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

In this issue, we’re going to focus on what’s happening beneath the surface, who’s watching, who cares, and who doesn’t… and why this all matters to you.

You need to know all of this NOW, not later, because the tug of war that’s going on between rotting/ignored fundamentals in the global economy and a totally rigged central bank stimulus matters to your money.

As recently sent forth in our Rigged to Fail report, the disconnect between reality and centralized “faking it” has left many investors blind to risk and common sense in a market backdrop that increasingly makes no sense…

Stocks, for example, are rising as analysts cut earnings estimates for the rest of 2019. Make sense? Nope. Who cares? Very few.

But if you stay a step ahead and use your head, it could make a real difference to your wealth.

Let’s get started…

So, Who Really Cares About What’s Going on Out There?

These days, centralized stimulus is “in,” and caring about what’s really going wrong beneath the surface is “out.” We got a little chart-happy this week, to make our point. Let’s walk rapid-fire through six examples of what folks should care about but are otherwise casting a blind eye.

  1. Who cares that the SP500 Index seems massively overbought compared to the Russel 2000 Index?

The current gap between the two Indexes (lower panel in the chart below) displays a compelling valuation spread between small caps and the broader S&P Index, a gap not seen since just prior to the Great Recession of 2008.

Small caps are lagging the large caps by the most in 11 years.

Do you think the big boys are overvalued? Do you think a stalling small-cap sector (which measures the pulse of U.S. business strength) is a glaring recessionary signal? Common sense says, yep. But does anyone care? Not really.

  1. Who cares that Europe seems to be imploding?

The critically important European Purchasing Manager Indexes (PMIs) have been falling across Europe, with Germany taking the largest beating. Take a look…

Does the stock market care? Not really.

  1. Does ECB President Mario Draghi care?

Well, yes. He’s been watching… and he cares a lot because he sees what’s coming. Last week he sounded the alarm on Euro Area uncertainty (chart below), but the market merely ramped up to new highs on bad news. Does that make any sense to you?

  1. Does anyone care that global earnings revisions are being downgraded?

Take a look below… revisions are tumbling just as they did last December when the markets tanked? Stock markets don’t seem to care … again, new equity highs were achieved last week.

  1. And does anyone care that global aggregate negative-yielding debt (the most obvious sign of a rigged to fail market) is soaring to an all-time high… and with tremendous momentum in the last 12 months?

Take a look below. Again, the answer is nope.

  1. And shouldn’t some folks care about what typically happens (chart below) when the S&P 500 Index peaks at the same time interest rates stop rising (let alone start falling as expected this week at the Fed) – one of the most predictive indicators of a looming recession?

Ditto… nope.

And should anyone care about another pierced debt ceiling and historically unprecedented deficits in the U.S.?

Based on recent equity highs, the markets don’t really seem to care about any of this either.

Well, you should care. Here’s why…

All Eyes Are on the Wrong Thing

The sad and simple fact is that most investors have stopped looking at both the disease and symptoms of a fundamentally broken securities market.

And the reason is simple: They trust central bank fantasy to save them, and thus all eyes are on the Fed rather than the facts.

The sober fact, moreover, that the Fed has a 0 in 9 record for both predicting and preventing recessions and market meltdowns is ignored when investors are punch-drunk on over a decade of low rates and hence record debt and market highs.

The $72 trillion debt keg party on Wall Street, Main Street, and Constitution Avenue has lulled investors to think like sheep and ignore such salient matters as a completely toxic corporate bond market armed to send the U.S. markets and economy into a tailspin while Fed governors go on speaking tours telling the herd not to worry.

I remember Alan Greenspan and Ben Bernanke warming hearts about “containing” the subprime crisis just months before it sent U.S. and global markets into a tailspin.

The Powell of Oz is no different, but he may forget to mention this Wednesday that the level of toxic BBB, levered loans, and junk bonds in the U.S. is now at $5.4 trillion, whereas the toxic subprime mortgage debt that sent the U.S. over the cliff in 2008 was comparatively much less at $1.5 trillion.

