Colin McEnroe: Reviving the economy by dribbling dead cats
It feels risky to be writing about the markets here on Thursday morning because you won’t be reading this until Sunday.
For example, by the time you read this, President Donald Trump may very well have replaced Federal Reserve Chairman Jerome Powell with a German shepherd. It’s an open question as to whether that would restore or weaken confidence.
Speaking of dogs, did you know there’s a market-watching term called a “dead-cat bounce?” (Whenever I write about economics, there’s always a strong chance that everybody else already knows something I just figured out.)
A dead-cat bounce is a momentary uptick in something — a stock, a market index, the economy of an entire company — that was in decline and that will continue declining after the brief uptick. The entire economy of Argentina was described this morning as having experienced a dead-cat bounce, which cannot be good news to anyone except possibly Argentinian mice.
Here in the United States we have our own ominous phrase: “inverted yield curve.” This applies to bond markets. Bond markets are all about loans. Let’s imagine that I am going to lend you some money, and you have agreed to pay me back in two years. So I’m charging you 2.5 percent interest. But before we finalize the loan you tell me, “Wait. I can’t pay you back for 10 years.”
Obviously, I’m going to jack up the vig. I’m going to hit you with 4.5 percent interest, because maybe I want to buy a Tesla, but I can’t because you’ve got my dough. I mean, 10 years? We could be subjugated by robot overlords by then. You know what, jerkface? Make it 5 percent.
In an inverted bond curve, the opposite applies. I can’t get as much for lending money for 10 years as I can for lending money for two years. Whaaaaaaat? That’s because an unusually large number of players want to make that 10-year loan. Consequently, I have to stop calling you “jerkface,” and I have to live with terms more favorable to you, or you’ll go make a better deal with my cousin Morty.
Why do so many players suddenly want to make that 10-year loan? Because it’s less attractive to get their money back in two years. Because in two years, economic conditions may — and here I will use some technical jargon — really suck. The players are looking for some place safe to park their money. In the case of my cousin Morty, he’s so scared that he might even lend for 10 years at a rate so low it won’t cover the effects of inflation. His vig might wind up being 0 percent or negative .22 percent or something.
Come on, Morty! Sack up! You’re killing us, you dipstick.
Why are Morty and other bond analysts so worried? Because they smell a recession coming. This throws a chill into the stock market. Frankly, any idiot can buy a stock, but the people who make complex, locked-in decisions about borrowing and lending have to be smarter. So when the bond market sneezes, the stock market runs a 104-degree fever and starts coughing up green Linda Blair sputum.
Are you with me so far?
Everything I just said could explain Wednesday’s terrifying Acapulco cliff diver plunge of the stock market, but there are complicating factors, starting with: there’s a full-blown psychotic person in the White House.
President Trump has, for example, started referring to the chairman of the Fed, in tweets, as “clueless Jay Powell.” It’s difficult to evaluate the impact of that on the international markets because no previous president has said something so bat guano crazy.
Most presidents, in times of economic uncertainty, try to calm the roiling waters. On Thursday morning, what investors wanted, more than anything, was for Mom and Dad to stop fighting. (Mom and Dad being, in this instance, the United States and China.) So in between the thud of the markets closing on Wednesday and the beginning of Thursday trading, President Trump did manage to say a number of conciliatory things, even referring to China’s President Xi as “a great leader” and “a good man” and “the cute Beatle.”
And then, just as the markets were opening Thursday, Trump said on a radio interview that the China deal has “got to be a deal, frankly, on our terms.” That’s basically Mom throwing a table lamp at Dad.
The effect of this could be seen in real time in the demeanor of Lisa Abramowicz who was anchoring Bloomberg’s daily opening bell segment. Abramowicz, doing her part to signal a bounce-back by wearing a green dress, began to speak as if she were experiencing a cluster of small ischemic attacks, saying things like, “So we’re opening a note of optimis — no it’s gone — there are signs of a rally — wait — it’s down — but we’re seeing a slight rise because of Walmart’s — oh, it just dipped — can somebody get me a glass of water — is that a dead cat on the set?”
Abramowicz was not to blame. The markets had begun to whipsaw, uncertain about whether to believe the good news or the bad news. Trump had, for some reason, decided to “yes and” the recession indicators.
TV interviewer: “The bond markets are in an inverted yield curve.”
Trump: “Yes and I can see Professor Dumbledore standing right next to you. I think reality might be starting to unravel.”
The adviser Trump seems to be listening to these days is a guy named Peter Navarro. When the Wall Street Journal editorial page argued that the hardball tactics with China are paving the road to recession, Navarro went on Fox Business News and said the paper “doesn’t sound a lot different from the People’s Daily,” the official newspaper of the Communist Party in China.
The Wall Street Journal editorial page ... sounds like ... Chinese Communists.
Honey, hide the cats. It’s getting scary out there.
Colin McEnroe’s column appears every Sunday, his newsletter comes out every Thursday and you can hear his radio show every weekday on WNPR 90.5. Email him at firstname.lastname@example.org. Sign up for his newsletter at http://bit.ly/colinmcenroe.