The Peter Schiff Show Podcast

Economy Slowing Down

We got quite a bit of economic data that was released today, pretty much all of it confirming what everybody seems to be denying, and that is that the U.S. economy is, in fact, slowing down, at least the way we like to measure it.  We will get more data later in the week, of course we get the big number, the nonfarm payroll number, on Friday. We always get that number the first Friday of the month; this Friday is June 1, so we are going to get the May jobs number.

Last Month's ADP Jobs Number Revised Down

We got the ADP number that came out this morning.  It was weaker than expected.  In fact, there was a significant downward revision to the prior month, which was originally reported at 204,000 jobs.  That was revised down to 163,000 jobs, so about a 20% reduction.  This month, the consensus was 187,000 and we got 178,000; of course, that number will also be subject to revision next month.  But, to me, that shows that we can potentially get a weaker number on Friday as well.

Decline in Refinances at an 18-Year Low

Earlier this morning, we got some data on mortgage re-fi's, which we get every week.  We get the numbers on new mortgages and mortgage re-fi's.  Everything is down.  This makes sense, because mortgage rates are going up. In particular, the decline in refinances is to an 18-year low in mortgage re-fi's. One of the reasons that the inability to refinance your mortgage is going to become a problem is that re-fi's have been providing a lifeline to consumers to enable them to continue to spend.

Refinances Available as Property Values Rise

When you refinance your mortgage, you're generally doing it to reduce your monthly payment because you are able to qualify for a lower monthly payment.  Some people who perhaps could not qualify a couple of years ago because they did not have enough home equity, but as real estate prices have risen that has enabled people who have been unable to refinance in the past to re-fi now.  Especially for those who are doing a re-fi and are also doing a cash out.

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Economy Slowing Down

We got quite a bit of economic data that was released today, pretty much all of it confirming what everybody seems to be denying, and that is that the U.S. economy is, in fact, slowing down, at least the way we like to measure it.  We will get more data later in the week, of course we get the big number, the nonfarm payroll number, on Friday. We always get that number the first Friday of the month; this Friday is June 1, so we are going to get the May jobs number.

Last Month's ADP Jobs Number Revised Down

We got the ADP number that came out this morning.  It was weaker than expected.  In fact, there was a significant downward revision to the prior month, which was originally reported at 204,000 jobs.  That was revised down to 163,000 jobs, so about a 20% reduction.  This month, the consensus was 187,000 and we got 178,000; of course, that number will also be subject to revision next month.  But, to me, that shows that we can potentially get a weaker number on Friday as well.

Decline in Refinances at an 18-Year Low

Earlier this morning, we got some data on mortgage re-fi's, which we get every week.  We get the numbers on new mortgages and mortgage re-fi's.  Everything is down.  This makes sense, because mortgage rates are going up. In particular, the decline in refinances is to an 18-year low in mortgage re-fi's. One of the reasons that the inability to refinance your mortgage is going to become a problem is that re-fi's have been providing a lifeline to consumers to enable them to continue to spend.

Refinances Available as Property Values Rise

When you refinance your mortgage, you're generally doing it to reduce your monthly payment because you are able to qualify for a lower monthly payment.  Some people who perhaps could not qualify a couple of years ago because they did not have enough home equity, but as real estate prices have risen that has enabled people who have been unable to refinance in the past to re-fi now.  Especially for those who are doing a re-fi and are also doing a cash out.

Biggest Move in Crude Oil

Not much action today in the stock markets on this Friday before a 3-day Memorial Day holiday weekend.  The action was really in the oil markets, the bond markets and the foreign exchange markets. The biggest move happening in crude oil.  Crude was down just over $3/barrel today; one of the biggest declines I've seen in some time.  We're back down to $67.50. Earlier in the week, we almost hit $73/barrel for crude, and here we are now at $67.50 - a pretty big drop today. We were down yesterday, also.

Speculation in the Market

The rumors today were that Russia and Saudi Arabia may be upping their production and it was that news that sent the market falling. But remember, markets don't move in a straight line.  You get a lot of speculators who get into the market and generally they're not there for the long run; they're there to catch a trend, and they're there to ride it as long as they can.  They tend to put stop orders in beneath the market.  In the case of oil, if you're long, you'll have a sell stop and many of those stops likely got triggered today.

