In 2022, the Everything Bubble burst courtesy of the inflation created by over $8 trillion in Fed and Federal government money printing.
As I outlined in my best-selling book, The Everything Bubble: the Endgame for Central Bank Policy, the Fed created the Everything Bubble when it attempted to corner the U.S. Treasury market in the aftermath of the Great Financial Crisis.
Treasuries are the bedrock of our current financial system, and their yields represent the “risk free” rate of return against which all risk assets (stocks, bonds, real estate, etc.) are priced. So, when the Fed created a bubble in Treasuries via Zero Interest rate Policy (ZIRP) Quantitative Easing (QE), it ended up creating a bubble in EVERYTHING.
So, it’s no small irony that the Fed and its absurd money printing from 2020-2021 was what unleashed inflation, which burst this bubble. You see, Treasury yields don’t just trade based on Fed intervention. They also trade based on economic growth as well as inflation.
So once inflation ignited in 2021, U.S. treasury yields broke out of their 35+ year downtrend.
Remember, when I wrote that the yields on these bonds represent the “risk free” rate of return against which all risk assets, including stocks, are valued? Once Treasury yields started rising, stocks were soon repriced much lower to account for this. The S&P 500 ended 2022 DOWN 19%, making it the seventh worst year for stocks since 1920.
Which brings us to today.
The single most common question my clients are asking is if “the worst is over” for this bear market.
To answer that, we need to determine the answers to two other questions:
1) Has the Fed managed to kill inflation?
2) Will the U.S. economy experience a soft landing as opposed to a severe recession?
I’ll delve into those tomorrow. In the meantime if you’ve yet to take steps to prepare for what’s coming, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
Investors should be praying for a stock market crash.
From a systemic perspective, the markets have entered a period of “risk off”. This has been the case since March of 2022. And the single best thing for investors would be for the markets to get this situation over with quickly via a crash.
Yes, I am fully aware that crashes are extremely painful and involve investors losing a lot of money. However, when the markets crash, they also bottom quickly, which means the pain is over FAST.
Consider the 2020 Crash: the entire collapse was over in about five weeks. And stocks had already begun to recover much of their losses within a few months. In fact, within six months they were at new all-time highs!
Now compare that to the Bear Market of 2000-2002.
That collapse took over TWO YEARS to complete. Not months… YEARS. Peak to trough the S&P 500 lost 50%. And on a yearly basis the losses were actually worse with each successive year. The market lost 10% in 2000, 13% in 2001, and 23% in 2002.
Worst of all, it took the S&P 500 FIVE years to recoup its losses. Investors lost money for years and then had to wait half a decade to make those losses back.
So again, the best thing for investors would be for the markets to crash soon. A crash would mean the pain would be over quickly and stocks could bottom.
Unfortunately, I don’t think that is going to be the case.
I’ll explain why in tomorrow’s article… however, in the meantime if you’ve yet to take steps to prepare for what’s coming, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
In 2014, I coined the term “the Everything Bubble” to describe the Fed’s insane monetary policies. By quick way of review, after the Great Financial Crisis of 2008, the Fed created a bubble in U.S. sovereign bonds, also called Treasuries.
The Fed did this by cutting interest rates to zero and introducing large-scale Quantitative Easing (QE) programs to the tune of $3.5 trillion. The end result was that the entire Treasury curve was repriced at extraordinarily low levels of risk.
Because these bonds are the bedrock of our current financial system, and their yields represent the “risk free” rate of return against which all risk assets (stocks, bonds, real estate, etc.) are priced, when the Fed created a bubble in Treasuries, it ended up creating a bubble in EVERYTHING.
This is why I coined the term “the Everything Bubble.” And in 2017 I published a best-selling book by the same name (The Everything Bubble: The Endgame For Central Bank Policy), explaining what the Fed was doing and what the final outcome would be.
That outcome?
That the Everything Bubble would burst, just like the Tech bubble of the 1990s and the Housing Bubble of the ‘00s. And when this happened, it would bring about the worst financial crisis of our lifetimes.
That process has now begun. Last year, 2022, was one of the worst years for the financial system in history.
It was literally the worst year for bonds on record, with bonds losing anywhere from 4% to 22% depending on the duration of bonds you owned.
The situation wasn’t much better for stocks. The S&P 500 finished the year down 18%, making it the seventh worst year running back to 1920. The only years during which stocks performed worse than this were during the during major financial crises or during a severe recession/ depression.
And unfortunately, this is just the beginning.
Unlike the Great Financial Crisis or the collapse of 2020, this process will NOT be quick. The reason is quite simple: during those situations the Fed was able to introduce extraordinary monetary policy to cushion the collapse.
This time it cannot.
The entire reason the Everything Bubble burst was because the Fed maintained its emergency level monetary policies for far too long. The recession of 2020 supposedly ended in May of that year, but the Fed printed $2.6 TRILLION after this, while also keeping interest rates at zero.
The Fed wasn’t the only one. Between multiple Stimulus programs and as well as socialist schemes disguised as infrastructure/ fiscal stimulus, the U.S. government has spent over $8 TRILLION in the last 34 months.
The end result is that inflation has arrived in the financial system. And the Fed CANNOT try to “cushion” this situation because more money printing/ easing is only going to make things worse.
