Welcome back to What’s Happening Now, your weekly guide to what’s going on right now and why it matters to you – and your money.

In last Monday’s issue, we discussed turning points and tipping points, differentiating one from the other by degree of severity.

On Wednesday, we addressed whether falling markets (800 points in a single day) meant another Lehman Moment (click the link for our answer), but cautioned readers to watch their step as we moved into autumn and warned of increasing volatility ahead as recession and technical signals were ripening.

By the end of the week, the yield curve had dipped to further invert (a precursor to every recession since the 1950s) and boy did we get our predicted volatility, with markets rising and falling an average of 300 points per trading day…

So, folks, just what’s behind last week’s wild ride, and why is it significant going forward? More importantly, what can YOU expect and do about it?

Let’s discuss…

We Got What We Expected – And Expect More to Come

Last Wednesday, the Dow Jones plunged 800 points, the worst daily fall for 2019. Nor were our markets alone – as every major (and highly inter-connected) market drinks the same low-rate/high-debt poison handed down from its post-’08 central banks.

Markets in every major country voted the markets down simultaneously – just as they did in December of 2018 and again in May of 2019, as you can see from the chart below.

So, here’s the question: Do you think your money will be safer if you diversify across major global equity markets, including emerging markets, during the current turning points?

Nah. Not when markets drop like a rock.

Or how about just staying local and diversifying among “safer” sectors right here in the good ol’ U.S.A., as traditional portfolio theory (and consensus-thinking) advisors would advise? Are such moves indeed safer during turning points heading toward a tipping point?

Nah… take a look below.

There is nowhere to hide. Such diversification didn’t work in December of 2018, nor in May of this year, or on Wednesday of last week.

Again, every sector sank like the same rock.

We call these concentrated/collective downturns highly “correlated.” Correlation is a measure of the degree to which variables are related – i.e. acting like the same “rock.”

Avoiding high correlation – which is NOT guaranteed by mere diversification – is a basic tenant to smart investing and one we apply in our work here at Critical Signals Report.

When turning points consolidate and a tipping point hits, those correlations (especially in stocks) can go to one – which means that everything moves (and sinks) together as one.

The takeaway for YOU is that “diversifying” more of your money into growth rather than value stocks, or more into European securities makes no difference when recessions are appearing off the bow of our $250 trillion global debt Titanic.

Rather than diversifying, you are merely “worsifying.”

Instead, and when multiple turning points align, you’ve got to get off the ship and protect yourself in higher cash levels, as our Storm Tracker prescribes – not simply rearrange the deck chairs for a better view of the iceberg.

What’s Behind the Titanic Mess Ahead?

In other words, playing with diversification into equally weak securities won’t help you any more than diversifying from a blue chair to a white chair on the A-Deck of the Titanic.

With 10-Year U.S. Treasury bonds this high (hence yields this low) and our yield curve this jeopardized (i.e. when long-term bonds yield fewer returns than shorter-term bonds), that tipping point beckons.

The bond market is clearly telling you it’s in manipulated (rigged) danger, as rates have tumbled to lows not seen since the epic crisis of WWII.

That can’t be good.

Opposites Attract

Opposites attract is a phrase often used to describe how very different people can be attracted to one another – say, like a movie star and a numbers geek.

Some say it’s a myth… but others ultimately discover that people who are otherwise opposites are eventually attracted by similar views and values.

Others just use the phrase as a metaphor. We believe in both. And we love metaphors…

Take stock prices and Treasury bonds. They are, of course, traditionally viewed as “opposites” by all us market geeks. Traditionally, for example, as stocks “zig,” Treasury bonds “zag” – that is, they go in opposite directions.

Take the chart below of the S&P 500 ETF (SPY) and the iShares 20+ Year Treasury ETF (TLT).

Note how these two asset classes have moved as opposites – i.e. in different directions for 16 consecutive weeks, the longest such streak since 2012 according to Bloomberg. That’s typically a normal thing – a good thing.

You see, unlike true love, we don’t like it when opposites (Treasuries and stocks) come together and move in the same direction. Such correlation (as described above) makes for a very bad romance and is dangerous to your wallet.

Following the Great Recession of 2008/2009, we saw such an “attraction,” as stocks and bonds rose together like Romeo and Juliet.

In short, this was a totally paid-for love affair, a relation based on money (printed) rather than natural affinity (market forces).

But money, we know doesn’t buy true love, nor can it buy permanent and artificial bond and stock bubbles that last forever. You see, stocks and bonds that rise unnaturally together, can fall together.

That’s a very bad thing. And we are tracking this carefully. Besides, we all know what happened to Romeo and Juliet…

For once the Fed stimulus wears off (i.e. once the market no longer responds to Fed “accommodation” of both stocks and bonds), rather than rise together, stocks and bonds can fall together, a very unnatural move for assets that are otherwise viewed by consensus-thinking (safety in numbers) advisers.

After all, most advisors are telling you that bonds will protect you (i.e. rise) when stocks are falling. Hence those famous pie-chart brochures and 401K plan models of 60/40 stock and bond “diversification,” of which I’m sure many of you have been sold.

But what happens if your “diversification” is really just “correlation” – i.e. “worsification”? What if bonds don’t save you when the next bear rolls out of his cave? That is: What if your bonds fall with your stocks?

Traditional investment thinking, namely “safety in diversification,” will likely not help you in post-08 “Fed markets” that are anything but traditional.

