A sampling of some of the analysis I've made that has come to pass is or happening now...
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.
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.
The S&P 500 is hitting up against substantial resistance right now. It has been here before. And before. And before.
Right now the technical indicators tell us nothing except in hindsight. Eventually one will be right and whomever was by luck of the draw pointing to that indicator at this moment, they will get to claim to be prescient.
Here you can see that the S&P 500 Index 50 day moving average on a weekly basis has crossed below the 100 day moving average on a weekly basis. This generally indicates the start of a bearish trend. However, we have gotten a few up days since that cross over began. We must remember the old adage; "the market can stay irrational longer than you can stay solvent" when considering what to do in response.
Despite tepid economic growth, weak leading indicators and nearly non-existent inflation expectations, the Federal Reserve has been talking up the idea of another rate hike over the summer, maybe as soon as June. While many people waste their time trying to argue with a Fed that doesn't listen to them in any way, in fact, doesn't even know they exist, maybe a smarter use of time would be to consider exactly what is motivating the Fed to talk about raising rates.
I think there is a very simple explanation to why the Fed is looking to raise interest rates. In a day where the U.S. is importing less Middle Eastern oil, the incentive for Saudi Arabia and its allies to continue to pump petrodollars into the U.S. is diminished. If those nations should start selling U.S. Treasuries, then there would be a significant problem for the U.S. as it tries to finance around one-third of her debt the next couple years.
The Federal Reserve has spent the past year-and-a-half telling people that the super easy money was gone. Sure, easy money is still around, and more is probably coming by next year, but short of a crisis - which we'll have someday, probably in the 2020s - there isn't going to be super-easy money again for a long time. The quick take is that investors need to stop falling into the TINA - there is no alternative - trap that they have to be in stocks because interest rates are low. The Fed is telegraphing a strong dollar event. When it happens, you'll want cash to go out and buy stocks favored by government fiscal policy. Accumulate cash on all market strength - we're at around 50%.
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