Put another way, this crisis is going to take longer, and get much worse than anyone expects. It’s quite possible stocks don’t bottom until 2024… at levels most investors can’t even imagine.
The time to prepare for this is NOW. During the bear market of 2000-2003, things actually got worse each successive year with stocks losing 10% in 2000, 13% in 2001, and 23% in 2002.
I believe something similar will happen this time around
If you’ve yet to take steps to prepare for this crisis, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
Over the last 25 years, the financial system has been in what I call the “era of serial bubbles”: a time in which central banks create asset bubbles, said asset bubbles burst, and central banks respond by creating another, larger bubble in a more systemically important asset class.
The first primary bubble was the Tech Bubble of the late 1990s. While that bubble was isolated to a particular sector in a particular asset class (Tech Stocks), it was egregious in scope. A third grader could have looked at a chart of the NASDAQ and told you the situation wouldn’t end well.
When that bubble burst, the Fed opted to create another bubble by employing extraordinary monetary policies. Specifically, the Fed kept interest rates too low for too long, essentially making credit free. And because congress passed legislation that lowered lending standards to potential homeowners, the subsequent bubble took place in real estate: a much larger, systemically important asset class.
However, this time around, the bubble became truly global in scope, courtesy of Wall Street derivatives that the Fed ignored/ refused to regulate. In simple terms, Wall Street packaged up garbage mortgages into “assets” that were sold to everyone from hedge funds to pension funds, banks and more. In this manner, toxic mortgages in Florida, Las Vegas, etc. ended up on the balance sheets of everyone from Japanese banks to Spanish hedge funds.
So, when the housing bubble burst, all of these assets had to be revalued at much lower values… resulting in the global banking system imploding during the Great Financial Crisis of 2008.
What did the Fed do to address this situation?
It attempted to corner/ create a bubble in U.S. sovereign bonds, also called Treasuries.
These are the senior most asset class in the world. These bonds act as the bedrock of our current financial system, with their yields representing the “risk free” rate of return against which all assets (stocks, bonds, real estate, etc.) are valued.
Put simply, when the Fed created a bubble in these bonds it was actually creating a bubble in EVERYTHING, because ALL asset classes would eventually be repriced based on Treasuries were doing.
This is why I coined the term “the Everything Bubble” in 2014.
And that bubble has now burst.
The yield on the all-important 10-year U.S. Treasury has broken its 35 year down trend. The era of Serial Bubbles is over. And there is nothing the Fed can do to fix this situation.
After all, what can it do? There isn’t a larger more systemically important asset class the Fed could use to create another bubble. And introducing more extraordinary monetary policy would make the situation worse.
What does this mean?
The Great Crisis of our lifetimes is finally here.
I’ll detail what’s coming for the markets in tomorrow’s article. In the meantime, if you’ve yet to take steps to prepare for this crisis, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
Something MAJOR happened last week for Tech Stocks.
That something?
The NASDAQ failed to reclaim its 200-week moving average (WMA).
See for yourself.
Why does this matter?
The NASDAQ has only lost its 200-WMA two other times in the last 30 years. Both of these instances (2001 and 2008) were during major bear markets that saw stocks lose an additional 44%-55% of their total value.
I’ve illustrated them in the chart below with red circles. Note that even during the 2020 crash, stocks managed to hold this line.
Not this time.
There is a small chance the bulls might be able to rally here and stop a full-scale collapse. But the clock is ticking.
If they don’t, consider that after the NASDAQ lost its 200-WMA in 2001, stocks lost another 55% in value.
In 2008, when they lost this line, stocks lost another 44%.
Suffice to say, a lot is at stake here. And as I said before… the clock is ticking.
If you’ve yet to take steps to prepare for the next leg down in the markets, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
The big news this week is that stocks lost their 200-Day Moving Average (DMA) again.
Historically, November and December are two of the most bullish months for stocks. Only April is better from a single month perspective. So, the fact the market was unable to reclaim its 200-DMA and remain there is EXTREMELY bearish.
The price action was feeble to say the least.
The bulls have everything going for them: the Fed has reduced the pace of its interest rate hikes, the economy is not yet in recession, and we are in one of the best months for stock market returns: the famed Santa Rally of December.
So the fact that the bulls were unable to get stocks above their 200-DMA indicates that this recent market rally was nothing more than a Bear Market Rally, NOT the start of a new Bull Market.
Below is a chart of what happened to stocks when they failed to maintain their 200-DMA during the Bear Market of 2000-2003. I’ve highlighted this in red circles. Stocks dropped another 30%.
Here’s the same item during the bear market of 2007-2009. This time around stocks lost 50%.
Unfortunately for anyone who is buying into this narrative that stocks are in a new bull market, the bear market is NOT over. With a recession just around the corner, stocks will soon collapse to new lows.
If you’ve yet to take steps to prepare for this, we just published a new exclusive special report How to Invest During This Bear Market.Paragraph
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
The Fed will end its two-day Federal Open Market Committee (FOMC) meeting today at 2PM East Standard Time.
The known universe expects the Fed to raise rates by 0.5%. And the current consensus is that by this time next year, inflation will be down near 2%.
It’d be hilarious if it didn’t involve so much suffering.
