Just over a year ago, I wrote “The Coming Crash” for CLNS Media. It was a four part series exploring the plethora of reasons I thought we could be in for a dangerous crash in the US stock market. Since that series went live, just about every assertion still applies. Some of the data is even worse now. The yield curve did indeed invert and other data points are flashing red that a recession is likely on the horizon. We’re now at the point that even mainstream financial news outlets are entertaining the idea that the economy could slow down. The fear has even transcended financial news with marketing industry publishers like AdAge prepping their readers for the eventual recession.
Despite the large selloff in the weeks/month after “The Coming Crash” was originally posted, the overall market has recovered and even made new highs as recently as this past July. Good for investors. I believe the recovery from the December correction has been another great sell opportunity. Let’s explore some of the new coal mine canaries.
Slowing? Try plummeting.
That ISM number would be the lowest since… The last recession.
With the news recently that Endeavor was pulling the plug on its IPO plans just before the offering, it was the latest in a series of brutal headlines for cash-burning stock offerings. WeWork was an absolute debacle and also postponed a planned IPO – that company is so poisonous that it probably needs its own article. SmileDirectClub is a mess and has been particularly massacred this week – closing yesterday at less than half of its IPO price. Lyft has been in a death spiral. Uber is another bloodbath. Peloton is trading well below IPO price. The market is now in the negative earner IPO rejection phase. Considering how many IPOs are in that category, it’s a bad sign if you’re an investment bank or venture capitalist who bought in pre-IPO looking to dump your garbage on mom and pop investors in the open market.
More than 80% of IPOs last year were non-profitable companies. The last time that happened? The Dot Com Bubble.
Russell Not Playing
The pink line in this graph is the Russell 2000. There is a considerable divergence in the performance of the Russell and the Dow Jones. That gap is likely going to be filled. The question is will the DJI adjust down or will the small caps catch up to the big internationals? Maybe the next point is an indication…
Death Cross in Transports
The “Death Cross” is a technical indicator that traders look for. The last death cross in transports was followed by a massive sell-off in equities. We just had another one.
Rate Cuts Get Sold
The market keeps pricing in rate cuts in the Fed Funds Rate – Wall Street is expecting another one this month. It is seen as economic stimulation. Paradoxically, bulls are saying the need for stimulus is good for stocks. Problem is, the rate cuts continue to be “buy the rumor, sell the news.”
Crisis Policies are Normal Now
Which brings us to the next point on the Fed. We’ve got our rate cuts. Now even QE is back baby! Just don’t call it “Quantitative Easing” this time. “Reserve Adequation” sounds good (Sidebar: if you haven’t checked out Manhole Financial, you should). That circled spike might seem small, but it’s just the beginning. From a historical perspective it’s a very big Fed balance sheet jump over a 1 month time period. Maybe it will work. Maybe it won’t. Ben Bernanke said in 2009 the balance sheet expansion was temporary and could be normalized. Whoops!
“A significant shrinking of the balance sheet can be accomplished relatively quickly.” That clearly never happened and it sounds a little like “Trade Wars are good and easy to win.” One has to wonder, if crisis-level stimulus is now the new normal, what do we do if the drugs stop working?
The Trade Deal Farce
We’ve gone from “talks are going well” and “Trade Optimism” headlines juicing the market higher seemingly every single day to tariff increases, blacklists, and potentially the restriction of domestic investment in Chinese entities. Somewhat absurdly, even the NBA has now found itself in the middle of this. And now China is signalling that there’s just about no way the sides are going to agree on anything of substance. And yet, “Trade Optimism” keeps faking out the Wall Street algos.
This is from today. Seriously.
I refuse to go down the political circus path but, in this instance, it matters. Democrats want to impeach the President. If you believe the polls (I know, they were wrong in 2016), Americans are becoming more open to the idea.
That reality certainly wouldn’t be good for a market that rallied about 40% from election night.
Can somebody remind me what the Bull thesis for equities in 2019 is again?
Disclaimer: opinion, not investment advice.