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One of the most interesting conundrums is the surging wealth gap in America. Despite two of the largest bull markets in history since 1980, most Americans struggle with making ends meet and are unprepared for retirement. Such a reality starkly differs from the belief that rising asset prices benefit the masses.

For example, in a recent St. Louis Federal Reserve Bank analysis, total household wealth was $139.1 trillion, covering 131 million families. Of that total wealth, 74% was owned by just 13.2 million families, or roughly 10% of the population.

Notably, this measure of wealth includes the equity of the family’s home. While home equity is essential, it is not readily spendable without taking on debt to extract the value. Therefore, Americans’ “liquid wealth” is far more unequally distributed. However, such is hard to fathom given the endless parade of media and social media influencers extolling the virtues of “building wealth through investing.”

Interestingly, that survey came after the Government injected nearly $5 trillion into the economy, a massive surge in deficit spending, and the Fed’s $120 billion monthly injections doubled asset prices from the March 2020 lows. Unsurprisingly, in February, Fidelity published its latest analysis showing the number of retirement accounts with balances of more than $1 million surged toward a record. To wit:

“The number of seven-figure 401(k) accounts at Fidelity Investments jumped 20% in 2023’s final quarter to 422,000, marking a sharp recovery from the previous quarter’s 7.7% drop.

Gains in the stock market helped swell retirement balances last year as the S&P 500 advanced 24% following 2022’s 19% decline. The impressive run was powered in large part by the so-called “Magnificent 7” stocks that now make up roughly 30% of the market-cap weighted S&P 500 Index. The only time when the ranks of 401(k) millionaires at Fidelity was higher was in 2021’s fourth quarter, when there were 442,000 such accounts. Elsewhere, the number of seven-figure IRAs is at a record 391,600 accounts.” – Bloomberg

…click on the above link to read the rest of the article…

Monetary Policy. Is The Fed Trying To Wean Markets Off Of It?

January 20, 2023

Monetary Policy. Is The Fed Trying To Wean Markets Off Of It?

Is the Fed trying to wean the markets off monetary policy? Such was an interesting premise from Alastair Crooke via the Strategic Culture Foundation. To wit:

“The Fed however, may be attempting to implement a contrarian, controlled demolition of the U.S. bubble-economy through interest rate increases. The rate rises will not slay the inflation ‘dragon’ (they would need to be much higher to do that). The purpose is to break a generalised ‘dependency habit’ on free money.”

That is a powerful assessment. If true, there is an overarching impact on the economic and financial markets over the next decade. Such is critical when considering the impact on financial market returns over the previous decade.

“The chart below shows the average annual inflation-adjusted total returns (dividends included) since 1928. I used the total return data from Aswath Damodaran, a Stern School of Business professor at New York University. The chart shows that from 1928 to 2021, the market returned 8.48% after inflation. However, notice that after the financial crisis in 2008, returns jumped by an average of four percentage points for the various periods.“

Monetary, Monetary Policy. Is The Fed Trying To Wean Markets Off Of It?

We can trace those outsized returns back to the Fed’s and the Government’s fiscal policy interventions during that period. Following the financial crisis, the Federal Reserve intervened when the market stumbled or threatened the “wealth effect.”

Many suggest the Federal Reserve’s monetary interventions do not affect financial markets. However, the correlation between the two is extremely high.

The result of more than a decade of unbridled monetary experiments led to a massive wealth gap in the U.S. Such has become front and center of the political landscape.

It isn’t just the massive expansion in household net worth since the Financial Crisis that is troublesome. The problem is nearly 70% of that household net worth became concentrated in the top 10% of income earners.

…click on the above link to read the rest…

The Biggest Crash In History Is Coming? Kiyosaki Says So.

May 13, 2022

The Biggest Crash In History Is Coming? Kiyosaki Says So.

Robert Kiyosaki recently tweeted, “The best time to prepare for a crash is before the crash. The biggest crash in world history is coming. The good news is the best time to get rich is during a crash. The bad news is the next crash will be a long one.”

Is Kiyosaki just being hyperbolic, or should investors prepare for the worst?

