A Deal in D.C., a Wipeout on Wall Street
- How the “Fiscal Responsibility Act” could tank the stock market
- But in the meantime, “the Fed Whisperer” helps fuel a rally
- GDI: The little-known recession figure flashing red
- When your license plate promotes… online gaming overseas?
- The mailbag: 5 Bullets... and a bunch of corny one-liners
After the Debt Ceiling, the Deluge (Not Good for Stocks)
Once in a while, the conservative satire site Babylon Bee can still be sorta funny…
What’s funnier is this: The bill suspending the debt ceiling through early 2025 is called the “Fiscal Responsibility Act.”
Yep, a bill that permanently locks in almost all of the Trump-Biden pandemic spending increases — the “Fiscal Responsibility Act.” Now there’s some next-level gaslighting from Washington.
➢ Flashback: When Mitt Romney picked Paul Ryan to be his running mate in 2012, I spent several hundred words calling out Ryan as a phony. “It takes a special kind of politician,” I wrote, “to vote for the TARP bailouts in 2008... and for Medicare prescription drugs in 2003... and still successfully pass yourself off as the Foremost Fiscal Conservative of the 21st Century™.” At the time, my conservative readers didn’t want to hear it. But when it comes to faith in the GOP’s fidelity to budgetary discipline… well, times have changed.
We assume the bill will pass the Senate and be signed by the president before Uncle Sam hypothetically defaults on the national debt Monday. And then what?
“Almost every Wall Street strategist will tell you that stocks are a sure buy as soon as the debt ceiling fight is resolved,” says Paradigm’s Dan Amoss — who has the demanding position of being Jim Rickards’ senior analyst.
“‘It’ll be back to business as usual,’ they’ll say. ‘Earnings will start to grow again. And corporate balance sheets are healthy!’
“In other words, good times will soon be here again! Well, all I can say is, not so fast.
“Sure, corporations have tons of cash,” Dan allows. “But that only tells a portion of the story.”
Corporations also have tons of debt. That debt was easy to service throughout the 2010s when interest rates were near historic lows. Now? Not so much.
So consider this: “A significant portion of the last decade’s stock market gains were produced by corporations buying back their own stock,” says Dan. “It was all enabled by the artificially low interest rates resulting from massive market intervention by the Fed.”
In the past I’ve cited the classic instance of Intel in 2012 — which took on $6 billion in debt at rates as low as 1.35%, using the proceeds to retire shares paying a 4.3% dividend. It was a no-brainer!
But that kind of maneuver is no longer possible now — as Apple is discovering to its dismay.
“Apple is buying back stock,” Dan points out. “But Apple’s free cash flow has already been shrinking for a few quarters. And it’s going to fall sharply in a recession.
“In other words, the Apple buyback scheme doesn’t mean it has plenty of cash on hand. It doesn’t indicate strong cash flow. Quite the opposite.”
After sifting through Apple’s numbers, Dan surmises that “Apple’s corporate finance strategists are selling high-cost debt to invest in low-yielding stock buybacks.
“Do you see the problem? They’re selling high-cost debt to invest in low-yielding stock buybacks.”
Here’s the central point: “If even mighty Apple’s balance sheet is weakening,” asks Dan, “what does that say about companies in lower-quality, more competitive businesses?”
It says nothing good, now that the debt ceiling farce is winding down.
“Markets are entirely dependent on liquidity,” Dan reminds us. “When liquidity is freely available, the stock market tends to outperform. But when liquidity is scarce, the stock market tends to underperform.
“Here’s where things get interesting: In the coming months, even with a debt ceiling agreement, the Treasury will be forced to sell enormous amounts of bonds to finance its operations.”
And we do mean enormous. After all, the Treasury has been unable to issue new bonds since mid-January. It’s got nearly five months of catching up to do.
“Tax receipts alone can’t finance them,” Dan points out. “Where will the money come from to purchase the bonds?”
Dan answers his own question: “Basically, we’ll be witnessing a vast wave of U.S. Treasury bill auctions. These will drain tremendous amounts of liquidity from Wall Street.
“For a stock market reliant upon generous amounts of liquidity, that is a poor sign.”
Especially when the full impact of the Federal Reserve’s interest-rate increases are yet to make themselves felt.
Putting it all together, “the combination of heavy Treasury bill auctions, a Powell Fed that wants a weaker job market and tightening credit conditions is a nasty cocktail,” says Dan. “The liquidity just isn’t going to be there, in my opinion.
“Batten down the hatches, it looks like rough times are coming.”
Well, today’s the start of hurricane season, come to think of it. We’ll be here to steer you through the heavy seas in the months ahead…
The Fed Whisperer Speaks
In the meantime, Wall Street is staging a relief rally after 1) the debt-ceiling vote in the House and 2) a shift in tone from the Federal Reserve.
At last check, the S&P 500 has once more hefted itself past the 4,200 level — up 0.8% to 4,213. (Let’s see if it can stick this time.) The Nasdaq is up nearly 1%, back above 13,000. The Dow is the laggard, up a half percent and back over 33,000.
Gold is up nearly $20 to $1,982 and silver is back within a dime of $24. Crude is recovering strongly, up $2.60 and back above $70.
So about the Fed: Late yesterday, the Fed’s preferred mouthpiece Nick Timiraos of The Wall Street Journal posted an article saying the Fed will likely leave interest rates alone at its next meeting on June 14 — while still leaving the door open to raising them in late July.
“The strategy,” Timiraos wrote, “would give officials more time to study the economic effects of the Fed’s 10 consecutive prior rate rises, as well as recent banking stress, by spacing out further increases.”
That’s as official as it gets: No change on June 14, no matter what happens with the job numbers tomorrow or the inflation numbers a few days later.
