Forgive me for using an analogy of our iconic symbol for our day of thanks to our economy, specifically in actions of our Federal Reserve. These bankers think that they can engineer our economy and thus, our lives. Everyone fairly understands the concept of booms and busts and how it effects our economy. Behind every bust is the Fed. Anyway follow this example...
You make and sell a product. Research shows that you have a 20% share of the market in the product that you make. Your bean counters, seeking a raise for themselves, offer this plan. We can increase production by this factor, which should not add to labor costs. Money is cheap to borrow. We can
not only increase our market share, but add x-amount of millions to our bottom line. So, the company enacts the plan. The only problem is your competitors utilize the same concept. Lo, and behold, supply exceeds demand just like our present oil market.
What happens?
Production is cut back(OPEC playbook). Workers hours are reduced. People have less to spend and the chain reaction affects all aspects of the economy. We went from boom to bust.
Enter the Fed.
They open their vault and read the emergency playbook. It says, "Throw money on it." They lower interest rates which allows poorly managed firms to rollover their debt and stay in business. It makes housing, the biggest and most important consumer item, more affordable. It gets management thinking, "Do I take this opportunity to do R&D on the cheap? If I buyback shares, I'll look good when the lower earnings come out because the earnings will be divided by a lower figure? What to do?"
The problem with the US economy is CEOs do the ego trip and buyback shares. These greedy, small minded egos follow their predecessors who outsourced our standard of living to China and elsewhere. This is sad to say, but China is the world's biggest economy. They manufacture the most gasoline cars. They seek to make the most electric cars with recent legislation. In alternative energy, wind and solar, they dominate. It is only ego that says the US is #1. Tariffs should be increased and taxes on US outsourced companies should double to force the return to the US. Anyway, China will want
their currency to be the world's reserve money. Heaven forbid! If that happens, everything that we buy will double in price. Our terrible poverty numbers will double and our standard of living will fall further. This is a future problem. Recent data indicates a more pressing concern.
New Problem
The cheap money that the Fed threw into the economy and which becomes debt, is all used up and now, money is costing more. The first signs of liquidity problems is revealing itself in short term financing. Dear reader, it takes hours to cook a turkey not to mention the days it takes to thaw the bird. Then, you have to constantly baste it so it won't dry out or get burnt. The Fed has suddenly realized that it has been enjoying the party at the punch bowl and not basting the bird or even coordinating the other parts of the meal like turnips, carrots, etc.
The global market is seeing the effects of political influence, which is generally never good. We have tariffs, migrations tensions, Brexit, Iran, Venezuela, Greece, Italy, Spain and the Middle East. We have Asians nations caught in the trade conflict between the US and China and everyone has excess debt that now, costs more. Investors are moving into dollars(safe haven) which hurts emerging markets. The higher dollar hurts all international companies. It does provide small relief to you and me, but it is only temporary.
Those names are the usual suspects except market conditions has banks and financial firms in the crosshair. The lending industry has to have their books balance at the end of the month. They take a short term asset to appear credible. Now, those rates cost more and it is beginning to effect the bottom line. The playbook is to cut costs which means, layoffs. This begins the bust phase in the economy as people have less to spend. This is the small picture. The closer to home aspect. In the big picture, a nation's debt and its ability to service that debt costs more. The US is already at unsustainable levels and with the Fed raising rates(expect one next month). The international market is looking fragile as emerging markets suffer with debt borrowed in US dollars and must be repaid in US dollars.
Finally,
We have the war between the bulls and bears in the market. People, I'm not just talking about the outlook for a stock like GE which has too much debt, but the different investing approaches to the market. As the Fed raises rates, this makes notes the safer and easier decision by investors. Why gamble on the unknowns of the market when I can get secure interest on treasury bills? This struggle for investor money will define 2019. Investors see what happened to Facebook(bear territory). The recent declines in market leaders like Nvidia and Apple(also bear territory). Even dividend firms are being questioned. Where is GEs dividend? LBrands just said all is well and then, cut its dividend in half There are many other examples. The present cloud in the market makes the safety of notes the better choice. Then, there is this aspect. In a higher market(like we have)notes should back off. They are not. Even with the looming expected rate increase by the Fed, they have not backed off. This is a tell by the market. The market believes that the Fed will stop raising rates. The market is reaching a confluence point. The market had better be right because 35% of all S&P revenues come from global aspects. Evaluations are already too high and if earnings falter, the market will tank. Sadly, the Fed relates to the market. If it is high, they conclude all is well. If it falls, get the emergency playbook out.
The turkey is done. Surprisingly. it comes out cooked to perfection. The Fed returns to the punch bowl and toast each other. We give thanks, eat, watch football and fall asleep. Black Friday comes. People shop and life resumes. All seems well except the banking industry is preparing to cut workers in January. Enjoy the day. Enjoy the season because the banking engineers are out of oil to grease the economy. Peace. Plan for a rainy day, but enjoy this one. Happy Thanksgiving.
