The Bubble Bursts Next Week

Posted On Mar 9, 2017 By Dave Gonigam

  • Market maven says Fed will raise rates till “something breaks”…
  • … but what if “something breaks” sooner than anyone expects?
  • The Fed meeting next Wednesday: Shades of the 2000 dot-com disaster
  • Retail CEO comes clean about too much floor space
  • Pets + pot = profit possibilities
  • Why regulators removed 20,000 free college lectures from the web
  • Crude craters… the latest on the Philadelphia beverage tax fiasco… reader takes on “If it pleases the crown”… and more!

This seemingly ordinary item from the mainstream financial pages is way more ominous than it looks…

Jeffrey Gundlach oversees more than $101 billion in assets as CEO of DoubleLine. In recent years, the media have crowned him “the Bond King” — a title previously held by Bill Gross, before his messy departure from Pimco in 2014.

During an investor webcast on Tuesday, Gundlach weighed in on Federal Reserve policy. As we’ve pointed out in recent days, by now everyone expects the Fed to lift its benchmark fed funds rate during a meeting set for next Tuesday and Wednesday. So Gundlach looked beyond next week and said the Fed is embarking on a series of “old school” rate increases; rather than doing it in fits and starts, it will raise rates steadily… until “something breaks.”

That’s been the Fed’s usual MO during the post-World War II era: keep raising rates until something breaks — either in the economy, the stock market or both.

The most recent case in point: The Fed under Alan Greenspan began raising rates in June 2004… and kept raising them for more than two years until it became apparent the housing boom of that era was stalling out.

We just don’t remember that process anymore because the Fed has kept rates so low for so long.

As a reminder, during the Panic of 2008, the Ben Bernanke Fed declared a monetary state of emergency and imposed a near-zero fed funds rate — something it had never done before. And the Fed kept it near zero for seven years. The Fed under Janet Yellen then raised the rate a paltry quarter percentage point in December 2015… and another quarter percentage point in December 2016.

We’ve forgotten what “normal” is like, and Gundlach is telling us we’re returning to normal.

Just one problem: In all likelihood, the Fed will “break something” simply by doing what everyone expects it to do next Wednesday.

The interest rate increase it will approve next Wednesday will be the third one in the current rate-raising cycle that began under Yellen in December 2015.

The third increase in a cycle “has a special meaning for the market,” says our own David Stockman — Reagan’s first budget director and later a highflying investment banker. “It’s an indication the Fed is serious about cooling the economy and withdrawing its easy-money stimulus. As a result, stocks tend to crash.”

An economist named Edson Gould discovered this phenomenon in the 1970s. He even gave it a name — “three steps and a stumble.”

The thing is if you know how to play it right you can use this phenomenon to generate extraordinary gains. During the dot-com bust — touched off by a Fed “stumble” in May 2000 — it was possible to parlay the collapse of a company like DoubleClick into a 319% gain.

David has some other compelling examples you’ll want to check out. And then you’ll want to learn about his plan to trade the next Fed “stumble” for similar gains. But don’t wait long: The Fed makes its move next Wednesday, so it pays to move now. Here’s where to start.

The major U.S. stock indexes have arrested their slow decline as we write on this Thursday morning.

But even though everything is in the green, the Dow remains below 20,900 and the S&P 500 below 2,370.

Meanwhile, bonds continue to sell off, pushing rates higher. At last check, the yield on a 10-year Treasury note is 2.58% — very near its highs of mid-December. For the moment, gold is holding the line on $1,200 — the bid currently $1,204.

But the big story in market action is crude — down nearly $4 the last two days. Nothing like that’s happened in at least a year. A barrel of West Texas Intermediate now fetches $49.15.

Yesterday, the Energy Department issued a surprise in its inventory report; U.S. stockpiles grew 8.2 million barrels in a week, more than four times what the “expert consensus” was counting on. So much for the notion that OPEC’s production cuts would spur U.S. refiners to drain their storage tanks.

Noteworthy earnings reports this week include Urban Outfitters — not for the numbers as much as the alarming trend its CEO sees.

“The U.S. market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel,” said URBN CEO Richard Hayne. “Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce.”

Gee, what were we saying only last week? Oh, yes, the United States has three times more retail square footage per capita than any other Western country. Developers overbuilt in the 1990s and early 2000s. The 2008 crisis didn’t touch off a total wipeout… but it appears the “Amazon effect” is.

We love Wall Street’s take on Hayne’s remarks. “We were surprised by management’s bearish tone on the sector’s harsh realities,” said an analyst from RBC Capital Markets. Because God forbid a CEO get real, apparently…

Pot stocks are hot. Pet care is hot. What happens when you combine the two?

We Americans love our companion animals: The pet care market has exploded from a $46 billion-a-year business in 2009 to a $60 billion business in 2015 — the most recent figures available from the American Pet Products Association.

