by Greyson Geiler | June 12, 2023
If you have been paying attention to the financial press over the last week then you are probably familiar with the news that the S&P 500 is in a new bull market. This is of course, an arbitrary label that really doesn’t mean much. But the fact that the S&P 500 is 20% off of the lows from last year does show that things are going better than one would expect considering the rocket launch in interest rates. There is still a lot of negativity in the financial press and a lot of short interest in the markets as well – meaning speculative investors are positioned so that they make money if the stock market goes down. But while it goes up these “short positions” lose money.
So likely there is at least a near term leg higher in the stock market and it will continue to frustrate investors that think it should be going down. For example, Morgan Stanley’s Mike Wilson previously suggested the stock market would struggle until the debt ceiling issue was dealt with. Now that it has, he is still sticking to his bearish guns thinking that the math just doesn’t add up for the stock market to continue higher. Time will tell…
One of the things that we continually write about is the overinvolvement of the Federal Reserve in the whole world’s financial and economic matters. The outrageous money printing after the Covid panic hit, choosing winners and losers during the shutdowns and now standing on the monetary brakes after “transitory inflation” didn’t turn out to be so transitory… Take a look at a historical charts of percentage changes in the most accepted measure of “money supply” under the Fed’s stewardship-what a ridiculous rollercoaster they have put us on…
So, the black line is the percentage change in M2 money supply, and the red line is inflation in percentage terms as measured by the CPI (Consumer Price Index). So, you can see the Fed got out of hand in 2020 but especially in 2021 when the lockdowns were over and the economy was back on its feet. The Fed had orchestrated a WHITE HOT residential real estate market by the fall of 2021, and they left the accelerator on the floor for another 6 months WHICH COMPLETELY DISTORTED THAT MARKET AND THE FINANCIAL SYSTEM BEHIND IT. Inflation was raging and Fed Chairman Powell was calling it “transitory” (June 2021) and didn’t ease off the throttle – until the next March. It was WILDLY irresponsible what the Fed did stimulating financial markets, and this is not Monday morning quarterbacking on our part!!
We wrote in real time (June 2021) how ridiculous the Fed was being – take a look… https://andorracapital.com/warning-signs/
Now we are worried that the Fed is going too far on the tightening side. But we know that the Fed is engendering OBSCENE distortions in our financial markets. To be sure, no reasonable person 16 months ago would have predicted financial markets holding together as well as they are with a discount rate at 5.25%. That’s the good news. The bad news is that the Federal Reserve is rigging the game to a degree that also no reasonable person would have predicted. When Silicon Valley Bank blew up, they backstopped an account with $500 Million in it and basically every other account in the country regardless of size. The whole concept of FDIC insurance became immediately irrelevant…
When Washington Mutual collapsed in 2008, the FDIC insurance was $100,000 per depositor. Meaning any money that you had on deposit at WaMu in excess of $100,000 was at risk in the event that the bank went bad. That was moved to $250,000 by The Emergency Economic Stabilization Act of 2008. It was proposed by Treasury Secretary Hank Paulson, passed by the 110th United States Congress and signed in to law by the President Bush. I guess those are just silly formalities now disregarded. The Fed is shooting from the hip, changing rules on the fly as they see necessary and $250K in FDIC insurance “coverage” turned into $500 Million over a weekend. For the most part, all risks for banking deposits have been displaced – but actually shifted to the value of the currency. What could go wrong?
Now the Fed understands – at least to a degree – that they have created a tough environment for banks. They have for decades had rules in place for what banks could do with depositors’ monies and during Covid times, banks bought a lot of bonds with low interest rates and high prices. Now that the interest rate has gone higher and bond prices have gone lower, many banks are insolvent. The Fed has come to the rescue and initiated the “Bank Term Funding Program” which basically lends to banks with the full purchase price of their bonds being usable as collateral – not the existing market price. Example: a bank bought $10 Million in bonds in June 2020. Now those bonds are worth only $7.8 Million in the marketplace so the bank can’t sell them or they will secure their insolvency. What they can do is borrow $10 Million from the Fed’s new program and wait for the bonds to get priced higher. The Fed says that this program will only be in place for one year. We all know that it will be extended. More kicking the can down the road…
One of the cans that didn’t get kicked down the road was that of First Republic Bank. This bank ran into solvency issues just like Silicon Valley Bank over the last few months sponsored by the Fed’s aggressive interest rate hikes. The Fed came in and took it into receivership. To oversimplify it, the Fed gutted Signature Bank like a fish, gave the filet to Chase and the entrails to the US taxpayer. Chase gets guarantees on future potential loan losses, $120 billion excess assets over liabilities and government financing to orchestrate it.
