The Market Bull – May 16, 2019
Despite considerable geo-political uncertainty, mixed economic data and still no resolution to the trade war in sight, the major averages closed with large gains. Erasing all of the panic trade war losses and then some. As once again nothing matters.
Construction activity beat expectations in April as housing starts advanced 5.7% to 1.235 million units annualized. Permits increased .6% to 1.296 million units annualized. While the downward trend for this series seems to be leveling off, lower interest rates have yet to make a meaningful impression.
The Philadelphia Fed regional index nearly doubled in May with an 8.1-point gain to 16.5 despite mixed internal data. Price gains remain fairly high.
Following the Great Financial Crisis of 2007-2009 considerable debate on the efficacy of Quantitative Easing or QE had one side championing its effectiveness, whilst the other side saw it as just another bubble blowing and ultimately economically destabilizing mechanism. 10-Years later a lengthy study on the subject from Stephan Luck and Tom Zimmerman over at Liberty Street Economics came to the conclusion that QE in fact did lower interest rates and spurred considerable increases in mortgage and other types of lending. Indirectly this led to sharp gains in real estate prices for a lot of markets in the post bust period.
But the effects of QE were also shown to be uneven not only amongst banks themselves, but also geographically as well. The study went on to note that actual broad gains in economic activity outside of those areas directly affected by lower interest rates was limited at best. Which brings me to a recent piece in Reuters that interviewed DoubleLine Capital CEO Jeffrey Gundlach. In it Gundlach noted that all of the economic growth in the last 5-years was compliments of ballooning government debt, much of it used to fund various QE programs. There is actually a very strong argument to take the debt funded economic growth idea back considerably more than 5-years. Additionally, one can also make a very strong argument that what little income growth has been seen since the 80’s is attributable to monetary inflation from a rapidly expanding monetary, aka credit, base. Something that has fueled 3 massive economic booms and credit bubbles, the first two of which burst spectacularly ending in disaster in 2000-2003, the Dot Com bust and again from 2007-2009 the Great Financial Crisis. The current bubble makes the last two look positively quaint in comparison, dwarfing them both. While so far, so good, as nothing really bad has happened yet. The market gyrations of the last 8-months should serve as a warning.
Standard and Poors 500 Index closed at: 2,876.32 up 25.36
NASDAQ finished the day: 7,898.05 up 75.90
Gold ended trading at: $1,287.20 down $10.60