A Love Letter to my Crow about my 2019 Predictions

By Randy Robertson [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Not-so-TruBlu97 was doing some of his typical cawing and provided the incentive for me, as we near the end of the year, to review the predictions I made for 2019, the most important one of which was locked within a Patron Post.

I was about to write a recap in my next article about my 2019 predictions anyway because another writer on Seeking Alpha repeatedly claimed (like my crow here) I predicted a stock market crash would happen earlier this year, which is not true.

My only prediction for the year for several months was written in an article about all the headwinds I believed would likely hit the US economy in 2019. That was my first Patron Post, written as a reward/thank-you to those who support this site at the rate of $5 a month or more. That said nothing about a stock market crash happening in 2019.

While the article laid out several things that I thought would be major themes in the year (and were), there was only one thing said with the certainty of a prediction. I think it is time now to bring that sole prediction out in the open for everyone since I’ve alluded back to it many times. (This is a chance for those who don’t have access to Patron Posts to catch the most important part of that one.)

First, the comment from my solitary crow:

Where is the market collapse?
funny looking market collapse

Since I haven’t predicted any such thing for 2019, this is my response:

I didn’t say the stock market would collapse this year. That was last fall when you lost in three months all the value you had built up in stocks during the first nine months of 2018 (but were too dishonest to admit it). I guess you still do not understand that the market is not the economy. Nowhere did I say the stock market would collapse this year BEFORE the economy goes into recession, and even then I didn’t say stocks would crash THIS YEAR, just stated in a few articles along the way that the recession that starts this year will likely crash stocks.

Now, if you wanted to ask “Where’s the recession,” that’s a fair question, since the third quarter came in with GDP growth at 1.9%, whereas recessions have to go negative. But you never ask fair questions because 1) you’re a troll and 2) you know I have answers for fair questions. I admit I thought (but never predicted) GDP growth would come in lower than that (around 1%) in the third quarter and would go negative in the fourth quarter, following the Repo crisis that ripped through the last couple of weeks of summer.

You may retort, “a Repo crisis” is not a recession, so let me go back to the start of the year to remind you of exactly what I said would start the recession so that I am only held accountable to what I actually said. [That would be back to the Patron Post I mentioned above.] Then we’ll have to see whether or not September’s obvious Repo crash does cause a recession — or if the Fed’s shockingly (to everyone) MASSIVE quarter-trillion-dollars-in-two-months intervention was enough to circumvent it. Just look at the scale and rate of their intervention compared to the rate at which the Fed tightened:

As you look at that, bear in mind that the Fed is continuing to add $60 billion more new money on top of that each month all the way to April, and that several times since September they’ve already had to increase what they said they would do, so may have to increase it more still. By the time we are done, based on the Fed’s schedule for its new QE, the Repo crash will have turned out to be so massive that the Fed will have flooded the economy with, AT LEAST, half a TRILLION dollars just to prevent the crisis from happening again and causing major banking/credit problems. Then add on top of that the impact of three interest-rate cuts in as many months. (And then consider that it may crash all over at the end of the year when year-end-repos are greater than on other day in the year, which is what the Fed greatly fears.)

So, you can’t tell me that, without this half-trillion-dollar intervention, the economy (which so far is STILL sinking in spite of it all!) would have weathered through without a recession. The only question remaining is whether the Fed managed to do what I said it would not manage to do, which is to respond fast enough and BIG enough to prevent the Repo-crash recession. (Admittedly, their response is bigger than I thought they would make, and they appear to be getting away with trying to claim it is “not QE,” though it is as large in scale as any QE we’ve ever seen and is now being done on a permanent basis via bonds and bank reserve accounts, just like QE.)

Here is what I predicted back in January in context, so that you can see my ONLY prediction at the start of the year, which was for much later in the year. In the middle of the year, I added one other prediction, which was that, AFTER a credit-crisis-related recession hit, the recession would take out the stock market … whenever that might be.

From my Patron Post on January 8, 2019:

A shuddering mysterious tremor hit the bond market during the New Year’s Eve festivities. Overnight bond repo yields skyrocketed from 2.5% to 6.125%, the sharpest increase since 2001. Some have suggested this was a foreshock of deep bank liquidity problems that are starting to surface. One securities trader noted that year-end funding pressure should have created a 50-basis-points rise, but this was a 350-basis-points rise. The spike left mouths hanging open. It suggested banks suddenly had to raise cold cash.

On the same day, the yield curve on one-year bonds over two-year bonds suddenly plunged dramatically and inverted, hitting its lowest level since 2008. The yield curve on ones over sevens also inverted. In fact, every yield curve up to 8-year bonds has inverted now. Inversion of the yield curve — especially if it hits the 10-year level — is considered the strongest evidence that a recession lurks on the near to medium event horizon.