Technical Noise

You probably had some people trying to minimize their exposure.  Either they limited their loss to the extent that they got in recently and they got stopped out with a loss or maybe they've been long for a while and they've been moving their stops higher to protect their profits and now they got stopped out of the trade.  But I think this is more technical noise.  I don't think this uptrend in the price of oil has changed based on this pullback from $73 now to $67.50.  Maybe we've got a little more downside, but if you look at the chart, you can barely see the decline.  The more recent uptrend that goes back to July - you look at this uptrend and it is holding perfectly.  We're not even down to the line yet.  We still have a little bit to fall before we hit that line.

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Biggest Move in Crude Oil

Not much action today in the stock markets on this Friday before a 3-day Memorial Day holiday weekend.  The action was really in the oil markets, the bond markets and the foreign exchange markets. The biggest move happening in crude oil.  Crude was down just over $3/barrel today; one of the biggest declines I've seen in some time.  We're back down to $67.50. Earlier in the week, we almost hit $73/barrel for crude, and here we are now at $67.50 - a pretty big drop today. We were down yesterday, also.

Speculation in the Market

The rumors today were that Russia and Saudi Arabia may be upping their production and it was that news that sent the market falling. But remember, markets don't move in a straight line.  You get a lot of speculators who get into the market and generally they're not there for the long run; they're there to catch a trend, and they're there to ride it as long as they can.  They tend to put stop orders in beneath the market.  In the case of oil, if you're long, you'll have a sell stop and many of those stops likely got triggered today.

Technical Noise

You probably had some people trying to minimize their exposure.  Either they limited their loss to the extent that they got in recently and they got stopped out with a loss or maybe they've been long for a while and they've been moving their stops higher to protect their profits and now they got stopped out of the trade.  But I think this is more technical noise.  I don't think this uptrend in the price of oil has changed based on this pullback from $73 now to $67.50.  Maybe we've got a little more downside, but if you look at the chart, you can barely see the decline.  The more recent uptrend that goes back to July - you look at this uptrend and it is holding perfectly.  We're not even down to the line yet.  We still have a little bit to fall before we hit that line.

Markets Rallied on Fed Minutes Interpreted as Dovish

Earlier today we got the release of the latest Federal Open Market Committee minutes and before the minutes came out (they come out at 2pm Eastern Time). Prior to the release, all the stock markets were down; the Dow was down maybe about 150 points or so, and when the minutes came out, we got a rally, and the Dow closed up about 50 points.  So, a 200-point rally on the minutes, and the reason the minutes acted as a catalyst for the rally is that they were interpreted to be a bit more dovish than expected.

The Fed's Symmetrical Inflation Target

To me, the minutes were as expected; I had already been talking about the Fed's view that inflation can go above 2%. That they were willing to allow for some kind of "symmetrical" inflation.  The symmetry in this case meaning, we were below 2% for a long time and so now we can be above 2%. I guess for some reason the markets focused in on that.

Specifically, the minutes read that

"A temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective."

What does "Modest" Mean?

Now, I don't know why allowing inflation to be higher than 2% is somehow helpful toward achieving their 2% objective. To me, It would be more helpful if they just kept it at 2%, if indeed that was their real objective.  But, even if you look at the language that they use, they don't really define what symmetrical could mean.  They talk about inflation being "modestly" above 2%: What is "modestly"? Is is 2.1%? What about 2.5%? Is .5% "modest"? They don't really define what "modest" is.  I have a feeling, again, that there's never going to be a definition, that it is going to be an ever-moving goal post.  Even 3% could be "modest".  "Hey, it's only 1%, right that's "modest", right?

Fed Is Impotent When It Comes to Inflation

But on a percentage basis, you wouldn't consider 3% modest.  You're above 2% by 50%.  50% is not a modest percentage, but they could say 1% is a modest percentage. Who knows?  I think the Fed is going to be looking for every excuse not to raise interest rates aggressively, no matter how high inflation gets.  Of course, they're not going to be that transparent. The last thing they would want to do is to let the markets know that they are that impotent when it comes to inflation.

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Markets Rallied on Fed Minutes Interpreted as Dovish

Earlier today we got the release of the latest Federal Open Market Committee minutes and before the minutes came out (they come out at 2pm Eastern Time). Prior to the release, all the stock markets were down; the Dow was down maybe about 150 points or so, and when the minutes came out, we got a rally, and the Dow closed up about 50 points.  So, a 200-point rally on the minutes, and the reason the minutes acted as a catalyst for the rally is that they were interpreted to be a bit more dovish than expected.

The Fed's Symmetrical Inflation Target

To me, the minutes were as expected; I had already been talking about the Fed's view that inflation can go above 2%. That they were willing to allow for some kind of "symmetrical" inflation.  The symmetry in this case meaning, we were below 2% for a long time and so now we can be above 2%. I guess for some reason the markets focused in on that.

Specifically, the minutes read that

"A temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective."

What does "Modest" Mean?

Now, I don't know why allowing inflation to be higher than 2% is somehow helpful toward achieving their 2% objective. To me, It would be more helpful if they just kept it at 2%, if indeed that was their real objective.  But, even if you look at the language that they use, they don't really define what symmetrical could mean.  They talk about inflation being "modestly" above 2%: What is "modestly"? Is is 2.1%? What about 2.5%? Is .5% "modest"? They don't really define what "modest" is.  I have a feeling, again, that there's never going to be a definition, that it is going to be an ever-moving goal post.  Even 3% could be "modest".  "Hey, it's only 1%, right that's "modest", right?

Fed Is Impotent When It Comes to Inflation

But on a percentage basis, you wouldn't consider 3% modest.  You're above 2% by 50%.  50% is not a modest percentage, but they could say 1% is a modest percentage. Who knows?  I think the Fed is going to be looking for every excuse not to raise interest rates aggressively, no matter how high inflation gets.  Of course, they're not going to be that transparent. The last thing they would want to do is to let the markets know that they are that impotent when it comes to inflation.

Solid Gains Today in the Major Stock Market Averages

We had solid gains today in the major stock market averages; the DJIA putting in the largest percentage gain, just over 1.2% or 298 points.  I think at the highs, the Dow was up 370 and change, so a strong day, S&P, NASDAQ also up not quite as much calculated as percentages. The Russell 2000 was not up as much as the other averages but it is at a record high again today.  I think it's the Russell 2000 that ultimately could make the biggest percentage drop once stock market traders start to figure out what's actually going to happen.

A Lot of Saber Rattling and Not a Lot of Fencing

But in the meantime, today, they were celebrating the cease fire in the trade war.  Although, I don't think I should call it a cease fire because nobody actually fired a shot.  It has been more of a war of words than a real conventional battle, I mean there was basically a lot of saber rattling and not a lot of fencing.  But I think what happened today is that we callee a truce.  Both sides sheathed their sabers and agreed that there is not going to be a war.

The Markets Have Not Adequately Priced in the Cost of a Trade War

And I think the markets were relieved, and so we got a relief rally based on that good news.  Although I don't think the markets sufficiently priced in the cost of a hot trade war.  I know Donald Trump said, "Oh, trade wars are easy to win." Believe me, if they were easy to win, we would have waged one.  They're not easy to win.  I don't think the markets really discounted how bad it would have been had the cold war turned hot.

Peace Dividend

Nonetheless, the fact that it wasn't going to happen - I think most people would agree that a trade war would be bad, and if now there is going to be trade peace, well there is a peace dividend and so we got that today.

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Solid Gains Today in the Major Stock Market Averages

We had solid gains today in the major stock market averages; the DJIA putting in the largest percentage gain, just over 1.2% or 298 points.  I think at the highs, the Dow was up 370 and change, so a strong day, S&P, NASDAQ also up not quite as much calculated as percentages. The Russell 2000 was not up as much as the other averages but it is at a record high again today.  I think it's the Russell 2000 that ultimately could make the biggest percentage drop once stock market traders start to figure out what's actually going to happen.

A Lot of Saber Rattling and Not a Lot of Fencing

But in the meantime, today, they were celebrating the cease fire in the trade war.  Although, I don't think I should call it a cease fire because nobody actually fired a shot.  It has been more of a war of words than a real conventional battle, I mean there was basically a lot of saber rattling and not a lot of fencing.  But I think what happened today is that we callee a truce.  Both sides sheathed their sabers and agreed that there is not going to be a war.

The Markets Have Not Adequately Priced in the Cost of a Trade War

And I think the markets were relieved, and so we got a relief rally based on that good news.  Although I don't think the markets sufficiently priced in the cost of a hot trade war.  I know Donald Trump said, "Oh, trade wars are easy to win." Believe me, if they were easy to win, we would have waged one.  They're not easy to win.  I don't think the markets really discounted how bad it would have been had the cold war turned hot.

Peace Dividend

Nonetheless, the fact that it wasn't going to happen - I think most people would agree that a trade war would be bad, and if now there is going to be trade peace, well there is a peace dividend and so we got that today.

