The 500-pound Gorilla

MARKETCYCLE WEALTH MANAGEMENT

 

 

PUBLISHED on July 22, 2019.

From day-one, the Federal Reserve has had a mandate to do three things:

  • keep inflation low (@ around 2% per year)
  • and promote job growth by holding corporate borrowing costs low
  • but put the breaks on a dangerous overheating late-stage economy by then temporarily making corporate borrowing costs high (raising rates)

 

In a rare move, the Fed is about to alter its mandate to include:

  • raise the inflation level

 

Higher inflation hurts:

  • Workers and consumers because the price of an unchanged ‘thing’ goes up in price; the price of ‘xvz,’ which you use daily, goes up… workers and consumers pay more for the same unimproved and unchanged product, so they are the natural losers.

 

Higher inflation benefits:

  • Corporations because they can charge more for the same unimproved and unchanged product; the price of ‘xvz’ does go up and they make more money from selling it… corporations benefit.
  • As the corporation makes more profit, the price of its stock goes up… investors benefit.
  • In today’s world, wage inflation cannot increase (a worker’s salary does not annually increase) because of the rapid rush toward automation and robotics… corporations benefit.

 

What happens to your money when the Federal Reserve lowers interest rates with unemployment at extreme low levels and the stock market near record highs, like now?

  • The value of the USD (U.S. Dollar) drops which further compounds the problem for U.S. workers and consumers, making everyday items even more expensive… it is mostly large-cap U.S. stocks and giant corporations and commodity producers that benefit from a weak USD.
  • Near-term, the value of gold goes up since it is actually an unprintable currency (longer-term, gold eventually falls before becoming the asset to own sometime around 2031).  Since almost all non-U.S. currencies are concurrently weak, gold may get an even stronger (but temporary) bounce.
  • Bitcoin roared ahead starting several months ago, and it did so for the same reasons as gold (although it currently appears to be over-priced, while gold still likely has further to run).

 

Why the concern?  DEFLATION is bad because, if prices collapse too far, then company profits are damaged so badly that it causes a deflationary economic-recession and a massive stock market drop and high job losses, as in 2008.  The Fed wants to avoid this.

As I type this sentence on July 22nd, for the Fed meeting to be held on Wednesday July 31, there is a 100% chance of a Federal Reserve 0.25% interest rate lowering and a 70% chance of a 0.5% lowering already priced into the market.  So, much of this is already worked into the price of the stock market and the actual announcement might end up moving the market lower, based on the old Wall Street adage:  “Buy (ahead of time) on the rumor and sell on the (day of the actual) news.”

The likely multi-month RESULT of lower rates?  There might (might!) be a final melt-up in the stock market, or perhaps not; there is just as much chance that we just drop from here. But as I said last month, the remaining possible upside gains (10%??) are now smaller than is the possible downside loss (25-50%??) in any investment portfolios that are not tactically managed by an experienced account management firm.

Currently, stock market risk remains high and MarketCycle’s client accounts are positioned to benefit from either a market rise or a market drop.  And no, this does not mean that we go sideways.  If the market goes up, we’ll go up.  If the market drops, we’ll ultimately drop much less.  At this advancing late-stage of the still bullish part of the stock market cycle, this is the best position to hold.

 

 

Gross Domestic Product (GDP) is the total value of everything produced by all of the people plus the companies in a country whether owned by citizens or foreigners. Normally, the entire globe moves in relative tandem.  But at present, they have diverged, with the United States being (too) much stronger than the rest of the globe.  They will eventually converge, so either the rest of the globe somehow gets stronger… Europe, Japan, China, etc get stronger (this is unlikely) OR the United States temporarily gets weaker in the not too distant future (with the gold line below dropping to meet up with the blue line). This is what MarketCycle is seeing:  Temporary U.S. weakness starting sooner rather than later, but after recession, general long-term U.S. out-performance lasting until sometime around 2029.  [UPDATE:  On Friday July 26th, quarterly GDP numbers came in for the U.S. with a drop from the 3.1% shown below… to 2.1%]

 

Home prices are definitely heading lower.  Interest rates are likely heading lower.  At current prices and rates, this is how much steady SALARY you need to make in order to buy the average home in your state:

 

BEYOND MEAT (stock symbol BYND):  I’ve been eating Beyond Meat (vegan) products since well before they went public in their IPO (they currently make 3 items).  They are now trading at 100x sales (and 300x company cash levels!).  This cannot last and they are due a deep correction on the tiniest smidgen of bad news.  To give an idea of its overvaluation:  Microsoft is trading @ 8x sales and Amazon @ 4x sales.  Look out below.

 

IMPORTANT:  Last month’s blog post showed a recent sample of our (paid membership) MarketCycle Wealth REPORT.  Of note was the fact that our risk section had turned from a 10-year long sea of green (BULLISH) to a sea of red tide (WARNING).  Since then, MarketCycle has gotten TWO very rare (proprietary) Double Hindenburg Omens which indicates a high likelihood of a severe & deep market correction soon, or within a period of ‘months.’  In real time and historically going back 70 years, it has never given a false signal (although it could).  The end of this current (too long) market cycle just keeps getting closer and is now likely counted in months rather than years.  Even though we are not yet bearish, this explains why MarketCycle Wealth Management’s global client accounts hold mostly:

  1. low-volatility, quality, dividend-paying, mid & large-cap U.S. ‘momentum defensive stock sectors’
  2. various U.S. income producing assets
  3. leveraged U.S. bonds
  4. long-duration U.S. Treasuries
  5. gold bullion held in the (safe) Central Bank of Canada

 

Frankly, it’s been a volatile “Tweet-Tariff-Threat” filled 2.5 years, when the market actually should have done incredibly well because of the giant corporate tax cuts (which may have been excessive, yet were still needed longer term).  What’s next?  Will the stock market temporarily break higher, above the green line, before heading lower to or toward the red line??  If it were to gyrate toward and then touch the red line at the end of 2020 (because of economic recession) that would represent a 50% loss… similar to what happened in 2002 & 2008.  There is reason to be cautious!

 

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MARKET CYCLE  —  DUAL MOMENTUM  —  LOW VOLATILITY  —  TREND FOLLOWING  —  HEDGE FUND

 

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MarketCycle Wealth Management | Stephen Aust
MarketCycle Wealth Management, LLC is a Registered Investment Advisor. Information presented is for educational purposes only, is not considered an individualized recommendation or personalized investment advice, may not be suitable for everyone and does not intend to make an offer or solicitation for the sale or purchase of any securities. All investments involve risk and unless otherwise stated, are not guaranteed. Past performance or performance charts are not a guarantee of future performance. Portfolio performance charts are shown net of fees so the management fee, brokerage fees, trading fees and ETF fees have already been subtracted. Current performance may be higher or lower than that shown and differing accounts may show different results. Investment returns and principal value in client accounts will fluctuate. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Be sure to consult with a tax professional before implementing any investment strategy.