To understand what I mean by this, let’s wind the clocks back a year to the Fed’s December 15th 2021, FOMC meeting. At that time, the Fed had only just decided that inflation was NOT “transitory.”
Bear in mind, inflation has measured by the Consumer Price Index (CPI) had cleared 5% in June of 2021. It had since increased to over 7% as of December 2021.
Despite this, the Fed had yet to raise rates or end its Quantitative Easing (QE) program: the Fed Funds Rate was at 0.25% and QE was around $105 billion per month.
Again, inflation was over 7%, the Fed Funds rate was 0.25% and QE was still over $100 billion per month. So, what did the Fed, with its army of economics PhDs and analysts predict would happen once the Fed started tightening monetary conditions in 2022?
The Fed’s official forecast for 2022 was that rates would be somewhere between 0.5% and 1%.
That is correct. With inflation over 7% and rates at 0.25% in December 2021, Fed officials predicted that one year later rates would be somewhere around 0.5%-1%. In fact, even the most HAWKISH Fed officials only saw rates around 1.25% in December 2022.
Don’t believe me? Here’s the dot plot from the December 2021 meeting.
Fast forward to today… and rates are at 4.5%. The Fed was not even in the ballpark.
But wait… it gets better.
Back in December 2021, the Fed also predicted where inflation, as measured by the Personal Consumption Expenditures (PCE) index would be a year later.
That prediction?
That PCE would be somewhere between 1.9% and 3% in 2022. In fact, the absolute worst case scenario Fed officials forecast for inflation in 2022 was 3.1%-3.2%.
See for yourself.
Fast forward to today and Personal Consumption Expenditures (PCE) inflation is 6%… or roughly DOUBLE the Fed’s WORST prediction.
I bring all of this up because the current consensus is that inflation has peaked, the Fed won’t need to be much more aggressive going forward, and that this time next year, inflation will have fallen back to the Fed’s target of 2%.
Good luck with that!
Unfortunately for anyone who is buying into this narrative today, the bear market is NOT over. With a recession just around the corner, stocks will soon collapse to new lows. And that’s even assuming that inflation DOES drop to 2% next year (it won’t).
If you’ve yet to take steps to prepare for this, we just published a new exclusive special report How to Invest During This Bear Market.Paragraph
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
The markets have reached a new level of stupidity.
Stocks are exploding higher based on inflation coming in at 7.1% Year over Year. This is apparently great news because Wall Street expected the number to be somewhere between 7.2% and 7.6%.
So, according to those buying stocks today, a 0.1% “beat” on an inflation number that is still north of 7% despite the Fed implementing its most aggressive rate hike cycle in 40 years in is a reason to panic bid stocks higher.
Looking through the numbers, almost the entire drop came courtesy of falling energy prices and used cars. I might add that the drop in energy is not surprising given that the Biden administration drained the Strategic Petroleum Reserve (SPR) by ~180 million barrels of oil. Practically everything outside of energy and used car prices is still rising.
Elsewhere in the report, core inflation, which the Fed looks at closely is still at 6%. Sure, it’s not spiking any higher, but this it’s not coming down much either. Again, this is good in a way, but is it a reason to panic buy stocks like inflation is gone? I don’t think so.
Unfortunately for those who are panic buying stocks today, the bear market is NOT over. With a recession just around the corner, stocks will soon collapse to new lows.
If you’ve yet to take
steps to prepare for this, we just published a new exclusive special
report How to Invest During This Bear Market.
It details the #1
investment to own during the bear market as well as how to invest to potentially
generate life changing wealth when
it ends.
As I warned earlier this week, stocks have lost their 200-day moving average (DMA).
This is a MAJOR development. In terms of seasonality, things are usually quite bullish this time of year (the famed “Santa rally”). The fact the bulls failed to keep the S&P 500 above its 200-DMA despite this is VERY bearish.
Remember, the 200-DMA is like a “line in the sand” for long term trends in the market. During bull markets, stocks rarely break below it. And during bear markets, stocks rarely break above it. You can see this relationship clearly in the below chart. The 200-DMA is the red line.
Put simply, the failure to maintain the 200-DMA indicates that this recent market rally was nothing more than a Bear Market Rally, NOT the start of a new Bull Market.
Below is a chart of what happened to stocks when they failed to maintain their 200-DMA during the Bear Market of 2000-2003. I’ve highlighted this in red circles. Stocks dropped another 30%.
Here’s the same development during the bear market of 2007-2009. This time around stocks lost 50%.
So again, the bear market is not over. The trend remains down. And stocks could lose another 30%-50% in the next 12 months.
If you’ve yet to take
steps to prepare for this, we just published a new exclusive special
report How to Invest During This Bear Market.
It details the #1
investment to own during the bear market as well as how to invest to potentially
generate life changing wealth when
it ends.
The following is an excerpt from my weekly investment advisory Private Wealth Advisory. To learn more about Private Wealth Advisory and how it can help you and your investments, Click Here!
This week I have
good news and bad news.
The good news is
that bonds are finally starting to stabilize.
The bad news is
that they are doing this right as the economy collapses into a severe recession.
As I’ve outlined throughout this year, the
ENTIRE stock market collapse thus far has been due to bond yields rising.