So how do our ever-rising (i.e. rigged) markets defy the cancerous power of this toxic debt crap at the foundation of our economy and markets?

It’s simple: When debt levels reach the moon, a central bank merely staples interest rates to the floor (or even below the floor) to keep the cost (i.e. pain) of that debt “contained.”

But here’s the rub: The Fed can’t sustain this desperate low-rate debt “solution.” One of two forces will destroy their best-laid plans – either inflation or a recession.

If we have inflation, for example, rates set by the bond market will naturally rise, which will act like a match next to a gasoline depot of debt – and kaboom! Party’s over.

Luckily, the Fed can simply lie about inflation (far closer to 10% than the reported 2%) to keep this match from igniting.

But as for a recession, well, that’s another story, and despite the Fed’s (and other central banks’) astounding double-speak, myth-making, and hubris, it has not achieved the fantasy power to outlaw recessions, despite essentially trying to convince the world that it has.

You see, in a recession, Main Street (which is already on its knees) simply cracks, purchasing and borrowing then stalls, which means company earnings tank and hence company debt payments (i.e. bonds) fail en masse – sending bond prices down and hence yields and rates up – which means kaboom, the debt party is over…

By many measures, our real economy is already in a recession, as we have shown here, here, and here, and thus the kaboom moment is closer than most might think.

For now, however, the media and the Fed will keep pumping out the propaganda that all is “good” with more fictions about earnings, unemployment, etc.

Most egregiously, the Fed will smile about the “growing economy” and buy time while simultaneously reducing rates in what is now 10+ years of desperate, emergency-measure-mode rate suppression.

So, which is it, a “growing economy” or an emergency?

When a central bank has centralized control over the markets and economy, that’s, well… an emergency.

The next obvious question is this: How does one invest in the backdrop of an emergency rigged to resemble a “recovery”?

Well, our Storm Tracker is one part of the solution. Using this tool as guidance, you will be more than prepared to play this rigged game for as long as it plays out.

Furthermore, our investing approach may mock the Fed, but it equally recognizes the dangers of fighting the Fed – it’s a bad idea to do so… The Fed is powerful.

Thus, if the Fed wants to keep artificially doping these otherwise Frankenstein zombie markets to new highs and a perfect storm, one would nevertheless be playing with fire to get in the Fed’s way and short too soon.

We accept this, and manage risk with cash and even join the bullish camp until the signals tell us otherwise.

But keep this also in mind: One day soon (2019, 2020, or even 2021), the Fed’s magical monetary wand will no longer work, and despite suppressing rates or even printing more money, the market will finally realize the fatal dangers rather than fake magic behind the Oz-like curtain at the Eccles Building.

And when that faith in the magic ultimately and inevitably collapses… so will the markets.

Fortunately, we at Critical Signals Report will be there to navigate you safely into reality – and big profits.

But the question today is: How long can the Fed’s “magic” last?

Stay Tuned This Week: The Fed “Magic Show” Continues

As to that magical Fed power, what if the Fed drops rates and the markets don’t salute? That is, what if markets drop rather than rise? It’s unlikely this early, but it’s possible. And the moment markets stop buying the magic, well… That would be a Monster Sell Signal.

Why? Because what’s important here is not what happens in the markets (with fundamentals like those revealed above largely ignored today), but rather how investors react to what happens in the markets.

Markets should go up on magical news, and they should fall on sober news. But here’s the thing… It doesn’t always happen that way, at least not for the last 10+ years of Fed “doping.”

When markets go up on bad news (like tanking PMIs, record debt levels, emergency measure interest rate suppression, flattening yield-curves, record-breaking retail store closings, pathetic earning revisions, massive bond risk, bank failures, etc.), that’s a good time to buy.

It means investors are drunk on stimulus, hope, and Fed-induced momentum.

But when markets go down on “magical” news (like more pathetic and downward rate manipulation), it means markets (at least those not driven by robots) are finally looking beyond the fantasy and accepting the ugly (i.e. a fatal bond market supported by inflationary fictions and Fed “stimulus”).

And as of now, markets are slowly starting to question the double-speak and thinning justifications for more rate suppression or money printing by central banks that tell us not to worry while simultaneously doubling down in emergency measure policies.