When we fired our 5 Bullets yesterday, we mentioned that futures trading suggested a 71% likelihood the Fed would raise this month. But today, after Timiraos’ story dropped? It’s a 72% likelihood the Fed will stand pat. (It’s astonishing how one reporter has this much market-moving clout, but that’s a topic for another day…)
➢ One underwhelming economic number: The ISM manufacturing index has now logged seven straight months of sub-50 readings, suggesting the U.S. factory sector continues to shrink. At 46.9, the May number is down slightly from April’s 47.1.
From Rickards’ Lips to BlackRock’s Ears
The asset-management behemoth BlackRock tells clients in its weekly commentary that the United States has “arguably” entered a recession.
“GDP has held up but [the U.S. economy] has arguably entered recession based on gross domestic income, which assesses the economy’s performance on an income rather than spending basis.”
We point this out in part to brag on Jim Rickards. In the write-up for his most recent Countdown to Crisis recommendation two days ago, Jim spotlighted “the significant gap that has appeared between gross domestic product (GDP) and gross domestic income (GDI).”
A little further explanation is in order: “The former is a measure of all goods and services purchased while the latter is a measure of all goods and services sold.
“In theory, the two should be the same subject to normal timing differences in terms of reporting the respective flows, and small methodological differences.
“Instead, the most recent figures reveal a huge gap between GDP and GDI. GDP for the first quarter of 2023 was reported at +1.3% (annualized). GDI for the first quarter of 2023 was reported at -2.3% (annualized). That’s a yawning gap of 3.6 percentage points between GDP growth and GDI collapse.
“According to GDI, not only is a recession coming, it’s already here and it’s severe,” says Jim — one-upping BlackRock’s “arguable” assessment.
“For these two data series to reconcile, either GDP must decline sharply (or be revised downward) or GDI must rise sharply (or be revised upward).
“Given all the other data that indicates a recession is looming (inverted yield curves, negative swap spreads, Treasury bill yields below the Fed’s overnight secured reverse repurchase rate, etc.), it seems far more likely that GDI has an accurate read on the economy and GDP figures will soon fall or be revised sharply lower.”
Declines of that magnitude “translate directly into reduced consumer spending. Beyond that, persistent drags on growth (or outright recession) translate into layoffs and business failures, which also reduce demand.”
Consider yourself forewarned…
Great Moments in Web Domain Maintenance
Government in action, Old Line State edition…
“The URL printed on hundreds of thousands of older Maryland license plates currently goes to a website promoting Philippines online casinos,” reports Baltimore’s WBAL-TV.
The plates were issued between 2010–2016 to commemorate the 200th anniversary of the War of 1812 (an event I couldn’t get very excited about during the time my wife and I lived in Baltimore — although it was an interesting episode in monetary history.)
Way back then, the URL starspangled200.org took you to the website for “the nonprofit entity affiliated with the commission that led the efforts to raise money for bicentennial projects and events,” explains the TV station. Nearly 800,000 of these plates are still on the road.
Long story short, someone dropped the ball and failed to keep the URL’s registration current. Thus, the URL redirects you to, yes, a website promoting online gaming in the Philippines.
Here’s the best part: It’s possible no one in Maryland discovered this oversight for at least six months. Out of curiosity, I plugged the URL into the Wayback Machine. As of last August, it still had relevant “Star Spangled Trail” information, even if it hadn’t been updated in over three years.
But by Dec. 2, it had been overtaken by some placeholder text about Philippine gambling — followed by a more functional online-betting website in January, complete with the obligatory “T&A”...
Good grief. Imagine if porn hucksters had gotten their hands on it…
“Change is Inevitable”
“Every business must adapt/change to keep relevant,” begins today’s mailbag — as our new name and format are still front and center.
“I have been reading since inception, and take every change in stride and look for the positives.
“The writing is what keeps me glued to my inbox daily, and I don’t expect that to change. Keep up the great work.”
“I am cool with the new format,” another reader writes. “However I was and always am skeptical of change — can't help it.
“Nevertheless, I say BRAVO!”
A reader submits the following random thoughts about yesterday’s edition…
“Love that meme on the first bullet. Can we get that ‘You are the carbon they want to reduce’ paired up with the ‘I did that’ Biden meme?
“Maybe Brough Lodge can and will become the ‘new Jekyll Island.’
“And for my last one — only 5 Bullets? You MUST be from a blue state because you're limited to a small magazine size.
“ROFLMAO at my comedic brilliance.”
Dave responds: Let’s just say one benefit of no longer living in Maryland is that Maryland is a “may issue” state.
“I’m sorry that you felt a change was necessary to be relevant with new readers,” says someone else who was with our previous incarnation from the beginning in 2007.
“Even though my reading load is heavy every day and even though I didn’t always agree with everything published, I never wanted to miss an issue.
“What about old readers? Did the percentage of new readers drastically outnumber previous readers?
“What I have witnessed in other publications is that editors in an attempt to bring new readers up to speed will repeat past information. I remember the old information, I want the new insights.
“Remember that when you try to please a small group you may alienate the larger group.
I’m hoping that the new format will be as enjoyable as the old and not just to get rid of the ‘time to read’ stigma.”
Dave responds: How well do you retain “the old information,” really?
If you remember it well, then you know one of my favorite quotations is from Samuel Johnson: “Men more frequently require to be reminded than informed.”
All I’m saying is that some repetitious reinforcement isn’t necessarily a bad thing — even though I don’t anticipate I’ll be thrashing over old ground any more than before.
We’re always bringing new readers in the door… and I’ve always been mindful of how to address both the new blood and the old guard at the same time.
Anyway, thanks to all the longtimers for the vote of confidence this week. Onward!
Best regards,
Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets
