Is it too late already? Did the Fed misjudge the world without all of its happy talk? Did their financial models betray them? Or is this all about how there will be no trade deal with China and the market misjudged the president's positive statements about the outcome of the talks?
My take: could be one or could be both. Let's get some things straight. There were many people who believed the president's comments that the talks with China went well. Why not? He put out Larry Kudlow, his chief economic adviser, and Steve Mnuchin, his Treasury secretary to tell us that. They made us feel confident that the Chinese really were ready to deal and would show good faith by buying a lot of machinery agricultural produce and oil and gas.
They let it be known that while there were 90 days to talk before the 10% tariffs go to 25%, which were supposed to be automatic come January, the negotiators just got an additional 90 days from when those tariffs were scheduled to go higher.
But then, like when the president was a judge on the Apprentice, we learned that Bob Lighthizer would be in charge of the negotiations and the 90 days tolling has already started! Two teams duking it out, only one can win.
Wait a second. It's like a mixture of the Apprentice and Howie Mandel's show that kicks in tomorrow night. Mnuchin and Kudlow want a deal because it would be good for business. Lighthizer and his doppelganger Peter Navarro, an assistant to the president, want No Deal, because they don't think this whole struggle is about trade at all -- it is about American hegemony and the desire to stop the funding of the Chinese desire to dominate world affairs by its appointed 2025 timeframe. That's been Navarro's fixation for ages and who can blame him? We don't put out plans that talk about world domination. It's an all-advised strategy that Navarro wants to have altered. Lighthizer wants the Chinese to stop stealing intellectual property. Neither man is talking about soybeans or liquefied natural gas.
The president seems to enjoy these face-offs. They have become his style. But they are not the style of the markets, which want certainty. Now we have maximum uncertainty and we see that it is time to sell. That's how managers view it. They also feel like they have been had. This is not a reality show. It is real life, with real jobs at stake, a real economy at stake, and while the president first got his name around via the show, it's more serious than going to the top floor and learning who has been fired. I think it is dawning on major league money managers that the president simply isn't serious enough to be considered dependable even as his base, which totally eludes them, loves it like they loved the show. A ratings bonanza.
Then there's the other side. The Fed. Many market participants like to take their cue from the multi-trillion dollar U.S. bond market. That market is flashing red, meaning it is showing that there isn't enough loan demand right now and yet the Federal Reserve is dead set on raising rates this month, something that could put the entire U.S. economy over the edge.
We've got an incredible dilemma here. We had banker after banker come out today and say things are just fine, not to worry. We have John Williams, the influential president of the Federal Reserve Bank of New York, saying that a strong economy warrants further rate hikes. We have lots of commentators talking to us about how everything's pretty strong and you shouldn't be thinking about what interest rates are saying ignore them. What you need to be worried about are higher wages and full employment. That's the worry.
Typically you do not get such a stark contrast: the Fed saying things are gangbusters with little risk.The interest rate barometer says be afraid, be very afraid. The bankers historically can't be relied on as they have been known to talk their book, meaning that they are preternaturally positive. Their loan books show, in many cases, record low defaults for consumers.
But their stocks are trading at or near historic lows versus their balance sheets and their earnings may be about to fall apart when they have to start paying you more for your deposits than they can charge for loans, which is about to occur if the Fed keeps raising rates.
How about the companies? The ones I talk to in manufacturing are getting adamant: the world is slowing. Their orders for the most part are slowing. They are getting concerned. No panic, but they are concerned.
What would make them sound the alarm? Almost all of the international companies -- again talking their books -- are against the tariffs and want to do business with China. They are not thinking politics, hegemony, world domination. They are thinking sales and profits.
Domestic companies are worried about housing prices -- they are headed down. They are worried about the stock market headed down. They are worried about new business formation and whether confidence is being shaken by the real-life Apprentice and Deal No Deal.
Me? I am concerned that the Fed just doesn't get how important its words are. It just needs to shut up. Talk about your region. Talk about business conditions in your states. But don't make sweeping declarations that confuse people.
Now I know that few on the Fed ever wants to say that economy could be less robust than they think when employment is so low. They are afraid they are going to look like fools. The Books, the old models, tell them that you have to raise rates aggressively when you have this low employment. They are deathly afraid of 3% wage growth, not like they are afraid of 3,000% CEO wage growth.
The Fed isn't thinking about how Toll Brothers (TOL) today said they had the lowest orders in four years. They aren't thinking about checkerless stores as Jeff Bezos of Amazon (AMZN) is. They aren't debating what the cloud does to white collar employment or what Ford (F) and GM (GM) are doing to blue collar employment. They are simply saying "Friday's employment number is going to be strong and we do not want to look like we are soft on wage inflation."
Now you could argue that when you see stocks of all the major and minor banks, all of the major and minor semiconductors and all the major and minor industrials going lower that it has to counter what the Fed is championing or, in the case of wages worried about.
The bottom line is this: the president's worrying people, the Fed is worrying people, and yet somehow they think they are being reassuring. They couldn't be more wrong.