When Treasuries were yielding 0.25%-0.4%
throughout most of 2020 and 2021, investors were willing to pay 20-22 times
forward earnings for stocks. However, once Treasury yields rose over 4% stocks
were repriced down to 16-18 times forward earnings. This makes sense. When the
“risk free” rate of return is close to zero, you’ll pay a premium for growth.
But once you can earn 4+% “risk free” suddenly stocks look a lot riskier!
Indeed, stocks were priced at 20-22 times forward earnings for most of 2020 and 2021. However, once Treasury yields began to rise in late 2021, stocks peaked in terms of multiples. They were eventually repriced down to 16-18 times earnings.
As I noted since this repricing began, the ONLY thing that would stop stocks from being repriced lower would be if bond yields stabilized. With that in mind, I want to point out that the yield on the 2-Year U.S. Treasury appears to have peaked. In fact, it now looks to be forming a kind of “Head and Shoulders” topping pattern. We only need the right shoulder to complete that pattern.
Regardless of
whether that Head and Shoulders pattern is actually confirmed, the key item
here is that Treasury yields finally appear to be
stabilizing. Obviously, stocks would LOVE for Treasury yields to fall,
as that would open the door to a higher forward multiple (assuming the economy
is strong). But for now, the price action in the Treasury market suggests that
stocks will remain priced at a forward multiple of 16-18 at least for now.
That is the good
news.
The bad news is
that earnings are now collapsing, as the economy collapses into a severe
recession. This means the denominator in the P/E ratio (Price/ Earnings) is now
shrinking. Earnings for the third quarter of 2022 are DOWN 8% Year over Year.
As Charlie Bilello notes, this is the second consecutive quarter of
negative earnings growth on a Year over Year basis.
Unfortunately, earnings will be dropping even more going forward. To understand why, we need to first understand the Treasury market. The Treasury is comprised of numerous bonds with different maturation periods ranging from 4 weeks to 30 years.
When you plot the
yield on all of these bonds, you get the “yield curve.” And the
difference in yield between various bonds on this curve is one of the most
accurate predictors of recession.
Specifically, the
difference between the yield on the 10-Year U.S. Treasury and the yield on the
3-month U.S. Treasury. Anytime this difference becomes negative (meaning the
3-month yield is actually higher than the 10-year yield) this indicates a
recession is about to hit.
I’ve illustrated
this in the chart below. Anytime the
black line falls below the red line, the 10-year 3-month yield curve is
“inverted.” This was the case in 1989, 2001, 2007, and 2019: all of those
preceded recessions.
It is happening again now. And as you can see, this metric is MORE negative today than it was before the COVID-19 crash as well as the Great Financial Crisis.
Put simply, the
yield curve of the Treasury market is predicting a severe recession in
the near future, likely the start of 2023.
This is going to
force stocks to new lows.
During the typical recession, Earnings Per Share
(EPS) usually fall 25%. As I write this, Wall Street’s current consensus for
2023 EPS is $230. And Wall Street expects this to GROW by 5%!!!
This means the anticipated fair value for the S&P 500 is somewhere between 3,680 and 4,140. Incidentally, that is the EXACT trading range the S&P 500 has been moving in for the last six months.
Put simply, the market is trading based on what Wall Street
expects is coming down the pike. But as I just noted, Wall Street expects
earnings growth of 5% next year. However, the reality is that bonds are telling
us a recession is coming… and a recession would mean a DECLINE in
earnings of at least 25% (remember, the yield curve is predicting a
SEVERE recession).
This would mean the actual 2023 EPS would be closer to $172.
Assuming Treasury yields no longer rise, this means the fair
value for the S&P 500 at 16 to 18 times this much lower EPS would be
2,752-3,096. I’ve illustrated that range in the chart below. Suffice to say,
the stock market has a LONG ways to go to the downside.
“But wait a minute, Graham” some of you are probably
thinking… “the Fed is about to pivot sometime next year, and that would STOP
the bear market!”
I wish that was
the case…
Historically, anytime the Fed stops
tightening and begins easing, the markets don’t actually bottom for
another 14 months.
During the Tech Crash, the Fed started cutting rates in January of 2001. However, by that point, a recession had hit and stocks lost another 44% eventually bottoming in October 2003.
Similarly, during the Housing Crash, the
Fed started easing in August of 2007. There again, a recession hit and stocks lost
another 56% before eventually bottoming in March 2009.
Simply put, even
if the Fed were to surprise everyone and start easing as soon as next month (December) the coming recession
would STILL result in EPS collapsing and stocks cratering another 30% or so.
With stocks at
4,000 or so on the S&P 500, a 30% decline would bring them right to… 2,800,
or around the lower end of the implied fair value for the market at a 16- times
my expected EPS for 2023: $172.
Low Multiple Recessionary EPS Fair Value in 2023
16 X $172 = 2,752
or ~2.800
So again, this
week we have both good news and bad news. The good news is that bonds are
stabilizing. The bad news is that a recession is coming, and earnings are about
to crater.
That will trigger
a stock market collapse to new lows… possibly down to the mid-2000s on the
S&P 500.
If you’ve yet to take steps
to prepare for this, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment
to own during the bear market as well as how to invest to potentially
generate life changing wealth when
it ends.
