On the 12/8/18 edition of Jerry Tuma’s Smart Money Radio John Criswell and Jerry discussed the signs pointing to possible recession in 2019 and what caused the big drop in equities in the prior week.
What is a quant?
The equity markets really took a beating midweek and yet, as Jerry described, there was no economic, no fundamental news that could have spooked the market. Trade talks with China actually looked a little more positive after the G20 summit in Argentina, with both sides calling for a truce, at least temporarily.
Jerry thinks that big computerized moves by “quants”, a term that is short for quantitative analysts who are financial and mathematic eggheads trading via complex computer models. Jerry believes it may be possible that the 800 point drop in the Dow may be at least partly attributable to quant moves.
Economy still looks strong, but…
The U.S. economy is still strong, but has begun showing signs of slowing. First time jobless claims, a sensitive leading economic indicator, jumped by 234,000. The home building sector is down, representing 16 percent of the U.S. economy.
Clear signs of recession are not yet present in the U.S., but the rest of the world shows clear signs of an economy rolling over. Lumber prices…a key indicator of construction demand, are plummeting. Copper is also down.
Interest rates which had been creeping up suddenly did an about face as equity investors are selling and moving into bonds, especially U.S. government bonds, as a safety hedge. In the week of 12/3/18, $50 billion moved from stocks to bonds in the U.S. Jerry expects that to be temporary.
Keep your eye on liquidity
The Federal Reserve as well as central banks all over the planet is tightening up liquidity. As Jerry has said on many occasions, “the party is going great until the Fed takes the punch bowl away.” The meaning is that it seems just as the economy is rolling along, the Fed gets fretful of inflation and starts to raise interest rates. In this case not only is that happening, but the Fed is also selling government debt instruments out of its portfolio, soaking up billions in liquidity.
Central banks in Europe and Asia are following suit. Bank reserves across Asia are down 7 percent.
Even though the economy is strong, liquidity trumps economic momentum. If the private sector gets starved of capital needed for operations and development, things start to turn down. Done too fast and it can be a hard landing.
Oil—enjoy those gas prices while they last
Like interest rates oil prices had been rising steadily, but recently have turned back downward. You’ve seen that reflected at the pump. President Trump temporarily relieved sanctions on Iran set to hit in November, and some producing nations increased output. Again, Jerry believes this is temporary. Bank Credit Analyst, the leading resource used at Cornerstone Financial Services, is sticking to its forecast of higher oil prices next year.
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