The Tyranny of the ten-year continues and it is obscuring so much good that it's almost obscene.
Today's session's become typical of what you can expect given the globalization that we've seen that makes the cup of U.S. capital flows runneth over.
It's so easy for foreigners to buy dollars, buy U.S. bonds and get yields that are far better than they are in their own country. That drives our rates down, which makes sense; Bonds trade on supply and demand. Right now, because of all the buyers overseas we are seeing a remarkable rush of buyers, something that is spooking both bond and stock investors, and while I get the former I do not understand the latter because lower rates are good for the economy, especially a consumer led economy and I think we need to go back to the basics to explain why.
First, if you watched CNBC you heard all day about central bank rate cuts and negative interest rates. You don't make anything on your money when you have negative interest rates.
So why not take your miserable, devalued currency, go buy a strong currency, the greenback, and then go shopping in the most liquid market in the world, U.S. Treasurys.
When you think of it like that you realize that our Treasurys are offering way too big a yield to stay as high as they are. So we are seeing almost insane buying of Treasurys to capture that relative bargain.
If you think back a week ago we were debating whether Fed Chief Powell should cut rates or not given how strong our economy is. There is all this gibberish about one and done - one small cut like he gave us, versus a rate cutting cycle.
All you need to know, and I mean it, all you need to know is rates are headed down and if Jerome Powell were to give a talk tonight at the Summit New Jersey Elks Club where he said that rates are still too high versus the rest of the world and how much deflation there is both here and globally, we might be up 1000 Dow points at the opening tomorrow. I'm a proud member; I gotta invite the guy. So then why did the stock market get hammered when rates plummeted in the morning?
Simple: there are plenty of people who get very scared when they see rates move quickly in either direction. It's unnerving and it usually means that's something is very wrong.
It's entirely possible that's the case.
But it is also possible that a demand shock to Treasurys is spooking people in the U.S. the wrong way.
We know why rates are going lower in other countries: there's not enough demand for money and these countries can't stimulate demand, especially with the big growth market that is China has stalled because of the trade war.
Our country does not have that problem. I don't like top down blather where commentators look at the ten year and surmise our nation's health. I don't trust the macro pundits at all as they are often out of touch with what's going on in the real world. As I listened to them endlessly all day and read them at night, I hear over and over again that global weakness will crush our economy and maybe already has. That's why rates are going down. It reflects a flight to quality, a looming financial catastrophe, and a recession to boot. A serious recession. Bonds, these wise men and women tell me are never wrong. My more positive view sickens these people, many of whom I think hate the president and seem to be rooting against the guy and, unlike him, think the Fed should do nothing.
I, frankly, do think the Fed has to lower rates but that's not my focus. I don't care for these macro thumbsuckers who probably can't even name one hundred of the S&P 500 names - maybe they think there are 600 companies in the 500. Me, I can name then and most of their closing prices because I live, breathe and eat this stuff.
This is not a new view for me. It dates from when I took endless macro courses in economics at Harvard, when I wasn't taking courses on the greatness of Marxism. So, in keeping with my empirical research, I checked in with JP Morgan (JPM) today, the largest bank in the country, to get a current read on our economy. I got lucky: CEO Jamie Dimon is on his annual bus tour - hey, stop trading, the guy rides a bus - and he's visiting Wilmington, Delaware, Washington, DC, Richmond, Raleigh-Durham, Charlotte and Nashville ,and he is seeing and hearing first hand about how strong the economy is.
JP Morgan's credit card growth is running at 8%. Consumer spending is growing at double digits, 11%. Charge-offs-bad loans continue to decline.
Credit card use in this country? Eight percent as measured by Visa (V) .
While overall GDP growth has slowed slightly JP Morgan tells me that consumer spending has fractionally STRENGHENED of late.
It isn't just JP Morgan. While the banks stocks are plummeting, all 25 top banks are seeing increases in consumer credit.
Mortgage applications last week increased 5.3% in part BECAUSE of the trade war with China, according to the Mortgage Bankers Association. The thirty year fixed fell to its lowest level since November 2016. And refinances rose 12%.
It isn't just JP Morgan. The top 25 banks are seeing 12% year over year growth in consumer credit.
Does that sound like a recession. Does a 3.7% unemployment rate, the lowest in 50 years mean anything? Is that a recession precursor?
Why do all of these stats matter? Because they are the fundament of the argument against the horrors the bond market is signaling.
Why do I care?
I care because of CVS Health (CVS) .
Okay, I am picking CVS,with 6200 stores and 300,000 associates is a microcosm - no pun intended - of what I care about.
Today CVS reported an incredibly good quarter, with sharply higher than expected demand at both the front and the back of the store, despite the looming threat of Amazon (AMZN) and the alleged pressure on drug prices. It's expanding its health offering and is crushing it with its managed care acquisition of Aetna. When I spoke to CEO Larry Merlo, one of my favorites from when he ripped out tobacco because, as he told me, how can CVS be a health company if it pushes cigarettes, he talked about a robust consumer who comes in for a health offering and goes out with front-of-the store merchandise. He's now offering in home delivery for an inexpensive subscription, something he says millennials like very much.
Both CVS with a ton of debt and the consumer, who often incurs interest charges when she shops, are benefiting from lower rates, something that can be very important because of all of the debt that CVS took down to buy Aetna. The cash flow here is massive.
But if you listened to the macro commentators, they may not know the difference between CBS (CBS) or CVS. They aren't going to suggest buying the stock of CVS even as it is likely that they shop there. They aren't going to put two and two together, marrying lower rates with lower prices at the pump, and figure out that's more money spent on health and beauty at CVS, a very weak category for competitor Amazon.
The tariffs? They aren't hurting CVS consumers at all. Business, which spans everything from home health care to groceries and diapers, is just strong in pretty much every aisle.
Now you can counter by saying "Jim did you see how poorly Disney (DIS) did?" Sure there was weakness there, not a perfect quarter. I think next one will be better though.
What really matters though as I could blind you to the positives by scaring you because of the tyranny of the ten year, or I could tell you that, keep your eyes open, have situational awareness and when you are waiting in line at a CVS think about buying the stock, too. Right here. Right now. Oops, I forgot that the New Zealand Central Bank just cut rates. Egads, India, too. Isn't that horrible? Aren't lower rates terrible?
Hmm, yes, unless you spend money, buy goods, create businesses, refinance loans and basically exist in America. In America, lower rates are nirvana both for the consumer in general and stocks, especially ones with decent dividends in particular.