Lies and Debt

By Jeff Kelly on September 13, 2024

“In our country the lie has become not just a moral category but a pillar of state.”

-Alexander Solzhenitsyn

Mr. Solzhenitsyn was writing the quote above about the former Soviet Union but unfortunately, he could be talking about America today. We see the consistent and repetitive lies from politicians, we also see it infesting the earnings calls from executives of companies as well.

I grew up in a family where I was the youngest of 6 kids. I had 4 older brothers. It took a lot for my mom to get really upset with me. She had seen it all by the time I came around. The one thing that could ensure you were going to get a whipping was to lie. She’d usually even give me a chance to change my story and fess up to what I had done. But if I stuck with it, there was a trip to this bush in the back yard where I had to select a switch to get some red marks on my behind. Child abuse, nah, character building. Lying wasn’t okay and it was much worse if you didn’t own up to what you’d done.

In today’s business and political world, I believe many are missing the chance to simply say, “I made a mistake” and move on. The candor would be refreshing. Alas I don’t see it happening anytime soon.

I won’t name names but there have been several conference calls this week with CEOs using the most embarrassing and silly lies to disguise poor performance. As things become acceptable in the political world it moves down the chain and through society.

One of the biggest lies we are told is there is no limit to the borrowing we can do as a country. We are racking up debt at a dizzying pace. We don’t even see it discussed much on the public stage. There is a limit, we don’t know what it is until we can’t sell bonds to finance the debt anymore. When that happens, it will be a crisis. We could do many things which would dramatically help the situation. But we won’t.

The first step? Stop the lying. Maybe we can plant a big bush in a park and force those caught lying to get a whooping, just like I did back in the day. I’ll bet we could do pay for view and make some money. It’s a big issue for our kids, grandkids and the future. It won’t go away. The first step is admitting we have a problem.

No lies in the markets. Everything is coming up roses. Stocks up, bonds up it’s all good. Next week and the following week are the two worst weeks of the calendar year historically. Will it matter this year? It seems unlikely the current string of positive days will continue but anything is possible.

The market has taken in some negative news this week and continued to advance. Several of the large financial stocks announced poor news this week. The selling was confined to those names with poor news. In the past selling in financials would impact the broader market. That’s not happening now. We still expect to see some weakness as we exit the 3rd quarter into the early 4th quarter. The biggest surprise is the continued outperformance of the utility and real estate sectors. On a quarter to date basis, they are the best performers of all S&P sectors. Quite remarkable given the emphasis on technology. 

I’d also be very cautious about the Federal reserve meeting next week. While they are almost certain to cut rates, bonds have priced in many rate cuts by year end. The two-year treasury is trading with a yield of around 3.6%. Federal funds are at 5.25-5.50%. The spread between these two rates is the most negative in 50 years.

If the Fed doesn’t cut 50 basis points it’s likely the bond market will be disappointed and sell off, this would send yields higher and take some wind out of stocks. Given this condition there will also need to be dovish commentary from the Fed chairman in his press conference. 

While economic data has been softer, it’s just that, softer. Not terrible or anything that would indicate the need for the number of rate cuts the bond market is anticipating.

We will enter preannouncement season next week as well. Any companies needing to temper expectations will likely do so in the next couple weeks. As we get to the end of the month, we enter a period where buybacks are blacked out until earnings are reported. This could also cause some weakness.

We continue to think any temporary weakness will be a buying opportunity for a good fourth quarter. Lastly, we get many questions about the effects of the election on equity markets. The market has little concern about who wins. Markets have done well under either party despite what either side has to say. What would cause the market to be concerned is a failure to peacefully transfer power from one administration to the next. If this were to occur a sell-off would be steep and swift.

CHARTS FROM THE WEEK PAST

Shortly after open Wednesday S&P 500 traded down 1.6% but then turned around and rose steadily for rest of day to close up 1.1%; 147 index points rally from intraday low to close was most impressive intraday recovery since October 2022.

A look at the last two “bullish engulfing” patterns.

May 31^st and September 11^th.

From Evercore ISI, arguments for a soft landing:

We are headed into the worst two-week period of the year on a historical basis.

