Blog | CB Investment Management

What’s Normal?

Everywhere you look the economic warning signs are overwhelmingly evident.
Atlanta Fed GDPNow Collapsing
Corporate earnings are also showing recession warning signals
The Credit Cycle is confirming corporate earnings weakness
“We’re approaching a period of vast credit default” Porter Stansberry
Fed has never raised rates before when these 2 indicators were below 50
What’s Normal? Not central bank policy
 Look beyond the current predicament
“I shouldn’t say I’m looking forward to leading a normal life, because I don’t know what normal is.”
Martina Navratilova
“In terms of what she is now referring to as the “normalization” of Federal Reserve interest rate policy, Fed Chair Janet Yellen proclaimed her mystery of central-planning faith yesterday, suggesting that it will be “a day we all are looking forward to.”
And US stocks proceeded to go straight down after she said that.
What does “normalization” mean? Is it normal for the head of the Federal Reserve to only answer pre-screened questions (like she did yesterday at The Economic Club of Washington) using cue cards? How about raising rates into a slow-down?”

Keith McCullough

Everywhere you look the economic warning signs are overwhelmingly evident.

While Fed Chair Yellen spoke confidently all week that the economy was doing so well they could begin to “normalize” interest rates, code words for a near term rate rise, the latest data continued to point in the opposite direction. As in recent weeks we continue to point out that most economic indicators suggest that raising rates right now might be a significant policy error. Most of the data, including the Fed’s own data, is far more typical of a gathering recession!


Atlanta Fed GDPNow Collapsing

Even the Fed’s own Atlanta branch, with one of the most accurate growth indicators is showing a sharp fall in Q4 GDP growth forecasts.

Evolution of Atlanta Fed GDPNow real GDP forecast

Almost certainly GDP growth for calendar year 2015 will come in below 2%, which is below calendar year 2014, which was below calendar year 2013. On this basis, how this can be characterized as good time to raise rates is incomprehensible.

Corporate earnings are also showing recession warning signals


According to Ellington Management:

“Corporations are now running out of steam in terms of their ability to generate earnings. As of Q2 2015, the year-over-year change in annual corporate earnings dropped to -$8.21 per share for the S&P 500 and to -$4.79 per share for the Russell 2000.The previous three times this metric fell that far into negative territory on the S&P 500 were Q1 1990, Q1 2001, and Q4 2007, coinciding with the start of each of the last three high yield default cycles. According to a recent article in The Economist, in the most recent quarter less than half of S&P 500 companies recorded increasing profit year-over-year.”

The Credit Cycle is confirming corporate earnings weakness.

Credit-ratings agency Standard & Poor’s shows in its latest report that its proprietary “distress ratio” hit a new high last month.

The distress ratio is a measure of stress in the high-yield corporate-bond market. It’s calculated by dividing the number of distressed securities by the total amount of high-yield debt outstanding. According to S&P, the ratio is highly predictive of future defaults.

The ratio increased to 20.1% in November, the highest level since September 2009, when it hit 23.5%. In other words, distress in the bond market has already reached levels not seen since the heart of the last financial crisis.






“We’re approaching a period of vast credit default” Porter Stansberry

Porter Stansberry is warnings of significant and widespread credit market trouble over the next two years.

Credit-market troubles are different than equity market troubles. Credit-market troubles are “contagious” and are amplified by leverage. Companies funded with equity go bankrupt and nobody notices. But when companies (or countries) funded with huge amounts of debt go bankrupt, it triggers a chain reaction. Institutions that would otherwise be sound can end up in default because they’ve invested in toxic debt.”






Fed has never raised rates before when these 2 indicators were below 50

This week we also had the manufacturing surveys, the PMI and ISM. Both surveys fell clearly into recession levels. The more widely used ISM survey fell below 50 as is shown below. Remarkably, it is below the level in 2012 when the Fed STIMULATED policy, by introducing its biggest QE program to date! Now at the same juncture it claims now is the time to tighten policy. The Fed has never before tightened policy when both the ISM and PMI were below 50.







What’s Normal? Not central bank policy

1015house of cardsOn the day that the European Central Bank (ECB) cut the deposit rate from negative 0.2 to negative 0.3 and extended QE almost indefinitely, European stocks fell over 2%!

Any detailed examination of the ECB’s policy record, shown in the link below, reveals a failed economic policy. Worse still it has created an even more fragile and unbalanced financial system.

This means that we are in the presence of a financial system that is at once more concentrated and consolidated (and thus increasingly ‘too big to fail’) but also more fragile, and as a result less likely to support the real economy in any meaningful way. In such a context, hoping to ‘encourage’ banks to lend through quantitative easing is, at best, delusional.”


The most aggressive example of QE policy is in Japan. The only thing you need to look at for the complete failure of policy there is that they are now experiencing their 4th recession in 5 years!











Now yellen is resolutely claiming policy success in the US.  No doubt claiming policy success is a requirement for central bankers, but given all the data we have shown this week, and every last few weeks, it looks like the worst possible time over the last several years for a rate rise.

Yellen does not seem to be noticing that the economic rocket is pointing in the wrong direction.














All the liquidity and financial privilege of the Fed/Wall Street zone seems to be focused on benefiting from the market manipulative power generated by the excess liquidity of policy. For real analysis you need to get outside that zone.

Keith McCullough explains why very little makes sense in terms of trying to rationalize central bank policy, which now increasingly resembles either pretense or delusion.

Needless to say this is a time of unprecedented uncertainty. Risk needs to be very low, but investment management also has to be highly alert, as the underlying fragility and instability of the financial system  continues to escalate.

Look beyond the current predicament

Interest Rate Cycle

The next financial crisis could manifest itself in the coming months. The time-line of monetary expansion reflected in the chart above is at risk of being terminated by events. If so, it will mark the end of current central bank monetary policies and state control of markets, as free markets reassert realistic pricing. Government bond yields will normalise, stock markets will fall, and banks will almost certainly fail. Supressed commodity prices will rise as banks, short through paper contracts, will be forced to close their positions. Credit default swaps, where the banks are collectively exposed to losses when interest rates rise, will be a further source of grief.

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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