The good news is that the "certainty" of "Liberation Day" (April 2) is almost upon us. The bad news is that April 2nd will provide absolutely no certainty about anything.
This is a process that will just go on and on and change 100 times - Just like the implementation of the Smoot Hawley Tariff Act than ran a course from April 1929 before being finalised in June 1930 and creating global carnage to trade for years thereafter
I am not saying that we are going into a Global Depression- I always refer to Mark Twain in saying that history does not repeat but it does rhyme.
The idea that President Trump will just turn into a "Teddy Bear" anytime soon is, I think, just misguided. He ran on this platform, and he is going to pursue it diligently and force the hand of the Fed (and they will eventually to be the balancing factor)
Why will the Fed capitulate? Because that is what they do. They talk a good book like Greenspan did and Bernanke did, and Yellen did and Jay is doing but, in the end, if the feedback loop continues as is likely to see further down turns in markets, the economy and employment they know full well that inflation will be the lesser issue. So does Trump so he will force their hand.
In the meantime, he will stress that today's pain is because of Government largesse, which needs to be weeded out of the system. The argument being better pain today than the disastrous route we are presently taking to tomorrow on the fiscal side.
None of us know if this will work. Time will tell us on that one. However, there are a few things we do know.
In that respect I am repeating the comments from last week's diary.
What rhymes with 1929
-We saw the Smoot Hawley Tariff act enacted over 1929- 1930 after a republican sweep of the presidency, house and senate in 1928. At this point the US economy was in very good shape and unemployment stood at 3%
- Back then Congress and senate had control over tariffs, but the US President had the power of Veto, and the process dragged on all the way into June 1930 after first being proposed in April-May 1929.
-The stock market (DJIA) peaked in August 1929 and fell sharply in Sept-November and bounced in April 1930 before the fall resumed. In Q2 1930 it had a bearish outside quarter (Higher high than the prior quarter, lower low and close below the prior quarter low). The fall continued with the bear market not finally ending until a bullish outside month at the lows in July 1932. That ended up being a high to low move of over 89%.
Most people's remembrance of history was the crash on 24th October 1929 (Black Thursday)
-History recognises that this backdrop was exacerbated by the inaction of the Fed leading to Ben Bernanke's famous comment to Milton Friedman on the occasion of his 90th birthday. "You're right, we did it. We're very sorry. But thanks to you, we won't do it again".
- The Smoot Hawley act brought down a Canadian prime minister (and in fact Government) in favour of a more adversarial conservative Govt.
Mark Carney will not make that mistake and is already talking tough improving the General election prospects of the liberal party (immeasurably). He has just called a general election for April 28th. However back then Canada suffered mightily in the tariff process and a lot of talk grew of reciprocal trade agreements (particularly as related to the old Bristish empire) as a result. As an aside it is interesting this week that President trump related speaking to Prime Minister Carney (not Governor) explicitly suggesting that he is a person he can do business with.
-Tariffs in themselves may or may not be inflationary but reciprocal tariffs as we saw then (tit-for-tat) depressed growth and thereby became massively deflationary
- A strong trade partner and good neighbour to the south saw the Government fall as a result of these tariffs only to be replaced by a government much less friendly with ultimately lasting repercussions- No, not Mexico- Cuba.
What rhymes with 1987
- In October 1987 we had Black Monday (19th October) when stocks plummeted with program trading being seen aa the main culprit. But that was more the effect than cause
-Economic growth had slowed while inflation was looking sticky
- The strong USD was putting pressure on US exports.
-For the first time the stock market and economy were sharply diverging with overall P/E's above 20 but forward estimates dropping. In the 5-years (Jul preceding October 1987 the DJIA more than tripled in value. In the last 5 years (July 2019 to July 2024) the SOX went from 1,500 to close to 6,000, the NDX (Feb 2020 to Feb 2025) from 8,100 to 22,200 and the S&P (Feb 2020-Feb 2025) from 2,850-6,150
-There was NO bearish outside quarter in either the S&P or DJIA in 1987.
- In Feb 1987 we had the Louvre Accord (A follow up to the Plaza Accord in 1985 which had somewhat successfully re-adjusted trade balances) which looked to stabilise the USD. Today's backdrop is probably closer to 1985 in that respect with a number of (misguided) ideas that we could see a "Mar A Lago accord"
-Monetary policy was contractionary at this period under Greenspan with the Fed funds rate at 7.25% in Sept 1987 with core PCE rising again and standing around 3.5% in Sept 1987.
-Most importantly and in contrast to 1929 the Fed moved rapidly to reduce interest rates and re-instill calm (but only after a crash). While the fall on black Monday was sharp (about 25%) the low of the high to low move (41%) was posted on Tuesday 20th October and the bull market resumed.