In fact, relying on bonds to buffer you (i.e. rise) in a rigged to fail market in which most bonds are Fed-stimulated junk and most stocks are grossly overvalued, will get you slaughtered, not protected in the next recession.

We know… it’s a morbid thought. Stocks and bonds went up together, but does that really mean they’ll have to go down together?

Unfortunately, our Déjà Vu Indicator (below) is warning of precisely such a moment of opposites attracting – i.e. falling together.

Ouch.

What Last Week’s Déjà Vu Warns

Last week was scary… right? The Dow dropped 800 points on Wednesday. You would think that Déjà Vu would begin to collapse… right?

Wrong. Our Déjà Vu indicator (the spread between the S&P 500 Index and U.S. Treasury spreads) actually widened because on a normalized basis, interest rates tumbled (i.e. bonds climbed) faster than stocks.

Take a look at our updated Déjà Vu chart below. See those previous (green-shaded) jaws that widened just before the dot.com crash and again just before the mortgage crisis?

Now look at the current “everything bubble.” We’re calling it Mega Jaws because that’s what it is – bigger, much bigger than the prior two bubbles.


Interest rates are that low… and stocks are that high. That’s really all you have to know. And since last week, the spread is bigger (has worsened).

That’s a bad thing.

Again, all those colors, lines, and crisscrossing spreads on spreads above may seem really confusing at first glance.

But they basically boil down to this: When rates start rising again, that debt-stoked stock market is going to tumble – and that Déjà Vu spread will tumble with it. Then it’s “fire in the theater” – that’s when stocks and bonds, which rose together are suddenly falling together – the perfect storm.

Once that green “Mega Jaws” above begins to meaningfully close towards the red, sharks will surround and bloody markets and portfolios alike.

Stated more simply, our so-called “recovery” after the 2008 Crisis has merely set up our rigged to fail market for an even worse crisis to come.

We will track this prolonged but fated struggle with our Deja-Vu Indicator every day, and keep you in the know as to when the Fed can no longer swim.

For now, however, the Fed will use all its mythical powers and fancy-speak to prolong this “uh-oh” moment for as long as they can. Don’t underestimate them or their desperation. In other words, be patient – but be prepared.

What YOU Can Do Now

And if you’re wondering just what you can do in the meantime to protect yourself from both falling bonds and falling stocks, we’ve got a column coming out soon that will calm your fears and give you the one asset that will protect you far better than the Fed in the next recession.

In fact, in our next report, we’re about to share with you the single most important asset you’ll ever own for the next decade. Stay tuned – this report will keep those jaws from biting you!

Q&A: Your Questions Answered

As always, we are woefully space-limited here to address the many compelling and appreciated questions flowing in each week from our readers.

Robert R., for example, asked about a cash recommendation. Robert – check out our Storm Tracker Series and What’s Happening Now columns. But, yes – we recommend 46% to cash.

Sharon S. wrote about her 60/40 401(k) portfolio, the failings of which we addressed above. Sharon – be careful, as bonds won’t “buffer” you in a recession. Check out this link here and keep your eyes out for our next column.

Talk to your advisor about cash allocations as well. Feel free to print our “Rigged to Fail” report and share it (and the prior link) with your advisor. See if he/she addresses your questions/concerns honestly.

Ray K. asked about our views on real estate and gold. Ray, click these links and stay tuned for our next issue; it will give you more to consider. As for real estate, mortgage rates have never been so low, nor home values so high. Good, right?

Well, not really… when bonds and stocks tank down the road, home values will fall dramatically further than the upside of the low-rate mortgages.

Looking Ahead

The Fed (FOMC) minutes will be released tomorrow (Wednesday, August 21 at 2:00 p.m.), and there will surely be more clues as to what’s to come from the Great Oz behind the illusory curtain.

As well, we’d encourage you to tune in to Jerome Powell’s remarks when he speaks two days later (on Friday, August 23) at an annual retreat for central bankers from Jackson Hole, WY. Talk about a circle of hubris…

Looking ahead at what the Fed might do at their next meeting September 17-18, as it stands right now, market odds are flashing a 50-basis point rate drop. Will it make a difference? It will be VERY important to see how the market (and yield curve) reacts to more “stimulus.”

We’ll close today’s issue with this shocker – in real terms (i.e. yield minus inflation), the facts tell us that yields on the 10-Year Treasury have now tumbled below zero, joining the likes of the U.K., Canada, Australia, and Japan. Again, that can’t be good and raises these questions…

  • Can the bond markets get it wrong? Yes.
  • Is a recession inevitable? Yes, but when?
  • Can we melt-up again? Yes.

Anything can happen in Fed-rigged markets like these. That’s why we calculate our own odds and play it safe.

But the bottom line is the Storm Tracker is howling at 46 knots. Déjà Vu is stretched to the max. Interest rates are back to where they were at World War II. Real interest rates are below zero in the U.S., and now we know that correlations between diverse markets converge to one (diversity disappears) when that big bad wolf comes knocking.

Take heed.

Until next time, be safe and be prepared. Keep your eyes peeled for our next column – you can’t afford to miss it, though once again, Buffett won’t like it…

Sincerely,

Matt Piepenburg


Comments

2 responses to “What’s Happening Now: Week of August 19”

Leave a Reply

Your email address will not be published. Required fields are marked *