Welcome. The content below is free to the public. It might be worth what you are paying for it. Having studied economics and being in finance for over two decades, I have learned that only one thing is certain - that almost nothing is certain. As we endeavor to come up with our best analysis of the world around us, the opportunities and risks, we have to try to overcome a myriad of issues including our own ignorance, biases and emotions. What follows are my attempts to overcome those obstacles. Welcome to my view - publishing Monday and Friday afternoons.
For the past two years now that stock market has traded up and down within a range. Bulls keep talking about an impending breakout and bears keep talking about an impending breakdown. So far, we've gotten neither. What's next is anybody's guess.
What we do know is that economic fundamentals are not meaningfully improving and that asset prices are relatively high when put aside growth rates. Eventually, something has to give. Either the world economy gets meaningfully better or many asset prices fall.
For the past 70 years, America's fortunes and freedom have coincided with the wave of Baby Boomers who have dominated the global economic and political landscape. That era is coming to an end. It will be a slow, and hopefully happy ending, but regardless of happy or not, the Baby Boomer era is in its final innings.
I hate to be overtly negative, however, given the vast wave of anger, frustration and extremism that is accelerating around the globe, I am extremely cautious going into summer as an investor. In the wake of another terror attack, this time in Turkey, talking investment strategy seems small, however, that's what this website is for. Before I continue, my heartfelt condolences to everybody affected by the senseless violence that seems to be on the rise.
In recent post "Brexit was a Reaction to "Slow Growth Forever" I said that "The dramatic impacts of the emotional nature of surges in populism cannot be underestimated." While a populist ethic is healthy and desired for the survival of civilization, when emotions exceed pragmatism, we get a range of consequences, mostly bad. I am afraid we are closing in on something far more bad than what we have seen so far.
Larry Summers isn't the only one starting to recognize the "slow growth forever" scenario I have been describing the past couple years. Today on Bloomberg, HSBC bond manager Steven Major cited demographics, debt and the income gap saying that "I sincerely believe we have low rates for a very long time. Structural problems are outweighing any kind of cyclical bounce." For investors waiting for a resumption of the central bank induced bull market, that is bad news.
Today, we are seeing stock markets around the world continue to fall, albeit not as badly as Friday, but with more of a tone of recognition that Brexit might just have been a reaction to other negative economic factors, as I described in my last piece. The next reaction could be worse.
For new readers, we have been talking about a concept I have dubbed "slow growth forever" on MarketWatch and here at Fundamental Trends. The very simple premise is that perpetually low economic growth relative to the post WWII to 2007 period is not just possible, but is truly unavoidable in coming decades due to massive accumulated global debt and the dramatic aging demographics faced by most of the world.
Because most people don't understand or accept the notion that slow economic growth is a structural issue that cannot be "fixed" they seek to blame somebody. "Brexit" is a manifestation of the frustration over slow growth and the psychological impact of economic change. Those in the United Kingdom who voted to leave the European Union have now chosen who to assign blame to for their frustration and fear.
Other than a few Tweets (@KirkSpano), I did not have much to say about the U.K. referendum regarding staying or leaving the European Union as it approached. I thought the speculation was so overdone and ill-informed that I decided to ignore the hype and prepare for whatever outcome. Here at Fundamental Trends, subscribers have known to hold extra cash, for about half of their portfolios, for quite a while. The last time we put a big cash hoard to work was August 24th, 2015 when the stock market opened down about 10% for no apparent reason.
As of this writing, about midnight the night the BREXIT is becoming official, U.S. stock market futures are down about 5%. Globally, we are seeing bigger sell-offs. The Nikkei is down about 8%, FTSE 100 Futures are down about 8%, the Pound Sterling is getting crushed down about 10% and crude oil is down about 6%. U.S. Treasury yields are falling towards a record low and gold is soaring. Will markets get worse on a further flight to safety? I sure hope so.
This week, the S&P 500 did break 2100 which was a technical level I indicated it needed to hit and hold on the week to indicate a breakout to new highs. However, just as the index rose, the index pulled back with significance on Friday. Hugely interesting is that it nearly hit the tight support of 2085 that I also mentioned earlier in the week. So, on Friday, the S&P 500 indicated nothing other than we all need to wait until this week to see which way the market will break: to new highs or into a correction.
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