The Market Finally Cracks
Posted by Eddy Elfenbein on October 10th, 2018 at 1:03 pm

At 1 pm, the S&P 500 is currently down about 1.4%. That would make it the worst day for stocks since April. Of course, that really says more about the last six months than it does about today.

Yesterday was a bad day for anything involved in building. Today’s pain is more concentrated on tech. There are also losses in high-end retailing. Also, most footwear stocks are getting hit.

Morning News: October 10, 2018
Posted by Eddy Elfenbein on October 10th, 2018 at 7:16 am

Two-Decade Rupture in Stock-Bond Link Flashes Global Market Pain

Big Oil’s Bet on Natural Gas Is a Slow Burn

Soaring Rice Prices are Dulling Duterte’s Luster in the Philippines

China’s About to Sell Dollar Bonds in Middle of a Trade War

The Unknowable Fallout of China’s Trade War Nuclear Option

Powell Places Risky Bet as He Stokes Too-Good-to-Be-True Economy

Sears Hires Advisers to Prepare Bankruptcy Filing

Google Appeals $5 Billion EU Fine in Android Case

New Pixel Phones and Other Gadgets Keep Google in the Hardware Hunt

Millennials Kill Again. The Latest Victim? American Cheese

Shipping Industry Stares Down New Fuel Restrictions

Amazon Scraps Secret AI Recruiting Tool That Showed Bias Against Women

Nick Maggiulli: Why The Best Predictor of Future Stock Market Returns is Useless

Joshua Brown & Michael Batnick: What Are Your Thoughts: Interest Rate Freakout

Ben Carlson: The Case for Bonds

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Ford Drops Below $9 per Share
Posted by Eddy Elfenbein on October 9th, 2018 at 2:15 pm

Shares of Ford (F) are now below $9. The current dividend of 60 cents works out to a yield of more than 6.6%, assuming it’s not cut.

But Ford is still making money. The data on this is hard to come by but Yahoo Finance shows that Ford’s stock was higher in May 1987. (I don’t find that data to be 100% reliable.) Here’s the chart I could find going back to 1984.

Powell Warns
Posted by Eddy Elfenbein on October 9th, 2018 at 10:17 am

The Fed is much less powerful than people assume. So what’s the real role of the Fed chairman? You can almost sense a pattern:

Powell Warns Against Overstating Impact of Fed Policy on Global Financial Conditions

In veiled message to Trump, Powell warns against meddling on Fed rates

Powell warns not all US problems can be solved by Fed

Trade wars hurt the economy, warns Powell

Fed’s Powell warns of digital currency’s risks

Fed’s Powell warns agriculture could suffer if tariffs in place for extended period

Fed Chair Powell warns some asset prices are ‘elevated’ including stocks

Bank of Japan ‘put’ to replace Fed’s as Powell warns no bailouts

Federal Reserve’s Powell Warns About Failure to Raise Debt Ceiling

Fed’s Powell warns US at risk of being trapped in low growth

Fed’s Powell warns that dollar-based Libor could disappear

Powell warns interest rate rises are a fine balance as he hikes in his first Fed meeting

Dollar index pares gains as Powell warns on inflation optimism

Morning News: October 9, 2018
Posted by Eddy Elfenbein on October 9th, 2018 at 7:09 am

Stocks Retreat as Treasury Yield Hits 7-Year High

The Bond Market’s $1 Trillion Deficit Spiral Has No Political Fix

IEA Urges OPEC to Open the Taps as Oil Market Enters ‘Red Zone’

When Imported Steel Makes Sense, Despite Tariffs

China Slashes U.S. LPG Imports Amid Trade War

Tencent’s $220 Billion Rout Is Breaking All Kinds of Records

Tesla’s Value Sinks by $10 Billion in a Week as Rout Deepens

Google Drops Out of Pentagon’s $10 Billion Cloud Competition

Google Plus Will Be Shut Down After User Information Was Exposed

Hope Floats for Offshore Oil Drillers

Orsted, A Giant in Offshore Wind Farms, Makes a Move in the U.S.

Microsoft’s $7.5 Billion GitHub Deal Set for EU Approval

Michael Batnick: Built to Break

Howard Lindzon: Momentum Monday – Do You Buy The Dip?

Cullen Roche: The Cost of Having a Taper Tantrum

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The Fed Backs Off from the Natural Rate
Posted by Eddy Elfenbein on October 8th, 2018 at 3:54 pm

Tim Duy recently noted in Bloomberg that the Federal Reserve is no longer guided by the natural rate of interest. Let me explain a bit. With monetary policy veering off into unchartered territory, the Fed needed some new ways of measuring what they were doing. John Williams, who had been at the San Francisco Fed and is now at the New York Fed, had advocated for watching the natural rate of interest, also known as R-star.

