Welcome back to What’s Happening Now, featured each Monday by the Critical Signals Report.

Despite Storm Tracker headwinds blowing at 45 knots in Q2, asset classes fared well in the first half of 2019, as markets continued to melt-up from the December disaster on the wings of Fed-speak.

On a total return basis, the S&P 500 Index (SPX) was up 18.54%; the Nasdaq Index (CCMP) was up 21.34%; the iBoxx Liquid Investment Grade Index (IBOXIG) was up 11.94%; the iBoxx High Yield Index (IBOXHY) up 10.10%; and the Bloomberg Commodity Index was up as well, but by just 3.8%.

Not bad. So, what’s ahead?

Q2 2019 is over and done now – totally in the rearview mirror.

So, let’s look ahead and review what you need to know, and why, as we transition to the second half of 2019…

Let’s Start at the Top of the Food Chain – Economic Growth

It’s a new quarter, so let’s look ahead at GDP going forward, using Bloomberg Contributor Composites as a proxy on what’s expected by way of economic growth for various regions around the world.

To be blunt, it’s not a pretty picture, as you can see in the graph below. GDP growth figures in three of five major regions are forecast to decline (China, the U.S., and the Eurozone), and Japan is forecast to be flat.

No shocker there for our readers on Japan

Let’s all keep our eye on China, the big gorilla in the room, because their projected growth is double that of the U.S. and is expected to decline – which will be impactful. As for the U.S., we’re in the middle of the pack, neither leading nor lagging, and U.S. GDP is expected to decline as well.

But as we also know by now, markets largely move on debt and low rates manipulated by desperate yet powerful central banks (nod to fiat currency creators), not fundamentals like honest inflation data or GDP signaling.

In short, such sobering declines in GDP hardly seem to matter to Fed-driven addiction. Our coming Rigged to Fail report will make this all the clearer.

But check this out. The Emerging Markets as a group is coming in second when it comes to absolute growth, considerably higher than the U.S., the Eurozone, and Japan individually. Emerging Market growth is projected to rise from 2019 forward.

For longer-term investors, emerging markets deserve a spot in your portfolio. There are numerous choices when it comes to allocating to emerging markets, with well over 20 Emerging Market ETFs traded on U.S. Exchanges.

Here are two ETFs with the largest assets under management that you could consider: (1) Vanguard’s FTSE Emerging Market ETF (VWO, $63 billion), and (2) Blackrock’s iShares Core MSCI Emerging Market ETF (IEMG, $59b), both plotted here:

Clearly, these suggestions track each other (are highly correlated), so you don’t need both. We do suggest that you plot sector choices like this side-by-side, as we do here at Critical Signals Report, to spot anomalies.

Note this as well… performance in the Emerging Markets was quite good from 2016-2018; then they stumbled big time, but now they’re rising again – which makes sense – and their GDP growth is topping other regions.

Just one caveat… no allocation is a forever allocation (set it and forget it) here at Critical Signals Report. This looks like a fine allocation in market melt-ups, but when it comes to a market meltdown, beware – all global stocks are correlated so you would not want to descend into the abyss with these in your portfolio.

We’ll be letting you know when to let go of those longs, go to cash, or even get short these markets as the Critical Signals Report rolls out.

The Group of Twenty (G20)

Last weekend, world leaders traveled to the slowest-growing, major country in the world, Japan, for the Group of Twenty Conference in Osaka. D.C. talk about withdrawing from our 60-year alliance with Japan is not what Japan needs at the moment, per the GDP chart above, but let’s stick with the global theme.

The top news coming out of the weekend was the G20 Meeting between Presidents Trump and Xi (leaders of the world’s two biggest economies). It appears they may have struck a truce in their trade war after meeting on the sidelines.

One can expect the markets to rise on such headlines, as debt-addicted markets like ours rise on good news and ignore sobering, bad news.

What’s the G20? The G20 (or Group of Twenty) was founded in 1999 as an international forum for governments, central banks, heads of state, and finance ministers (from 19 countries + the European Union) to discuss policy as it relates to global financial stability. Collectively, the G20 accounts for some 80-90% of world GDP and trade.