Importantly, I received Kiyosaki’s comment in an email that I could find out more by just clicking on the link to get a “free” report.

I can save you time, and future spam emails, by telling you that Kiyosaki will be correct.

Eventually.

However, the problem, as always, is “timing.”

As discussed previously, going to cash too early can be as detrimental to your financial outcome as the crash itself.

Over the past decade, I have met with numerous individuals who “went to cash” in 2008 before the crash. They felt confident in their actions at the time. However, that “confidence” gave way to “confirmation bias” after the market bottomed in 2009. They remained convinced the “bear market” was not yet over, and sought out confirming information.

As a consequence, they remained in cash. The cost of “sitting out” on a market advance is evident.

As the market turned from “bearish” to “bullish,” many individuals remained in cash worrying they had missed the opportunity to get in. Even when there were decent pullbacks, the “fear of being wrong” outweighed the necessity of getting capital invested.

Biggest Crash, The Biggest Crash In History Is Coming? Kiyosaki Says So.

The email I received noted:

“If such a disaster could be in the making, your assets are at risk and this requires your immediate attention! And if you believe that now isn’t the time to protect yourself and your family, when will it be?”

Let’s start with that last sentence.

…click on the above link to read the rest of the article…

A 50-Percent Decline Will Only Be A Correction

February 8, 2022

A 50-Percent Decline Will Only Be A Correction

A 50-percent decline will only be a correction and not a bear market.

I know. Right now, you are thinking, how could anyone suggest a 50-percent decline in the market is NOT a bear market. Logically you are correct. However, technically, we need an essential distinction between a “correction” and a “bear market.”

In March 2020, the stock market declined a whopping 35% in a single month. It was a rapid and swift decline and, by all media accounts, was an “official” bear market. But, of course, with the massive interventions of the Federal Reserve, the reversal of that decline was equally swift. As YahooFinance pointed out at the time.

“The S&P 500 set a new record high this week for the first time since Feb. 19, surging an eye-popping 51% from its March 23 closing low of 2,237 to a closing high of 3,389 on Tuesday. This represents the shortest bear market and third fastest bear-market recovery ever.” – Sam Ro

50-percent decline, A 50-Percent Decline Will Only Be A Correction

However, as I discussed at the time, March 2020, much like the “1987 crash,” was in actuality only a correction. To understand why March was not a “bear market,” we must define the difference between an actual “bear market” and a “correction.”

Defining A Correction & A Bear Market

Start with Sentiment Trader’s insightful note following the 2020 recovery to new highs.

“This ended its shortest bear market in history. Using the completely arbitrary definition of a 20% decline from a multi-year high, it has taken the index only 110 days to cycle to a fresh high. That’s several months faster than the other fastest recoveries in 1967 and 1982.”

Note their statement that the media’s definition of a “bear market” consisting of a 20% decline is “completely arbitrary.” Given that price is nothing more than a reflection of the psychology of market participants, using the 20% definition may not be accurate any longer.

…click on the above link to read the rest of the article…

Potemkin Economy: Costs & Consequences

February 4, 2022

Potemkin Economy: Costs & Consequences

A Potemkin economy has lured the Fed, economists, and Wall Street analysts into a potentially dangerous assumption of economic normalcy. However, with a review of how we got here, we can better understand the costs and consequences of monetary interventions.

“In 1783, after the Russian annexation of Crimea from the Ottoman Empire and the liquidation of the Cossack Zaporozhian Sich, GrigoryPotemkin became governor of the region. Crimea, devastated by the war, and the Muslim Tatar inhabitants became viewed as a potential fifth column of the Ottoman Empire. Potemkin’s major tasks were to pacify and rebuild the country by bringing in Russian settlers.

