Welcome back to What’s Happening Now, featured each Monday by Critical Signals Report, your weekly guide to what’s going on right now and why it matters to you… and your money.
In last Monday’s edition, we discussed the puzzling times we are in, pesky facts and yield curves, interest rates and trade wars, and the delicate balance between the two.
Then in Wednesday’s Is This Our Lehman Moment?, we talked about worsening market conditions and the next triggers that could spark a recession.
This week, we have even more information (technical- and fundamentals-based) at hand, as changing winds accelerate in a global race to the bottom when it comes to interest rates and currency devaluation.
Here’s the question: Does it take a turning point or a tipping point when it comes to foretelling the next recession? There is a distinction here.
Turning Point or Tipping Point?
According to Merriam-Webster, a turning point is a “point at which significant change occurs,” whereas a tipping point is “the critical point beyond which a significant and often unstoppable effect or change takes place.” See the difference? Tipping points are more critical than turning points.
And that’s the business we’ve chosen here at Critical Signals Report, to determine for you what’s critical and what’s not. The 2008 Lehman Moment, for example, was a critical tipping point for the Great Recession.
For clues today, let’s start by looking beneath the market’s surface with Storm Tracker®. Storm Tracker, for reference if you’re just joining, is described here in our five-part Storm Tracker Series.
In a nutshell, Storm Tracker is our one-of-a-kind diagnostic tool that tracks nearly 100 data points in multiple timeframes to detect storms ahead. You won’t find an online tool this robust, this telling, and this valuable to keeping your hard-earned money safe and growing. It’s as simple as that.
Veteran readers will recall that Storm Tracker has five parts, namely:
- Consensus Driven Data;
- Yield Curve Shapes;
- Market Trends;
- Leading Indicators, and;
- Our Proprietary Timing Indicator, Déjà Vu©.
Here’s where Storm Tracker is as we approach mid-August – it hasn’t budged much.
Looking into the Eye of Storm Tracker
Storm Tracker is blowing at a powerful 46 knots and has been bowing in the 40s for quite some time, registering a gale-force wind sufficient to turn upside down most passively (blindly) managed portfolios allocated to stocks and bonds based upon past results (never a good predictor of future performance).
Looking into the eye of Storm Tracker, the chart below indicates what’s looking good and what’s not…
And here’s what such data means when it comes to turning points and tipping points…
- Market consensus, yield curves, and market trend (the first three components) are at turning points because they either have crossed or are about to cross the 50% line marked on the chart above.
- Leading Indicators (the fourth component) tell of a fast-approaching tipping point (that point of no return) with a reading of 72% in the red zone.
- Yet the Déjà Vu indicator (the fifth component) is 99% green/positive. This critical timing indicator tells us just how fast the next recession is barreling down upon us. No turning point or tipping point here.
How can that be?
That’s because the markets have not yet discounted (absorbed) what’s going on beneath the surface.
Fortunately, we understand what’s going on, which means you understand what’s going on… and as for the pending recession, we’re not there yet.
Storm Tracker’s leading indicators indeed suggest a tipping point ahead and the signals from our consensus, yield curve, and market trend analysis are not far behind.
When these last indicators continue to deteriorate, Déjà Vu (our measure of stock market performance vs. interest rates) will simply collapse into the red – and that will be our tipping point, our clarion bell – loud and clear. Here’s what Déjà Vu looks like now:
(Let me pause for a moment here to ask each and every one of you if you would like to be informed, via Critical Signals Report, as to when our Déjà Vu indicator begins to meaningfully collapse… along with what you should do about it. Please reply in the comment box below; we’d like to hear from all of you. Thank you!)
Turning Points That Could Tip
Wolves howl before they strike, and when they strike, they do so silently. The same is true of recessionary turning points and tipping points.
The wolves (leading indicators) are currently howling as the pack (consensus, yield curves, and market trend) gather round, adding to the froth. But when they pounce, the wolves do so quietly, from the shadows, unnoticed by their prey.
Then it’s game over. The turning point tips.
As we journey into the fall, a notoriously difficult time for the markets, some of those wolves are coming out of their shadows, meeting up with the pack, getting ready to pounce. To name a few of the wolves gathering…
Negative-yielding debt has climbed dramatically in recent weeks and just hit the $15 trillion mark as politicians and central banks, with their economic backs to the wall, increasingly explore a multitude of desperate measures, like helicopter money and MMT (modern monetary theory), as yields to drop to the floor and conventional measures fail.
