Everybody in the market is asking themselves this question. I don’t know the answer, but I know what the overwhelming weight of the technical evidence says at this point. The major averages have broken down below their 200 day moving averages and seem to have taken up residence there. That’s bad. Trump is bullheaded about tariffs. That’s bad. Powell is bullheaded about the cost of money. That’s bad.
But when you look much beyond these facts, you see a much brighter picture. For instance, the selloff is based on the economy staging a major slowdown. If you look at the price of Dr, Copper (he has a Ph.D. in economics) you see nothing but a pathetic breakdown suggesting a recession soon. But this is based largely on the flap with Trump and China. We have the worst case scenario that both Trump and Powell can possibly present to the market. Trump is slapping tariffs on everything with China refusing to even talk, and Powell is continuing on his present course of over-aggressive tightening.
The only change that can be reasonably expected is China and Trump getting together, and Powell lightening up. Either one or both of these developments would end the selloff with a bang. I think it’s silly that market is perplexed by a 3% cost of money (10 yr) in a good economy when historically we have 6%-8% in a boom. 1995 saw near 8%, and that certainly wasn’t an economy killer or a market killer. The market may loose its fright over interest rates. It seems to me it’s just sticker shock from too many years of no interest rates at all.
Another thing that strongly indicates the economy isn’t going to get killed is the Baltic Dry Index. This tracks the cost of shipping dry bulk commodities. What is that? Think ore and all manner of components that are not wet, like oil, and are in the most raw form and take awhile to be made into product for sale. It must look ahead farther, and discounts economic facts and reacts sooner than the stock markets better than just about anything, If you look at its chart, you see that it has a strong habit of making major moves about 2 to 6 months in advance of the other market’s big moves. (click on images to view)
