Q4 2019 Market Update – “Connecting the Dots”

Many people have been asking me of late exactly WHAT is driving markets to ever more obscene highs on a daily basis?

Let’s start below and connect the dots to see what we come up with…

 

Ever since the “Overnight Repo Market Crisis” began in Mid-September last year, in what was supposed to be a “small & temporary glitch”, it has now morphed into an average of over $200 Billion of additional Liquidity pumped into the markets every week since the turn of the New Year. This will also be maintained indefinitely according to Jerome Powell…

Federal Reserve, Repos, T-Bills

Federal Reserve Outstanding Repos and T-Bill Holdings

 

“But Wait” I hear you say, “I thought that everything was wonderful in the world with the economy booming on all cylinders and markets at All-Time Highs?” “If everything is so hunky dory, then WHY would the Fed need to inject such enormous amounts of liquidity into the US Financial System and hence markets???” WHY indeed… What is it that we are NOT being told???

Right now the Fed is pumping more Liquidity into the system than it did during QE1, QE2 or QE3… And what is the effect it is having on the markets? See for yourself below.

S&P 500, Federal Reserve Balance Sheet, Weekly Change

Weekly change in Federal Reserve Balance Sheet Vs. S&P 500 Index

 

S&P 500, Federal Reserve Balance Sheet, Correlation

Federal Reserve Balance Sheet correlation to S&P 500 Index

 

In this next chart you can see the massive “about face” that Jerome Powell & Co performed in September last year when they started the “Repo Operations”. But don’t worry about this… “ Nothing to see here, move along…”

Fed Balance Sheet, Total Holdings Change

Federal Reserve Balnce Sheet Total Holdings change since September 2019

 

And here you can see the Total amount of “Global Central Bank” actions at work and the “stick save” that occurred in late 2018 as Central Banks around the world opened up the “Liquidity Spigots” once again…

Global Central Banks, Liquidity, S&P 500

Global Central Bank Liquidity correlation to S&P 500 Index.

 

So while all of this liquidity has been driving markets relentlessly higher, what has been happening in the actual economy?

Nationwide Manufacturing numbers have dropped back into contractionary levels again (below 50 is contraction). Look at how these current levels line up with past periods of Recession (Red Shaded areas).

ISM Manufacturing, Contraction

Institute for Supply Management – “Manufacturing Index”

 

Let’s see what happens when you look at the Index of Leading Economic Indicators. Can you see anything “familiar” occurring?

Conference Board LEI Index

Conference Board Leading Economic Indicators Index

 

And we are seeing the same trend change going on in Commercial & Industrial Loans in the chart below.

Commercial Loans, Industrial Loans

Total Commercial & Industrial Loans at All Commercial Banks

 

But it is not just in the Business arena where we are seeing this “slowing” (trend change) occur. We are seeing the same results in the Personal Credit arena where delinquencies on consumer loans and auto loans have already made substantial moves higher. Do you think the Blue Line (unemployment Rate) will follow the Red (Delinquency Rate) higher just like it has EVERY OTHER TIME?

Delinquencies, Consumer Loans, Unemployment

Delinquency Rate on Consumer Loans Vs the Unemployment Rate

 

Yes that Red Line will turn higher, especially when you consider that companies are already pulling back and the number of “Job Openings” has clearly rolled over and is starting to head the other way. What comes next? Job CUTS???

Job Openings Chart

Cyclical Monthly Change in Job Openings

 

One final “Recession Precursor” that you should also consider is not an “Inverted Yield Curve” (Blue Line below) but it is actually the “Un-inverting” (move back above zero) of the yield curve that has been the harbinger of what was yet to come. As you can see, ladies and gentlemen, that has already occurred…

Yield Inversion

US 3 month & 10 Year Bond Yield Spread. (Recessions are Red Shaded Areas)

 

So how does all of this come into play with regards to the Stock Market? Not much for stocks themselves as Central Bankers push prices higher, while Earnings Per Share for the S&P 500 actually dropped almost -5% last year.