https://prospect.org/blogs-and-newsletters/tap/2023-05-03-jpmorgan-takeover-first-republic-bank/
Much like Washington Mutual 15 years ago when Chase got to pay only $1.9 billion for a carved up and cherry-picked bank that had some $120 billion of assets in excess of liabilities https://money.cnn.com/2008/09/25/news/companies/JPM_WaMu/index.htm
What is it about giving banks to Chase that have about $120 Billion more assets than their liabilities? Like they always say – it’s not what you know, it’s who you know…
Wrapping this up, financial markets are holding together well considering the circumstances. But don’t get complacent – remember that three of the four largest bank collapses in the history of America have happened in the last four months. The Fed claims that they will stick to “higher for longer” interest rates whatever that means. But the banks have already proven that they can’t stand on their own in this environment – so what else will the Fed have to prop up? What other laws/regulations will the Fed rewrite on a whim? No one knows for sure, but it is quite clear that the Fed having to prop things up doesn’t mean the stock market is going down. Especially as many buyers as still have to come into the marketplace (speculators have to buy to cover their “short” positions) – so plan accordingly.
The hard part is that it sure seems the Fed is playing chicken with the financial markets by keeping interest rates at unsustainable levels and cleaning up collateral damage on the fly. They seem to be one-dimensional in thinking interest rates have to be high to push inflation down. Markets and economies have proven for decades that is a bad strategy, but the Fed doesn’t seem to be listening. In a financial system as complicated and interconnected as ours, we are doubting that the Fed can keep patching everything together if interest rates stay up here. Of course, there are lurking economic issues that they haven’t even thought of. They may be inviting a black swan event that makes this last banking crisis look like a warmup! However, for now things are holding together remarkably well.
Of course that doesn’t mean you should sell your gold – and let us know if you would like to learn how to earn interest in gold on your gold!
Regards and good investing,
Greyson Geiler
by Greyson Geiler | May 30, 2023
The long-anticipated stock bear market and economic recession just hasn’t materialized. The Federal Reserve has gone on the most aggressive raising of interest rates in more than a generation in an attempt to stamp out inflation. That has resulted in some distortions in markets. However, in spite of three of the four largest bank failures in the history of America, as well as a litany of other bad news both political and economic, things are stubbornly holding together in our financial marketplace. Recently analysts at Citibank and Bank of America have thrown in the towel on their bear-market opinion of our marketplace. Driven by a new AI enthusiasm that manifested in blow out earnings numbers reported by Nvidia, major stock indexes have firmed up near the highs of the last year and a half. Wall Street analysts that are still bearish are now throwing in the towel and raising their guidance for the end of the year price of the S&P 500.
So now that all of the Wall Street analysts are comfortable that the stock market is going higher, we start getting nervous and looking for cracks in the dam. Of course, we are back to the strange dichotomy that bad economic news is good news for the stock market because it means the Fed will stop tightening and maybe start loosening. Another strange part about the current situation is there are plenty of cracks in the dam – if you are looking. We showed you this chart of larger corporation bankruptcies a couple weeks ago…
Through April bankruptcies are running hotter than the entire last decade – so what about May? It looks even worse…
That is not a good look and is obviously running counter to the Wall Street analysts giving up on their bear market expectations. One of the most concerning things about corporate bankruptcies is that they are happening with much of the debt priced at lower interest rates. With interest rates rocketing higher, we are concerned about Wall Street’s ability to refinance their debt when it comes due. Well, very little of it has come due recently – and there is only a gradual increase over the next few years of corporate bond maturity. In an approximately $10 Trillion corporate bond marketplace, less than $1 Trillion will have to be refinanced in 2024 and about $1 Trillion will have to be refinanced in 2025. This is good news – there is no huge wall of refinancing that will have to happen at these higher interest rates.
