Investors Remember William McChesney Martin, and Sell

Oct. 8, 2018
by Bob Adelmann

William McChesney Martin served as the ninth and the longest-running chairman of the Federal Reserve, from April 1951 to January 1970. He served under five presidents. But when people think of him, they remember him saying that:

Our purpose [at the Fed] is to lean against the winds of deflation or inflation, whichever way they are blowing.

The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.

It’s not known if he was trying to be funny or merely ironic. But history records that the last 12 economic U.S. expansions were doused when the Fed raised interest rates, ending the parties.

The current Fed chair, Jerome Powell, is in full party mode. Last week he made an astonishing four public appearances, serving as the Number One (well, Number Two) cheerleader for the Trump economy. He called the economy “remarkably positive,” “extraordinary,” and its outlook “particularly bright.”

Added Powell on Tuesday:

The economy is strong, unemployment is near five-year lows, and inflation is roughly at our two percent objective. The … outlook for forecasters inside and outside the Fed is for more of the same.

On Wednesday, payroll firm ADP announced that 230,000 non-farm jobs were added in September, followed almost immediately by the Institute for Supply Management (ISM)’s report that its non-manufacturing index jumped to the highest level seen since that index was created.

On Friday, the Department of Labor (DOL) reported that 134,000 jobs were created in September along with huge upward adjustments of its numbers in July and August. Put all together, for the year through September the U.S. economy has added 1.8 million new jobs.

This good news was just too good, and by the close of business on Friday the yield on the U.S. Government’s 10-year note had hit four year highs while the Dow Jones Industrial Average (DJIA) had sold off 500 points.

Bond investors who have been nervously watching interest rates on some of the U.S. Government’s Treasury securities move to their highest levels since April, 2011, began to sell off large portions of their holdings. Their panic was palpable: the 10-year U.S. Government bond is a proxy for mortgages supporting the housing market, and rising interest rates will slow that market even further. The Economic Cycle Research Institute reported on Thursday that its home price index “has made a downturn that it hasn’t made in a long time,” and both stock and bond investors could see the threat higher interest rates would pose on that struggling market.

On Friday, additional evidence of the U.S.’s remarkable economy came from the National Association of Manufacturers. It reported that nearly 93 percent of its 14,000 members are projecting further expansion of their businesses, one of the highest and most positive outlooks seen in the last 20 years.

The stock and bond markets continued their selloffs into the close on Friday.

This threat from the Fed is just one of many clouds beginning to gather over the Trump economy. Last Friday, this writer noted here:

There’s the new car “dealer doldrums indicator” that is clouding part of the sky. According to AutoNews, September auto sales year-over-year are off severely, many by double digits, among the nation’s biggest carmakers. Ford sales are off 11.5 percent, General Motors’ sales are off 15.8 percent, Fiat Chrysler’s sales are off 11.5 percent, Honda’s are off seven percent, Nissan’s are down 13.3 percent, while Toyota’s sales are down 10.4 percent.

Floyd Norris, long a financial correspondent for the New York Times, says that when that “dealer doldrums indicator … is down two percent or more, a recession is either under way or set to begin within a few months.”

As Investor’s Business Daily (IBD) editorialized, both stock and bond investors “knew that the growth-averse Fed will now almost certainly raise rates in December. Before [the sudden avalanche of good news about the economy] it was only considered a possibility.”

According to the IBD, the Fed has successfully stalled all 12 previous economic expansions, which in its opinion had gotten too “warm,” by raising interest rates, taking away the punch bowl, and stalling them. The Fed chair apparently thinks he can remove the punch bowl without anyone noticing. But partygoers see what is happening and are leaving the party early.

While the stock market will be open on Monday, Columbus Day, the bond market won’t be. So observers will have to wait until Tuesday to learn if concerns about the Fed’s intention to remove the punch bowl in December are going to derail the remarkable Trump economy and its record-setting stock market rally.

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Sources:

Background on William McChesney Martin

CNBC.com: Job growth slumps in September, but the unemployment rate hits the lowest level since 1969

The Washington Examiner: Manufacturing confidence at all-time high despite workforce shortage

McAlvanyIntelligenceAdvisor.com: In Baseball Lingo, Conor Lynch Thinks the U.S. Economy is in Its Final Innings

MarketWatch.com: Bond-market bloodbath likely to hit mortgage rates soon — another test for the housing market

Investor’s Business Daily: Will Fed Take Away The Punch Bowl?

Investor’s Business Daily: Memo To Fed: Don’t Prematurely End The Trump Boom

Bloomberg.com: Powell Heaps Trump-Like Praise on Economy as Rate Hikes Loom

Punch bowl quote from WM Martin

CNBC.com: ISM non-manufacturing index hits 61.6 in September, vs. 58 estimate

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