As
the global market crisis continues, the danger posed by this crisis to the U.S.
economy continues to be underestimated by economists and central bankers. A report recently showed that U.S. job
openings surged in December and the number of American voluntarily quitting
work hit a nine-year high. According to
the report, this data points to “labor market strength despite a slowdown in
economic growth.”
Further
commenting on the supposedly improving labor market, Reuters stated: “The signs
of a robust jobs market could ease concerns about the health of the economy,
which were underscored by other reports on Feb. 9 showing a drop in small
business confidence in January to a two-year low and further declines in
wholesale inventories.”
It
was also noted that economists at the Federal Reserve look at these numbers to
determine their monetary policy. What
this translates to is that the Fed now has another incentive to continue
pursuing their tightening policy. This
is exactly the opposite of what the market needs. Indeed, the direction of Treasury yields
(below) is screaming to the Fed that looser money is what it desperately wants.
Reuters
quoted Joel Naroff, chief economist at Naroff Economic Advisors, as saying: “If
the labor market is tightening, can the economy really be faltering?” Allow me to answer his question with an
emphatic “yes!”
Most
economists continually underestimate the degree to which the stock market acts
as an extension of money supply. That’s
why the saying, “As goes the stock market, so goes the economy,” is so
true. The global bear market in equities
has already led to trillions of dollars in losses, and this will sooner or
later show up in the U.S. economic numbers.
Unfortunately, by the time it does it may be too late for the Fed to
take effective action to forestall recession.
One
would think by now that Fed Chair Yellen would have learned a lesson. Yet
the overall tenor of her recent comments suggests that she is completely
oblivious to the negative effects that higher interest rates are having on
equities. The fact that one FOMC voting member
recently implied that the Fed would likely raise rates four times this year
testifies to how oblivious the central bank is to the growing threat of a U.S.
economic slowdown.
Taking
the sum of the various comments from FOMC members, it would appear there is
confusion within the Fed. There is no clear consensus from
voting members on what tact the bank should take in the coming year in regard
to interest rate policy. A market-sensitive central banker like
Ben Bernanke would know what to do. He
would heed the market’s cry for liquidity, liquidity, and more liquidity.
By
contrast, Yellen appears to be frozen in the oncoming headlights of the global
crisis. This is not what the market wants to
see. In times of crisis the market wants
above all to have confidence in its policy makers. Until
it receives a calming message from the Fed, the uncertainty will likely
continue. And as veteran market analyst
James Dines used to say, “bear markets are characterized by the high state of
uncertainty.”
Meanwhile
stock analysts and economists are debating whether or not the global economic
crisis is sufficiently big enough to cause another 2008-style crash. The crisis hasn’t metastasized enough to
allow for a definitive answer yet, but here is a technical point worth
considering: The following graph shows the NYSE Composite Index (NYA) going
back over the last 10 years. I think
it’s noteworthy that the NYA is testing the 9,000 level which can be viewed as
a technical/psychological benchmark with origins in the 2007-2008 credit
crisis. Note that when the NYA first broke below the 9,000 level in January
2008 (circled), it served notice that crisis conditions were fully
underway. It was eventually followed by
a waterfall decline in the major averages.
The
significance of the 9,000 level in the NYA was further underscored in early
2013 when the runaway phase of the QE-fueled bull market kicked off. The NYA hesitated for a few weeks after
initially breaking above the 9,000 level in 2013, but after re-establishing
support above this level it was off to the races and the market barely looked
back from there until finally hitting the wall in late 2014.
History
doesn’t normally repeat by the letter, so if the NYA breaks under 9,000 this
time it won’t necessarily be followed by a similar cascade-style crash. However, a break under the 9,000 would
definitely be of concern and would indicate abnormal weakness. It could also invite panic selling, which
knows no bounds if it occurs within the context of a major financial or
economic crisis. I normally don’t put
great emphasis on chart levels, but in this case I believe we should closely
monitor the 9,000 level in the NYA. The bulls will likely do everything in
their power (limited though it may be right now) to protect the 9,000 level
from being violated in the near term.