In 1787, as a new war was about to break out between Russia and the Ottoman Empire, Catherine II, with her court and several ambassadors, made an unprecedented six-month trip to New Russia. One purpose of this trip was to impress Russia’s allies prior to the war. Another purpose was to familiarize herself, supposedly directly, with her new possessions.To help accomplish this, Potemkin set up “mobile villages” on the banks of the Dnieper River. As soon as the barge carrying the Empress and ambassadors arrived, Potemkin’s men, dressed as peasants, would populate the village. Once the barge left, the village was disassembled, then rebuilt downstream overnight.” – Wikipedia

While there is some debate about the accuracy of the story, in politics and economics, a Potemkin village is any construction (literal or figurative) whose sole purpose is to provide an external façade to lead the population to believe the country is faring better than reality.

A reasonable amount of data suggests the Federal Reserve and the Government created such a facade.

A Potemkin Market

…click on the above link to read the rest of the article…

Could The Fed Trigger The Next “Financial Crisis”

November 29, 2021

Could The Fed Trigger The Next “Financial Crisis”

Could the Fed trigger the next “financial crisis” as they begin to hike interest rates? Such is certainly a question worth asking as we look back at the Fed’s history of previous monetary actions. Such was a topic I discussed in “Investors Push Risk Bets.” To wit:

“With the entirety of the financial ecosystem more heavily levered than ever, the “instability of stability” is the most significant risk.

The ‘stability/instability paradox’ assumes all players are rational and implies avoidance of destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’

The Fed is highly dependent on this assumption. After more than 12-years of the most unprecedented monetary policy program in U.S. history, they are attempting to navigate the risks built up in the system.“

The problem, as shown below, is that throughout history, when the Fed begins to hike interest rates someone inevitability pushes the “big red button.”

Next Financial Crisis, Could The Fed Trigger The Next “Financial Crisis”

The behavioral biases of individuals remain the most serious risk facing the Fed. While they may hope that individuals will act rationally as they hike rates and tighten monetary policy, investors tend not to act that way.

Importantly, each previous crisis in history was primarily a function of extreme excesses in one area of the market or economy.

In the early 70’s it was the “Nifty Fifty” stocks,
Then Mexican and Argentine bonds a few years after that
“Portfolio Insurance” was the “thing” in the mid -80’s
Dot.com anything was a great investment in 1999
Real estate has been a boom/bust cycle roughly every other decade, but 2007 was a doozy

What about currently?

A Bubble In “Everything”

No matter what corner of the market or economy you look there are excesses.

…click on the above link to read the rest of the article…

The 5000-Year View Of Rates & The Economic Consequences

October 11, 2021

The 5000-Year View Of Rates & The Economic Consequences

The fact we have the lowest interest rates in 5000-years is indicative of the economic challenges we face. Such was a note brought to my attention by my colleague Jeffrey Marcus of TPA Analytics:

“BofA wants you to know that ‘Interest rates haven’t been this low in 5,000-years.‘ That’s right, 5000 years. ‘In the next 5,000 years, rates will rise, but no fear on Wall Street this happens anytime soon,’ said David Jones, director of global investment strategy at Bank of America. This should not come as a shock to anyone who has been watching, given that the FED’s balance sheet is now an astonishing $8.5 trillion and that fiscal spending has caused the U.S. debt to balloon to over $28 trillion (For reference, the U.S. GDP is $22 trillion).

All of this really means that the FED and the U.S are in a tough spot. They need a lot of growth to dig out from mountains of debt, but they cannot afford for rates to move too high or debt service will become an issue.“

Rates Economic 5000-year, The 5000-Year View Of Rates & The Economic Consequences

Yes, rates will probably rise at some point in the next 5000-years. However, currently, the primary argument is that rates must increase because they are so low.

That argument fails in understanding that low rates are emblematic of weak economic growth rates, deflationary pressures, and demographic trends.

Short-Term Rate Rise Can’t Last

In recent weeks, interest rates rose sharply over concerns of a debt-ceiling default and inflationary fears. But, asMish Shedlock noted, five factors are spooking the bond market.

Debt Ceiling Battle: Short Term, Low Impact
Supply Chain Disruptions: Medium Term, Medium Impact
Trade Deficit: Long Term, Low-to-Medium Impact
Biden’s Build Back Better Spending Plans: Long Term, High Impact
Wage Spiral: Long Term, High Impact

…click on the above link to read the rest of the article…

Markets Next “Minsky Moment”

July 27, 2021

Technically Speaking: The Markets Next “Minsky Moment”

In this past weekend’s newsletter, I discussed the issue of the markets next “Minsky Moment.” Today, I want to expand on that analysis to discuss how the Fed’s drive to create “stability” eventually creates “instability.”

