Folks, I can’t state strongly enough that the world sits on the precipice of an economic collapse like we’ve never seen. The real question is, when this collapse of Biblical proportions occurs, will you have built an Ark for your investment portfolio in time?
The people responsible are the central bankers and global elites. They are more interested in keeping their Bentleys gassed and their pools heated than providing opportunities for prosperity for the rest of us.
These people have gotten away with being modern day versions of Frank and Jesse James for so long, it’s now our “normal” and we don’t even question it. The unfortunate fact is that for those of us not lucky enough to hobnob with central bankers and people of influence, it’s about to get a lot worse.
Central bankers and the world’s elites have put us on the Kingda Ka without safety harnesses. What comes next for our families and our wealth will make Chernobyl look like a weekend at Epcot.
These people in power have hit the button and started the ride. But the good news is, it’s not too late.
I’m going to share with you the one thing the elites would rather keep secret because they plan to use it to line their own pockets! This one thing will destroy your wealth but I’m going to tell you exactly how to side step the danger.
You’re Better Than That
If you were enticed by the title of this commentary or the lead paragraph; then I have to slap your hands with a ruler like Sister Margaret from the Villa Maria Academy. Shame on you for being pulled in by that fear mongering crap!
The one thing that will destroy your wealth is making investment decisions based on blogs, “research” or any commentary that preys on your fear of financial loss.
Managing money, whether it’s your own or other peoples’, is serious business. As such, it requires a serious approach that is data-dependent, process driven and risk conscious.
Enter Captain Fear Monger
Fear mongering gets people paid because it strikes a chord with our caveman and cave women brains. We are hard wired to believe a saber tooth tiger is just around the next rock. Well, this isn’t 3000 B.C. and unless you live in South Florida, a saber tooth tiger isn’t around the corner.
There have been no shortage of commentaries comparing 2017 to prior horrific time periods like 1929 and 1937. Some people believe the U.S. is on the cusp of the next “Great Recession.” The S&P 500’s recent 1.2% pullback from its brand new all-time high has only encouraged the proliferation of these types of commentaries.
I’ve sifted through dozens of these articles and found one that succinctly captures the common aspects prevalent in these types of commentaries. I’m going to leave this guy’s name out of it and simply refer to him as Captain Fearmonger. That said, if you want to fact check me you can find his commentary here.
Capitan FM believes that 2017 is setting up to be a repeat of 1937. He says the Fed is going to make the same mistake they did back then by hiking rates into a weak economy with “soaring” inflation. He believes this will lead to a recession and a 48% plunge in the S&P 500.
Fear mongering aside, I encourage you to embrace the reality of the U.S. economy and the possible implications to U.S. equities. If a recession or correction were to occur, these possibilities aren’t to be feared but rather to be monitored and exploited.
Weak Economic Analysis
Captain Fearmonger uses the Atlanta Fed’s GDPnow tracker as evidence the US economy is in a weak state. “GDP Now has collapsed from 3.4% in early February to 1.3% today. It will be revised even lower based on the awful deficit numbers (the US trade deficit hit a five year high in January).”
All he’s managed to highlight is that the inept forecasting of the Atlanta Fed has declined from a first Q1 estimate of 3.4% down to 1.3%. US GDP growth itself has undergone no such decline. It’s a clever twist of statistics but it’s completely inaccurate.
We track 15 different US growth indicators that we carefully curated out of the thousands reported each year. Of those 15, ten have improved since December and are implying that the annual growth of US GDP is accelerating here in Q1 2017. Further confirmation came last week with February’s labor data. Both ADP and NFP annual growth rates accelerated higher for the second consecutive month. Captain FM is right when he says US exports will be a drag on US growth, but how much of a drag remains to be seen. It’s likely other parts of the economy can mask the trade deficit impact for at least the next quarter.
But it’s not just lagging data that contradicts Captain FM’s (and the Atlanta Fed) premise that growth is slowing; markets are telling us in real-time he’s wrong.
