I am often asked why I think that central banks can’t prevent a collapse in the financial system. Surely they can keep the game going, most people think. Just keep interest rates low and print lots of money.
By now you probably know that the US government’s May jobs report released last Friday hugely missed expectations. Only 138,000 jobs were added in May while the previously reported March and April estimates were revised lower by 66,000.
March and April auto sales data were very poor, as reported here. Would we see a bounce back in May? Not a chance. Auto sales declined for the fifth straight month with domestic light vehicles annualizing 12.59 million vehicles, the lowest sales number going back more than three years, despite record incentives and discounts to rental and other fleet customers. Even worse, inventories continued to grow.
You may think me a little strange but I am a car nut. I have owned many of the world’s most extravagant automobiles at one time or another and I enjoy following the market. As I do my research, I sometimes discover some odd things. It seems that the used car market may tell us a lot about the stock market.
Well, the equity bubble continues. The senior US indices all made new highs last week. The advance was narrow…a very few, very large stocks drove most of the gains. Here’s the proof. This chart shows the ratio of the equal weighted S&P500 to the market cap weighted version you usually see. The equal weighted index values each company equally, whatever its size. As you can see, the trend in this ratio is down, indicating that smaller stocks are underperforming. Probably it’s all those index ETFs buying the same stocks.
We have been reporting on the collapsing bubbles in the auto industry and public employee pensions. You may not be aware of these unfolding crises because the main stream media is reporting 24/7 on the Russia-Trump connection, a total non-story if ever I heard one. Let’s look at some real news.
Yesterday (Wednesday) we got a hint of just how fragile equity markets are. The Nasdaq led the rout with a decline of 2.8%, closing on its lows. That’s because market performance is not based on a firm foundation of a strong economy and rising earnings. The markets are hanging on to current elevated levels based solely on a wounded President’s promises, promises of tax cuts and infrastructure spending that we said were a fantasy back when he was elected.
My sources tell me that Commercial and Industrial (C&I) lending has collapsed Banks have essentially stopped making C&I loans. It’s not because of tightened credit conditions. Demand for credit has collapsed. For an economy totally dependent on credit, this is not good news.
The big story in the markets is record low volatility, with the VIX dropping to a level not seen since 1993 while shares are trading at record levels. There have only been three moves in the S&Ps of 1% or more since the start of the year; based on the norm, there would have been 19. Investors have never been more complacent, according to sentiment measures.
The New Orders component in last week’s Purchasing Managers’ Index (PMI) reports on the Chinese economy tumbled to their lowest levels in at least 6 months. So what, you may ask? These downbeat reports came despite Q1’s record surge in new credit creation.