The biggest takeaway: A truce, for now, and more breathing room as President Trump relented some on the Chinese tech giant Huawei and walked back imposing an additional $300 billion in additional tariffs.

There is much more distance to go in these negotiations, but this should be a near-term (and headline) tailwind for stocks while potentially clipping the wings of gold’s recent flight upwards.

Meanwhile, mostly ignored risks are still very high for the global economy. The Critical Signals Report Storm Tracker remains elevated, global growth is contracting, Purchasing Manager Indexes (PMIs) are sliding across regions, existing tariffs are triggering declines in trade and global growth.

One would expect such bearish trends to spark bearish markets, but it’s worth repeating that Fed-driven markets aren’t real markets, they are rigged markets.

That is precisely why central banks around the globe are easing, or are increasingly headed in that direction, preemptively. Markets are up in large part because today’s investors believe that lowering interest rates, along with other forms of quantitative easing (QE), will save the markets, even fuel a much higher melt-up.

We certainly think this is likely in the near-term, for all the reasons we’ve previously listed.

The real question, though, is what Mr. Market thinks, not Mr. Investor. Once a downward economic trend gets legs, it can be hard to stop, and this one is getting legs, with Storm Tracker blowing at gale force winds.

And remember this… not all recessions have been forestalled by lowering rates, too little, too late.

In these totally rigged markets, the best and smartest thing we can do now is track the conditions carefully and in real time, watching/preparing patiently for the thunder while simultaneously exploiting the temporary sunshine of Fed “stimulus.”

Take note as well, this is a global issue. Since the U.S. began to apply tariffs, Chinese imports from the U.S., Japan, South Korea, and Taiwan have declined. The takeaway is that this is not just a China/U.S. issue… It’s a global issue, and it’s getting stickier and stickier, month by month.

Back at Home in the Good-Old USA

Back home, the Fed is much in the news these days with a rate cut in the offing as early as July. Fed Chair Jerome Powell has been pretty clear … when downside risks increase (and they are), the Fed is poised to swoop in decisively to ward off any (market) decline.

Powell has said that ‘an ounce of prevention is worth a pound of cure’ – no risk of a policy error here since there’s no inflation to be seen, right? But the risks are up, so ‘take the pedal to the pre-emptive metal’ is the Fed’s intent.

Well … the fact of the matter is that Powell has no shame and a Pinocchio nose.

Since 2008, we’ve had much more than an “ounce” of prevention, we’ve had tons and tons and tons of it (that is trillions and trillions of it) and the “pound of cure” the Fed has handed us since the crisis of 2008 will eventually be the poison behind the next crisis.

Furthermore, and despite Powell’s lengthening nose, there is plenty of inflation already out there as the Fed runs out of both bullets and believability. Take a look below – the U.S. yield curve is in the ICU, very sick indeed.

That said, a Fed rate cut now (still billed as “preemptive” after over a decade of emergency measures masquerading as “recovery”) would straighten it out. A rate cut at the short-term side of the curve would make it look a whole lot less loopy and a lot more upward sloping to the right.

Source: Bloomberg
After all, if we drop the Fed Funds Rate by 50 basis points, short-term rates would indeed fall below medium- and long-term rates and hence the curve would look hunky-dory, right?

Wrong, because the curve would be looking good for the wrong reasons, namely responding to contrived stimulus. That curve would not be straightening itself out because demand is rising, but merely because the Fed is, as usual, engineering it. Again, it’s a rigged game.

And for those of you that are new to the importance of yield-curve indicators, I highly recommend a quick review here and here.

Cutting Rates Impacts the U.S. Dollar

Yet this is what the spoiled Wall Street nephews of the rich Uncle Fed expect, 50 basis points of rate cuts (by year-end) to boost more cheap borrowing (i.e., debt) while reducing inversion pressures on the yield curve, all of which could add fuel to that melt-up we’ve been discussing for months… at the near-term risk (we just have to add) of a less valuable, lower-yielding U.S. dollar.

Check out our time-box indicator on DXY – the U.S. Dollar Index below, which averages the exchange rates between the USD and major world currencies. As rates fall, the dollar falls.

Hmm… trading opportunity?