Jim Paulsen, Leuthold Group Inc.’s chief investment strategist, hit the nail on the head last week when referring to ECB President Mario Draghi’s commitment to increased levels of “supportive” central bank “magic”…

“Draghi’s [supportive] tone did more to raise recession fears than it did to ease them. That’s what the market is reacting to because there is the fear out there that even if we start easing, it might be too late and it brings up that same fear here in the United States.”

“It might be too late” are the operative words here. How will we know? Consider this contrarian idea…

If the Fed reduces interest rates this Wednesday and the markets noticeably fall rather than rise, we may be nearing that tipping point. In such an event, consider taking a short position in equities broadly by buying ETFs that short the major indexes.

This could be just a plain old short the S&P 500 play. Consider buying ProShares Short S&P 500 (1x) ETF (SH) if the S&P ultimately falls should rates fall; or ProShares UltraShort S&P 500 (2x) ETF (SDS); or even ProShares UltraPro Short S&P 500 (3x) (SPXU) if markets really sell off. The more the markets sell off, the more confident the bet.

And if this doesn’t happen this week, keep this trade in your quiver and pull it out down the road when markets react significantly poorly to significant “magical” news. We’ll keep you aware of such indicators as they arise.

And if markets rip up this Wednesday in an already priced-in rate cut, well, that just means Oz is still doing his artificial magic and the fantasy of fiction over facts (i.e. Fed support over market fundamentals) simply limps forward once more. This is quite possible as well, and a signal to stay on the long side for now.

Q&A: Your Questions Answered

After last week’s Rigged to Fail report, we received a rapidly increasing number of questions from our readers, not all of which we can address here, but we’ll try to get to as many as we can.

Adam S. asked what he needs to be getting into or buying, and asked for specific instruments. There are a number of answers to this. First, we recommend sticking with our Monday “What’s Happening Now” reports, which provide weekly trade suggestions.

Our numerous other reports often contain specific recommendations as well, depending on the current market signals (i.e. shorting Tesla at the right moment, going long silver, shorting the Australian currency, Canadian banks, etc.).

George W. remarked about Japan running up huge debts repeatedly over the centuries – always culminating in a devaluation of the currency so the government debt is largely wiped out. He asked if devaluation of currencies will be at play.

George, the short answer is “Heck yeah.” Currencies across the globe are in a race to the bottom to compete on exports as well as pay U.S. Dollar-denominated debts. Recently, the Australian Housing Bubble has been a strong signal to short its currency, which faces not only a residential debt crisis, but a foreign debt crisis as well.

I see no immediate alternative down under but a further currency devaluation – the bread and butter tactic of debt-soaked sovereigns, of which the world is now filled.

Terry S. asked about what instruments we are referring to when we say “Go to cash.” This could be as simple as the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL). BIL’s objective is to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index. Market cap: USD $9.24 billion. 12-Month yield: 2.10%.

Finally, M. S. agrees that nothing can last forever (inevitably something has to give), but remarked that this market has way too many conflicting traditional and non-traditional forces at play, and thus using traditional metrics (fundamentals like PMI, debt levels, earnings revisions, rate spreads, etc.) to track markets may not be the reliable path they once were, and that making striking statements about the market’s potential future is wizardly.

Fair point. The entire body of this current report addresses how disconnected traditional risk metrics and fundamental signals are from market pricing, and thus evidences our strong agreement with the problems you raise of relying solely on cold facts and traditional indicators to track market behavior.

Stated otherwise: Stocks don’t move on normal price-discovery or traditional metrics. Just look at Apple

Furthermore, we fully accept the non-traditional forces (i.e. central bank policies) which effectively determine current markets, and equally recognize the dangers of “fighting the Fed’s” distortive forces, no matter how repugnant they are to a now extinct classic capitalism and free markets.

But as for the concern regarding our “striking statements” about the market’s potential future (namely a meltdown), we don’t consider it wizardly. We are not permabears or fear-exploiters, nor are we tarot readers.

We are realists. And we are active investors – in all conditions.

