Welcome back to What’s Happening Now, featured each Monday by the Critical Signals Report.
Last week, we addressed forecasts of waning global growth for 2019-2021, along with worrisome signals in small-cap stocks, downgrades in global earnings, and waning consumer confidence.
This week, we focus on the good (a rising stock market) AND the bad (tumbling indicators) – two opposing forces that will impact markets and your portfolios.
Folks, we know how it can sound: It seems we are predominantly reporting on the bad as markets (and our risk-adjusted portfolio) continue to reach record highs. How can this be?
This coming week, we will explain why, in an extended special report, which describes these markets as rigged to fail.
You see, rigged-to-fail markets can still melt-up despite nearly every fundamental indicator going against them – that’s what makes them, well… rigged.
Thus, for many who feel the Fed has outlawed both recessions and economic forces or that black swans are now extinct, there’s little stopping them from going “all-in,” for there’s little stopping artificially-manipulated lower rates from taking the markets higher in 2019.
We see that clearly; more importantly, we called it out in advance. Markets will rise in this rigged game. Good news, right?
Not so fast.
For if common sense, facts, and old-fashioned market history (and sound risk management) still play a part in your thinking, you’ll understand why we urge caution, patience, and even informed skepticism despite the engineered tailwinds pushing these rigged markets upwards.
In the coming Rigged to Fail Report, we’ll lay it all out there – giving you the evidence (rather than dire rants) you’ll need in order to objectively see just how distorted, and hence risky, domestic and global markets have become, and why.
Once read, you’ll also understand why our Storm Tracker recommends highly conservative cash allocations despite the obvious rising tides of a rigged system.
That is, because markets are not only rigged, but ultimately rigged to fail, we see no other reasonable choice but to remain opportunistically guarded rather than blindly greedy.
In this way, we are neither bearish nor bullish – just clever enough to win this rigged game by knowing its tricks, which means not being suckered or greedy. As they say in Wall Street, “the bears and bulls live, but greedy pigs get slaughtered.”
The temptation to ride these melt-up highs with all you have is real, but as our next report (as well as the All-Weather Portfolio Series to follow) will make clear, there are quantifiably too many dangers to justify putting all your chips into this rigged game.
Opposing Forces: Stocks Vs. Indicators
As we come off the high of the Fourth of July, recent data on the U.S. economy is considerably more sobering, widening the spread between what’s good and what’s bad.
In the colorful chart below, we’ve been plotting opposing forces that show a stock market achieving new highs while economic indicators (like purchasing manager indexes (PMIs), manufacturing indexes, commodities, and inflation) are achieving new lows.
Crazy, no? Well, not in a rigged to fail market…
As for stocks, it looks like a melt-up; yet when one considers: 1) the indicators plotted, 2) an increasingly inverting yield curve, 3) rising New York Fed recession probabilities, 4) tumbling Atlanta Fed GDP growth estimates, and 5) our own highly-sophisticated Storm Tracker, ALL indicators point to an eventual melt-down.
Again: Crazy, no? But that’s precisely what characterizes a rigged to fail market: It goes up despite nearly every indicator tumbling down around it. More on this later.
For now, let’s do a quick walkabout to see what all these indicators look like.
The U.S. Yield Curve: Inverting
The U.S. Yield Curve is waiving a red flag. We’ve drawn attention to this before, even in last week’s Monday Critical Signals Report, but it appears to be worsening and you need to be on top of this.
What’s your take on the chart below… promising or gloomy?
That would depend on whether you’re a bull or a bear.
If you’re a bull, the bad U.S. yield curve looks good because the U.S. Fed is likely to power down the short end of the curve by lowering interest rates in Q3 and Q4, straightening it out with even more stimulus. That is certainly likely to favor a market melt-up.
Ironically, however, recent “good news” on jobs reports sent the markets tumbling on Friday. Huh? What gives? Answer: in a rigged rather than natural market, good news is bad news, and bad news is good news.
Everything is topsy-turvy.