S&P EPS, S&P 500 Index

S&P 500 Index Vs. S&P 500 Earnings Per Share

 

And here is the Massive Disconnect between the Dow Jones and its own Forward Earnings Per Share consensus…

DJIA, Dow EPS

Dow Jones Industrial Average Index Vs Dow Industrials Consesus Forward Earnings Per Share

 

So NO, markets have NOT been climbing higher on any sort of “Fundamental Basis”. It has been 100%+ accountable to “Multiple Expansion”. Which simply put, means higher prices for “No Good Reason”. (Unless you count Central Bank Liquidity that is).

S&P 500, Yardeni Fundamental Indicator

S&P 500 Index Vs Yardeni Fundamental Stock Market Indicator

 

But Hey, when has this sort of disconnect between Stock Market Prices and Economic Fundamentals EVER happened before right?

S&P 500, US Corporate Profits

S&P 500 Index Vs US Corporate Profits

 

Just keep listening to the Wall Street punditry about how it’s “Different This Time” and everything will be OK. The problem with that statement is because it IS different this time, markets have NEVER been so egregiously “Overvalued’ compared to any fundamental basis before…

S&P Price-to-sales

S&P 500 Price-to-Sales Ratio

 

But that shouldn’t matter, you should just keep buying stocks with both hands and feet because “the Central Bankers don’t see any bubbles in the markets”. What about never seen before RECORD Speculative Positioning? More importantly, what happened each time that one of these peaks were reached previously? “History never repeats but it does often Rhyme”…

Call Buy to Open, Speculative positioning, S&P 500

Record Speculative Positioning in the S&P 500 Index

 

So far we have just “Set the Table”. Now for the “Soup Du Jour”. DEBT…

Corporate Debt today is at it’s highest recorded levels since 1954. Look at the previous peaks and ask yourself “What happens next”?

Debt to GDP, Corporate Debt

Non-Financial Corporate Debt to GDP Ratio

 

But if Corporate Debt by itself is not enough for you, how about TOTAL DEBT of everything in the system? Hey, do you remember in 2008 how Debt was the biggest problem facing the world financial system???

Just look where we are today. As the Black Knight from Monty Python’s “Holy Grail” would say: “T’was but a mere flesh wound” in 2008…

Total System Leverage, S&P 500

Total System Leverage of All Debt

 

Please also consider that this is NOT just a “US Financial System Phenomenon”. Central Banks and Countries around the World have all been doing the same thing…

Global Central Bank Balance Sheets

Cummulative Global Central Bank Balance Sheets (Total Global Leverage)

 

So I think you have now been able to “Connect the Dots” for yourselves and you can see exactly what has been going on and precisely where we stand today…

Nasdaq Index

Nasdaq Index Analog – Current market Vs. 1999-2001

 

One final thought, “What has been going on with the Global Economy?” I hear you say…

***“The new head of the IMF, who took over from Christine Lagarde in November, warned that the global economy could soon find itself mired in a great depression.

During a speech at the Peterson Institute, IMF Chairwoman Kristalina Georgieva compared the contemporary global to the “roaring 20s” of the 20th century, a decade of cultural and financial excess that culminated in the great market crash of 1929.”

That’s not very optimistic now is it?

IMF Cuts Growth

IMF Cuts Predictions of Global Economic Growth for 2020 & 2021

 

So to wrap it all up now, here is an excerpt from someone who’s views I follow:

 

“When I was growing up, my father used to tell me I should “never take advice from anyone who hasn’t succeeded at what they are advising.” 

The most truth of that statement is found in the financial press, which consists mostly of people writing articles and giving advice on topics where they have little experience, and in general, have achieved no success.

The best example came last week in an email quoting:

“I read an article saying retirees shouldn’t change their strategies. ‘If you’ve got a thoughtful financial plan and a diversified investment portfolio, the general rule is to leave everything alone.’” 

This seems to be an entirely different approach to what you are suggesting. Also, since corrections can’t be predicted, it seems to make sense.”

One of the biggest reasons why investors consistently underperform over the long-term is due to flawed investment advice.”