And the reality is this: NOT ONCE in the 5,000 year history of sovereigns using debt to solve a debt crisis (from ancient Rome to Paris, or Tokyo to Beijing, or Washington to Australia) has a country ever avoided catastrophe via debt expansion. Not once.

To this extent, I am admittedly and proudly a student of the Austrian rather than Keynesian way of thinking, and whole-heartedly admit my agreement to von Mises, who noted long ago that the bigger the debt-based euphoria that precedes a crash (such as right now), the bigger the crash that follows.

We don’t think this time is different. In fact, we think it’s much worse.

Of course, this is always hard to see or believe when markets are reaching new (artificially stimulated) highs and pundits are making black and white into a comfortable grey based on empirically proven misinformation about such critical issues as unemployment, inflation, GDP, and earnings.

Time and time again, investors quickly forget recent disasters (like 2008) or current risks (like the biggest global and national debt bubble in recorded history) when seduced by rising markets or fantasy (i.e. desperate) notions like Fed magic or modern monetary theory (MMT).

Fantasy, moreover, is a real market force and one admittedly hard to quantify. We respect this, and we recognize that fantasy can postpone the glaring alarms we are seeing at the factual and fundamental level, as charted above.

We also know that no one can time a market crash, and we are no different. What we can do, however, is gage and track market conditions better than most, and our Storm Tracker is how we express this.

Being prepared is far more realistic than being scared or psychic. We favor math, data, risk-management, and history to guide you.

In the end, all our considerable experience and knowledge comes down to this: Avoid tops and buy at bottoms, because market bottoms are where fortunes are made. Almost everyone gets this; almost no one does it.

We know we can’t perfectly time the top or the bottom, but we are more than confident that we can get closer than the others and that for patient investors, fortunes can and will be made with far less risk of losing what was won.

In the meantime, be safe and informed, and keep an eye on your inbox for more blunt-speak this week. Obviously, and sadly, the Fed will be a primary force as the month ends.

And keep asking these great questions and sharing your concerns. We’d be thrilled if each and every one of you had just one question ahead of next Monday’s report. Fire away! We’re here to help. The Critical Signals Report is not just about us. It’s also about sharing your views with other readers.


Comments

9 responses to “What’s Happening Now: Week of July 29”

  1. Neither you or I are going to move the markets. To me it’s all about the huge multi-billion dollar institutions. My question is: Which one do you believe is going to start pushing the sell button and have the others following them real quickly? As we have witnessed before, once the hard selling starts, we can see 300, 400, or more points loss in an extreme short period of time.

  2. Question, with 2 years left to retire, would it be safe to put 70% of deferred com into bonds and 30% continue to be moderate investments?
    T Walker

  3. Do you think it is possible, for people like a George Soros, who hate Trump, with a passion to create a black-flag event to cripple the market, before the election, so as to promote a democratic for president? Upon their being successful, pumping up the stock market to make the new president look good?

  4. If the majority of stocks are clearly expected to fall, would it not be wise to sell all our investments presently, and reinvest after the expected crash has occurred.

  5. Nothing has been mentioned about Precious Metals being the most appropirate and long established why all the risks you are currently warning us against can be dealt with.

  6. If holding an institutional bond mutual fund like PTTRX when the debt meltdown occurs won’t the companies in the fund that survive (assuming the majority are in the best rated companies) need to pay higher rates for rolling over their debt providing higher dividends to the holders of the shares?

  7. We recently bought ISHARES IBOXX INVT GRADE BOND ETF (Symbol:LQD) 20+ YEAR TREASURY BOND ETF (Symbol TLT), MBS ETF (Symbol MBB), INTERMEDT TERM CORP BOND ETF (Symbol IGIB) JP MORGAN USD EMERGING MARKE (Symbol EMB). Are these bonds the right investment with the Fed just announcing a interest rate cut. The Dow is dropping by 340+ points since Powell has made this announcement! Are we doing the right thing by buying these bonds at this particular time? Our financial advisor sold C.D. and bought these bonds with the anticipation of the Fed lowering interest rates. Was this the right move?

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