Little wonder that as legalized marijuana is spreading, so are the possibilities for veterinary use. The man you see in the tweet there is Michael Fasman of San Francisco. His 12-year-old Portuguese water dog named Hudson suffers from arthritis. She gets a daily dose of cannabis extract mixed with a bit of yogurt.

“We think it’s really lifted her spirits and made her a happier dog,” Fasman tells The Associated Press. “It’s not that she’s changed. She’s just back to her good old self.”

There’s little or no THC in these cannabis compounds for pets, so they’re not getting high. On the other hand, they’re highly illegal for veterinarians to dispense in most states. So for now, pet owners are left to experiment on their own.

Still, it’s hard to overlook the growth potential here. Who might be first to the post with a publicly traded company marketing to pet owners in states where cannabis is legal? We’re sure Ray Blanco will be on top of it when it happens — on top of all the other “monthly marijuana millionaire” possibilities out there.

And now a landmark in government: Heavy-handed regulations have just subtracted from the sum total of human knowledge.

For a long time, the University of California, Berkeley has posted more than 20,000 lectures online — free for anyone to watch or listen to on YouTube and iTunes U.

Then a while back, two employees from Gallaudet University — the school for the deaf in Washington, D.C. — filed a complaint with the Justice Department. Their problem? “Berkeley’s free online educational content was inaccessible to blind and deaf people because of a lack of captions, screen reader compatibility and other issues,” according to an account at Inside Higher Ed.

Last August, the DOJ found Berkeley was violating the Americans With Disabilities Act. Rather than expend the man-hours and money required to add closed-captioning to the videos, the lectures will be pulled down from public view starting next week. Henceforth, only University of California students, faculty and staff will have access.

We hope the regulators feel good about their accomplishments…

Speaking of regulation… “I know everyone is now focused on what is happening in D.C.,” writes a reader, “but a small story regarding the new ‘beverage tax’ in Philadelphia, initiated on Jan 1, 2017, deserves some attention.”

[We shared the story two weeks ago, but it’s worth a revisit now that Pepsi is letting go up to 100 people at its Philadelphia distribution plant.]

“It appears the mayor of Philadelphia and the city council were caught off guard when presented with the news that soda sales were down over 40% since the first of the year. They failed to foresee how adding a 51% tax on beverages would affect sales in the future, which most kids on the street would have been able to predict.

“The city added this tax on top of the existing sales tax of 6% state and 2% city, making the total tax bill on your soda purchase 59%. So if you picked up $10 worth of soda at the store, by the time you walked out, you would have forked over $15.90 for the soda.

“According to quotes attributed to the mayor of Philadelphia, he is puzzled by the sudden drop in sales and is not quite sure why it is happening. I would bet the struggling citizens of Philadelphia would be glad to help explain it to him.”

The 5: It’s worse than that. As we mentioned at the time, the mayor is blaming “corporate greed.”

“If it please the editors,” a reader writes after we took notice yesterday of the new internet meme “If it pleases the crown”…

“1. The construction is obviously subjunctive, so it should be ‘If it please the crown…’ Not that we can fight an established meme, no … But somewhere in Agora world there is an editor saying, “At last, a concurring vote!

“2. The question about why these petty tyrannies are exclusively local — I offer two thoughts.

“First, they wouldn’t be petty if they were not local.

“Second, more seriously, local always means fewer alert citizens to exercise oversight. You see this around the world — some of the most vile abuses of ordinary people are committed at the hands of local bureaucrats in China, the Middle East, in South Asia …

“In the U.S., on the local level, we see an oft-forgotten aspect of separation of powers. The local official can do as he pleases, and if I don’t like it, in a local setting I can more easily hold him up to public ridicule. We each have our roles, and nothing can stop either of us.

“Keep up the splendid work.”

The 5: According to the site Know Your Meme, the concept originated with a Twitter user named Kally Omally on Feb. 24…

Description: f20.jpg_large.jpeg

…and it took off from there.

Which raises a new question: Why now?

Another reader submits his own variation on the theme…

“If it pleases the POTUS . . .
Tell Otis to leave notice when the PRNC launches the big one.

“If it pleases the POTUS . . .
Tell Otis to leave notice when my insurance runs out.

“If it pleases the POTUS . . .
Tell Otis to leave notice when the budget gets balanced.

“If it pleases the POTUS . . .
Tell Otis to leave notice when the feds get heads.

“If it pleases Ms. Yellen . . .
Your money is funny, honey.

“If it pleases MGM . . .
Your Lion is fryin’ and slowly dyin’.”

The 5: Once again we see some readers have way too much time on their hands…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. We know we said we’d tackle the debt ceiling today. After all, it comes back into force next Wednesday. The president and Congress will have to reach some kind of agreement to raise the ceiling by this summer.

We promise we’ll get to it tomorrow or early next week. But in the meantime, we wish to draw your attention to the “other” big deal coming next Wednesday, and that’s the Federal Reserve meeting in Washington.

Nearly everyone expects the Fed to raise interest rates… and so do we. But almost no one expects the market washout that David Stockman says is sure to follow. Will you be ready?


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