Brian Pretti
Executive Summary
- New bear market + re-enter recession = 30-40% drop in stock prices
- What are the chart of the best technical indicators telling us?
- Confusion reigns during the transition from bull market to bear
- Why volatility will reign & capital protection should be prioritized
If you have not yet read Part 1: Has The Market Trend Shifted From Bull To Bear? available free to all readers, please click here to read it first.
It’s The Global Economy, Stupid!
I believe another key question for equity investors right now is whether the recent noticeable slowing in global economic trajectory ultimately results in recession. Why is this important? According to the playbook of historical experience, stock market corrections that occur in non-recessionary environments tend to be shorter and less violent than corrections that take place within the context of actual economic recession. Corrections in non-recessionary environments have been on average contained to the 10-20% range. Corrective stock price periods associated with recession have been worse, many associated with 30-40% price declines known as “bear market” environments.
We can see exactly this in the following graph. We are looking at the Dow Jones Global Index. This is a composite of the top 350 companies on planet Earth. If the fortunes of these companies do not represent and reflect the rhythm of the global economy, I do not know what does. The blue bars marked in the chart are the periods covering last two US recessions. US recessions that were accompanied by downturns in major developed economies globally. As I’ve stated many a time, economies globally are….
Why The Next Drop Will Likely Be 30-40%
PREVIEWExecutive Summary
- New bear market + re-enter recession = 30-40% drop in stock prices
- What are the chart of the best technical indicators telling us?
- Confusion reigns during the transition from bull market to bear
- Why volatility will reign & capital protection should be prioritized
If you have not yet read Part 1: Has The Market Trend Shifted From Bull To Bear? available free to all readers, please click here to read it first.
It’s The Global Economy, Stupid!
I believe another key question for equity investors right now is whether the recent noticeable slowing in global economic trajectory ultimately results in recession. Why is this important? According to the playbook of historical experience, stock market corrections that occur in non-recessionary environments tend to be shorter and less violent than corrections that take place within the context of actual economic recession. Corrections in non-recessionary environments have been on average contained to the 10-20% range. Corrective stock price periods associated with recession have been worse, many associated with 30-40% price declines known as “bear market” environments.
We can see exactly this in the following graph. We are looking at the Dow Jones Global Index. This is a composite of the top 350 companies on planet Earth. If the fortunes of these companies do not represent and reflect the rhythm of the global economy, I do not know what does. The blue bars marked in the chart are the periods covering last two US recessions. US recessions that were accompanied by downturns in major developed economies globally. As I’ve stated many a time, economies globally are….
Executive Summary
- Declining margin debt will signal an impending major market decline
- This signal will be even more telling for non-US countries
- Evidence indicates we are passing the peak margin debt cycle right now
- There is time to act, but time is running out
If you have not yet read Part 1: The Margin Debt Time-Bomb available free to all readers, please click here to read it first.
In the meantime, monitoring trends in levels of margin debt is one of a necessary number of risk management tools. Meaningfully declining monthly levels of margin debt ahead will be an important red flag. The key is knowing it will come and being able to act unemotionally and rationally when it occurs. For now, in the clarity of hindsight, we have the very short term divergence in place between price (SPX) and margin debt levels as of month end July. Now it’s a matter of continuing to monitor margin debt levels ahead as one of a number of important risk management tools.
I think it is important to note that in the two prior market cycles, margin debt declined noticeably after the year over year change in S&P 500 sales (revenues) fell into negative territory, as we are now seeing in 2015. As you can see from the chart below, the year over year change in S&P 500 sales from 2014 to 2015 has crossed into…
The Criticality Of Monitoring Margin Debt Closely From Here
PREVIEWExecutive Summary
- Declining margin debt will signal an impending major market decline
- This signal will be even more telling for non-US countries
- Evidence indicates we are passing the peak margin debt cycle right now
- There is time to act, but time is running out
If you have not yet read Part 1: The Margin Debt Time-Bomb available free to all readers, please click here to read it first.
