then I would have been right, given the timing of the move
  • Why was 2015 the year the stock market didn’t really go up?
  • That’s the year the Fed stopped supporting the market with QE
  • That headwind hurt the market
  • It’s not just the stock market; the bond market appears to be rolling over and the real estate market appears to be rolling over, given higher interest rates
  • This time, though, it won’t be the stock market that will provide an excuse for the Fed return to accommodative monetary policy; the only data the Fed will act on will be weak jobs numbers, which they may get
  • Also the GDP numbers – we are going to get a very weak Q4 GDP number of 2015, which will make 2015 the weakest year of the so-called recovery and the beginning of the next recession
  • The Fed will not sit by and watch the economy slip deeper into recession during an election year
  • Eventually the day of reckoning is coming and I think 2016 will be the year that is reflected
  • Gold experienced another down year; the third consecutive year which is very abnormal
  • What is going to surprise everybody is when the Fed does not raise rates and does QE4 – none of that is priced into the gold market or the dollar – the opposite is reflected in the price
  • Even if the Fed does not lower rates, but refuse to raise them, that should be very negative for the dollar and supportive of gold
  • If overseas economies end up stronger than forecast, causing the Fed to ease while everybody else is tightening, the sudden move down in the dollar would signal a precipitous drop
  • It is important not to try to time this thing and maintain your position outside the U.S. dollar, despite the fact it has risen recently
  • This is the nature of bubbles: they always get bigger than you think, but they pop and once they end, they end with a bang, and I expect this bubble to be no different