Imminent Sign of Market Collapse?

This is a syndicated repost courtesy of The Daily Reckoning. To view original, click here. Reposted with permission.

Share!Tweet about this on TwitterShare on FacebookShare on LinkedInEmail this to someonePrint this page

We have it on high authority — Reuters — that “the ‘reflation’ trades of 2016 that were supposed to mark a turning point in global markets are fading. Fast.”

And CNBC senior markets commentator Michael Santoli sees the scribbling on the wall:

The question now is how it ends — with a whimper or a bang.

David Stockman has his answer. And it’s of the combustible variety:

The sweeping Trump tax cuts and fiscal stimulus are dead as far as the eye can see… So now comes the fiscal bloodbath and the day of monetary and fiscal reckoning.

One sign that something has to give — and probably soon — is the widening chasm between stocks and bonds.

Bond yields are at historical lows. Yet stock prices are at historical highs.

And therein lies a tale indeed…

Low bond yields suggest an uncertain future… subdued growth expectations… and low inflation.

High stock prices suggest faith in the future… elevated growth… “healthy” inflation.

Since peaking at 2.6% in mid-March, yields on the bellwether 10-year Treasury bond have slipped to 2.2%.

Shyam Rajan, strategist at Bank of America Merrill Lynch, says the interest rate market reflects the increasing likelihood that Trump’s tax reforms might never see dawn:

The rates market is pricing in the death of tax reform and dimming 2018 economic prospects.

Scott Minerd, global chief investment officer at Guggenheim, now projects that the 10-year yield could plummet to a dour 1.50% by summer.

Meanwhile, stocks bounce right along, merry as a wedding bell.

The Dow weighs in at 20,578 today, up another 174 points. The S&P’s also up 18 today, and the Nasdaq a cheery 54.

Thus, we have two seemingly incompatible market narratives locked in a bitter combat.

Stocks versus bonds.

Hope versus fear.

In this great tug of war, the market seems to pull on both ends of the rope… pitted against itself.

It can’t last.

Which side is the “real” economy throwing its weight behind?

Bonds, apparently…

As most recently as Feb. 1 the Atlanta Fed’s closely watched GDPNow had first-quarter growth around 3.4%.

But its latest estimate, out this week, weighed in at just 0.5%.

And Gallup reports that confidence in the economy is at its lowest in five months.

More rain: The March jobs report came in about 82,000 short of expectations… retail bankruptcies are rising… auto sales dropped sharply in the first quarter.

Meanwhile, commercial and industrial (C&I) credit growth has slowed to 5.4%… down from 10.3% a year ago.

That’s a rate of decline not seen since December 2008, according to The Telegraph’s Ambrose Evans-Pritchard — the onset of the Lehman Bros. crisis.

He says that’s “hard to square with the exuberant view of investors that the world is on the cusp of an accelerating economic boom.”

We’re inclined to agree.

So are Elga Bartsch and Chetan Ahya of Morgan Stanley, apparently:

We have not seen such a sharp deceleration in bank lending to U.S. corporates since the Great Financial Crisis… Historically, credit downturns have led recessions.

Rather disturbing for a global financial system more leveraged than at any time in history.

And if you’d like more evidence that the stock market is impossibly at odds with the real economy — deep in the dingles of bubble land, that is — consider the following:

Household net worth relative to GDP has never been higher.

As independent investment adviser J. Lawrence Manley reports:

Since 1950, private-sector net worth (real estate and financial assets) has averaged 377% of GDP. Currently, private-sector net worth is 492% of GDP, which is 2.8 standard deviations above the mean.

In all its graphic detail:

It was John Maynard Keynes who said the market can remain irrational longer than investors can remain solvent.

Many would argue the past eight years affirm Keynes in spades.

But if the bond market wins its tug of war with the stock market, reason could soon make its inevitable return — and with a vengeance too.

The post Imminent Sign of Market Collapse? appeared first on Daily Reckoning.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases promotional consideration is paid on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. The Wall Street Examiner makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

0 comments