The Twitter Market*

The Twitter Market

Stock markets go up and stock markets go down. America’s current bull market has been going up since 2009, its longest run ever. It’s been buoyed by consistently positive U.S. GDP growth, massive government spending that has created massive Federal budget deficits (see, for example, “It’s Congress’s Fault” in the July 15th TLR), unprecedented Federal Reserve money-printing (see, for example, “What is Money?” in the June 12th TLR and “A Weaker US Dollar?” in the August 26th TLR), and historically depressed interest rates (see “The Fabulous Federal Reserve” in the April 19th TLR) …, although recent market moves have had little to do with any of these. The most significant market mover of 2019 has been Twitter … and its master has been and continues to be President Trump. We’re living in a Twitter Market.

“So what?” you may say. The market is up over 15{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} and fundamentals are great! So what if the President’s negotiating tactics sometimes are taken negatively misinterpreted by plutocats Wall Street. America and Americans are prospering like never before and the stock market’s heights and its future promise are an accurate reflection of that prosperity. Moreover, a bit of twitching markets Twittering is harmless and in fact keeps traders – and America’s enemies – on their toes.


What does the economic future of America look like? And what possible effect can twitching markets Twittering having on the economic fundamentals driving that future (besides making market participants nervous)?

The media have highlighted the fact that the yield curve has inverted. That happens when the yield on the 2-year US Treasury note is higher than the yield on the 10-year US Treasury bond (the reasons for which were discussed in “Is This Time the Same?” in the August 21st TLR). A recession has followed every time the yield curve has inverted since WWII … with no exceptions. But many analysts correctly point out that unemployment is at its lowest rate since … well, almost forever. That’s a sign of a bubbling economy with the promise of solid GDP growth, true? Well, actually … no. In a normal business cycle, unemployment is at its very lowest in the early days of a recession …, which doesn’t mean that the U.S. is in the early days of a recession or that the unemployment number can’t go lower if GDP continues to grow. What it does mean is that the current low unemployment rate isn’t necessarily a sign of a robust U.S. economy or of a continuation of the current expansion. In fact, a number of pundits are pointing to a variety of economic fundamentals that indicate that the U.S. already is in recession. An ominous sign is that corporate insiders sold an average of $600 million of stock/day in August. The only other time that insider selling reached current levels was in 2006 and 2007, as a prelude to the Great Recession. From a macroeconomic perspective, a number of analysts are chilled by the combination of a breakdown in globalization, slowing global growth, rising tariff barriers, an escalating U.S.-China cold war, over $17 trillion of negative-yielding bonds (evidencing the impotence of Central Bank efforts to raise inflation and spur growth), and declining consumer confidence caused by rising economic, political and social uncertainty.

On the other hand, spending by both by government and consumers has been on a tear over the past few years. The Trump Administration’s December 2017 $1.5 trillion tax cut coupled with a government spending blitz has given the economy a strong boost. Most analysts believe that the resulting sugar high will continue to propel the economy for several more years. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in July, another positive sign. Jobs have grown for 106 consecutive months, the longest streak on record. And the University of Michigan’s consumer-sentiment index has remained above 90 for more than four years, a level not achieved since the mid-’90s.

Of necessity, a market must have two sides. As Harry Truman noted, economic advisers invariably advise “on the one hand” that the economy is booming and “on the other hand” that storm clouds are approaching. Economists can find support “on both hands,” which is of little help in making economic forecasts and planning for the future.

With an overabundance of data and data analytics, economists and the talking heads at news outlets can seek out and find support for any position they want to advocate, cherry-picking those items that suit their desired outcomes … and attract the larger audiences. There nevertheless is a consensus, based on the direction of revisions in GDP, nonfarm payrolls and other indexes, as well as job gains, housing starts, new home sales and consumer sentiment, that the U.S. economy is slowing. Both government and consumer spending are in a downward trend … and this is now weighing on manufacturing and business investment … which themselves contracted in the first half of 2019. There also is growing weakness in core commodity prices, industrial production, and surveys of CFOs as well as troubling mismatches between macroeconomic data. The U.S. economy is continuing to expand, though more and more slowly. President Trump understands this quite well.

Meanwhile, global deflationary forces are growing despite determined – and thus far unsuccessful – efforts by Central Bankers to push inflation towards a universal target of 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}/year (see “Deflation?” in the June 17th TLR). Inflation in the U.S. currently stands at 1.8{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} … and is declining. The Fed projects that it will reach its target in 2021 …, but then it previously projected that it would reach that target years ago. The reality is that globalization and technology have decimated – and are continuing to decimate – the working middle class. There are progressively fewer jobs in utilities, oil and gas fields, delivery services (witness Uber and Lyft) and especially retail (which Amazon and its competitors are rapidly replacing), thereby reducing wages and wage growth. Wage inflation appears unattainable. Although low-paying service jobs are plentiful, unionization continues to decline and workers lack the leverage to negotiate higher wages and better conditions. At the same time, a slowing global economy has led to weaker commodity prices (notably crude oil prices) and created a negative feedback loop by reducing jobs and economic activity that, in turn, results in weaker commodity prices and creates a further negative feedback loop. With that, even with the retreat from globalization there also is increasing global competition and greater government intervention that, among other things, is reducing drug prices and medical costs which have been the most significant component of inflation. The voting public is nervous, seeking comfort, and thirsty for news.

