Disclaimer: The Coming Crash was a four-part series examining the 2008 Financial Crisis and current economic conditions. The series was originally posted on CLNSMedia.com from October 4th – 7th, 2018. I am not a licensed financial expert. I’m not an economist. I’m just a guy trying to learn each day and share my thoughts with others. My views and opinions do not necessarily reflect the views and opinions of CLNSMedia. Consult your own financial adviser when deciding how to allocate your personal wealth.
In the disclaimer above, I mentioned The Coming Crash series that I wrote for CLNSMedia back in October. What followed very shortly after that post was a 20% correction peak to trough by the end of the year. To call my article prescient, I think, would be somewhat fair. What I did not expect to happen, was new all time highs in the S&P 500 so soon after. As I’m writing this (early afternoon on June 21st, 2019) the S&P is on pace for the highest close, ever.
So, let’s cut rates?
If you even have a small understanding of the economy and credit, you know cutting rates in the “strongest economy ever” with stocks at all-time highs is absolutely ludicrous. I’m not going to rehash everything from previous posts about interest rates and the economy. If you don’t understand the relation between the two, read the Coming Crash before continuing. Short story: suppressed interest rates are an attempt to stimulate economic activity. You don’t cut rates when the economy is booming. You raise them.
Anyway, when you hear something like “we’re at all time highs,” it’s easy to have a knee-jerk feeling that bears are wrong. But that is not necessarily so. Just because the timing is extremely difficult (if not impossible) to nail down, it doesn’t mean the thesis is incorrect.
Debt levels are still at or near all-time highs. Economic data is screaming risk of a global recession. Global treasury yields are negative in many areas. The Fed wants to CUT RATES to stimulate spending. And equities, in the aggregate, are completely overvalued. Cap tip to David Rosenberg on this one:
How expensive are equities? Price/tangible book at 10.8x is nearly double the historical norm, a record high that is 24% above the dotcom bubble peak and represents a 3 SD event. In a word – froth. pic.twitter.com/NlnUtpz5Pi
— David Rosenberg (@EconguyRosie) June 21, 2019
Point is. This is yet another terrific sell opportunity. And if you think I was wrong in my post in October, consider:
A Fun Exercise
Let’s take a look at would have happened if you read The Coming Crash, you actively manage your assets, and you made some changes to your portfolio based off the theme of that post. We’ll use closing prices from the day following the final post in the series as our barometer (Final installment was released on a Sunday 10/7).
Option 1: If you had taken some funds out of the overall market in October and left it in cash, how would you have done?
Option 2: Comparatively, how would you have done if you stayed completely allocated to the market?
Option 3: What if you rotated a portion of your wealth out of equities and purchased some Gold with the proceeds as I mentioned in the post?
Barometer (10/8 Closing prices):
S&P 500 – 2,884.4
Gold – $1,188/oz
Option 1: Part of your portfolio missed a market rally of 2.4% – oh no!
Option 2: You’re up 2.4% – yay!
Option 3: Your equities are up 2.4% but your Gold is up 17.6% – *nodding approval*
Point is, diversify. If you don’t understand markets and monetary policy, learn it. Ignorance will not be a very good excuse if things get ugly.
And just to prove I’m not a permabear who hates everything, let’s look at how my Streaming War recommendations have performed since my post on April 3rd, 2019 – we’ll again take closing price from the day after post:
Since April 4th
An investment weighted equally over those 4 stocks would be up 13.5% – in less than 2 months! That return easily beats both Netflix and the market overall in the same time-frame.
The point of this recap isn’t to suggest how great I am, though I do think I’m pretty swell. The point is to reinforce the idea that A) you don’t need to just buy equities because that’s what every schlub in a tie on CNBC tells you to do. B) you can definitely make money by taking a contrarian view even when markets go up. And C) now is probably a good time to sell.
Here’s the technical view. I love picking on the S&P 500.
Green line shows new all-time highs. Red line shows declining momentum. This is called a bearish RSI divergence. Purely technically, the buying is exhausting. When you factor in the plethora of bad fundamentals (slowing growth in numerous sectors, trade war, Iran situation), it would appear wise to do a little bit of equity de-risking. We might keep going higher. The market is now actively pricing in not one, but two interest rate cuts before the end of the year. Those expectations will probably continue to juice the market a bit higher. But when that sugar rush wears off, like a 4-year-old who just consumed a pixy stick, the crash back down to earth won’t be long after. In my opinion, Fed Funds Rate cuts in 2019 will be one of the great “buy the rumor, sell the news” moments in my lifetime. Or I could be completely wrong. You decide for yourself.
Enjoy your weekend!
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