Here only selected quotes.
"Whether
it is a mild, or 'massive', recession will make little difference to
individuals as the net destruction of personal wealth will be just as damaging.
Such
is the nature of recessions on the financial markets."
“More
importantly, a decline of such magnitude will threaten to trigger ‘margin
calls’ which, as discussed previously, is the ‘time bomb’ waiting to
happen.
Here is the point. The ‘excuses’ driving the rally are just that. The election of President Trump has had no material effect
on the market outside of the liquidity injections which have exceeded $2
Trillion.
Importantly, on a weekly basis, the
market has pushed into the highest level of overbought conditions on record
since 2005. I have marked on the chart
below each previous peak above 80 which has correlated to a subsequent decline
in the near future.”
As I noted, the problem for
investors is not being able to tell whether the next correction will be just a
“correction” within an ongoing bull market advance, or something
materially worse. Unfortunately,
by the time most investors figure it out – it is generally far too late to do
anything meaningful about it.
“As shown below, price deviations from the 50-week moving average has
been important markers for the sustainability of an advance historically. Prices can only deviate so far from
their underlying moving average before a reversion will eventually occur. (You can’t have an ‘average’
unless price trades above and below the average during a given time frame.)”
However, in the short-term, the market trends are CLEARLY
bullish, very overbought, but nonetheless bullish.
As
such, our portfolios remain “long” on the equity side of the ledger…for
now.
No
Risk Of A Recession?
A Funny
Thing Happened On The Way To The Recession
The majority of
the analysis of economic data is short-term focused with prognostications
based on single data points. For example, let’s take a look at the data below
of real economic growth rates:
- January 1980: 1.43%
- July 1981: 4.39%
- July 1990: 1.73%
- March 2001: 2.30%
- December 2007: 1.87%
Each of the dates above shows the growth rate of the
economy immediately prior to the onset of a recession.
You will
remember that during the entirety of 2007, the majority of the media, analyst,
and economic community were proclaiming continued economic growth into the
foreseeable future as there was “no sign of recession.”
“We are now either in, or
about to be in, the worst recession since the ‘Great Depression.’”
The chart below
shows the S&P 500 index with recessions and when the National Bureau of
Economic Research dated the start of the recession.
There are three
lessons that should be learned from this:
- The economic “number” reported today will not be the same when it is revised in the future.
- The trend and deviation of the data are far more important than the number itself.
- “Record” highs and lows are records for a reason as they denote historical turning points in the data.
For example,
the level of jobless claims is one data series currently being touted as a
clear example of why there is “no recession” in sight. As shown below, there is little
argument that the data currently appears extremely “bullish” for
the economy.
However, if we
step back to a longer picture we find that such levels of jobless claims have historically noted the peak of economic
growth and warned of a pending recession.
This makes complete sense as “jobless
claims” fall to low levels when companies “hoard existing labor” to meet current levels
of demand. In
other words, companies reach a point of efficiency where they are no longer
terminating individuals to align production to aggregate demand. Therefore,
jobless claims naturally fall.
Furthermore, this widely touted economic and earnings “recovery,” as
witnessed by surging asset prices, should have certainly been met by
stronger activity from the majority of Americans, right?
But there is more to this story.
Less
Then Meets The Eye
The last two-quarters of economic
growth have stronger than the last two, but not breaking any records by any
measure. However,
these two stronger quarters of growth come at a time when oil prices are
recovering modestly from their crash boosting activity and earnings.
What’s going on here?
Economic cycles are only
sustainable for as long as excesses are being built. The
natural law of reversions, while they can be suspended by artificial
interventions, cannot be repealed.
More importantly, while
there is currently “no sign of recession,” what is going on with the main
driver of economic growth – the consumer?
The chart below shows the real
problem. Since the financial crisis, the average
American has not seen much of a recovery. Wages have remained stagnant,
real employment has been subdued and the actual cost of living (when accounting
for insurance, college, and taxes) has risen rather sharply.
The
net effect has been a struggle to maintain the current standard of
living which can be seen by the surge in credit as a percentage of the
economy.
There
has been a shift caused by the financial crisis, aging demographics, massive
monetary interventions and the structural change in employment which has skewed
the seasonal-adjustments in economic data. This makes every report from employment, retail sales, and
manufacturing appear more robust than they would be otherwise. This is a
problem mainstream analysis continues to overlook but will be used as an excuse
when it reverses.
Here is my point. While the call of
a “recession” may seem far-fetched based on today’s economic
data points, no one was calling for a recession in early 2000 or 2007
either. By the time the data is adjusted,
and the eventual recession is revealed, it won’t matter as the damage will have
already been done.
Is there
a recession currently? No.
Will
there be a recession in the not so distant future? Absolutely.
Whether it is a mild, or “massive,” recession
will make little difference to individuals as the net destruction of personal
wealth will be just as damaging. Such is the nature of recessions on the
financial markets.
Of
course, I am sure to be chastised for penning such thoughts just as I was in
2000 and again in 2007. I am okay with that, it
is a price I will gladly pay to keep my clients, and loyal readers, from being
burned at the stake, not
if, but when the next recession begins.
….
----
----
No hay comentarios:
Publicar un comentario