The Fed’s Great Recovery Rewind tightens to breaking point: The ultimate downdraft for the entire global economy [for 2019] is the Fed’s balance-sheet unwind. If you get that, you’re ahead of the Fed because they clearly don’t, and neither do market analysts or most economists. The Great Rewind is far more significant than the Fed’s targeted interest rates, which really have just been playing catch up to what the zapping out of existence of fiat money is doing….

The stock market didn’t fall until the combined balance sheets of the Fed, ECB and BoJ began to decline in January [of 2018] and then again when the Fed reached full Rewind pitch in the fall [of 2018]. I’ve always said, this is where the big action will be; and because everyone is more focused on the Fed’s interest rate policy, the Rewind is likely to go too far. [Subsequent note: In March I added a prediction that the Fed, which had said it would continue balance-sheet reduction through September, would discover it had to end earlier than that and would end in the middle of summer. It did. It ended in July because it realized it could go no further. Even then, it had obviously gone WAY too far, as I said it would, and as many economists and the president were by then telling the Fed it had done.. Proof that it went to far came in September when nearly everyone acknowledged the repo crisis was due to over-tightening of bank reserves from the Fed’s balance-sheet reduction.]

We saw last January [2018] that the [stock] market plummeted when the Fed doubled down on the rate at which it is rewinding its recovery accomplishments, and then we saw the market immediately fall to pieces in the fall when the Fed finally amped up to full rewind velocity. This retraction of money from the monetary system affects some industries quite severely and not just stock prices or bond prices….

The value of stocks and bonds deteriorated enough in December that we are going to start seeing collateral feedback loops in markets where those assets were pledged as collateral. The drop in collateral value forces all kinds of snowballing cycles….

Credit crisis: There are so many ways in which a credit crisis is developing of such magnitude that I will be dedicating a full article soon to that topic. This developing headwind is felt particularly in the bond and collateral problems mentioned above. This change in how robust bank reserves are as their holdings in bonds devalue creates fear between banks, reducing their willingness to lend to each other, which tightens up the credit market for the whole economy because money stops moving as freely….

This is more in the realm of prediction than current headwind, but this gentle wind looks likely to whip up later in the year. The vital note here is that credit of every kind is tightening as central bank money supply shrinks. We’ve seen sudden spasms in bond rates.2019 Economic Headwinds Look Like Storm of the Century

The Repo crisis at the end of summer was, of course, a collateral-related problem and particularly a problem caused by diminished bank reserves as banks soaked up government bonds. Those three highlighted items are all issues that I spotlighted from the first hint of a repo shock at the end of 2018 as being the definitive issues that would team up all year in 2019 to cause a credit crisis “later in the year,” which would result in a recession. In a subsequent article, I tightened that up to say I thought this Repo-crisis related recession would start sometime in the summer, and the Repo crisis did hit in the last two weeks of summer.

I, frankly, don’t think I could have been more spot on in that Patron Post about what part of the economy would break down badly this year, about when it would break, and about exactly why it would break. IT’S NOW A HALF-A-TRILLION-DOLLAR PROBLEM! By anyone’s way of measuring financial problems, a sudden injection of money supply half the size of the US annual deficit is a massive problem.

But, then, I clouded it up a little when I reiterated that prediction in a public post later in February:

I believe the US will go back into recession as soon as the Fed actually reverses course on interest rates. I believe things will be generally bad enough by late spring or summer (for all the reasons I laid out in my Premium Post titled “2019 Economic Headwinds Look Like Storm of the Century“) that we’ll see the Fed actually stop QT and reverse interest rates. However, we will already be in a recession when they do, though it will not be officially declared that the US entered recession until the end of the year or start of 2020 because recessions are only declared a month after GDP has receded for two straight quarters.

The Bears Have it Right: Economy went Polar Opposite of Bullish Predictions

In that follow-up statement for the rest of my readers, I timed the recession that would be caused by a repo/credit crisis a little too soon. I thought the crisis would come together with the predicted reversal of interest rates, but the repo crisis didn’t actually happen until two months after the interest-rate cuts at the end of summer. That’s still summer, so technically the arrival of the repo crisis (if it does, in fact, turn out to be the start of a recession) is not out of line with this later statement, but that statement made things a little sloppy. All of that, however, was strictly regarding a recession, not a stock market crash.

As for a stock market crash, what I said was,

We may well see a second crash in US stocks because of this year’s recession, but whether we do or not is irrelevant now that we have already taken a trip with the bear.

Tick, Tick, Talk, 2019 Recession Coming

Hardly much of a prediction of a stock-market crash.