There is some bad news as other indicators of economic activity are also showing slowing…
- After tumbling last month, The Dallas Fed’s Manufacturing outlook survey was expected top bounce in May… but it didn’t. The Texas Manufacturing Outlook survey dropped from -23.4 to -29.1 (vs -18.0 exp). This is the 13th straight month of ‘contraction’ (below zero) for the index
- Conference Board’s measure of labor market tightness worsened notably (less jobs plentiful vs hard to get) in May…
- 5% of consumers said jobs were “plentiful,” down from 47.5%.
- 5% of consumers said jobs were “hard to get,” up from 10.6% last month
- The Bureau of Economic Analysis reported that GDI (Gross Domestic Income) was -2.3 percent in the first quarter of 2023, and -3.3 percent in the fourth quarter of 2022. That’s recession territory, but GDP isn’t.
- US home prices show annual decline for the first time since 2012
It appears as though Congress has come to an agreement on the debt ceiling – which some day will become a travesty of epic proportions – but now the markets can move past the political grandstanding that has been keeping a check on things. For now, the bulls are firmly in control and the short-selling that has accumulated by speculators will probably provide fuel for the near term to keep stock prices higher. We continue to monitor the macro environment for issues that may affect asset markets and we are certainly detecting more storm clouds accumulating on the horizon…
Regards and good investing,
Greyson Geiler
by Greyson Geiler | May 22, 2023
There is a lot of bad news, political, economic and otherwise in the news right now. It probably isn’t a huge surprise when we tell you that the Fed’s recession risk indicator is now greater than it was in November 2007. If you recall, this was the time right in front of the Schemin Brothers disaster immersed in the subprime mortgage scandal. At that point this indicator from the NY Fed, stood at 40 percent.
Now this indicator is pushing 70%!! This indicator is a calculation of the inversion of the yield curve. Short term interest rates are much higher than long term interest rates which is counterintuitive and doesn’t bode well for long-term capital investment in the economy. Historically, that is one of the most accurate indicators of a pending recession. The dangerous, million-dollar question is – is it different this time?
One thing that the financial media is largely missing on the positive side of the asset market ledger is the Inflation Reduction Act. This is a $1.7 trillion stimulus package on top of the more than $5 trillion that Congress dumped on the economy after Covid. The “Inflation Reduction Act” – which is misnamed just for marketing purposes – is hitting government spending numbers right now as the 1st quarter of 2023 the Federal government spent 3% more than 2022. As bad of a long-term strategy for economic stimulus that government spending is, for the near term, it is supporting things. The total government spending as a percentage of the economy in the U.S. is firmly north of 40% and obviously getting much worse – but that is a different discussion.
For now, the question is whether or not the economic slowdown that has obviously started accelerates into a recession. The stock market keeps getting bid up as economic numbers slow down as investors are assuming the Fed is done hiking rates. We will see in the next few months if the effects of the Fed’s aggressive rate hikes are baked into the economy and market environments right now or if there is more pain to come. Stay tuned!
Regards and good investing,
Greyson Geiler
by Greyson Geiler | May 1, 2023
Of course, businesspeople fear bankruptcy, but it is an essential part of the structure of capitalism. Misallocated resources need to be reallocated and it can be a painful process. Up until the last year, we have been in a 30 plus year downtrend in interest rates and that has been quite the tailwind for American businesses in particular. Businesses that may not be extremely efficient can continually refinance their debts at lower and lower rates as years go on. That led to a significant number of public companies being labeled “zombie” companies. What that means is they essentially have to borrow more and more money to keep their doors open. Again, when interest rates are going down for decades it is understandable how inefficient companies continue to chew up capital. At some point however, the piper has to be paid and of course we had a lot of big company bankruptcies after the 2008 economic meltdown. Take a look at this chart courtesy of Bloomberg…
Taking a look at the numbers of companies going bankrupt with at least $50MM in liabilities, you can see that this is the third worst start (Jan through April) to a year since 2000. The alarming part is alluded to above and that is the fact that interest rates were brought down by the Fed in March and April in the years that had more large bankruptcies this early in the year. This year it looks like the Fed is CONTINUING higher with interest rates this week! We just had another bank taken over by the FDIC (First Republic) so again, the Fed is acting as arsonist and fireman simultaneously. The long downtrend in interest rates starting in the early eighties has been broken. We are not sure that interest rates stay up here, but it does appear that the Fed is trying to stick to its guns to leave interest rates up – even if they have to bail water in the banking system to do it.