In 2007, I was at a conference where Paul McCulley, who was with PIMCO at the time, discussed the idea of a “Minsky Moment.” At that time, this idea fell on “deaf ears” as markets were surging higher amidst a real estate boom. However, it wasn’t too long before the 2008 “Financial Crisis” brought the “Minsky Moment” thesis to the forefront.

So, what exactly is a “Minsky Moment?”

Economist Hyman Minsky argued that the economic cycle is driven more by surges in the banking system and credit supply. Such is different from the traditionally more critical relationship between companies and workers in the labor market. Since the Financial Crisis, the surge in debt across all sectors of the economy is unprecedented.

Markets Minsky Moment, Technically Speaking: The Markets Next “Minsky Moment”

Importantly, much of the Treasury debt is being monetized, and leveraged, by the Fed to, in theory, create “economic stability.” Given the high correlation between the financial markets and the Federal Reserve interventions, there is credence to Minsky’s theory. With an R-Square of nearly 80%, the Fed is clearly impacting financial markets.

Those interventions, either direct or psychological, support the speculative excesses in the markets currently.

Bullish Speculation Is Evident

Minsky’s specifically noted that during periods of bullish speculation, if they last long enough, the excesses generated by reckless, speculative activity will eventually lead to a crisis. Of course, the longer the speculation occurs, the more severe the problem will be.

Currently, we see clear evidence of “bullish speculation” from:

…click on the above link to read the rest of the article…

Lance Roberts: GMO’s Jeremy Grantham Is Correct, There’s An ‘Epic Bubble In Stocks’

January 8, 2021

Lance Roberts: GMO’s Jeremy Grantham Is Correct, There’s An ‘Epic Bubble In Stocks’

Following GMO’s co-founder Jeremy Grantham’s renewed warning about extreme overvaluations, RIA Advisors Chief Investment Strategist Lance Roberts chimed in on the conversation Thursday morning.

In “Three Minutes on Markets & Money,” Roberts agress with Grantham, saying, “the stock market is in a bubble.”

To refresh readers on Grantham’s Tuesday note titled “Waiting for the Last Dance,” Grantham wrote, “today, the P/E ratio of the market is in the top few percent of the historical range, and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.”

He wrote while he doesn’t know when the bubble will burst, the bust cycle is inevitable, and not even the Federal Reserve can prevent it.

“Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives,” Grantham said.

So back to Roberts, he says bubbles are a function of the market and repeat throughout time. Clearly, that is true in the figure below, showing bubbles over the past four decades.

Today is “clearly a bubble,” he said, adding that S&P500 valuations are overly stretched.

He said investors’ psychology is euphoric as they take on more equity exposure than ever before, adding that most speculative risks are being transacted in the options market.

In a series of charts, Roberts shows extreme optimism and/or high valuations that are not sustainable.

Market Cap Of Stocks / GDP Ratio

S&P500 Price To Sales Ratio

…click on the above link to read the rest of the article…

Fourth Turning Accelerating Towards Climax

May 12, 2020

FOURTH TURNING ACCELERATING TOWARDS CLIMAX

“At some point, America’s short-term Crisis psychology will catch up to the long-term post-Unraveling fundamentals. This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed.” – Strauss & Howe – The Fourth Turning

Economists Predict Great Depression II for US Economy: Fast or V ...

I’ve been writing articles about the Fourth Turning for over a decade and nothing has happened since its tumultuous onset in 2008, with the global financial collapse, created by the Federal Reserve and their Wall Street co-conspirator owners, that has not followed along the path described by Strauss and Howe in their 1997 book – The Fourth Turning.