The only thing I actually worded as a “prediction” related to the stock market came in May, when I noted that the stock market was setting itself up for another collapse:

Prediction: The cub [December’s bear market] is coming out of hibernation and is about to grow up. The first quarter’s entirely unmerited, euphoric rise in stocks has paved the way for the second quarter’s volatility. Because China trade problems and all the other global problems have not been properly weighted by the market, which has chosen to believe a greater trade war will be averted, the market is poised for another collapse.

You Know Things are Falling When…

What I predicted there was volatility, and we certainly saw a lot of up-and-down in four months of sideways churning after that. I followed that prediction up with a statement that the market had set itself up to collapse, but I did not say when that would happen. Those who hadn’t seen my Patron Post about everything being tied to a repo-triggered recession later in the year might have thought I meant right away, but the original prediction made it clear that a crash, IF it happened, would be later in the year and caused by a credit crisis involving repos and deficient bank reserves. I also predicted in May that GDP would start to fall, which it has done in each quarter reported since I wrote that.

In another May article, I wrote,

Am I saying the market should crash because of tariffs? No. I’m saying the market may well crash all over again because of foolhardy greed like we saw in the dot-com bust. (And, of course, those who want to rationalize this will look for all the ways that now is different from then, but that misses the point that what is not different is the high dosage of denial reddening up the market’s veins.) When you see the market operating this much based on sheer hope in the face of clearly flagging earnings while ignoring every downside piece of news that comes along, even horrible economic news like we got Friday, that is the kind of fever that ends in even bigger crashes than the polar-bear plunge the market took in the final quarter of 2018.

Hopium Floats, and That’s How the Market got High on Friday

So, really I didn’t predict a stock-market crash at all for this year, but just said I thought one MAY come when the recession came (not before), and I alluded to that possibility that, if a stock-market crash did happen, it would not likely be what caused the recession but would happen because of the recession … as part of the recession. There was nothing in all of that about it happening this year, but just that it was setting itself up this year all over again for another crash.

I also said in a mid-year comment,

In the churn of that rough-and-tumble news environment and with limited trading during the summer, I think the market could easily crash due to economic reasons in the summer because it just doesn’t have enough fuel to power through to late September to get to feel the assurance of next Fed rate cut. HOWEVER, I can’t say with any certainty what the market will do OR WHEN (so I’m NOT predicting this summer as the timing for the market’s crash) because the market is so entirely irrational, due to being so entirely dependent now on the Fed, that it finds ways to cling to any hope it can find, particularly the peculiar hope of bad economic news that means we’re going back to easy money from the Fed, and the Fed will do all it can to talk the market off a ledge and keep it going with hot air. What I am fairly sure of (and am still predicting) is that the economy will keep deteriorating through the summer and that, at some point, the market will have to collapse to that reality because the stock market has never managed to rise during a recession. I doubt, however, most investors will realize we are in a recession when it first hits, but the reality of that recession will keep eating away from under the market. So, sorry, can’t give any solid answer to when the market catches down to the economy, but a fair degree of certainty still that we slip into recession this summer, but won’t know it until next year…. It may surprise me as to how long it [the market] can lug through a deteriorating economy (as you’ve said), and I wouldn’t actually be surprised by that (which is why I’m not putting a firm time on how long it takes the market to cave into the recession.

Stock Market Pigs Hold Powell Hostage to Deliver the Bacon

So, no prediction for a stock market crash this year. My actual predictions were all about the certainty of the Fed’s over tightening resulting in repo-related recession later in the year due bank reserves becoming too low and that the recession would be what eventually brings the market down again, but no statement that the market would come down this year just because the recession would start this year.

As for the repo crash being the start of a recession, that remains to be seen. The Fed has leaped in with a quarter-trillion-dollar response to date. We’ll see if that is enough to circumvent the severe banking problems they obviously suddenly fear and the recession I said those banking problems would cause. What is obviously clear, as I’ve stated for years we would see when the Fed finally tried to tighten is that it has no end game that works, so it would have to jump back into QE quickly. I’ve said they won’t be quick enough.

The question that remains to be seen, therefore, is whether its panicked leap back into QE with both feet came soon enough and is large enough. They stopped QT quicker than they thought they would (but right when I predicted they would) and leaped back in quickly with an extremely large response, so maybe they will narrowly avert the recession that otherwise would have started roaring like a blast furnace after September’s huge repo crash.

Once again, Crow, your inane criticism, attempting to slam me for things I never claimed, served as a useful foil. By demanding an answer to something I never predicted, you provided me with reason to explain what I actually did predict and to lay out all I actually did get right on that subject. Just another chance to clean up the stock-exchange floor with you.

Cleaning up after the stock market crash.
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