I track two proprietary indices composed of markets that outperform or underperform when US growth is improving. The index of markets that outperform, the high growth index, has outpaced the slow growth index by 400 basis points so far this year.
What’s more, in just the first 8 trading days of March, the slow growth index has declined 3.9%. At the same time, its high growth counterpart is holding steady, up 10 basis points. I’ve tracked these indices for years and this magnitude of divergence has never been a head fake.
Don’t get me wrong, I’m not a Polly Anna that believes you should always be a buyer of the US economy and US assets. I’m data dependent and process driven. I will stay bullish on the US economy and the markets that outperform in that environment until the data and my framework show otherwise.
Fly Like an Eagle
I guess “soaring” is a somewhat subjective term and open to interpretation. I’ll just layout the inflation data from 2017 and 1937 and let you decide if inflation is soaring like an eagle or not.
Back in ’37, inflation readings bounced between 2.1% and 5.1%, averaging 3.6% for the full year. This was a 210 basis point acceleration from the average reading of 1.5% in 1936.
Last year, inflation readings oscillated between 0.8% and 2.1%, averaging 1.4% for the full year. January’s reading jumped to 2.5%, a 110 basis point acceleration from last year’s average.
I don’t know about you but a 2.5% inflation rate on the back of a 110-basis point acceleration doesn’t scream “soaring” to me.
If we asked folks who took out a mortgage back in the early 80’s if they thought 2.5%, or even 1937’s peak inflation rate of 5.1%, was “soaring;” they’d laugh at us.
Inflation is accelerating but it’s not out of hand. In fact, steady inflationary pressure is a positive development for most risk assets. Besides that, wouldn’t it be nice to get a little interest bump on your money market or savings account? Needless to say, inflation running low single digits isn’t going to send the U.S. economy careening off a cliff.
Sawing the Market in Half
Captain FM finishes by pointing out that because of the Fed’s mistake, stocks were “nearly halved.” He must have forgotten that the Fed made this exact mistake in December 2015 and no calamity ensued.
When the Fed hiked rates for the first time in a decade, they did so into an economy that was actually slowing. US GDP had peaked in Q1 2015 and slowed for three consecutive quarters right into that first hike. The economy slowed for another 6 months before bottoming last summer.
The S&P did experience an 11% drawdown in the immediate aftermath of the rate hike. But it recovered that loss and gained 7.5% cumulatively in the next 7 months while the Fed was normalizing, US growth was slowing and inflation was accelerating.
Investing is nuanced and financial market outcomes exist along a spectrum of probabilities. Just because something happened a certain way before does not guarantee a similar outcome this tim
The Bottom Line
Let me ask you a question: what if the US enters a recession and the US equity market pukes up 15-20% of its gains? Recessions and stock market corrections are healthy and typically lead to greater gains in the future.
They’re like drinking Skinny Me Tea for a month. Yeah of course it’s no fun and it may be a little painful, but 30 days later you’ve lost weight and your skin absolutely glows. Not that I know from firsthand experience, I have a friend who tried it.
If a recession occurs, there will be plenty of signals ahead of time. Economies don’t go from humming along, to recession in 6 weeks. Likewise, markets don’t go from cranking all-time highs to crashing in a fort night.
In addition to having ample warning, not every asset class craters when the US economy hits the recession skids. Even if you’re a long only investor, there are places to put your hard-earned shekels until the economy bottoms and starts to rev up again.
If you’re a trader experienced with shorting markets, then a recession is fertile ground for you my friend. In a recessionary environment, you will get ample opportunities, on both the long and short side, when volatility ramps up across all 4 major asset classes.
Fear mongering articles and “research” are like products on late night infomercials. They are typically a better deal for the person selling than for the person buying. Don’t let these “sources” convince you the next Econopocalypse is right around the corner. Trust me, stay data dependent, process driven and risk conscious; you’ll come out way ahead.