A Trade War to the Death
The trade war between the U.S. and China is escalating, pushing those leading indicators in Storm Tracker closer to a point of no return when it comes to avoiding the next recession. The longer the trade war continues to accelerate, the harder it will be to lower the recession risks that are rising across the world’s biggest economies.
A Deep Currency War
Accelerating trade disputes could herald in another tipping point, namely a currency war between the U.S. and China, as China (now reacting to being labeled a “currency manipulator”) day by day depreciates the peg of the Chinese yuan to the U.S. dollar.
A global trade war that morphs into a global currency war, which escalates into untold numbers of sanctions, could tip an already weak global economy into recession.
The more financial battles that are fought… and the more wins required to cleanse prior wounds, the harder it gets to pull off a victory or reverse a loss.
A Junk Bond Collapse
And let’s not forget those highly leveraged corporate debt markets, especially the high-yield or “junk” bond markets. These markets are not yet signaling trouble as interest rates decline and junky companies (“zombies”) continue to feast on cheap loans to stay their rocky course.
But once those rates reverse and start to climb or lending liquidity tightens, that’s a tipping point worth monitoring. We’ll be doing that for you.
Passive Investors Race for the Exits
Over recent years, passive investors favoring stocks and bonds have piled some $74 trillion into passive investment vehicles like passively managed ETFs. Active investing is out.
Last year, the U.S. had a whopping 33% of managed money allocated to passive investing, with Asia as high as 31%. These investors are all crammed into the same theater, and the moment the market yells “fire!” the exit door will be the size of a mouse hole, and folks will be burned.
Nor will today’s paucity of active managers have enough ammo to arrest the downfall. Frankly, the big players and sell-side insiders will be on TV peddling retail investors to stay “all-in” to push up prices so that the “smart money” can get out at a profit and leave retail investors in danger.
The big players are going to cash and defensive positions; most retail investors, however, are all-in and (as happens time and again) will get slaughtered.
We’re Not There Yet and the Contrarians May Be Gearing Up
On this gloomy pathway south, we do need to pause and consider a contrarian outcome to all of this.
Once the markets feel like they have gone too far, once that yield curve further inverts, once interest rate on the U.S. 10-year Treasury hit 1% and the stock market corrects by 10% or more, with no clear support in place, all of this could reverse temporarily to the upside.
Looking into the abyss, the U.S. and China (in a single tweet) could halt the trade war; the U.S. Fed could deploy the desperate monetary measures described above.
In other words, as extremes widen quickly (as in the spread charted below between the S&P 500 Index and U.S. Treasury 10-year Yields), they can snap back with a vengeance and catch those on the wrong side of the trade flat-footed as markets melt-up that last time.
In our next column mid-week, we’ll be offering a look at what you can expect as August gives way to September. Keep your eye on your inbox, as this column will examine the key forces that will have an immediate impact on your money as we head into the historically rocky months of autumn.
Q&A: Your Questions Answered
Once again, we’ve had a wave of questions wash in this week and will address only a couple below. We plan to address questions in separate columns, as space for these Monday issues is simply too limited to tackle all the queries coming in.
Note as well that readers can go to our home page and type in keywords (“cash,” “gold,” “bond markets,” “real estate,” etc.) at the top of the page to search and address a range of questions.
Bob asked why we favor ETFs over specific companies, as they move faster.
Bob, we like ETFs (baskets of stocks) when it comes to expressing macro views, as individual stocks can be impacted by variables unrelated to the theme. But when individual stocks (like Tesla or individual names within the FANGs) are at obvious risk, you will hear from us.
Terry asked that with things being as bad as they are, won’t we likely see a depression rather than a recession? Fair point and the short answer is – yes. For more of our thinking on this, check out the following link.
Expect a raft of economic releases this week on consumer prices, manufacturing surveys, retail sales, jobless claims, industrial production, and housing – all providing new clues for next week’s What’s Happening Now.
Before we go, take note… next week’s edition of What’s Happening Now will be published on Tuesday evening, August 20. Monday, we’re on the road.
Until then, stay thoughtful, look ahead, and be safe and informed.
51 responses to “What’s Happening Now: Week of August 12”
August 12 2019