Stocks lost their 200-day moving average (DMA) yesterday.
This is a major development, because it indicates that the bulls could not get the S&P 500 to break above its 200-DMA and stay there, despite numerous interventions, manipulations, and performance gaming.
Why does this matter?
The 200-DMA is like a “line in the sand” for long term trends in the market. During bull markets, stocks rarely break below it. And during bear markets, stocks rarely break above it. You can see this relationship clearly in the below chart. The 200-DMA is the red line.
With this latest failure, it’s a clear sign that the bear market is nowhere near over. Take a look at the bear market of 2000-2003 to see what I mean.
Here’s the bear market of 2007-2009.
So again, the bear market is not over. The trend remains down. And it likely won’t end anytime soon (think months, possibly years). Many investors will lose another 50% of their portfoios… if not more as it unfolds.
You don’t need to be one of them!
If you’ve yet to take steps to prepare for this, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
Over the last few days, I’ve illustrated how several major indicators are flashing “RECESSION!”
By quick way of review:
The 10y-3m yield curve has predicted every recession in the last 50 years. It’s telling us that a new severe recession is just around the corner.
Oil has collapsed from $130 per barrel to ~$75 per barrel, indicating demand destruction is underway.
All of this is BAD news for stocks.
Why?
During the typical recession Earnings Per Share (EPS) decline by 25%.
Based on what bonds are doing, stocks are priced between 16 and 18 times forward EPS. Wall Street is currently forecasting EPS growth of 5% next year to $230.
$230 X 16 (or 18)= 3,680 to 4,410.
Incidentally, that is the trading range that stocks have been in for most of the last six months.
By Graham Summers, MBA
Over the last few days, I’ve illustrated how several major indicators are flashing “RECESSION!”
By quick way of review:
The 10y-3m yield curve has predicted every recession in the last 50 years. It’s telling us that a new, severe recession is just around the corner.
Oil has collapsed from $130 per barrel to ~$75 per barrel, indicating demand destruction is underway. This only happens during a recession.
All of these data points are BAD news for stocks.
Why?
During the typical recession Earnings Per Share (EPS) decline by 25%.
Based on what bonds are doing, stocks are priced between 16 and 18 times forward EPS. And Wall Street is currently forecasting EPS growth of 5% next year to $230.
$230 X 16 (or 18)= 3,680 to 4,410.
Incidentally, that is the trading range that stocks have been in for most of the last six months.
However, a recession would mean that EPS for 2023 is closer to $172.
$172 X 16 (or 18)= 2,752 to 3,096
That’s the red box in the chart below.
Put simply, a recession will erase trillions of dollars in wealth…and Wall Street is once again asleep at the wheel, driving its clients off a cliff.
You don’t need to be one of them!
If you’ve yet to take
steps to prepare for this, we just published a new exclusive special
report How to Invest During This Bear Market.
It details the #1
investment to own during the bear market as well as how to invest to potentially
generate life changing wealth when
it ends.
As I noted yesterday, the bond market is telling us that a recession is just around the corner.
By quick way of review, the U.S. treasury market is comprised of 12 bonds, with durations ranging from four weeks to 30 years.
When you plot the yield on all of these bonds, you get the “yield curve.” And the difference in yield between the 10-Year U.S. Treasury and the 3-month U.S. Treasury is one of the best predictors of recessions in the world.
Put simply, anytime this difference becomes negative (meaning the 3-month yield is actually higher than the 10-year yield) this indicates a recession is about to hit.
It happened in 1989, 2001, 2007, and 2019 and today.
This alone is bad news, but we get additional confirmation of a recession from oil.
As you know, oil is extremely closely linked to economic growth. And oil is collapsing, having fallen from $120+ per barrel to the mid-$70s per barrel.
There is only one reason for oil to fall like this during a period of high inflation: demand destruction.
Demand destruction is when the economy rolls over and there is less demand for oil. It only happens during recessions.
And what do you think a recession will do to stocks?
It’s called a crash.
This is going to
force stocks to new lows. I’ll explain why in Friday’s article. Until then…
know this: it is highly likely that a recession is going to trigger a major
crash in stocks. It’s not a question of “if,” it’s a question of “when.”
If you’ve yet to take
steps to prepare for this, we just published a new exclusive special
report How to Invest During This Bear Market.
It details the #1
investment to own during the bear market as well as how to invest to potentially
generate life changing wealth when
it ends.
The stock market is closed tomorrow for Thanksgiving. It will also close early on Friday November 25th at 1PM. As one can imagine, most of Wall Street has already left for the holidays.
This means that trading volume will be extremely light. And that means that those few traders/funds who are active will have an easier time moving the market.
As I write this, the S&P 500 is within spitting distance of its 200-day moving average. There’s little doubt in my mind that stocks will make a run for that line sometime over the holiday.
However, that is a short-term issue. The longer-term issue is that the Treasury market is telling us a severe recession is coming.
The Treasury is comprised of numerous bonds with different maturation periods. They are:
Treasury Bill Maturation Periods:
4 Weeks
13 Weeks
26 Weeks
52 Weeks
Treasury Note Maturation Periods
2 Years
3 Years
5 Years
7 Years
10 Years
Treasury Bond Maturation Periods
20 Years
30 Years
When you plot the yield on all of these bonds, you get the “yield curve.” And the difference in yield between various bonds on this curve is one of the most accurate predictors of recession.