Las Vegas to Vancouver to Las Vegas

I'm recording today's podcast from my hotel room in Vancouver, Canada.  I'm up here for a couple of days at the 2018 Vancouver Resource Investment Conference and actually I left Las Vegas to come here; I am at the Las Vegas Money Show, I was there yesterday and I will be back again tomorrow for another talk, and on Thursday I am flying to Puerto Rico for another conference before heading back to Weston, Connecticut for the summer.

Debating Bonds with Gary Shilling

I was on a panel yesterday in Las Vegas at the Money Show and it was moderated by Mark Skousen, and one of the guys on the panel with me was Gary Shilling. And I've been arguing with Gary Shilling for a long time; there are plenty of YouTube videos of Shilling and myself over the years, arguing. He is basically a perma-bull when it comes to U.S. Treasuries. He is always bearish on the stock market and he's always bullish on the bond market.  For a while, he was right to be bullish on the bond market, because we had a huge bull market in bonds. But the bull market appears to be over, yet Gary Shilling is as bullish as I have ever seen him on the U.S. bond market. He is also bullish on the dollar; I guess if you are always bullish on the bond market you are also bullish in the dollar because bonds are dollar I.O.U.'s.

Shilling: China Would Never Sell U.S. Bonds

Now I think this is one of the times when Gary Shilling is dead wrong.  One if the points that he made that I challenged him on was when he started talking about China.  He said the Chinese would never sell their U.S. Treasuries because if they sold them, the prices would collapse, and they would be destroying their own portfolio; therefore they are not going to sell because they do not want to destroy the value of the assets they might want to sell.

China Can Just Let Their T-Bills Mature

I pointed out to Gary that the Chinese don't have to sell any Treasuries to get out of them.  They simply have to let them mature. Then it is not China who has to sell the Treasuries, but the U.S. Treasury who has to find a new buyer to replace China.  If China were dumb enough to own a lot of 30-year government bonds, then they would have to put those bonds on the market.  That would affect the price.  In fact, if you were China, and you owned a trillion dollars worth of 30-year bonds, and you did try to sell, the price would collapse.  China may be dumb, but they are not that dumb. They own a lot of T-bills, so they will mature in 30 days, 60 days, 90 days; they don't have to sell anything.

 

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Las Vegas to Vancouver to Las Vegas

I'm recording today's podcast from my hotel room in Vancouver, Canada.  I'm up here for a couple of days at the 2018 Vancouver Resource Investment Conference and actually I left Las Vegas to come here; I am at the Las Vegas Money Show, I was there yesterday and I will be back again tomorrow for another talk, and on Thursday I am flying to Puerto Rico for another conference before heading back to Weston, Connecticut for the summer.

Debating Bonds with Gary Shilling

I was on a panel yesterday in Las Vegas at the Money Show and it was moderated by Mark Skousen, and one of the guys on the panel with me was Gary Shilling. And I've been arguing with Gary Shilling for a long time; there are plenty of YouTube videos of Shilling and myself over the years, arguing. He is basically a perma-bull when it comes to U.S. Treasuries. He is always bearish on the stock market and he's always bullish on the bond market.  For a while, he was right to be bullish on the bond market, because we had a huge bull market in bonds. But the bull market appears to be over, yet Gary Shilling is as bullish as I have ever seen him on the U.S. bond market. He is also bullish on the dollar; I guess if you are always bullish on the bond market you are also bullish in the dollar because bonds are dollar I.O.U.'s.

Shilling: China Would Never Sell U.S. Bonds

Now I think this is one of the times when Gary Shilling is dead wrong.  One if the points that he made that I challenged him on was when he started talking about China.  He said the Chinese would never sell their U.S. Treasuries because if they sold them, the prices would collapse, and they would be destroying their own portfolio; therefore they are not going to sell because they do not want to destroy the value of the assets they might want to sell.

China Can Just Let Their T-Bills Mature

I pointed out to Gary that the Chinese don't have to sell any Treasuries to get out of them.  They simply have to let them mature. Then it is not China who has to sell the Treasuries, but the U.S. Treasury who has to find a new buyer to replace China.  If China were dumb enough to own a lot of 30-year government bonds, then they would have to put those bonds on the market.  That would affect the price.  In fact, if you were China, and you owned a trillion dollars worth of 30-year bonds, and you did try to sell, the price would collapse.  China may be dumb, but they are not that dumb. They own a lot of T-bills, so they will mature in 30 days, 60 days, 90 days; they don't have to sell anything.