The Whole Soft-Landing Narrative is Changing

September 28, 2023

You’d almost think they [financial news media] never said any of the things they, in fact, did say as they now start lining up to report the same things I’ve been saying all year; and they do this without batting an eye over how that means all their recent forecasts are failing. Look at the changes in the narrative in today’s news, many of them from CNBC where I pulled many of those earlier quotes about inflation being largely beaten, a soft landing now virtually guaranteed, a new bull market in stocks, recession moved beyond the far horizon, and a resilient economy.

You know, as a reader here, what vain prognostications the financial media have been teasing us all with for months; so under the headings below that state what they’ve been telling us, look at what they are suddenly all saying in today’s news to see how the story has “turned on a dime”:

“Inflation has been largely beaten.”

First you heard the endless recitation of stories attempting to explain how the Fed nearly has inflation sacked and how it will be ready to start reducing interest rates by the end of this year. As the year wore on, the date moved ahead to 2024, but the reduction of rates remained as certain, even if a little further down the road. The mainstream financial media sounded like those end-of-the world date setters who keep pushing the world’s end off a little further as each prophesied end date fails to materialize. They never hold themselves to account.

Here is what various publications are saying today that were just telling us how inflation was almost beaten:

The benchmark 10-year Treasury yield rose Wednesday, reaching its highest level in more than 15 years, as traders weighed fears of persistent inflation and tighter monetary policy for longer than expected.

That comes as the Federal Reserve suggested last week that interest rates would go higher still and remain elevated for longer, prompting concerns among investors about what it could mean for the economy.

The benchmark 10-year Treasury yield hit its highest levels since 2007. The 2-year Treasury yield also climbed. Meanwhile, U.S. crude futures popped more than 3% to settle at $93.68 per barrel….

Inflation remains the big concern,” said Greg Bassuk, CEO of AXS Investments. “Investors have been very anxious about not only the elevated rate, but how that impacts companies with the higher borrowing costs.”

Remains” the big concern? Last week they were telling us it was fading as a concern.

Harsh reality of 'higher-for-longer' rates looms over US stocks

Ah, they’re all smart now:

“I think the market is telling us we should expect another hike or two, and the consensus is building higher for longer,” Ares Management CEO Michael Arougheti said in an interview with CNBC’s Leslie Picker….

Sure, but a week ago, it the brainless market was telling us exactly the opposite. Then the Fed spoke and then inflation started showing up in oil prices that broke the $90 level, etc., the housing market went all wonky, so the soft-landing narrative plunged into the dust.

DoubleLine Capital CEO Jeffrey Gundlach said odds for more rate hikes are higher now in light of the recent jump in oil prices, which could put upward pressure on inflation. JPMorgan Chase CEO Jamie Dimon also warned that interest rates could go up quite a bit further.

Yes, the very things I’ve said would stand the narrative on its head. Of course, there are still those whose sales goals require that they just never get it:

"We don’t believe that 'higher for longer' will prove true,” said Eric Kuby, chief investment officer at North Star Investment Management Corp.

Not too surprisingly, however, he doesn’t hold that view with much conviction anymore:

Still, he has been holding off on adding to the firm’s holdings of small-cap consumer stocks, wary there may be more market volatility ahead as investors digest higher rates and other factors, including elevated energy prices.

“The Fed’s soft landing is now virtually guaranteed.”

That was yesterday’s narrative from the wise stock-market gurus, but today’s is …

As the Federal Reserve’s hawkish stance boosts Treasury yields and slams stocks, some investors are preparing for more pain ahead.

US Yield Surge Helps Fed on Inflation, But Risks a Harder Landing

The latest surge in long-term interest rates to the highest levels in 16 years adds to a lengthening list of headwinds threatening to blow the US economy off a soft-landing course.

The increase in borrowing costs puts a nascent recovery in the housing market at risk and raises the hurdle for companies seeking to fund investment. It’s also sent shudders through US equities, trimming some of the wealth gains investors have enjoyed so far this year.

The rise in rates — 10-year Treasury yields are up over a percentage point since mid-May — is one of a series of shocks buffeting what’s been a surprisingly resilient US economy. Autoworkers are on strike, the government is on the verge of a shutdown and student loan payments are resuming after a pandemic pause. Oil prices are rising, growth in Europe is stagnating and China is struggling with a property market breakdown.

“It’s becoming a series of unfortunate events,” said Diane Swonk, the chief economist at KPMG LLP. “The soft landing is being jeopardized.”

The soft landing was always jeopardized, and it wasn’t even slightly hard to see those exact troubles building up. It is as if stock investors had blinders on, and someone suddenly ripped them off. The unblinded suddenly see what was staring them down all along, and they think that everyone is just like them and didn’t see any of that coming.

Of course, hope among the insane dies hard:

While Swonk expects the US to avoid a recessionary hard landing, she sees the expansion rate slowing sharply in the fourth quarter to a 1% annualized rate from some 4% in the current quarter, with risks to that forecast to the downside….

The move could take some of the steam out of an economy that Fed officials have feared was running too hot. The latest leg-up in yields has come after the central bank delivered a more hawkish message than many investors expected last week even as it kept interest rates unchanged….

Not everyone is so sanguine.

MacroPolicy Perspectives LLC founder Julia Coronado said the rise in long-term rates will hurt demand for housing and autos. And it will squeeze smaller and regional banks by further devaluing their holdings of loans and bonds that bear low rates.

Just one more thing I’ve been warning about repeatedly, which is most certainly coming.

We see a growing risk of an economic contraction due to the lagged effects of monetary policy — in addition to the United Auto Workers strike and a potential government shutdown on the horizon.”