We aren’t sure how this rolls out – but the good news is that earnings season is going reasonably well and although there are more layoffs in the employment world, the economy is stubbornly resilient. Part of that is clearly the Federal Government not backing off on its deficit spending – but we don’t think that can continue indefinitely. The private sector is starting to get nervous about the tightening in credit – and the Fed is trying to reduce its balance sheet. So if the government keeps sucking up investment dollars from the marketplace that could be financing private projects – that recession that everyone feels is irrelevant may actually come to pass. More on that next week…
Regards and good investing,
Greyson Geiler
by Greyson Geiler | April 24, 2023
So far the month of April has been remarkably boring with regard to the financial markets including stocks, bonds and commodities. This is quite surprising especially when considering the extraordinary events happening around the globe. The NASDAQ is, of course normally a wild ride, yet in all of April the difference between the highest and the lowest prices is only 2.5%. The S&P 500 has traded 19 straight days without being down 1% or more. It hasn’t done that since 2021. The maniacal rollercoaster in the interest rate (bond) markets that we experienced in March has also settled down although the 10-year rate has been steadily climbing. On the commodity front, crude oil ROCKETED higher at the beginning of April as the Saudis talked about a production cut from OPEC, yet almost the entire price rally on that news has been retraced. That’s pretty benign…
When we take a look at a chart of the standard volatility indicator – the VIX from the CBOE we see remarkably low volatility…
March came in like a lion and went out like a lamb. The VIX numbers were pretty hectic in March and yet gave way to the lowest volatility of the year. What happened? Was there a peace treaty in Ukraine? Did OPEC decide to produce more oil to calm the markets down? Did all the feuding politicians in Washington DC go on sabbatical with the debt-ceiling circus fixed?
The quick settling of the financial world from March has many scratching their heads and asking how. Part of the answer seems to be that the start into earnings season has shown mildly positive surprises in earnings – clearly nothing shocking one way or another. The tranquility of the stock market seems to be predicting that the OK reports will continue. The Fed Funds Futures are predicting a 90% chance that there will be a .25% rate hike in May. Expectations of a DECREASE in interest rates coming up this fall have dissipated. Maybe that predictability for the near- medium term is helping calm fears…
Here are some of the positive news pieces recently:
- US Manufacturing at 11-month high– prints 50.4 (expansion) in flash April vs 49.2 prior, well ahead of the drop to 49.0 expected.
- US Services at 6-month high – prints 53.7 (expansion) in flash April vs 52.6 prior, well ahead of the drop to 51.5 expected.
Here are some of the negative news pieces recently:
- Credit is tightening across the economy and defaults are rising. Corporate bankruptcies are edging up as are personal loan defaults, mortgage defaults credit card missed payments and car loan defaults.
- Money supply growth from the Fed fell to a 50 – year low. Sounds like panicky kind of news, but don’t forget the Fed created trillions of dollars during Covid.
- The median selling price of a previously owned home fell 0.9% from a year earlier to $375,700 in March – the largest decline since January 2012.
- The Philly Fed Business survey unexpectedly puked to its lowest (ex-COVID lockdowns) since March 2009. Analysts expected a rebound from -23.2 to -19.3, the headline plunged to -31.3 in April.
- Initial jobless claims were expected to tick higher last week, and they did, up to 245k (from 239k prior and higher than the 240k expectation). That is basicallyin line with the highest level since Jan ’22
Lots and lots of people are still worried about an imminent economic meltdown. Generally, when many people are worried about something in the financial markets, it doesn’t come to pass. That is not to say we don’t see a lot of risks or that we think a serious recession couldn’t happen. But we get more afraid when the general consensus is that things are peachy and rosy.
Your portfolio should be balanced so market volatility is not keeping you up at night. You should have a safe portfolio that you can withdraw from if the stock market is not doing well. You should be able to handle some rollercoaster in stocks, cause that’s what they do. In the long run, the stock market is rigged to go higher. In the short to medium term – your eyeballs can pop out if you have to much risk on. Everyone should own some gold and we are encouraging people to learn how to earn interest in gold on your gold deposits and make it a long-term part of your investment strategies. Reach out to us if you need help with that and please make it a focus to spend more cash rather than use credit cards in your day-to-day activities. That will help hold off the nightmare that a central bank digital currency would be for Americans’ liberties!
Regards and good investing,
Greyson Geiler