Specifically, the difference between the yield on the 10-Year U.S. Treasury and the yield on the 3-month U.S. Treasury. Anytime this difference becomes negative (meaning the 3-month yield is actually higher than the 10-year yield) this indicates a recession is about to hit.
I’ve illustrated this in the chart below. Anytime the black line falls below the red line, the 10-year 3-month yield curve is “inverted.” This was the case in 1989, 2001, 2007, and 2019: all of those preceded recessions.
It is happening again now. And as you can see, this metric is MORE negative today than it was before the COVID-19 crash as well as the Great Financial Crisis.
Put simply, the yield curve of the Treasury market is predicting a severe recession in the near future, likely the start of 2023.
This is going to force stocks to new lows. I’ll explain why in Friday’s article. Until then… know this: it is highly likely that a recession is going to trigger a major crash in stocks. It’s not a question of “if,” it’s a question of “when.”
If you’ve yet to take
steps to prepare for this, we just published a new exclusive special
report How to Invest During This Bear Market.
It details the #1
investment to own during the bear market as well as how to invest to potentially
generate life changing wealth when
it ends.
Ever since inflation entered the financial system is early 2021, there has been a debate as to when the higher cost of living would hit consumer spending to the point of inducing a recession.
Sure, consumers can rely on savings or credit to make ends meet in the near-term. However, if inflation remains elevated for a prolonged period, eventually it becomes too much to bear, and the consumer is forced to “tap out” and cut discretionary expenses. That’s when a recession hits.
I mention all of this because the stock market is telling us that the recession has arrived.
One of the best means of analyzing intra-market developments is ratio work. This consists of comparing the performance of one asset or stock relative to the performance of another.
For example, let’s look at the ratio between the Consumer Discretionary ETF (XLY) and the S&P 500 (SPY). During periods of consumer spending strength, this line rises. And during periods of consumer spending weakness this line falls.
Below is a chart of the ratio over the last four years. As you can see, this ratio is dropping like a stone. It is actually lower today than it was at the lows of the March 2020 Crash!
This suggests the consumer is “tapping out” right here and now. The question now is if this is just a slight downturn or the start of a major recession. To answer that, let’s step back and look at a longer-term chart.
From an economics perspective, this is the most disturbing thing I’ve seen in years. It suggests the U.S. is entering its first major recession since the Great Financial Crisis of 2007-2009.
I think we all remember what happened to stocks during that time: an extraordinary crash in which stocks lost over 50% of their value.
A crash is coming. And it’s going to make 2008 look like a joke.
If you’ve yet to take steps to prepare for this, we just published a new exclusive special report How to Invest During This Bear Market.
It details the #1 investment to own during the bear market as well as how to invest to potentially generate life changing wealth when it ends.
Last week, I warned you not to trust the positive economic data being put out concerning the U.S. economy.
The reasons for my warning were simple: the data was bunk, made up, and of no real value.
By quick review, ALL of the jobs that were supposedly created in October 2022 were not real jobs; they were created in a government spreadsheet via various accounting gimmicks… not in the economy. And yes, I’m talking about all 261,000 of them.
The inflation data that everyone was so excited about last week was also NOT positive.
Month over Month inflation was 0% in July, 0.1% in August, and 0.4% in September. With that in mind, I ask… “how was a month over month reading of 0.4% in October a great thing? Technically the inflation data was BETTER during the summer!!!”
Moreover, the items that DECLINED in price… allowing the beancounters to make inflation look better than it is, were used cars and trucks, medical care, apparel, and airline fare.
By way of contrast, shelter, gas and food prices all increased.
Again… how is any of that good for the economy?
I realize it might be difficult to believe me here. After all, 99% of mainstream economists and financial media talking heads are saying the exact opposite: the economy is doing fine and inflation is coming down.
So, with that in mind, I ask you to take a look at the following data points. What do they tell you about the TRUE status of the U.S. economy?
· Juul lays off ~1/3rd of its workforce.
· Redfin lays off 13% of its staff.
· Meta to fire 13% of its workforce.
· Twitter lays off ~50% of its workforce.
· Snap lays off 20% of its employees.
· Wayfair: lays off 10% of its corporate team.
· Microsoft fires 1,000 workers.
· Disney to begin layoffs, targeted hiring freeze.
· Re/Max to fire 17% of its workforce.
· Compass to layoff 10% of its workforce.
Let’s be blunt here… corporations implement major layoffs like this during only one kind of economic environment: a recession.
And what impact do you think a recession is going to have on the stock market?
I’ll detail in tomorrow’s article. For now, the key item to note is that the Everything Bubble has burst.
On that note, we are putting together an Executive Summary outlining how to invest in this new bearish environment.
It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here.
Yesterday I illustrated that the Fed has NOT pivoted and won’t be for months. Anyone who says otherwise isn’t listening to what the Fed is actually saying!
Reviewing the Fed’s public statements since March 2022 (the month it began tightening monetary conditions), nowhere is there any hint or mention of a Fed pivot.
