January was a month of extremes. The broader market managed a strong advance for the first month of 2019. The Dow Jones Industrial Average, Nasdaq and S&P 500 surged last month to notch their best monthly gains for January, in years – if not decades. On the other side of the spectrum, extreme weather patterns brought a blast of Arctic air that caused temperatures to plummet across the central and eastern U.S.
It was politics as usual and the partial U.S. government shutdown came to an end after 35 uncertain days. The January Federal Reserve meeting came and went with no change in rates but a notably dovish shift that emphasized the FOMC’s intention. The Fed stated that it would be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
There was some resolve at the end of January but plenty of questions still hung in the air.
The final month of 2018 had been a dismal one for Wall Street. The major stock indexes posted annual losses that were the worst since the deep tumble of 2008. Yet the turnaround that came after the year-end slump of 2018 saw the S&P 500 tack on 7.87% in January. The performance marked the index’s best advance since 1987.
BUBBLE READY TO BURST
David A. Stockman, former congressman and budget director for President Ronald Reagan, remembers 1987 very well. It was the year that Greenspan kicked off the “era of bubble finance.” This era simply kicked the can, or what Stockman calls “the day of reckoning,” down the road. Indeed, the balance sheet has gone from $200 billion to topping the trillion-dollar mark.
Stockman spent his early days in Washington D.C., engaging with several administrations of the White House and changes in Chairmanship at the Federal Reserve. He is quick to point out that the current “dysfunction in government” is worrisome and that there is “nothing but bad stuff ahead.”
Some things change while other things stay the same. In the case of borrowing by the federal government there have been no signs of a slowdown since Stockman first warned Americans about deficits during the Reagan years. While the debt-to-GDP ratio of the U.S. may not be at the very top of the list of worst offenders, it has cleared the 100% mark.
Stockman joined me at the NASDAQ MarketSite in New York to discuss his top concerns for the U.S. economy. He says that it’s not the trade deals or funding for a U.S.-Mexico border wall that are the most worrisome of issues. Instead, he remarks that Americans are living on borrowed time and the root of the problem lies in “bad” money.
Sept. 20, 2018, is indicated as an important date. He delves further into the significance of that day in another interview and in his latest book, Peak Trump. In case you’re wondering about Stockman’s prediction for the next stock market correction – listen closely to his answer and learn how he is planning for his grandchild’s financial future:
Interview segment with David Stockman on January 24, 2019: CLICK HERE.
THE BIG FREEZE
Winter usually brings colder and shorter days and plenty of inclement weather. While most of the country is thawing out from the recent bout of wintry weather, forecasts for slower economic growth continue to be issued by global institutions and investment houses.
The 2019 State of the Union did not address specific policy solutions to the problems that Trump says would endanger the national economy. Yet the immediate potential crises on the horizon include: the short-term government funding measure set to expire on Feb. 15 and the clock is ticking for the debt ceiling reinstatement on March 2.
In addition, the expiration of the U.S.-China trade tariff truce is March 1. U.S. officials will be heading to Beijing on Feb. 14-15 with the delegation comprised of Robert Lighthizer, Steven Mnuchin and David Malpass.
Whether March welcomes a balmy environment for market sentiment – time will deliver the outcome of the negotiations.
Stockman wonders how the nation will fare in the aftermath of these risk events and remarks that Americans will “reap the consequences of the money-printing spree … and massive borrowing by the public and private sectors.” Even cautious optimism isn’t convincing enough to drag gold lower.
As the equity markets recovered in January the bond market did not reflect risk-on behavior. At the same time spot gold extended gains last month and held above the $1,300 per ounce level. Gold has managed to hold onto multi-month highs as the Fed rate outlook hit the “pause” button.
In the short-term, the precious metal is caught in a tug-of-war between a stronger dollar and fundamental risks. At the very least the dovish Federal Reserve should provide support for gold prices.
According to the World Gold Council, holdings of gold ETFs last month marked their highest level since March 2013. The spotlight was shining on inflows into global gold ETFs that increased 72 tonnes in January. The WGC pointed out that net longs are below historical averages. In the beginning of February, the outflows of global gold ETFs were notable.
Amid rising gold prices and increased M&A activity among the mining majors, the outlook for the yellow metal may be brighter.
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