Like molten lava bursting forth from a long dormant (80 years) volcano, the core elements of this Fourth Turning continue to flow along channels of distress, long ago built by bad decisions, corrupt politicians and the greed of bankers. The molten ingredients of this Crisis have been the central drivers since 2008 and this second major eruption is flowing along the same route. The core elements are debt, civic decay, and global disorder, just as Strauss & Howe anticipated over two decades ago.

…click on the above link to read the rest of the article…

Oil Price Crash Was Inevitable

April 25, 2020

Oil Price Crash Was Inevitable

The oil price crash was inevitable.

To understand why we have to review a bit of history.

In 2013, I began warning of the risk to oil prices due to the ongoing imbalances between global supply and demand. Those warnings fell on deaf ears.

Nobody wanted to pay much attention to the fundamentals at a time when near-zero interest rates were pushing banks, hedge funds, and private equity firms, to chase the “yield” in the energy space. Naturally, with money flooding into the system, companies were forced to drill economically unproductive wells to meet investor demands, which drove supplies higher.

Disclaimer

This week’s #MacroView is a broader commentary on the more general issues of the oil market. However, given this backdrop of what oil prices will likely remain suppressed far longer than most currently imagine, some opportunities exist in the energy space.

We recently added positions in Exxon (XOM), Chevron (CVX), and the SPDR Energy ETF (XLE) to our portfolios. We believed the companies offered significant value before the crisis, and offer even more due to the sell-off in oil.

Based on our discounted cash flow model for XOM and CVX, we think both companies are 25% undervalued. The model assumes very conservative earnings projections for the next three years and a low EPS growth rate after that. In addition to trading at a steep discount, we think their strong balance sheets put these companies in a prime position to purchase sharply discounted energy assets in the months ahead.

These stocks, and the sector, will be volatile for a while, but we intend to add to these positions in the future and potentially hold them for a long time.

Now, for the rest of the story.

…click on the above link to read the rest of the article…

#MacroView: The Fed Can’t Fix What’s Broken

March 28, 2020

#MacroView: The Fed Can’t Fix What’s Broken

“The Federal Reserve is poised to spray trillions of dollars into the U.S. economy once a massive aid package to fight the coronavirus and its aftershocks is signed into law. These actions are unprecedented, going beyond anything it did during the 2008 financial crisis in a sign of the extraordinary challenge facing the nation.” – Bloomberg

Currently, the Federal Reserve is in a fight to offset an economic shock bigger than the financial crisis, and they are engaging every possible monetary tool within their arsenal to achieve that goal. The Fed is no longer just a “last resort” for the financial institutions, but now are the lender for the broader economy.

There is just one problem.

The Fed continues to try and stave off an event that is a necessary part of the economic cycle, a debt revulsion.

John Maynard Keynes contended that:

“A general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”

In other words, when there is a lack of demand from consumers due to high unemployment, then the contraction in demand would force producers to take defensive actions to reduce output. Such a confluence of actions would lead to a recession.

On Thursday, initial jobless claims jumped by 3.3 million. This was the single largest jump in claims ever on record. The chart below shows the 4-week average to give a better scale.

This number will be MUCH worse next week as many individuals are slow to file claims, don’t know how, and states are slow to report them.

…click on the above link to read the rest of the article…

Margin Call: You Were Warned Of The Risk

March 19, 2020

Margin Call: You Were Warned Of The Risk

I have been slammed with emails over the last couple of days asking the following questions:

“What just happened to my bonds?”

“What happened to my gold position, shouldn’t it be going up?”

“Why are all my stocks being flushed at the same time?”

As noted by Zerohedge:

“Stocks down, Bonds down, credit down, gold down, oil down, copper down, crypto down, global systemically important banks down, and liquidity down…
Today was the worst day for a combined equity/bond portfolio… ever…”

This Is What A “Margin Call,” Looks Like.

In December 2018, we warned of the risk. At that time, the market was dropping sharply, and Mark Hulbert wrote an article dismissing the risk of margin debt. To wit:

“Plunging margin debt may not doom the bull market after all, reports to the contrary notwithstanding.
According to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it’s below.
Why, then, do I suggest not becoming overly pessimistic? For several reasons:
1) The margin debt indicator issues many false signals
2) There is insufficient data
3) Margin debt is a strong coincident indicator.”