In the meantime, monitoring trends in levels of margin debt is one of a necessary number of risk management tools. Meaningfully declining monthly levels of margin debt ahead will be an important red flag. The key is knowing it will come and being able to act unemotionally and rationally when it occurs. For now, in the clarity of hindsight, we have the very short term divergence in place between price (SPX) and margin debt levels as of month end July. Now it’s a matter of continuing to monitor margin debt levels ahead as one of a number of important risk management tools.
I think it is important to note that in the two prior market cycles, margin debt declined noticeably after the year over year change in S&P 500 sales (revenues) fell into negative territory, as we are now seeing in 2015. As you can see from the chart below, the year over year change in S&P 500 sales from 2014 to 2015 has crossed into…
Executive Summary
- Expect a bond market bloodbath as rates rise
- Municipal, corporate and sovereign defaults will soon follow
- Liquidity suffers as necessary goods prices rise, but securities prices fall
- The new, nuclear risk of a derivatives market collapse
If you have not yet read Part 1: The Global Credit Market Is Now A Lit Powderkeg available free to all readers, please click here to read it first.
You may remember that what caused then Fed Chairman Paul Volcker to drive interest rates up in the late 1970’s was embedded inflationary expectations on the part of investors and the public at large. Volcker needed to break that inflationary mindset. Once inflationary expectations take hold in any system, they are very hard to reverse.
A huge advantage for Central Bankers being able to “print money” in very large magnitude in the current cycle has been that inflationary expectations have remained subdued. In fact, consumer prices as measured by government statistics (CPI) have been very low in recent years.
When Central Bankers started to print money, many were worried this currency debasement would lead to rampant inflation. Again, that has not happened for a very specific reason. For the heightened levels of inflation to sustainably take hold, wage inflation must be present. I've studied historical inflationary cycles and have not been surprised at outcomes in the current cycle in the least, as in the current cycle, continued labor market pressures have resulted in the lowest wage growth of any cycle in recent memory. But is this about to change at the margin?
The chart below shows us…
What Awaits Us In The Future Of Higher Interest Rates
PREVIEWExecutive Summary
- Expect a bond market bloodbath as rates rise
- Municipal, corporate and sovereign defaults will soon follow
- Liquidity suffers as necessary goods prices rise, but securities prices fall
- The new, nuclear risk of a derivatives market collapse
If you have not yet read Part 1: The Global Credit Market Is Now A Lit Powderkeg available free to all readers, please click here to read it first.
You may remember that what caused then Fed Chairman Paul Volcker to drive interest rates up in the late 1970’s was embedded inflationary expectations on the part of investors and the public at large. Volcker needed to break that inflationary mindset. Once inflationary expectations take hold in any system, they are very hard to reverse.
A huge advantage for Central Bankers being able to “print money” in very large magnitude in the current cycle has been that inflationary expectations have remained subdued. In fact, consumer prices as measured by government statistics (CPI) have been very low in recent years.
When Central Bankers started to print money, many were worried this currency debasement would lead to rampant inflation. Again, that has not happened for a very specific reason. For the heightened levels of inflation to sustainably take hold, wage inflation must be present. I've studied historical inflationary cycles and have not been surprised at outcomes in the current cycle in the least, as in the current cycle, continued labor market pressures have resulted in the lowest wage growth of any cycle in recent memory. But is this about to change at the margin?
The chart below shows us…
Executive Summary
- What the NACM Index and the Atlanta GDPNow are telling us about the odds of returning to recession
- Bond market volatility is picking up
- Are central banks are losing their control?
- Why monitoring credit markets will be our best indicator of the next downturn
If you have not yet read Part 1: As Goes The Credit Market, So Goes The World available free to all readers, please click here to read it first.
That indicator is the current level of the National Association of Credit Managers Index. Although not wildly well known, the National Association of Credit Managers Index is an indicator deserving of attention and monitoring immediately ahead.