In month/month terms, August PPI +0.2% vs. 0.0% prior; core +0.3% vs. -0.2% prior (rev down from 0%).

Germany’s industrial slump is steep and troubling.

The top two leadership groups are utilities and real estate.

Financials are losing momentum as several announce earnings troubles this week. Tech, despite some big moves this week is still losing momentum.

It looks like 1 month volatility will cross below 3-month volatility.

A bullish move if it happens.

Rail traffic is still looking good.

Intermodal up 12.1% for the week and 9.4% for the year to date.

The “K” shaped economy in full bloom.

Ferrari doing great, Dollar General crashing.

Per the latest weekly STR release, total US RevPAR was down -5.2% YoY for the week ended 9/7, decelerating from the prior week’s +3.6%. 

This week’s data was mostly clear of any major nationwide calendar shifts but was impacted by the typical post-LDW malaise.   

Demand is cooling for second homes.

Mortgage rate locks for second homes fell 13.1% year over year in August. This is the lowest level since March 2016.

Another look at the outperformance of sectors via net new highs.

Oil trades lower and lower.

This may be reflecting how poorly China is doing as a country.

China stock market trading at 4-year lows and close to taking out 2020 lows.

For comparison the S&P 2020 low was 2192!

The last time China was deflating this hard; it was 3% of global GDP.

Now it is 20% of global GDP. Undeniably having effects worldwide and cannot be ignored or discounted.

“August saw the biggest equity fund outflow since 2022,” according to JPM.

This points to the abrupt downshifting of the retail impulse into equities.

Bull markets have been longer since the 1990s.

This is likely due to more intervention and technological advancement.

Bankruptcy filings continue to be problematic.

The cost of health insurance continues to accelerate while the CPI shows modest increases.

Another reason people distrust these statistics.

American Community Survey, as of 2022, nearly 39% of owner-occupied homes in U.S. did not have a mortgage (up from 32.9% 10 years earlier).

Very little negative equity in today’s mortgages.

This is a large margin of safety.

Mortgage rates are hitting the lowest levels of 2024.

Tariffs are not good.

We know this because they have been used by Trump and Biden. They are inflationary and a tax on goods.

It’s interesting how much more oil America is producing today than in 2020.

Hmmm….

Pup thinking about this talk of eating the dogs!

To say the least, he’s not a fan.

A true story about immigrants eating dogs.

Hot Dogs that is.

WEEKEND HOMEWORK

Through blatant lies, deep cover-ups, and high-level collusion with government and media, Big Pharma has continuously put profits over people with dangerous results. Now, with her signature investigative rigor and uncompromising commitment to the facts, Sharyl Attkisson takes readers on an shocking journey through the dark underbelly of the pharmaceutical industry.Follow the Science recounts, in exacting detail, how far the pharmaceutical industry and its supporters in medicine, media, and government will go to protect their profits. Attkisson provides shocking examples that reveal the disturbing callousness our government, public health officials, and top researchers are capable of when it comes to the most vulnerable among us. And she explains, in a graphic sense, how some of the most trusted within our society are willing to commit life-threatening ethics violations.

Erik Townsend and Patrick Ceresna welcome Jim Bianco to MacroVoices. Erik and Jim discuss:

• The FED’s Political Position 
• Rate Cut Predictions 
• China’s Economic Impact on Global Markets
• US Economic Outlook & Inflation Concerns
• Long-term Interest Rates & Gold 

MacroVoices #445 Jim Bianco: Still No Landing, and Inflation is Not Transitory

Judy Shelton and Keith McCullough discuss gold and the monetary system. An important conversation. This is worth your time.

Real Conversations | Judy Shelton 1-on-1 with Keith McCullough

Sadly, Louise leaves tomorrow. I do think about the quote “don’t cry because it’s over. Smile because it happened.”

What a treasure. I will miss them terribly. It does make me want to work harder on my health and fitness. I want to be there for as much of her life as possible. So, guess what? I’m going to do 20k steps Saturday and Sunday. I’m going to workout both days. And of course, I’m going to get outside! Lots of football this weekend as well. Have a great one. Don’t forget to reach out to someone who’d love to hear from you. Make their day.