Control Panel: 1987? 1998? 2008? Trend change or flash in the pan?

Investment Analysis Clubs Macro Economic Trends and Risks
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The weather was perfect on the Olympic Peninsula yesterday so I went on a picnic instead of writing a Control Panel.

Today’s sudden drop in the markets isn’t surprising given that the Control Panel has shown an expanding bubble in 2024. The question is how similar it will be to deflating bubbles in the past.

https://www.wsj.com/finance/stocks/is-this-1987-all-over-again-whats-driving-the-market-meltdown-4d107126

Is This 1987 All Over Again? What’s Driving the Market Meltdown?

Just like today, going into ‘Black Monday’ investors were on edge and ready to sell to lock in big profits

By James Mackintosh, The Wall Street Journal, Aug. 5, 2024

…
The [Monday, 8/5/2024] selloff was triggered by Friday’s jobs data prompting a sudden switch in the economic narrative from soft landing to hard landing. Add to the mix a period of deflating hype about artificial intelligence and a Bank of Japan rate rise designed to strengthen the yen. News that Warren Buffett’s Berkshire Hathaway had sold half its Apple shares and boosted its cash pile added to the pain…

The extreme examples of past effects from big market falls are 1987’s crash, 1998’s Long-Term Capital Management blowup and 2008’s global financial crisis. History is never perfect, but so far this looks more like a (milder) version of 1987 than it does the other two… [end quote]

Several financial writers at the WSJ and NY Times are urging the Federal Reserve to cut the fed funds rate right now at an emergency meeting before the September FOMC meeting where (until today) the options market has been betting the Fed will cut 0.25%. There are even prompts for the Fed to cut by 0.5%.

The Fed’s mandate is to maintain low inflation and full employment. Not to support the speculative financial markets. Fed Chair Powell has been quite firm about sticking to the long-term plan and not caving in to whining and cries of pain during stock market drops in 2022-2024.

The CAPE shows that the market resembles the dot-com bubble of 2000 more than the examples in the WSJ article. It’s possible that today’s slide is the start of a relentless slide like 2000-2002 which did not recover the peak until 2007 – just in time to collapse into the 2008 financial crisis.

Then again, it might be a flash in the pan like 1987, which recovered quickly.

The SPX and NASDAQ index breakdown began about 2 weeks ago. Today, there was an extreme flight to safety. The trade is risk-off as stocks and junk bond prices suddenly fell relative to safe Treasuries whose prices jumped as their yields fell. The Fear & Greed Index suddenly dropped into Extreme Fear.

The Treasury yield curve dropped along all durations. The 10-year Treasury yield, which affects interest rates in many sectors of the economy, fell to about 3.7%. The question is whether it will bounce back above 4% or continue to fall.

VIX suddenly spiked but not to the crisis level of 40. The Financial Stress Index is lagging today’s market action but I will keep an eye on it. It’s likely that the Fed will provide liquidity if the markets start to lock up but a Financial Stress Index of 2 or above coupled with an elevated VIX is correlated with falling markets. If Financial Stress is above 4 while VIX is above 40 it’s a sure sign of a financial crisis. The financial crisis didn’t happen in 2001 but the SPX fell.

A variety of indicators show mild slowing of the growth rate of the economy. However, the ISM Services PMI® registered 51.4 percent, indicating sector expansion for the 47th time in 50 months.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 was 2.5 percent on August 1, which is respectable, sustainable and certainly not recessionary.

The stock market, especially the SPX and NAZ indexes, have been driven by a speculative bubble based on very few stocks. The sudden drop in the indexes may not affect the prices of the majority of stocks unless margin calls force selling.

It’s too early to tell whether the stock market index drops of the past few weeks are a trend change or a flash in the pan. It’s likely that the trend in Treasury yields will continue downward but the sudden drops may reverse up to trend (10YT = 4%) if the stock market calms.

The METAR for this week is stormy. Whether it’s just a quick summer squall or a more serious thunderstorm is yet to be seen. I doubt it will be a hurricane but there may be a lasting trend change.

Wendy

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/july/

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This would be absurd and likely would only add to the panic rather than reduce it. I do think, and mentioned it last week, that the fed should have done a small rate cut last week as a strong indicator that they are starting their rate cut sequence, albeit the magnitude of which would still be data dependent.

Also, a fed rate cut is almost meaningless because the MARKET has already given us more than one rate cut on its own. For example, 26-week T-bills have dropped from 5.38% to 4.88% in a quarter, that’s a 1/2 point “rate cut” right there. And 52-week T-bills have similarly dropped from 5.49% last October to somewhere below 5% … auction is tomorrow, if I remember, I’ll edit the post then, or reply to it, but it almost surely will be below 5%, maybe even 4.75% for a 1/2 to 3/4 point “rate cut”.

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Yep, they were too slow to react to “transitory” inflation and are now being too slow to react to a slowing economy.

They act as if a 0.25% change is a massive commitment instead of a slight adjustment - and in doing so, increase uncertainty.

Now, if they fail to act in September, the bottom is going to fall out and we will be facing a .75% or even a 1.00% reduction in December as they try to get ahead of it.

Edit: I will also note that their inaction is starting to feel a little like June 2006/2007 where instead of starting to slowly take rates back down (or at least stop pushing them up), Greenspan actually pushed rates up one more time - and of course the first rate decrease in September of 2007 was a .50% decrease.

No one likes emergency meetings and as much as I would like rates to be lower today, I don’t want to see an emergency meeting this month to correct what they should have done in July.

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I joked with a friend within the last two weeks that we are at the top of the Gartner Hype Cycle for AI, but inside I wasn’t really joking. We might have hit it.

And then this: x.com

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And there may be a shift in the forecast, away from “burden reducing, pro-growth” policies going forward.

Steve

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Around a month ago I decided that the market was getting absurd. While, in the past I would have closed out my stock portfolio and paid my lumps to the tax man, this time I trmmed about 20% which netted nearly no capital gains/loss. I figure I can wait for a while and then redeploy.
While the market generally does well during an election year, Sept is not an auspicious month and one of the presidential candidates would benefit from attempting to increase the angst caused by a market crash.
That’s why they call this a game (or a racket).
Jeff
(Currently somewhere between Copenhagen and Gdansk)

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1946?

Not exactly. We are past 1946. The recession will be shallow.

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¿1987? ¿1998? ¿2008?

What do they have in common?

  • They are all four digit years
  • They are in ascending order

¡1987! ¡1998! ¡2008! ¡2024!

Makes perfect sense except 2024 took longer in coming, 16 years while 1998 and 2008 only took 10.5 years on average. Could it be the Peace Dividend?

The Captain :clown_face:

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So the 52-week auction is complete and the rate was 4.458%. So there you have it, the “market” has provided a rate cut from 5.49% last October to 4.46% today. That’s a full point of “rate cut”!!!

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