If anything, even formerly dovish Fed officials like Neel Kashkari (President of the Federal Reserve Bank of Minneapolis) or John Williams (President of the Federal Reserve Bank of New York) reveals that they are all inflationary hawks!
However, this hasn’t stopped the shills in the media from pushing the narrative that the Fed is about to pivot. And has been the case multiple times this year, investors have fallen for this narrative, piling into stocks.
The latest Fed pivot-induced rally began in mid-October. It went into hyperdrive on October 21, when Nick Timiraos, a Wall Street Journal reporter who is believed to be a Fed conduit in the media, published an article titled, Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes.
At the time, the Fed was in a “blackout” period in which Fed officials couldn’t make public appearances to dissuade the investing public from interpreting this article as suggesting a Fed “pause” and possibly even a “pivot” in monetary policy were at hand.
This presented under performing fund managers with a golden opportunity.
Many funds (both mutual and hedge) have performed TERRIBLY this year. With numerous large financial institutions’ fiscal years ending October 31 (Fidelity, Vanguard, etc.) and November 15th serving as the date by which large investors need to alert hedge funds of their intentions to withdraw money, fund managers were under TREMENDOUS pressure to game performance going into month-end and mid-November.
In this context, the Timiraos article published on October 21, 2022, was the perfect excuse to ramp stocks higher based on the ignorant and deceptive notion that the Fed was about to pivot.
THAT is why stocks have been rallying.
Not because the macro situation has improved (it hasn’t) Not because the Fed or Fed officials have hinted at a pivot (they haven’t). Not because the inflation data is improving (it isn’t). But because fund managers were desperate for any excuse to push stocks higher, and a supposed Fed conduit in the financial media gave them that excuse.
Full stop.
So where do we go from here?
I’ll detail that in tomorrow’s article. For now, the key item to note is that the Everything Bubble has burst.
On that note, we are putting together an Executive Summary outlining how to invest in this new bearish environment.
It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here.
Ever since the Fed began tightening monetary policy in March of 2022, numerous pundits, social media personalities, and financial media types have been pushing the notion that the Fed will “pivot” or stop tightening monetary policy soon which will ignite a new bull market in stocks.
This narrative is both ignorant and deceptive.
It is ignorant in that history has shown us that stocks usually don’t bottom for another 14 months once the Fed starts easing monetary conditions following a cycle of tightening. This was the case during the Tech Crash and the Housing Crash.
I’ve received questions from several of you as to why this was not the case during the COVID-19 crash. In that particular instance the market was imploding due to an exogenous issue (the pandemic) triggering an economic shutdown, as opposed an organic bear market triggered by Fed tightening.
Moreover, during COVID-19, the Fed effectively backstopped the entire financial system, spending over $3 trillion buying municipal bonds, corporate bonds, corporate bond ETFs, student loans, auto loans, and more in the span of three months. Were the Fed to abandon its current monetary tightening and begin easing financial conditions, it would NOT implement similar schemes; rather it would likely simply cut rates.
So again, history is very clear here: barring an exogenous issue (another pandemic, nuclear war, etc.) if the Fed were to abandon its tightening and begin easing conditions, stocks would continue to fall and likely not bottom for another year.
However, the “Fed is about to pivot” narrative is not only ignorant… it is also deceptive in that there is practically ZERO evidence that the Fed has even begun considering it.
Looking over the statements made by Fed officials since March 2022, I’m struck by the fact that even the most formerly dovish Fed officials have become inflationary hawks.
Neel Kashkari is the President of the Federal Reserve Bank of Minneapolis. Prior to the Fed’s current monetary tightening it is quite difficult to find any instances in which he wasn’t a fan of money printing/ QE/ maintaining easy monetary conditions.
However, since the Fed embarked on its crusade to end inflation, Mr. Kashkari has been extremely hawkish. Some notable headlines from the last six months…
Fed’s Kashkari: We may have to push long-term real rates into restrictive territory.
~May 2022
Fed’s Kashkari says officials are ‘a long way’ from backing off inflation fight.
~July 2022
Kashkari stakes out the most aggressive stance on lifting interest rates
~August 2022.
Kashkari Says Bar for Fed Policy Pivot on Rates Is ‘Very High’
~October 2022.
Again, this is Neel Kashkari, the man who was arguing that the Fed shouldn’t “overreact” to “temporary inflation” throughout 2021. And now he is adamant that the Fed needs to be aggressive in raising rates to end inflation. Nowhere do you see him even hinting at the Fed pausing rate hikes let alone easing.
Another example of a formerly dovish Fed official turning inflation hawk is John Williams.
Mr. Williams is the current President of the Federal Reserve Bank of New York: the branch of the Fed responsible for market operations. In September of 2021, when inflation cleared 5% for the first time in 13 years, Mr. Williams commented that it might be “appropriate” for the Fed to ends its emergency level Quantitative Easing Program sometime in “mid-2022.”
Yes, he wanted the Fed to run QE for another eight months despite inflation clearing 5%. This was insanely dovish and negligent.
Fast forward to the middle 0f 2022, and Mr. Williams is making the following statements:
NY Fed president urges big interest-rate hike but believes ‘economy is strong’
~June 2022.
Fed’s Williams pushes back on market expectations of a rate cut next year.
~August 2022.
