Clouds Over 2018
The stock market just can’t enough Trump and business folks are doing the happy dance thinking the EPA, Dodd-Frank, tax rates and who-knows-what-all will be chopped, making America great, again. Plus, there’s a trillion in infrastructure spending coming and a big wall to build and so much more.
However, Janet Yellen is thinking it’s time interest rates started heading up, up and away, and according to David Rosenberg at Gluskin Sheff, “Monetary policy is profoundly more important to the markets and the economy than is the case with fiscal policy, though all the Fed is doing now is removing accommodation.”
He added, “there have been 13 Fed rate hike cycles in the post-WWII era, and 10 landed the economy in recession. Soft landing are rare and when they have occurred, they have come in the third year of the expansion, not the eighth.”
“We are likely just three or four hikes away from the yield on the two-year T-note converging on the five-year,” Rosenberg writes, “and that is when the fun will really begin in terms of a more serious discussion for the end of this economic, market, and credit cycle — 2018 has clouds over it, and keep in mind that every GOP President in the post-WWII era confronted a recession at some point in the first half of his term.” (Emphasis added by Yahoo.)
Sheesh, Trump is supposed to lead us out of the Obama/Hoover wilderness. “Every president since then has seen at least one calendar year with annual GDP growth of at least 3 percent or higher. The best average growth in a single calendar year under Obama is 2.6 percent in 2015, and never 3 percent or more. No president has experienced that since Hoover.”
Now Rosenberg is saying that little old lady from Brooklyn will put the kibosh on Trump’s jobs blast off. Wolf Street smells something foul in the economic air as well. Wolf Richter, writing about C&I loans, “They edged down to $2.1 trillion in the week ended February 15. That’s where they’d first stood on October 19. After ballooning relentlessly for six years straight, C&I loans have now been stalled for four months in a row.” We haven’t seen this since the financial crisis.
C & I (commercial and industrial) lending is an indicator of small and large business activity. When C&I loans have dipped, the economy is on the verge of a recession. It’s too soon to tell, but Richter wonders “Perhaps it will blow over, and companies will head back to their bankers, and C&I loans will surge once again. But more likely, it’s an early warning sign of a gradual change in the dynamics, just when no one wants to see any red flags.”
Car values are also about ready to fall off a cliff. According to Morgan Stanley analysts and quoted by Grant’s Interest Rate Observer, “Our base case for used-car price decline is in line with a ‘normal’ cyclical downturn of 20% by 2021. Our bear-case scenario sees used-car values falling 50% over five years(-13% per year), representing as much as $1 trillion of value erosion applied to the entire used [vehicle fleet] in the U.S. market alone.”
It’s as the Austrian economists predict: when the monetary accommodation ends, it’s time for the cleansing of malinvestments to begin.