The Bears Have it Right: Economy went Polar Opposite of Bullish Predictions

Monday, February 18, 2019
By Paul Martin

By David Haggith
February 17, 2019

Bears, like myself, picked the meat off market bulls throughout 2018. We scoffed at the start of the year when bulls concocted a narrative that said bears would starve because 2018 was going to be the year of “global synchronize growth.” We bears bawled that this was euphoric nonsense.

Global economies fell off a cliff as soon as the bulls’ narrative took hold, and all economies continued to falter for the entire year. The US was the only major economy to get a significant boost, due to absolutely massive tax cuts, which piddled away after two quarters (fourth quarter now estimated at 1.5%).

The more polar opposite from bulls the bears went, the more right they were

I’m going to make my first prediction for 2019; but, first, I’ll offer the following points as proof the bears were completely right for 2018:

Global cooling of all economies continued all the way into 2019, with IMF and central banks writing down their future estimates. It turned out to be the year of globally synchronized slowing. This happened largely due to the unwinding of the Fed’s balance sheet, and in spite of massive US tax cuts.
The Retail Apocalypse grew worse throughout 2018 just as bears said would be the case for the full year. Retail sales, originally reported by wishfully bulls who hoped December would finally make them right, turned out to have tanked miserably. Just like “globally synchronized growth,” holiday sales flopped on their head.
The bears boldly claimed 2018 would be the year of Carmageddon. US auto sales fell so badly that 2018 became the absolutely historic year in which multiple lines of US cars were discontinued for good, and several US auto factories were permanently closed. The country that brought mass manufacturing of cars to the world practically went out of the car business, though SUVs, vans and trucks continue.
The US housing market worsened one gradient at a time every single month after the first quarter of the year. Canadian, UK, and Australian housing markets have done about the same.
Bears said (cynically to the bovine mind) nearly 100% of tax money repatriated to the US along with money from massive corporate tax breaks would go into stock buybacks, and your most polar of bears right here said, vast as those buybacks would be, they still would not save either the US economy or the US stock market from becoming a train wreck in 2018. Neither would money fleeing out of other economies into the US. Testosterone-hot Bulls thought that was ludicrous because the tax cuts were enormous. However, the Fed’s unwind was just as enormous, so Ursa Major rose in ascendancy throughout the year, and Taurus fell into an icy winter. Emerging market stocks and developed markets all fell. Even the US stock market fell to pieces right at the start of the year and looked like a mess all year.
Nevertheless, a deafening chorus of bulls maintained through the year that the US stock market would end the year higher … even after the October surprise (for bulls, not bears) had begun. Bears, on the other hand, held their line and predicted US stocks would end lower than at the start of the year. Bears proved resoundingly correct as the dumbfounded bulls fell silent in the nights of December.
Bears, including yours truly, had claimed throughout the decade-long recovery that the Fed would never be able to unwind its balance sheet or return to normal interest rates without crashing its “fake” recovery. Yours truly even said 2018 would be the year this claim proved true. Stepping up to that proof, Jerome Powell volunteered himself for a face-plant in late December, which he reinforced again this January. Having valiantly promised in September that Fed rate increases would continue apace and balance-sheet reduction would continue on autopilot, Powell reversed himself less than three months after his balance-sheet reduction hit full speed. China also moved back to massive easing, and the ECB just indicated it may return to more easing, having only just stopped easing at the end of 2018. The Bank of Japan has simply said it will continue with its quantitative easing program. Central banks appear to be scrambling to stop the wreckage their tightening has already caused.
The dialogue about synchronized growth is ancient history, replaced predominantly at the end of 2018 by talk about the possibilities of global recession starting in 2019, which is where I’ve said for two years a bad 2018 will take us, and of late by talk of a “Goldilocks” economy that is just bad enough to re-engage the Fed in economic stimulus but not so bad as to kill the market. Good luck with the replacement narrative. It won’t hold any better than “globally synchronous growth” did last year.

I predict we are caught in an economic polar vortex

This particular polar bear said for the past couple of years the Fed will continue tightening right into a recession because that is what it does. Though the Fed has stopped raising its target interest for interbank lending and has said it may stop unwinding its balance sheet and, it continues unwinding its balance sheet, apparently still believing it can.

The yield curve has already twisted and contorted into portions that are flat or inverted. Nomura’s Charlie McElligot notes that steepening of the curve after inversion is the actual point at which we have almost always gone into recessions historically. My way of putting it is that “flattening of the yield curve cocks the gun; reducing interest rates again fires the gun.”

The Rest…HERE

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