Fed’s Williams says more rate hikes needed to bring down inflation
~ September 2022.
My point with the above examples is anyone who pushes the narrative that the Fed will soon pivot isn’t actually paying attention to what the Fed (and Fed officials) are saying. In this sense, the people who keep finding excuses to push this narrative are being highly deceptive.
But that hasn’t stopped them from trying…leading investors to the slaughter time and again!
I’ll detail what’s really driving stocks higher in tomorrow’s article.
A crash is coming. And it’s going to make 2008 look like a joke. I coined the term the “Everything Bubble” in 2014. I warned about it for the better part of 10 years.
And it has officially burst.
On that note, we are putting together an Executive Summary outlining how to invest now that the Everything Bubble has burst.
It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here.
Once again, the bean counters at the Bureau of Labor Statistics (BLS) made the economy look better than reality.
According to the BLS, the economy added 261,000 jobs in October. This was significantly higher than the 200,000 that was expected. The investing world was ecstatic to see this and bought stocks hand over fist on Friday.
The only problem with this is that none of those “jobs” were real.
As Bill King notes in the King Report, the BLS tweaked its seasonal adjustments in 2022 to boost the NFP numbers.
In 2021, for the month of October, the BLS reduced the total number of jobs in America from 149.31 million jobs down to 148.005 million jobs, an adjustment of -1.305 million.
For some reason, this year (2022) the BLS only adjusted the total number of jobs by -1.061 million.
That’s a difference of +244,000 from the 2021 adjustment.
So, right off the bat, 244,000 of the 261,000 jobs the economy “created” in October of 2022 were imaginary, created via a seasonal adjustment in a spreadsheet by the BLS.
For those of you keeping track this means that over 93% of the jobs created in October 2022 were fake or made up.
Actually, in reality, things were even worse than this.
Another gimmick the BLS used was to create “jobs” was its Birth-Death Model.
You see, in the real world, jobs are not created consistently throughout the year. Some months see a lot of jobs created and others don’t, depending on how many businesses are created or go bust in a given month.
The BLS tries to “smooth” over this by using a Birth-Death Model. It too, is a gimmick, nothing more. And for some reason, this gimmick boosted the number of jobs crated in October 2022.
In 2021, the Birth-Death model added 363,000 jobs in October. In 2022, this same model added 455,000 jobs. That’s a difference of 92,000 jobs.
So, there’s another 92,000 FAKE jobs created in a spreadsheet instead of in the economy.
And people were BUYING stocks based on this?!?!
The reality is that stripped of gimmicks, the economy LOST more jobs than it created in October. This only adds to the evidence that the U.S. economy is in fact in recession.
And what happens to stocks during recessions?
A crash is coming. And it’s going to make 2008 look like a joke. I coined the term the “Everything Bubble” in 2014. I warned about it for the better part of 10 years.
And it has officially burst.
On that note, we are putting together an Executive Summary outlining how to invest now that the Everything Bubble has burst.
It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here.
The financial system is currently experiencing a “relief rally.”
For the eight weeks ending October 28th, the primary problems facing the financial system were:
1) The collapse of the British Pound/ UK Government Bonds
2) The collapse of the Japanese Yen.
3) The collapse of U.S. Treasuries.
All of those have been resolved temporarily, courtesy of the Truss Government resigning in the U.K., the Bank of Japan making its largest intervention ever in the currency markets, and U.S. Treasuries catching a bid, courtesy of Treasury Secretary Janet Yellen verbally intervening to help the Biden Administration with the mid-term elections.
All of these solutions are temporary however.
The fact is that the U.S. is in an inflationary recession. I know it. You know it. Policymakers know it, though they have to lie to prop up the bogus narrative that everything is under control.
It’s not.
The financial system has already erased more wealth in 2022, than it did in 2020 or 2008. During those prior crises, bonds rallied providing a hedge against the collapse in stocks.
Not this time.
Bonds AND stocks are both collapsing, erasing over $18 trillion in wealth. And bear in mind, that’s NOT counting the loss of capital in housing or other asset classes.
And unfortunately for the bulls, we are nowhere near the bottom for either stocks or bonds.
Stanley Druckenmiller is arguably the greatest investor alive today. He averaged 30% a year for 30 years straight. And he notes that historically, whenever inflation gets over 5%, inflation never comes down until the Fed raises rates ABOVE CPI.
Currently, rates are 3.0-3.25%.
CPI is over 8%.
We have a looooong ways to go here. And there is plenty of historical data to back that up.
During the last stagflationary crisis in the 1970s, stocks lost 50% of their value before bottoming.
Thus far, in 2022, stocks have only lost 22%. If we are LUCKY, we are half way through this bear market.
Who would you rather bet on being correct… an investment legend like Druckenmiller, who has one of the greatest track records in history… or the Fed or some other establishment shill whose job it is to claim everything is great?
A crash is coming. And it’s going to make 2008 look like a joke. I coined the term the “Everything Bubble” in 2014. I warned about it for the better part of 10 years.
And it has officially burst.
On that note, we are putting together an Executive Summary outlining how to invest now that the Everything Bubble has burst.
It will be available exclusively to our clients.
If you’d like to have a copy delivered to your inbox when it’s completed, you
can join the wait-list here.
