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Post Coal in My Stocking; from Ric Mauricio
Created by John Eipper on 12/26/18 4:09 AM

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Coal in My Stocking; from Ric Mauricio (John Eipper, USA, 12/26/18 4:09 am)

Ric Mauricio writes:

Merry Christmas from Silicon Valley. Yesterday I found coal in my Christmas stocking. Yes, the last couple of months have been quite a downer in the markets. And everyone is asking me what the cause is. Well, it is a little bit of everything.

Let's first address what the President blames .... increasing interest rates by the Fed and the Fed unwinding their bond positions. Is this to blame? Yes and no. Chairman Powell is looking at economic numbers and bases his decisions on low inflation and unemployment. Never mind that the inflation rate calculation is hosed or that those who are no longer eligible for unemployment are not counted. Chairman Powell says, "Let them eat bear." For those who blame low interest rates on the asset inflation, here is your answer. Never mind that many small investors are getting hurt and that businesses are now reassessing projects going forward, thus leading to an economic slowdown. Never mind that pension plans are even more underfunded today than they were two months ago, and we will now see cuts in pension plan payouts. But Mr. President, wasn't it you who replaced Janet Yellen with Jay Powell? But we don't know if Ms. Janet would be doing the same dance as Mr. Jay.

Others blame the global economic turmoil of the President's "Tariff Man."  Yes, the threat of global economic wars is taking a toll on global economics and as a result, stocks, especially multinational companies whose economic welfare depends on global trade. One need only look at the Smoot-Hawley tax of 1930 to know my view on tariffs.

The yield curve is not yet quite inverted. It is the 2 year vs. the 10 year that gives us the signal. So, as yet, no indication of a recession. But I am watching it very closely.

Another blame is the partial shutdown of the government. Actually, this only hurts government workers, who are not getting paid during the shutdown. Imagine if you need to pay your mortgage with this income. I only wish they would shut down the IRS. Congress and the White House should not be paid either. They're requiring many essential government workers to work without pay. Why can't Congress and the White House be subject to the same rule?

The biggest blame, which the news does not seem to focus on, is debt. The national debt is growing at a much faster rate than the previous eight years, although still not at the rate of the George W. Bush era, but it is accelerating. If one noticed, the George W. Bush era was not a good one for the stock market. This growth in the national debt is not surprising, given the current president's penchant for spending. $5 billion? No problem. He will argue that leverage is good. Yes and no. If one purchases an asset with 20% down and 80% debt, and that asset's value increases by 4% per year, you will have a 20% return per year (but mathematically, only if you buy a new asset every year; if you hold on, mathematically, that return will decrease each year). What's interesting is that even with leverage, the president has only managed to have a return of 7% per year since he inherited his $200 million per year in 1979. And that's due to his unwise use of leverage that has led to bankruptcies. Will his love of debt lead the US to bankruptcy? Only time will tell.

In the meantime, I will burn my lump of coal and dirty the air. After all, the president says we are not causing climate change.

JE comments:  Would love to join you at brazierside, Ric!  Will Santa one day be depositing "renewable" energies in the stockings of naughty children?

Meanwhile, with the US government shutdown, the Grinch will probably take over the markets for the rest of the week.

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