The idea of the natural rate is that there’s some sort of perfect rate of interest that exists everywhere in the globe, and at this rate, everything comes into perfect balance. The thing about this rate is you never know what it is exactly. You can only tell by inference. If we’re above it, then X, Y and Z are supposed to happen. If we’re below, then A, B and C are supposed to happen.

Is this right? I’m not sure but I think this is one of those things where it’s probably wiser to act as if it’s true. Importantly, the natural rate is expressed as a real rate, meaning after inflation.

Williams has argued that the natural rate has fallen, and I suspect he’s right. However, he recently gave a speech saying there’s been an overemphasis on the natural rate. He doesn’t say that it’s bad, but now that things are back to something like normal, tracking a natural rate is far too blurry to use as an effective monetary tool.

“At times r-star has actually gotten too much attention in commentary about Fed policy,” Williams said. “As we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur.”

Some market participants are concerned that interest rates have increased. Let’s remember that real short rates have gone from -2% to 0%. If I had to guess, I’d say the natural rate is at 1%. The Fed is far from putting the breaks on the economy.

Weakness in the Semis
Posted by Eddy Elfenbein on October 8th, 2018 at 12:10 pm

The semiconductor sector has been looking weak lately. This is notable because the sector has been strong consistently for the last 10 years.

Consider this performance. On November 20, 2008, the VanEck Vectors Semiconductor ETF (SMH) closed at $14.70 per share. On March 12 of this year, the SMH closed at $113.07. That’s an increase of 669% in 9-1/2 years.

But lately….

Nordhaus and Romer Win Nobel
Posted by Eddy Elfenbein on October 8th, 2018 at 10:34 am

Congratulations to William Nordhaus and Paul Romer for winning this year’s Nobel Prize in Economics. (Yes, I know. The Econ Nobel isn’t a Nobel Nobel. But still, it’s nice recognition.)

Nordhaus, a professor at Yale University, is best known for his work on climate economics. Romer, of NYU’s Stern School of Business, is a proponent of a theory that examines how the world can achieve sustainable growth.

“This year’s Laureates have designed methods for addressing some of our time’s most basic and pressing questions about how we create long-term sustained and sustainable economic growth,” the Royal Swedish Academy of Sciences said in a statement.

Nordhaus developed an influential model that examines the consequences of climate policy interventions, including carbon taxes, on the global economy.

His work on climate was recognized the same day that a key UN panel warned that governments around the world must take “rapid, far-reaching and unprecedented changes” to avoid disastrous levels of global warming.

A former chief economist at the World Bank, Romer has shown that economic forces govern the willingness of companies to innovate. The concept is the foundation of what is now called “endogenous growth theory,” which states that new ideas and technology help drive economic activity.

Romer is a particular hero of mine for his criticism of poor economic writing. He threatened to block a development report if it contained too many “and’s.” Romer determined the acceptable “and” level to be 2.6%.

Here’s Romer’s TED Talk on charter cities.

Morning News: October 8, 2018
Posted by Eddy Elfenbein on October 8th, 2018 at 7:08 am

Nordhaus, Romer Win 2018 Nobel Prize in Economic Sciences

Saudi Crown Prince’s 2021 Aramco IPO Deadline Is a Daunting Test

China to Pump $175 Billion Into Its Economy as Slowdown and Trade War Loom

Norway Is Plowing Cash Back Into Its Wealth Fund

Tech Workers Want to Know: What Are We Building This For?

Silicon Valley Investors Shunned Juul but Backed Other Nicotine Startups

UK Seeks Additional Reassurances from Comcast on Independence of Sky News

Toy Makers May Struggle This Holiday Season Amid the Absence of Toys ‘R’ Us and More Trade War Fears

Walmart Partners With MGM to Boost Video-on-Demand Service Vudu

Tesla’s Autonomous Driving Narrative Has Hit A Brick Wall

Comcast’s Revenge: Never Sell Hulu

UBS Goes on Trial in France Over Alleged Tax Fraud

Ben Carlson: Checking In on Bond Market Losses

Jeff Carter: The Fed And Valuation

Roger Nusbaum: FIRE Wars Escalate

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September NFP +134K, Unemployment 3.7%
Posted by Eddy Elfenbein on October 5th, 2018 at 8:37 am

The jobs report is out. The US economy created 134,000 new new jobs last month. The unemployment rate fell to 3.7%. That’s the lowest since December 1969. Revisions added another 87,000 to nonfarm payrolls. Labor force participation rate was 62.7%.

A separate measure of unemployment that includes discouraged workers and those holding jobs part-time for economic reasons — sometimes called the “real unemployment rate” — edged higher to 7.5 percent.

Unemployment among black Americans declined three-tenths of a point to 6 percent, slightly above its record low of 5.9 percent achieved in May.

The closely watched average hourly earnings component showed a 2.8 percent year-over-year increase, in line with Wall Street estimates. The average work week was unchanged at 34.5 hours.

After the report, the 10-year Treasury yield climbed to the highest in seven years.