Another sign of a coming market top may be that the ultra-rich in America have stopped spending – ValueWalk Premium
500-Pound Duck

Another sign of a coming market top may be that the ultra-rich in America have stopped spending

As Judge Judy continually shouts:  “If it walks like a duck and it quacks like a duck, it’s a duck.”

Q2 hedge fund letters, conference, scoops etc

The U.S. Gross Domestic Product (GDP) report is important.  The GDP is the total value of everything produced by all of the people and companies in a country.  If the number goes down too far, then the economy is imploding and investors better duck.

The recent U.S. GDP report, vastly simplified, says:

  • Companies have curtailed spending due to the global uncertainty, both politically and economically… business investment was at minus 0.6%
  • The consumer is helping to hold up the economy, via shopping and spending… they are having to  borrow money for over 50% of their purchases
  • Retail store profits are at the lowest level in over 10 years
  • Consumer spending is outpacing salary increases by 40%
  • Savings account funding is down dramatically
  • Disposable (consumer) Income in the U.S. is now lower than at any time during the past two decades (since 1999)
  • The monthly interest due on debt (borrowed money) by both consumers and corporations, is now higher than it was just prior to both the 2000 Tech Crash and the 2008 Financial Crash
  • Exports are down by a 5.2% annual rate
  • The Housing sector has contracted for the past 1.5 years… and home prices peaked in January of 2018 (yes, they already peaked)
  • Auto sales are on life-support
  • Small business employment has contracted for each of the past two months and this is a strong leading indicator for recessions
  • If you strip out government spending, GDP is close to 0%
  • So, said another way, the value of what we are producing is close to 0%

The U.S. Federal Reserve will be forced to continue with its interest rate cuts over the next 2 years.  To answer a question posed by a half dozen of MarketCycle’s clients:  Rates down = bonds up.  So, this makes holding extended-duration Treasury-bonds a safe portfolio hedge for the foreseeable future.

MARGIN levels:  Margin is the money that is borrowed by investors to use in investment accounts.  It is a highly dangerous practice and is mostly done by professionals and hedge funds.  Margin levels began to fall in January of 2018, almost 18 months ago.  This means that the professionals are cashing in their chips and selling their stocks to the people that always buy at the end of a bull market.  If you are not a client of MarketCycle, at least make sure that you are not one of these late-to-the-party people.  Margin levels falling (red line below) is a very bearish development and most analysts will miss it.  (Chart courtesy of Yardeni Research)

500-Pound Duck

The YIELD CURVE just inverted enough to indicate an upcoming recession. (Chart posted on August 25, 2019… Yield Curve in green/red and the S&P-500 shown as a black-dashed line.)  Please note that tops are not sudden events, they normally roll over during a year long period and give sufficient warning to the few that are willing to stop and look:

500-Pound Duck

U.S. Leading Economic Indicators (of economic recession) are on the cusp of turning negative while LEIs in much of the rest of the globe are already indicating recession (chart courtesy of Doug Short and Advisor Perspectives):

500-Pound Duck

Another sign of a coming market top may be that the ultra-rich in America have stopped spending (items courtesy of CNBC):

TRADE WAR?  China already sells over 80% of its manufactured goods to countries other than the United States.  It has recently lowered the price of its currency in order to promote more exports.  As I wrote about last year, China has a population of 1.5-Billion that is ready to consume internally; there are more actual buyers sitting in China itself than in the rest of the globe.  It has already found new non-U.S. supply markets for most of the products that it still imports.  And it is just a fact that the cost of the imposed tariffs on China will actually be paid by U.S. consumers rather than by China.

The stock market has gone up during the past week on news that the Trade War is working itself out, and it might go even a bit higher.  But in my opinion, while the U.S. might verbally claim victory (before the elections) and with perhaps China humbly (and strategically) agreeing, China will clearly be the actual winner.

From CNBC on Friday August 30, 2019:

500-Pound Duck

MARKET SUMMARY:  Risk remains very high.  In the short term, if all of the stars align, we might get a bounce and that potential market upside may see the S&P-500 touch 3050 or even 3075, which would be a little higher than the record high set in July.  Any bounce might be temporarily led by small-cap U.S. stocks and technology.  Bull markets usually die of ‘euphoria’ rather than boredom.  But even now and with the possibility of a short lived bounce, risk is most definitely skewed to the downside.