In other words, the recent good news on jobs is bad for markets, as it means the market fears the Fed may not lower rates fast and deep enough. Thus, Wall Street’s spoiled nephews of the rich Uncle Fed panicked on Friday.
They worry they won’t get their low-rate candy to keep their debt party going.
Again: crazy but true. Everything in this rigged game now hinges upon lowering rates.
But if you’re a bear, you’re looking longer-term; you’re looking at that ugly yield curve inversion (that now extends from one month out to three months); you’re noting that the 10-year yield has now fallen below 2%; and you may be thinking that we’re fast marching towards negative interest rates in the United States, a path increasingly traveled by Europe and Japan.
New York Federal Reserve: Recession Probabilities Mount
Plotted below you’ll find the latest New York Federal Reserve Recession Probability Index, which tracks the probability of recession 12 months out.
The index is going parabolic as it closes in on the level of probability almost exactly in effect 12 months before the 2008 recession. Does history repeat itself? Often.
Atlanta Federal Reserve Bank: Q2 GDP Forecast Falls
The Atlanta Fed’s GDPNow Forecast, which models real GDP growth expected for Q2 2019, has been falling and as of July 3, was at 1.3%, a recent low, down on the very indicators we track, like manufacturing, exports, inventory investment, and the like.
Storm Tracker: 42 MPH Force Winds
Tracking nearly 100 signals, trends, and indicators that typically precede recessions, Critical Signals Report‘s popular Storm Tracker measures the wind speed of approaching storms.
This July, Storm Tracker is registering at 42 knots of gale force winds, down three knots from 45% in June, but still very, very windy and currently calling for a recession to hit landfall beginning in Q1 or Q2 of 2020.
The fundamental stars for an eventual meltdown thus seem aligned, but to truly know whether we’ll melt-up further from here, or melt-down, those increasingly bearish indicators will need to replace the notion (fantasy) that ‘stimulus-forever’ (unaccompanied by growth) is going to work forever.
But expecting facts to have an impact on rigged markets may be asking too much, at least for now.
In a rigged to fail market, the hype (and 10+ year emergency-measure rate policies) can keep the facts at bay longer than expected, which is why we need to be realistic, patient and informed. Hence the Storm Tracker…
Again, the fact that the equity markets fell on Friday, disappointed by the unexpectedly healthy U.S. jobs report, says it all. U.S. hiring rebounded in June, topping all economist estimates, a sign of labor-market strength that may ease calls for a Federal Reserve interest-rate cut.
More jobs should have been bullish, not bearish – and herein lies the problem as well as symptom of a debt-driven (and debt-addicted) market rigged to fail: Investors are RELYING on short-term stimulus, not long-term growth, to boost passively managed, long-only portfolios. Risky business.
Trade Idea: Consider Silver
Whether you’re a bull or a bear, with recessionary probabilities this high, you’ll likely be looking for alternative investments like gold, which we addressed in last week’s Critical Signals Report.
But gold isn’t the only shiny metal coming into favor. Silver, too, is slowly catching up (typically a six-month lag). The chart below plots both rising trend and rising inbound flows in silver.
We’ll be breaking downtrend and flows for you in Part 2, Portfolio Assembly of our five-part series on the Critical Signals Report All-Weather Portfolio that will be hitting your inbox in the coming days. Stay tuned for that!
Most investors already have a pretty good handle on trend. That’s a trend building to the right side of the chart within the green circle. The trend is your friend, something that you bet against at your peril.
Trend alone, however, is insufficient for us here at Critical Signals Report to take a position in our All-Weather Portfolio.
That is, it takes three to tango. Meaning, (1) macro must be aligned with (2) trend, but we need something more to confirm that it’s timely to invest, and that something would be (3) investor flows.
When the macro story is corroborated by both trend AND investor flows, now we’ve got something that’s investable.
Let’s examine this chart above again. See the red circle in the upper left? Those green lines within suggested a trend was developing in silver; but looking directly below, asset flows were negative (outbound).