How to Short the U.S. Dollar? Pretty simple. You could buy the Investco DB U.S. Dollar Index Bearish Fund (UDN), an ETF designed to replicate being short the U.S. Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

Having said, investors beware. The U.S. dollar is subject to short-term spurts of risk-on and risk-off; for example, this Monday when yields rose (prices fell) in a risk-off mode as tariff discussions were bumped down the road. U.S. dollar weakness is a continuing story, but once that next recession hits, the U.S. dollar could easily soar as a safe-haven currency, as it did back in August 2008 when the S&P 500 Index plummeted.

U.S. Stock Market

Finally, this Monday, these three charts caught our eye as we continue to track the coming storm ahead…



Storm Tracker

Which brings us again to the Storm Tracker as we turn the corner toward July.

Our Storm Tracker eased ever so slightly to 42% coming into July, down from 45% in June, as adverse trends eased in financial conditions, global equities, and commodities.

Nonetheless, U.S. consumer confidence has now fallen to the lowest level since September 2017, with the Conference Board’s Consumer Confidence Index slipping from a reading of 134.1 to 121.5, for a 9.4% drop – which is a bunch – while economic data remains generally in decline.


Bottom Line

The first half of 2019 appears to be based upon hope– hope for lower interest rates and hope for resolution of the trade wars. “Hope,” however, is never a good investment plan; data is. Stick with the CSR Report. We’ll be telling you what to do, when and why. Sound good?

Q&A: Your Questions Answered

Lastly, we want you to know that we read and appreciate all of your comments. We’ve addressed other queries here, here, here, and here. Last week, like this week, we addressed more of your concerns and will do so again below.

Gold. Leon B., Edgar D., and Carl S. are all asking good questions about the increasingly popular topic of gold, which has been in a broad trading range of $1,100 to $1,900 for years, and recently has been trending up off a $1,350 technical floor likely to hold despite inevitable pullbacks coming off this weekend’s “truce” with China.

Let me begin by repeating my overall take on gold as a long-term investment and currency hedge against the inevitable decline of fiat-money/central bank currency poisons. Gold helps you protect the value of your savings, against which the Fed has otherwise been at war for years at these disgustingly low rate policies.

In other words, getting cute on the timing of gold pricing is not the real issue (for me), as gold is best thought of as flood insurance for a global market living on the banks of a rising river of fiat currencies. Regardless of near-term price moves, gold will pass $2,000 (and far beyond) in the coming years. Period.

That’s why I recommend the “Swiss Approach” (answering Tim’s question) of allocating 10%-15% to gold now, and then suggest you stop worrying about the price volatility. Remember: Gold is an insurance investment, not a short-term trade. Buy some, and then stop looking at its price moves, for that will only upset you in the short-term, especially as others mock you for playing it safe as they ride topping stock markets to higher near-term returns.

I anticipate a pullback to the $1,350 levels, but regardless, one should own gold sooner rather than later. IRA and 401(k)s (answering Anthony G.’s question) should give you access to such tickers as GLD or PHYS to articulate your gold allocations. As for “cash” or “cash equivalents” (which correspond to our Storm Tracker, now at 42 knots, and thus 42% cash), 401(k)s allow you to articulate this via money market allocations.

As for now, your apt questions about such things as commercial banks shorting precious metals are valid ones. Although the six-year breakout in gold pricing has (and will) lead to a ramp-up in commercial short positions on the precious metals (especially on silver, as per last week), the short positions remain well below their highest levels of exposure.

One key reason for this (entirely ignored by the Ken and Barbie financial media), is the recent move by the Bank of International Settlements (or “BIS”) to allow commercial banks to hold gold on their balance sheets with same current market value as cash. This massively important ruling (buried in a BIS white paper that “journalists” never read) gives banks a far greater incentive now to hold gold, which (at least for me) is a far greater explanation for gold’s recent rise than mere “trade tensions” as per the headlines, most of which are written by recent college graduates, not seasoned traders.

China, by the way, owns a lot of gold, and for good reason. It’s playing the long-term chess game, not the short-term “checkers” game. In the coming years, especially after the inevitable meltdown ( and despite crowd faith/fantasy that the Fed has magically found a way to outlaw recessions), currency regimes will be increasingly in flux, and increasingly backed by some stronger ratio to gold as the great central bank experiments – so heralded now – eventually fail in the coming years.