  • Lance Roberts, RIA Pros

 

Indeed and I have been telling people since late 2014, that WHEN the next big downturn comes, we will be looking at a 1929 style crash and a 1930’s style Global Depression. (Seems like the new head of the IMF agrees with me, as does Morgan Stanley in a Dec ’18 report calling for an “L” shaped “recovery” after the next downturn). Just remember that the after crashing in 1929, it took 29 years of “Real Returns” (Adjusting for Inflation) just to get back to “Breakeven” as you can see below:

Real S&P 500 Total Return

History of the “Real S&P 500 Total Return” (S&P 500 Adjusted to account for Real World Inflation)

 

“Oh, but Cory” I hear you say. “That was so long ago and things have changed so much in the markets since then. That couldn’t possibly happen in this day and age could it?”

You betcha it can and if you don’t believe me, just ask the Japanese:

Nikkei 225, Japan

Historical Chart of Japan’s “Nikkei 225” Index

 

How can you avoid all of this?

Give me a call with any questions or concerns that you may have. We can get you set up with some downside “Loss Protection” for your investments.

https://hkwmanagement.com/portfolio-models/

That’s what we do!!!

 

So how have our Models been doing in these turbulent markets? Here are the Lifetime performance graphs of our Model Funds as of 1/24/20.

Conservative “Total Return Income” Model (Orange) [+6.36%] Vs. Broad US Markets – VLGI (Gray) [+1.84%]

Inception date 08/01/2017 – thru – 1/24/2020

Conservative “Total Return Income” Model

Conservative “Total Return Income” Model (Orange) [+6.36%] Vs. Broad US Markets – VLGI (Gray) [+1.84%]

 

Moderate “Global Opportunity” Model (Orange) [+3.68%] Vs. Broad US Markets – VLGI (Gray) [+1.84%]

Inception date 08/01/2017 – thru – 1/24/2020

Moderate “Global Opportunity” Model

Moderate “Global Opportunity” Model (Orange) [+3.68%] Vs. Broad US Markets – VLGI (Gray) [+1.84%]

 

Aggressive “100% US Equities” Model (Orange) [+10.11%] Vs. Broad US Markets – VLGI (Gray) [-5.34%]

Inception date 08/01/2018 – thru – 1/24/2020

Aggressive “100% US Equities” Model

Aggressive “100% US Equities” Model (Orange) [+10.11%] Vs. Broad US Markets – VLGI (Gray) [-5.34%]

 

Aggressive “100% International Equities” Model (Orange) [+3.29%] Vs. Broad US Markets – VLGI (Gray) [-5.34%]

Inception date 08/01/2018 – thru – 1/24/2020

Aggressive “100% International Equities” Model

Aggressive “100% International Equities” Model (Orange) [+3.29%] Vs. Broad US Markets – VLGI (Gray) [-5.34%]

 

Contrarian “Long/Short All Weather” Model (Orange) [-12.63%] Vs. Broad US Markets – VLGI (Gray) [+1.84%]

Inception date 08/01/2017 – thru – 1/24/2020

Contrarian “Long/Short All Weather” Model

Contrarian “Long/Short All Weather” Model (Orange) [-12.63%] Vs. Broad US Markets – VLGI (Gray) [+1.84%]

 

As you can see 4 of the 5 funds are still all outperforming the Broad US Markets (VLGI) over their respective “lifespans” since they were each started.

The last Long/Short Fund is specifically designed to benefit from the larger Macro Economic changes yet to come with poential commodity inflation along with the inevitable recession and market swoon/drop/crash (Pick your poison).

 

Please feel free to reach out to me with any questions or concerns.

 

Cory Reader

Chief Investment Officer

HK Wealth Management, Inc.

Southern California

213-509-6544

 

Email:  creader@hkwmanagement.com

Web:  www.hkwmanagement.com

 

Past performance does not guarantee future results.  All investments carry some degree of risk.

The Answer is:  YES!

This email is for discussion purposes only and does not constitute an acceptance of any offer, agreement or contract.

Posted in Market UpdateTagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,  |  Leave a comment

Leave a reply