Ah, so now the lag effect exists! Only a week or two ago, we were reading about how it doesn’t apply anymore.

Part of the climb in long-term yields is due to rising concern about large US budget deficits in the future, and the relative absence of buyers that used to be big purchasers of Treasuries, former Fed Governor Kevin Warsh said in a webinar last week.

No kidding! Debt suddenly matters when loans aren’t practically free anymore.

“We have entered a new bull market in stocks.”

Ahem!

The Dow Jones Industrial Average fell Wednesday, building on the steep losses from the previous session, as an uptick in Treasury yields and oil prices dented investor sentiment.

Remember we were told investor sentiment was soaring last week because consumer sentiment was high?

Those moves come after the S&P 500 on Tuesday fell below the key 4,300 level for the first time since June. The Dow also posted its biggest one-day loss since March, dropping more than 300 points to close below its 200-day moving average for the first time since May.

Stocks have come under pressure recently from rising rates and disappointing economic data….

The S&P 500 is down by 5% month to date, while the Dow is down more than 3%. The Nasdaq is the laggard of the three, losing more than 6% this month.

Following a 1.5% tumble on Tuesday, the S&P 500 is now down more than 7% from its July highsstung by sharp declines in shares of some of this year's biggest winners….

With policymakers projecting rates will remain around current levels until the end of 2024, some investors say more volatility could be in store. Higher yields on Treasuries - which are sensitive to interest rate expectations and seen as risk free because they are backed by the U.S. government - offer investment competition to stocks while raising the cost of borrowing for corporations and households.

"Investors are asking, ‘Why do I need to (take) equity risk when I get more returns than that just by holding a Treasury bill?’"

Of course that is the “stock-bond” pump I’ve talked about several times in action as attractive “no-risk” bond yields pump money out of the stock investment pool and into the bond pool.

The equity risk premium, which compares the attractiveness of stocks over risk-free government bonds, has been shrinking for most of 2023 and was last around its lowest levels in about 14 years

Sentiment could be turning…. The Nasdaq has started to move inversely with real rates again,” the bank’s analysts wrote. “If this continues, the risk is that equities have a long way to go to price-in rate sensitivity again, hence more downside.”

Investors see 2023 gain as a bear market bounce and expect a recession next year.

A majority of Wall Street investors haven’t taken solace in stocks’ 2023 gains, thinking the market could retreat further as risk of a recession creeps up….

More than 60% of respondents believe the stock market’s gain this year has just been a bear market bounce, seeing more trouble ahead.

“Worries of recession have moved beyond the far horizon.”

Old story out, new story in:

The 10-year Treasury yield up to 4.5% "changes the narrative for stocks," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, who is holding a higher-than-normal cash position.

"Investors are going to be even more worried that we could enter into a recession as the cost of borrowing is increasing and corporate margins will be squeezed," he said.

Asked about the probability of a recession, 41% of survey respondents said they expect one in the middle of 2024, and 23% said a downturn will arrive later than 12 months from now. Only 14% said they don’t expect a recession.

“The economy is resilient.”

Really?

With higher mortgage rates continuing to push many prospective buyers out of the market, US homebuilder sentiment slumped to a five-month low this month. Home-purchase mortgage applications are hovering near the lowest readings in decades in Mortgage Bankers Association data….

Given all the headwinds hitting the economy, there’s not that much more it can take without running the risk of tipping into a recession, according to Moody’s Analytics chief economist Mark Zandi.

The U.S. is weaker now than when we downgraded [the US credit rating] in 2011, former S&P ratings chairman says.

The U.S. is in a weaker position now than when S&P downgraded its sovereign credit rating in 2011, according to the former chairman of the agency’s sovereign rating committee….

Moody’s earlier this week warned that a government shutdown would harm the country’s credit, after Fitch downgraded the long-term U.S. sovereign credit rating by one notch in August on the back of the latest political standoff over raising the debt ceiling….

The U.S. fiscal position is now even weaker than it was back then.

The consumer is less resilient all of a sudden, too:

Consumer confidence slipped for the second straight month.

In closing

What we also saw today was further climbing in the price of oil that I have been saying is likely to continue to rise and drive inflation back up:

Crude oil prices moved higher today after the Energy Information Administration reported a crude oil inventory draw of 2.2 million barrels for the week to September 22.

This compared with an inventory draw of 2.1 million barrels for the previous week, which in turn followed a build of around 4 million barrels for the week before that….

The EIA report followed the American Petroleum Institute’s estimate, which showed a crude oil inventory draw of some 1.6 million barrels. More importantly, however, the API also estimated that stocks at Cushing, Oklahoma, had slipped to below 22 million barrels, which is on the brink of the minimum operating level for the hub.

That said, do not be surprised if there is some correction in the near future as the rise in prices has been pretty steep and may be overbought. Still that $100/barrel oil I’ve talked about is only $5 away as of today, so we could easily see that before there is some equilibrium adjustment.

Oil traders have been gobbling up futures in the six most traded crude and fuel contracts on that market for four weeks now. It's easy to see why: it was enough for Saudi Arabia and Russia to announce an extension of their 1.3-million-bpd combined supply cut, and traders stopped obsessing over demand in China.

By now, however, traders have placed so many bullish bets that, according to Reuters' market analyst John Kemp, oil prices are due for a correction.

Finally, let me point out a video below about the warning from major US banks of impending chaos for the reasons you’ve been reading all along here in The Daily Doom. The video quotes a few stock advisors that I think have been far more accurate about banks and especially stocks than most of the talking heads out there.

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The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.

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