(No… not that dip. Must be lunchtime already… Source: Getty Images)
Joel Bowman, checking in today from Buenos Aires, Argentina...
Here’s a supply chain that’s breaking at every link: Cheap goods… made by cheap labor… using cheap energy… financed by cheap money.
All previously abundant. All coming to an end.
So read Bill’s message earlier this week, one that Dan Denning and Tom Dyson have reiterated in their paid research which, for new readers, is where these daily philosophical musings are filtered into actionable investment analysis. Learn more, here...
Ok, we hear you say. But people still gotta eat, right? They still gotta drive to work and charge their smartphones and post photos of brunch on anti-social media and get mad at the television during elections… they still have to pay the mortgage and utility bills and fill the tank... and all the other things that modern make life what it is.
With inflation still stubbornly non-transitory (the official CPI print came in hot again this week at 7.7%... still more than 3% above the Fed’s key lending rate), one wonders where people get the money… until, that is, one looks at credit card loans and total household debt. Then one says, “Ah, that makes sense.”
According to data from the Federal Reserve Bank of New York, Americans are on track to hold close to $1 trillion (with a “T”) in collective credit card debt before year’s end. And that’s at eye-wateringly high rates, too. A survey by Bankrate.com puts the average credit card interest rate at just over 19%, the highest it’s been in over thirty years.
During the second quarter of 2022, credit card debt in the US rocketed to $887 billion outstanding, up a whopping 13% since the same period last year. All in, total household debt is up 2% from Q2, 2021, an increase of $312 billion to $16.5 trillion.
Mortgage balances, too, were up $207 billion over the same period, totalling $11.4 trillion as of the end of June.
Speaking of housing, that pillar of middle class American wealth, data released this week shows that mortgage applications have fallen to their lowest level in a quarter of a century as key rates top 7.14%. Ouch!
So, what’s a stock market to do, given such a bleak outlook? Why, stage a face-ripping rally, of course!
The Dow ended the week 4.1% higher after logging a spectacular 1,200 point rally on Thursday. The S&P 500 finished up 5.9% and the Nasdaq closed out a monster 8.1% gain for the week.
That’s it then, eh? Back to business as normal? Time to “buy the f@cking dip?”
Not so fast, says Dan, who’s got his attention trained on the action in the bond market. Here’s a choice snippet from his weekly update to paid readers...
The bond market is not buying whatever junked-up good news that the stock market is selling. The chart below shows the spread between 90-day T-bills and 30-year US government bonds. It’s inverted, which means short-term rates are higher than long-term rates.
Source: US Federal Reserve
It’s not inverted by a lot–the yield on T-Bills is 4.16% while the yield on the 30-year is 4.02%. But both are on the way up. We maintain that the terminal rate of the Fed’s rate-hike campaign is closer to 6% than 5%. When the yield curve inverts like this it means the risk of recession is high (the gray vertical bars on the chart indicate previous recessions.)
What Investment Director Tom Dyson has called The Fed’s Wrecking Ball (a combination of higher rates and a run-off of its nearly $9 trillion balance sheet) has only just begun to hit the real economy. It will result in tighter credit, higher unemployment, and lower corporate earnings. Stocks have not yet ‘priced in’ a 2023 recession.
This week’s price action in the stock market was wild. There’s no doubt about that. The S&P 500 was up 5.5% on Thursday. That’s the 15th largest one-day gain since 1950. It was the best daily price return on a Consumer Price Index (CPI) data release day since 1949. The Nasdaq’s 7.4% gain was one of its 20 best days going back to 1971.
But wait!
Of those top twenty one-day moves on the Nasdaq, did you know sixteen of them were during bear markets? Of the four that weren’t, two of them were in March and April of 2020. And according to some research I saw published on Twitter, there were 14 days between 2000 and 2002 where the Nasdaq rallied by more than 6%. None of them marked the bottom of the bear market.
The bear market is not over and this is not normal price action. Bull markets don’t see 5% rallies in large cap stocks. Bear markets do, though. It’s liquidity driven and it’s panic driven. You can look. And the looking is spectacular. But I wouldn’t recommend touching.
If you’re not already receiving all of Dan and Tom’s paid research, now’s as good a time as any to get with the program. Find a subscription plan that suits you, here...
And now for Bill Bonner’s missives from the past week...
Just took a look at the Dow Sucker Rallies between October 1929 and July 1932. On the chart you can see half a dozen major ones, with ~ 25 to 50% rallies before resuming the devastation that had the Dow move from ~375 in 1929 to where it settled in July 1932(~20). The price action over that period was a wealth planet killer. Not, however, if you bought in the summer of 1929 and then held on until after WW2, but rather if you sold and bought, sold and bought, sold and bought. It’s called FOMO. Sucker rallies take no prisoners.
Just took a look at the Dow Sucker Rallies between October 1929 and July 1932. On the chart you can see half a dozen major ones, with ~ 25 to 50% rallies before resuming the devastation that had the Dow move from ~375 in 1929 to where it settled in July 1932(~20). The price action over that period was a wealth planet killer. Not, however, if you bought in the summer of 1929 and then held on until after WW2, but rather if you sold and bought, sold and bought, sold and bought. It’s called FOMO. Sucker rallies take no prisoners.
I will owe nothing and be happy.