It’s safe to begin with what we all know. No matter what ‘it’ is, what goes up does come down. When you ask me when it will be and how bad will it get, I counter with who cares when it will be when the better question is how prepared are you now? When you are prepared for the Big One, for example, you are more likely to live and tell your own story. I’m sure you would rather be talking on the news rather than being talked about in the news. According to me, it’s not about the prediction of what might happen when, it’s all about the preparation today so your assets don’t look like they’ve just been hit by a disastrous train wreck, fire or flood. Since 2017 provided good upside reasons for investors to party like it’s 1999, it makes sense to this observer to prepare for a 2018 that shows up like the Great Depression of 1929.
One of the most interesting market commentators is Jeffrey Gundlach the CEO of DubleLine funds. He was on a January 10, 2018 webcast when he said, if the market rallies 15% from here, 2018 will end the year in negative territory. One of the things Gundlach said to watch for is 2.63% on the 10 year Treasury yield and 3% on the 30 year Treasury.
So what’s going on? Carl Weinberg, CEO at High Frequency Economics pointed out that a key to seeing around the next recession corner may be a function of how foreign money ebbs and flows into the USA, on Yahoo Finance on Nov 13, 2017. Weinberg asserts “Foreign direct investment, which is exactly what it sounds like (foreign investors buying USA real estate, financial assets, and businesses) has risen as a percentage of GDP ahead of each of the (four) recessions since the 1980’s.”
“We admit to having no economic theory to explain this,” Weinberg wrote. “That does not deny the correlation. We wonder if we should be concerned about the jump in FDI in the United States in 2015 and 2016 to near-record highs, since all previous spikes in FDI have been followed by a downturn.”
“How much money from abroad, for instance, piled into the U.S. real estate bubble of 2007, or bought into the dotcom bubble?” Weinberg wrote. “In this way, [foreign direct investment] can add incremental destabilization to a cycle in any economy.” Naturally, past performance does not guarantee future results. The Yahoo Finance article concluded with, “But with most assessments of the U.S. economy expecting continued expansion, it is worth asking if investors from outside the country are telling us something we can’t yet see about our economic cycle.”
So to dig deeper I turned to Harry Dent at Dent Research for his comments on January 9. 2018. “Central banks have taken over the markets and economy. They’ve put us on an endless stream of crack and stimulus to keep us going. And now nothing else ‘seems’ to matter as much, not even the most fundamental demographic trends in spending. As long as the markets see low rates and almost-free money, and companies just buy back their stocks instead of investing in real growth, everything seems to keep chugging along all sunshine and roses. But I maintain that you cannot live indefinitely off such something-for-nothing policies. Fundamentals should still mean something in our economy.”
With $12 trillion of country Quantitative Easing outlaid Dent said no combination of countries would have the resources necessary to avoid what he calls the ”Economic Winter Season” and the deflation that comes with that freeze from “rolling over us.” Dent likes to ask, was the massive stimulus finally working after seeming so anemic for years? Or, was it a two year blip in demographics? Dent avers his research suggests it’s more the latter. As you can see in the chart just above, “The next wave down bottoms between 2020 and 2022 and doesn’t turn up strongly until 2025. The worst year of demographic decline should be 2019,” said Dent.
Dent along with other market observers, including this one, sees that it’s clear nearly every market here and abroad are high with expectations of President Trump’s 3%-4% growth rates. Now, what happens if for any reason (you won’t notice until after the fact) this just doesn’t occur? Allow me to repeat myself, enjoy the melt-up as you prepare while you can for the melt down.
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