For the past few years, the economy has been propped up via corporate stock buybacks and by tapped out consumers; both are already coming to an end.  Now, the only thing left to prop up stocks is government spending.

At this advancing late-stage of a market cycle, inflation would normally be abundant.  But there is literally no inflation in sight and we are, in fact, in a rare deflationary environment.  This is really not good, especially in a world that contains $16-TRILLION of government bonds paying a negative yield (where a bond holder pays the government interest each month for the privilege of loaning the government money).  Even Switzerland has yields below zero%, so if you loan the Swiss Government money, you also must pay them interestIt’s crazy.  During the past three years, the U.S. government has increased the national debt by a whopping $10-TRILLION.  My little hand held calculator doesn’t even do trillions!  Just during the past month, the debt of the United States government has skyrocketed by almost $700,000,000,000.

Nine of the last ten recessions occurred when a Republican was in the White House. Arguably, President Jimmy Carter sacrificed his presidency in 1981 in order to put a halt to the runaway inflation of the late 1970s & very early 1980s (which was caused by the Vietnam War).  In my opinion, Carter knowingly sacrificed his second term in order to create a much needed recession that would finally break the back of inflation.  Now, President Trump will likely do anything possible to avert a recession this time around, especially since the current environment is deflationary rather than inflationary.  

If we go into a global recession with yields collapsing and Central Banks too accommodative, how will the world’s governments stimulate the global economy?  Yes, you guessed it: Government spending, as in “infrastructure spending.”   Even more debt.  Endless debt with ever growing interest payments due.

And almost all nations of the world go further into debt each second.  This global government debt ultimately comes due in about 15 years, when it will become too high to even pay the interest on the debt.  However, it is corporate debt that comes due first, possibly in 2020.

It is the extremely high current risk level that has prompted MarketCycle to put protection on client accounts a bit earlier than it normally would have, although we might temporarily and slightly lag the stock market if the market moves a bit higher from here.  Volatility is sure to remain very high and any downdrafts will still be big, so that will be good to sidestep.  MarketCycle went (correctly) bullish in the first days of April of 2009 and we are just now ‘almost’ turning bearish. Again, risk remains extremely high and it may be a good time to DUCK!

S&P-500, posted on August 29, 2019:

500-Pound Duck

What makes me question my current “high risk” investment thesis?  Too many people are suggesting a recession is on the near horizon.  Normally, roughly 95% of investors fail to see a recession until it is too late.  Does this suggest that something different may happen?  All I know right now is that risk levels are off the chart so MarketCycle is currently positioned for high-risk but not yet positioned for recession.  We recalculate real recession probabilities each week and actual calculated economic-recession chances 3 months out remains below 5%… still crazy low, but at this point, when this changes, it will change fast.

And this:  President Trump’s submitted 2020 budget includes:

  • Social Security to be cut by $25-Billion
  • Medicare to be cut by $845-Billion
  • Medicaid (for the poor) to be cut by $1.5-Trillion
  • Public school funding to be cut by $7-Billion

And remember:  The recently enacted tax cuts will expire in 2025, but only for those making under $600,000 per year in the United States.  If you make over $600,000 per year, then you get to keep your (much bigger) tax cut.

And don’t forget:  The U.S. deficit has increased by $1-Trillion during the past 6 weeks.

But, WHAT’S POSITIVE?  The reason that you are still alive is because you continually destroy the weak cells in your body and replace them with new healthy cells; this even applies to your bones.  Some entire organs are replaced with new young cells every few weeks.  The spleen that you have today will be re-created with 100% brand new cells by this time next month.  You will have a brand new heart within a few months.  And if you live a better lifestyle, then you will create better organs.  You are in a constant state of renewal, not decay.

Recessions are similar.  The ‘purpose’ of an economic recession is to purge the weak companies, the bad practices and the excesses of the prior bull market and then to create a better and healthier economy out of the ashes.  Recessions are not bad.  Recessions  re-new.  Recessions are necessary… and investment portfolios can easily be altered to acclimate to the repetitive market cycle of destruction and renewal.

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Article by Stephen Aust, MarketCycle Wealth Management

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