I disagreed with Mark on several points at the time. But fortunately the Federal Reserve’s reversal on monetary policy kept the stock market from sinking to levels that would trigger “margin calls.”

As I noted then, margin debt is not a technical indicator that can be used to trade markets. Margin debt is the “gasoline,” which drives markets higher as the leverage provides for the additional purchasing power of assets. However, that “leverage” also works in reverse as it provides the accelerant for larger declines as lenders “force” the sale of assets to cover credit lines without regard to the borrower’s position.

…click on the above link to read the rest of the article…

Special Report: Panic Sets In As “Everything Must Go”

March 12, 2020

Special Report: Panic Sets In As “Everything Must Go”

Note: All charts now updated for this mornings open.

The following is a report we generate regularly for our RIAPRO Subscribers. You can try our service RISK-FREE for 30-Days.

Headlines from the past four-days:

Dow sinks 2,000 points in worst day since 2008, S&P 500 drops more than 7%

Dow rallies more than 1,100 points in a wild session, halves losses from Monday’s sell-off

Dow drops 1,400 points and tumbles into a bear market, down 20% from last month’s record close

Stocks extend losses following 15-minute ‘circuit breaker’ halt, S&P 500 drops 8%

It has, been a heck of a couple of weeks for the market with daily point swings running 1000, or more, points in either direction.

However, given Tuesday’s huge rally, it seemed as if the market’s recent rout might be over with the bulls set to take charge? Unfortunately, as with the two-previous 1000+ point rallies, the bulls couldn’t maintain their stand.

But with the markets having now triggered a 20% decline, ending the “bull market,” according to the media, is all “hope” now lost? Is the market now like an “Oriental Rug Factory” where “Everything Must Go?”

It certainly feels that way at the moment.

“Virus fears” have run amok with major sporting events playing to empty crowds, the Houston Live Stock Show & Rodeo was canceled, along with Coachella, and numerous conferences and conventions from Las Vegas to New York. If that wasn’t bad enough, Saudi Arabia thought they would start an “oil price”war just to make things interesting.

What is happening now, and what we have warned about for some time, is that markets needed to reprice valuations for a reduction in economic growth and earnings.

It has just been a much quicker, and brutal, event than even we anticipated.

The questions to answer now are:

…click on the above link to read the rest of the article…

MacroView: The Next “Minsky Moment” Is Inevitable

February 8, 2020

MacroView: The Next “Minsky Moment” Is Inevitable

In 2007, I was at a conference where Paul McCulley, who was with PIMCO at the time, was discussing the idea of a “Minsky Moment.” At that time, this idea fell on “deaf ears” as the markets, and economy, were in full swing.

However, it wasn’t too long before the 2008 “Financial Crisis” brought the “Minsky Moment” thesis to the forefront. What was revealed, of course, was the dangers of profligacy which resulted in the triggering of a wave of margin calls, a massive selloff in assets to cover debts, and higher default rates.

So, what exactly is a “Minskey Moment?”

Economist Hyman Minsky argued that the economic cycle is driven more by surges in the banking system, and in the supply of credit than by the relationship which is traditionally thought more important, between companies and workers in the labor market.

In other words, during periods of bullish speculation, if they last long enough, the excesses generated by reckless, speculative, activity will eventually lead to a crisis. Of course, the longer the speculation occurs, the more severe the crisis will be.

Hyman Minsky argued there is an inherent instability in financial markets. He postulated that an abnormally long bullish economic growth cycle would spur an asymmetric rise in market speculation which would eventually result in market instability and collapse. A “Minsky Moment” crisis follows a prolonged period of bullish speculation which is also associated with high amounts of debt taken on by both retail and institutional investors.

One way to look at “leverage,” as it relates to the financial markets, is through “margin debt,” and in particular, the level of “free cash” investors have to deploy. In periods of “high speculation,” investors are likely to be levered (borrow money) to invest, which leaves them with “negative” cash balances.

…click on the above link to read the rest of the article…

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