As per the National Association of Credit Management (NACM), the Credit Managers Index is a monthly survey of responses from US credit and collections professionals rating factors such as sales, credit availability, new credit applications, accounts placed on collection, etc. The NACM tells us that numeric response levels above 50 represent an economy in expansionary mode, which means readings below 50 connote economic contraction. For now, the index rests in territory connoting economic expansion, but the index is also sitting quite near a 6 year low. We’ve been here before in the current cycle as the economy has moved in fits and starts in terms of the character of growth:
In a prior discussion, I mentioned the slowing in the US economy in the first quarter of 2015. I highlighted the Atlanta Fed GDPNow model that turned out to be very correct in its assessment of Q1 US GDP. While the Atlanta Fed was predicting a 0.1% Q1 GDP growth rate number, the Blue Chip Economists were expecting 1.4% growth. When the 0.2% number was reported, it turns out the Atlanta Fed GDPNow model was virtually right on the mark. As of now, the Atlanta Fed GDPNow model is predicting a…
The Central Banks Are Losing Control Of The System
PREVIEWExecutive Summary
- What the NACM Index and the Atlanta GDPNow are telling us about the odds of returning to recession
- Bond market volatility is picking up
- Are central banks are losing their control?
- Why monitoring credit markets will be our best indicator of the next downturn
If you have not yet read Part 1: As Goes The Credit Market, So Goes The World available free to all readers, please click here to read it first.
That indicator is the current level of the National Association of Credit Managers Index. Although not wildly well known, the National Association of Credit Managers Index is an indicator deserving of attention and monitoring immediately ahead.
As per the National Association of Credit Management (NACM), the Credit Managers Index is a monthly survey of responses from US credit and collections professionals rating factors such as sales, credit availability, new credit applications, accounts placed on collection, etc. The NACM tells us that numeric response levels above 50 represent an economy in expansionary mode, which means readings below 50 connote economic contraction. For now, the index rests in territory connoting economic expansion, but the index is also sitting quite near a 6 year low. We’ve been here before in the current cycle as the economy has moved in fits and starts in terms of the character of growth:
In a prior discussion, I mentioned the slowing in the US economy in the first quarter of 2015. I highlighted the Atlanta Fed GDPNow model that turned out to be very correct in its assessment of Q1 US GDP. While the Atlanta Fed was predicting a 0.1% Q1 GDP growth rate number, the Blue Chip Economists were expecting 1.4% growth. When the 0.2% number was reported, it turns out the Atlanta Fed GDPNow model was virtually right on the mark. As of now, the Atlanta Fed GDPNow model is predicting a…
Executive Summary
- Why the Fed may no be able to raise rates from here
- Will the Fed go to negative interest rates instead?
- Why the next recession will limit the Fed's options greatly
- Why it may well be too late for the Fed at this point to act
If you have not yet read Part 1: Has The Fed Already Lost? available free to all readers, please click here to read it first.
What If The Fed Isn't Actually Able To Raise Rates From Here?
Let’s start with a look at the history of the Federal Funds rate (the shortest maturity interest rate the Fed directly controls). Alongside the historical rhythm of the Funds rate are official US recession periods in the shaded blue bars.
Chart Source: St. Louis Federal Reserve
Of course there is one striking and completely consistent historical commonality in the behavior of the Funds rate over time. The Fed has lowered the Federal Funds rate in every recession since 1954 at least. There are no exceptions. You can see the punchline coming, can’t you? Just how does one lower interest rates from zero to stimulate a potential slowdown in the economy?
Of course in the banking system…
The Future Of Interest Rates
PREVIEWExecutive Summary
- Why the Fed may no be able to raise rates from here
- Will the Fed go to negative interest rates instead?
- Why the next recession will limit the Fed's options greatly
- Why it may well be too late for the Fed at this point to act
If you have not yet read Part 1: Has The Fed Already Lost? available free to all readers, please click here to read it first.
What If The Fed Isn't Actually Able To Raise Rates From Here?
Let’s start with a look at the history of the Federal Funds rate (the shortest maturity interest rate the Fed directly controls). Alongside the historical rhythm of the Funds rate are official US recession periods in the shaded blue bars.
Chart Source: St. Louis Federal Reserve
Of course there is one striking and completely consistent historical commonality in the behavior of the Funds rate over time. The Fed has lowered the Federal Funds rate in every recession since 1954 at least. There are no exceptions. You can see the punchline coming, can’t you? Just how does one lower interest rates from zero to stimulate a potential slowdown in the economy?
Of course in the banking system…
Total 18 items
by blaggers