What rhymes with 2000
2000 came after a contagion. Not in this a medical contagion but a Financial Contagion. In 1998 we saw the Russia debt default, the Asia crisis, the failure of LTCM and the Mexico crisis (Then named the Tequila crisis). Once again in similar mode to 1987 the Fed cut rates quickly and again the situation stabilised. The fall in the S&P was "relatively modest" compared to 1929 and 1987 (about 22% high to low) and it bottomed out in October 1998 with the aid of 75 bp's of Fed easing into November.
That fall in 1998 did see a bearish outside quarter in the S&P in Q3,1998
The Fed then tightened rates again back to 6.5% and through 2000 indicated that their concerns on inflation were more important than the "irrational exuberance" in the Equity markets. Between Jan 1995 and the peak in Jan 2000 the S&P rose from 457 to 1553 and the NDX from 395 to 4800.
As a consequence, the Fed held the line on interest rates into January 2001 even after the S&P fell close to a bear market (down over 19%) and the NDX fell about 56%. So far, we have had just a 28% fall in the SOX from the high and just over a 10% fall in the S&P.
Ultimately, they were too late to the party and had to be really aggressive at that point to stabilise the equity markets. From Jan 2001 into May 2001 the Fed Funds rate dropped 250 bp's with 5 successive 50 bp's cuts. By July 2001 the S&P was now down 39% with the Fed cutting another 25 bp's in June. It is quite possible at that point that the worst was behind us and the Fed had gotten "ahead of the curve" again but then 9/11 hit and the World changed. By the time we got to October 2002 the NDX had fallen over 80% before a bullish outside month put the low in just as it had done with the DJIA in July 1932. The S&P also bottomed out that month after a high to low move of just over 50%.
So, the Fed will remain stubborn for now as they preach that the (seasonally distorted) inflation is transitory as is in their view the downturn in growth.
Simply translated- They are paralysed and do not know what to do. This means when they do react, they will both be behind the curve and aggressive with the first move. In my view that clearly looks likely to be a cut.
Is June too early? I don't think so, but they are still stubborn at the moment so for June to come in play we need to see a clear employment deterioration or much lower equity markets or both
Some of the numbers under the surface are warning of this on Employment but they clearly need to see the "whites of the eyes" in this reflected in NFP and the Employment rate and likely the JOLTS/ Number of unemployed works ratio below 1:1
For me that suggests little respite for the equity market right now.
I have talked on a number of occasions about now similar the chart on the SOX and also the NDX today are to what we saw in Sept-Oct 2000 . We also know that the 2000 charts had similarities with 1987 and 1987 had similarities with 1929
This is not 1929. This is not 1987. This is not 2000....BUT it sure is a "Mark Twain" triple play in terms of Rhyming"
And now we have a potential increased warning sign on the SOX, the S&P and the NDX
On all 3 indices, unless we see a sharp recovery on Monday, we will see bearish outside Quarters posted.
On the SOX it is a virtual "done deal" as only a recovery above 4,770 can avoid this and it closed Friday at 4,288.
On the S&P (cash) we will get it on a close under 5,674 (Friday closed at 5,584) and on the NDX below 19,622 (Friday close was 19,308)
These are not done deals until we get the Monday close but at the moment look very likely.
If we combine this with an "intransigent" Fed (for now) and I think a strong likelihood that Trump effectively holds the line on tariffs and that other countries retaliate and it is hard to think that this is anywhere near over yet and that we will need even lower levels (SPX at 5,000 or below) before the Fed even suggests blinking (or really bad employment numbers next week)
Add to this that both the Ukraine and middle east peace processes seem to be fraying at the edges, and you are left with disarray and uncertainty- Not something that financial markets, business or individuals like to see,
This does not augur well for the path of equity markets, the economy and Employment. Clearly Trump is trying to make our trading partners blink and for now that is just not happening. Also clear to me is that the fallback is that if they don't blink these actions will force the Fed to be the ones that crack.
That also likely puts back in play the likelihood of even lower US rates in the Bond market and a danger (still) of seeing US 2's 5's and 2's 10's flatten again. In a best-case scenario, I can see US rates falling down towards 3.90-3.95% (10 year) and a possibility that we again head towards the 3.60% lows seen in Sept 2024
While initially (Fed stubbornness) the 2-year yield "might" lag I think it can also revisit the 3.50-3.55% support area and IF that gives way possibly extend towards 3%. As a consequence, I still expect that a short-term bull flattener may give way to a strongly trending bull-steepener as it becomes increasingly obvious that the fed will have to capitulate.
On the USD I am in 2 minds and it is not likely a one-size fits all outcome. Places like Canada and Mexico are in the "eye of the storm" but Japan for example is in a different place. Is Europe really going to suck in capital? Tit for tat trade wars will clearly hurt them more...so not convinced. All this still a work in progress.