Bank Failures/Bail-Ins. After my recent report on Deutsche Bank’s Woes, some of you (Mike P., David S., and Carl S.) have been asking about the larger question of the health of banks and what to expect going forward, on everything from mortgage rates to “hiding cash under the bed, and the Baby-Boomer’s natural concern of loss avoidance as a key priority.”

As for loss avoidance, the key to maintaining what you currently have involves allocating both to cash (as per the Storm Tracker percentage above) and to currency hedges (as per the gold percentages, also above).

Most baby boomers should be less focused on chasing/trading admittedly rising tops, and more focused on conservatively protecting their current holdings, however tempting these market melt-ups may seem over the next year or more. (Think, again, of the little piggy who built the brick house rather than the straw house; he survived the big bad wolf…)

Sure, you can follow our signals and actively trade with a certain percentage of your monies, but the bulk of your portfolios need to be conservative and well signaled. We’ll be launching a series soon dedicated to our Critical Signals ReportAll-Weather Portfolio that will explain this in more detail.

As for bail-ins and banking risk, there’s no doubt banks are capable of doing dangerous things, as per 2008 or Deutsche Bank today. The Post 2008 Bail-In measures, designed to prevent another “near-death experience” with banks, has not entirely gone according to plan, as the world’s top five banks actually hold a greater percentage of banking assets today than they did in 2007.

A failure among any of these TBTF banks would therefore be catastrophic. Recent Bail-In regs require banks to raise their own debt so that they can “bail themselves out” (or “in”) with their own equity and bonds in the next crisis. Unfortunately, these banks are having a hard time raising the required debt to meet these requirements, especially in the E.U. This could lead to increasing consolidation among banks.

But does that mean banks will fail and your money lost with it? Should you literally hide your cash in a mattress? For now, this is unlikely, and sadly, even if a banking failure were to occur, we can expect further emergency measures from the central banks to “solve” this via more money printing – which is all the more reason to own currency hedges like Gold.

As for your questions about mortgage rates and reduced re-financing costs following in the wake of central bank rate cuts, it’s important to know that the Fed does not directly set the mortgage rates, just the Fed Funds Rate, which impacts short-term rates. Nevertheless, mortgage lenders watch the Fed carefully, not just monitoring the rates it sets, but whether it is loosening or tightening its balance sheet.

As for now, mortgage rates have fallen in 2019 and the re-fi rates should remain lower for now as well, which means do it (i.e. re-fi) while you can. Despite the real estate bubble that we are in, borrowers can at least hedge the risk of falling real estate prices down the road by exploiting the current low-rate euphoria.

China as “Trigger”? Finally, Peter T. gave a thoughtful analysis of China as a more likely “trigger” for the next global recession, commenting on its absurd levels of corporate defaults, poorly performing (and soon to be maturing) bonds, and off-the-books debt held by local governments in the provinces. In short, he argues that China has a lot more to lose than the U.S. in the current trade war.

Well, Peter, I frankly couldn’t agree with you more, and have written extensively on China as a Paper Tiger, which is clearly less likely to “win” a trade war than the U.S. In the long run, all the major players on the global stage are rotting in debt, but the U.S., as I’ve argued, will be the last to rot, not the first. This buys us time and rising markets, but not solutions, given how interconnected global markets are today. In any case, your points are well taken. Needless to say, Japan is equally on the verge of the absurd…

Stay Tuned

That’s it for this week’s report on What’s Happening Now. Stay tuned, though… more data this week will provide more clues, ranging from more Fed Speak on Monday and Tuesday, to updated data on Construction Spending, Purchasing Manager Indexes, initial jobless claims and employment.

In the meantime, be safe out there, and keep an eye on your inbox for more blunt-speak from the Critical Signals Report, wherein we’ll be rolling out our Rigged to Fail report as well as the first of our five-part series on the All-Weather Portfolio. We think you’re going to enjoy this.


Matt Piepenburg


4 responses to “What You Need to Know and Why…”

  1. Well thank you for the opportunity to reply to your very intuitive and solid reporting of the current financial situation , the world is in at present . Especially enjoy your feelings on Gold and Silver .

    Robert Howie

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