That’s not good and sure enough, the trend on the left side of the chart fails with the passage of time – i.e., it turns red.
Now look at the upper right in the chart, to the green circle. Trend is now advancing; and so are flows, directly beneath, which signals that investors are piling into the trade.
Nothing’s a sure bet, especially in today’s distorted markets, but with macro, trend, and flows on your side (along with protective stops for you traders), you’re a big step ahead of the pack.
The iShares Silver Trust ETF (SLV) would be a go-to solution for taking a long position in silver. The ETF has a market cap of $5 billion. Assets of the trust consist primarily of silver held by a custodian on behalf of the trust.
For more juice (but less liquidity), you could try the ProShares Ultra Silver ETF (AGQ), which trades silver at 200%; or Credit Suisse’s VelocityShares 3x Long Silver ETN (USLV), which trades silver at 300%.
But remember, that’s 200% and 300% up OR down – so be careful when using these leveraged versions. Precious metals can move in a hurry.
Bottom Line This Week: Tug of War
We’re in a tug of war between (a) waning growth and (b) more stimulus by Central Banks around the world, coupled with trade resolutions – both equally impactful when it comes to investing.
Our plan, as always, is to be opportunistic yet realistic, and hence carry a Storm Tracker 42% cash position while trading opportunistically, long or short, wherever the macro, trends, and flows may take us. This makes us money; better yet, it makes us smart money.
And when these rigged to fail markets signal the inevitable “uh oh” moment, we’ll be ready to make a fortune – the old-fashioned way…
Q&A: Your Questions Answered
We continue to read and appreciate all of your comments. Recent reports on Deutsche Bank, the Canadian banks, and the Australian economy have prompted further queries, some of which I’ll address below.
Reader De. P. asked if we see the Aussie Dollar going much lower against the U.S. Dollar. The short answer is yes. Currently at the equivalent of 68.5 U.S. cents, The Aussie dollar will likely go much lower over the next year, due primarily to RBA interest rate policies.
You see, as Aussie rates continue to go down (1%), the Aussie Dollar goes down with it. This trend, however, could be temporarily offset by supportive commodity pricing (in particular Iron Ore) which helps float the Australian currency. Thus, you’ll want to watch those commodity prices as well.
Following our reports on the banks, Gregg asked why others aren’t as “dire” as we are in their forecasting. Well, not every bank is equally sick. Deutsche Bank, for example, poses serious concerns, and this week we are likely to see lots of folks being “let go” from this sinking ship.
But not every bank is sinking. For example, in my report on Canada’s banks, I made it clear that their banks are by no means set for a “2008 moment.” Nothing that dire – just a potentially good short.
We are not seeing a banking failure or TBTF bailout on Canada’s horizon, just a potential share price decline as some of its banks face a classic setup for impaired loans becoming defaulting loans. That’s bad for bank earnings, and even worse for bank stocks…
In fact, the specific banks that made our Canadian “short list” (to answer Mic. W.) are no different (shameless bow) than those Steve Eisman is targeting, namely CBIC, the Royal Bank of Canada and the Laurentian Bank of Canada.
At the same time, other readers (like Thomas S.) were enquiring as to which Canadian banks are the safest for U.S. depositors. According to Global Finance’s “Safest Banks in The World 2018,” Canada’s TD Bank Group came out on top for North America, rated AA-, Aa1, and AA- by Fitch, Moody’s, and S&P respectively.
Stay Tuned: More Fed Speak This Week
That’s it for this week’s report on What’s Happening Now. Stay tuned, though… last Friday’s June jobs report was stronger than projected and Jerome Powell will surely address this in his semi-annual, two-day testimony this Wednesday & Thursday before Congress.
Will this double-speaking Fed Chairman push ahead or back off/postpone rate reductions? Stay tuned.
In the meantime, be safe out there, and keep an eye on your inbox for more blunt-speak this week from the Critical Signals Report. We think you’re going to really enjoy what’s coming next…
One response to “What’s Happening Now: Week of July 8”
July 08 2019