So the yield curve has inverted, economic fundamentals are rocky, and tariff barriers are rising. Ray Dalio recently urged people to study the economic and investing conditions of 1935-45 as “there is a lot to be learned by understanding the mechanics of what happened then … in order to understand the mechanics of what is happening now” (see “1937” in the March 11th TLR).

With bears and the bulls tugging the stock market in opposite directions, Twitter is precisely the right medium to deliver messages to the public. It has become the 21st Century’s megaphone. It has supplanted newspapers, magazines, radio, television and the internet … although all willingly serve as amplifiers of its message. News is a commodity that media require to maintain and grow their audiences and sell their wares. Sensationalism sells! President Trump’s Tweets provide the media with the controversial – and often-times sensational – grist they need to fill what otherwise would be dull, or even blank, front pages and repetitive, and perhaps even silent, newscasts. His mastery of the Twitter medium invites complimentary comparisons with Roosevelt’s and Hitler’s mastery of radio – and not because of any similarity in their messages, but rather because of the genius each evidenced in recognizing and becoming proficient in the cutting-edge communication technology of their respective eras …, delivering their messages to their audiences and successfully motivating their constituencies.

The one thing upon which virtually all economists agree is that the resilience of the U.S. economy is due to successful micromanagement by the Fed. World leaders accordingly have become accustomed to doing little or nothing and await the Fed coming to the rescue any time the economic expansion is threatened. The question is whether the Fed today has the tools as well as the wherewithal to do so. Interest rates are at historic lows, deficits are at historic highs, and there are clear signs that Central Bank efforts have been bearing diminishing returns. A number of economists now believe that the Fed’s tools have been exhausted and that any efforts it makes will, at best, have only a minimal impact.

President Trump disagrees. Strongly! He believes that the Fed has the power to right the U.S. economy and ensure the continuation of the current expansion at least through November 2020. That’s why his Twitter Storms have frequently focused on the Fed’s actions … and its inactions. “The Fed is the Central Bank of the United States, not the Central Bank of the World [applying the President’s ÔÇÿAmerica First’ philosophy to the Fed’s obligations] …. The Federal Reserve acted far too quickly [to lower interest rates], and now is very, very late…. The Fed has got to do something!” And, “…[Fed Chairman] Jay Powell made TWO enormous mistakes. 1. When he said ÔÇÿmid cycle adjustment.’ 2. We’re ÔÇÿdata dependent’. He did not do the right thing.” And, “We are winning, big time, against China…. Prices to us have not gone up, and in some cases, have come down. China is not our problem…. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut…. Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back.” And only last week, “[The Fed] loves watching our manufacturers struggle with their exports to the benefit of other parts of the world,” and “Our Federal Reserve cannot ÔÇÿmentally’ keep up with the competition – other countries. At the G-7 in France, all of the other leaders were giddy about how low their interest Costs have gone. Germany is actually ÔÇÿgetting paid’ to borrow money – ZERO INTEREST PLUS! No Clue Fed!” Finally, “Just a quick reminder: [The Fed] is flat-out wrong…. The Euro is dropping against the Dollar ÔÇÿlike crazy,’ giving them a big export and manufacturing advantage … and the Fed does NOTHING!” “We don’t have a Tariff problem…, we have a Fed problem. They don’t have a clue!”

These are in addition to President Trump’s tariff bombshells announcements, almost all of which have caught the markets unawares and caused major moves. The most recent ones included an early-morning increase in the escalating tariff war with China that roiled the markets and the ordering of U.S. companies doing business in China to find an “alternative.” Trump subsequently reversed himself in part on the tariff increases and stepped back, then forward, then back again on his “order” to American companies. One day the President condemns China and its President and the next day calls President Xi “a great leader & representing a great country.”

Whew! Those are a lot of Tweets. And each of them moved stock, bond and commodity markets … at times, significantly. Some of Trump’s opponents question not only the economic rationality rationale of those tweets and their effects on the markets, but their purpose, also wondering whether newscasters on Fox News and/or the President’s advisers might have had foreknowledge of the Tweets and traded on that knowledge (which would be perfectly legal – see “Insider Trading” in the July 10th TLR).

The media and Wall Street all-too-often react violently to Trump’s tirades against the Fed and his on-again, off-again trade war rhetoric with China (and other countries) … and the implications of both for the U.S. and global economies. For market participants, the art of trading and forecasting is to … have a Twitter account and follow it closely, second-by-second … and also to monitor Fox News and spot those one or two (or three or four) key stories that will catch the President’s attention. Contrary to traditional market analysis, analysts, investors and traders at times must exclude discount all previously essential extraneous and distracting fundamental and technical market data. Moreover, they must be quick on the trigger because, in a twitching market, nerves easily get jangled, volatility is exaggerated and moves can take on lives of their own. After all, this is a Twitter Market.

Finally (from a good friend)

*┬® Copyright 2019 by William Natbony. All rights reserved.

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