The latest in a growing chorus of major banks issuing warnings about the likelihood of a substantial stock market correction is Morgan Stanley. In a piece authored by Andrew Sheets, chief cross-asset strategist at Morgan Stanley, he affirms that:
“The time has come to put our money where our mouth is. In light of these concerns and others, (namely that bad data should be feared rather than cheered because of the likelihood of rate cuts and that the market is too optimistic on earnings going forward. Also underestimating the pressure from inventories, labor costs and trade uncertainty) we are downgrading our allocation to global equities from equal weight to underweight. The most straightforward reason for this shift is simple- we project poor returns”.
I guess the banks are seeing the same thing I am seeing. Namely that the “printing and buying” schemes of the central banks may have just run their course. I have to wonder aloud if interest rate cuts would have the desired effect on the markets now as we may have come face to face with peak debt.
The global economy is accelerating to the downside as I have been pointing out for months as it seems each economic report is weaker than the last. JP Morgan is the first to opine that Germany may have actually seen contraction rather than growth in 2Q 2019. Also, according to Carsten Brzeski, chief economist at ING Germany “Devastating new orders data just undermined any hopes for an industrial rebound. We are starting to lose our optimism. Combined with the weakest June performance of the labor market since 2002 and disappointing retail sales, today’s new orders wrap up a week to forget for the German economy.”
In possibly the greatest warning of all Deutsche Bank is laying off 18,000 people and exiting the equity sales and trading business. This at a time when stocks and bonds are at all-time highs. There is a saying that they have that says “be first, be smarter or cheat”. Are they just the first? Time will tell. We already KNOW they cheat because they have paid billions in fines because of it.
Commerzbank’s Peter Dixon and Joerg Kraemer said “The eagerly expected economic recovery in Germany is still nowhere to be seen. In addition to the weakness of the auto sector, this is attributable to weak demand from China, where the extensive stimulus measures have not yet had any effect”.
This is a real mouthful as the focus was on Germany but possibly a lot more important is the statement about MASSIVE STIMULUS MEASURES THAT HAVE NOT HAD ANY EFFECT YET IN CHINA. Of course, they had about a trillion in debt in the year 2000 and admit to over $40 trillion today. This is another sign, in my opinion, that once you reach peak debt (people, corporations, cities, states and national governments have all the debt they can handle- and some substantially more than they can handle) actions that worked in the past may cease to work going forward. Many people have been conditioned that lower rates = higher stock and bond prices. As Lee Corso on college gameday says “NOT SO FAST” when he disagrees with someone else’s projections. It pays to keep an eye on this globally. Yes, right here in the USA also. I believe the Fed is actually pondering what they may have to do if they reduce rates and the desired outcome is not achieved.
It appears to me that they will try to “talk” the markets higher for as long as they can without having to find out.
For anyone still in the delusion that we have “the greatest economy of all time” and we are not affected by this think about this.
Chicago, Philly, New York and Dallas PMI are all slowing down dramatically.
Store closings are at all-time records. Year to date job cuts are the highest since 2009 while multiple-job holders are at record highs. (What kind of jobs are being created when you need two or three to survive?)
Supposedly we have a “tight” labor market. The “experts” on the financial game shows are confused why incomes are not rising because “we have full employment”. Or NOT! According to the US Household Survey “the number of people unemployed has dropped by more than 400,000, or 6.5%, since December. But the number of employed has also declined by almost 200,000. So their sum total- the labor force- has fallen by almost 600,000, or about 0.33%”. In English, this means that 600,000 people have been added to the “NOT COUNTED” when determining the U3 unemployment rate which is about as real as a unicorn. According to the USdebtclock.org that number stands at over 96 million. That is 96 million people of working age who, according to the U3 don’t exist at all. That is over 25% of our ENTIRE population that cannot find a job- many for years.
Vehicle sales have plunged to levels not seen since 2009.
Even as manufacturing is grinding to a halt inventories are piling up in almost every industry.
All of the “printing and buying” has artificially inflated asset prices but it appears that it has happened at the expense of the economy that you and I need to sustain our lifestyles. It is imploding and is obvious to anyone who cares to look past the financial game shows and the obvious mistruths about our economy coming from those who would like to keep this illusion alive for as long as possible.
There are many people out there misleading many- like Larry Kudlow who is being paraded out like Baghdad Bob and telling us that all is great and that income inequality isn’t bad. REALLY? Tell that to the millennials who are working 2-3 jobs to survive. Tell that to the growing list of homeless people who have been priced out of housing by those “printing” money and driving asset prices higher for their own benefit. They really must think we are stupid, blind or both. Shame on them all!
The sad part to me is that all of this information is out there but people fail to look. They see headlines and hear soundbites. So many are deceived by the R and the D by people’s names when they should understand that we are all in this together and we need to stand together to effect any real change. R and D is the problem- not the solution.
The best performing asset class- even in dollar terms since the year 2000- is gold. The powers that be keep that quiet and dismiss it as “a barbaric relic” as they are buying it in record amounts- along with the largest commercial banks and sovereign governments around the world.
Personally, I believe that these people know EXACTLY what they are doing and are determined to own EVERYTHING as I wrote about 5-6 years ago. They are well on their way. Just look at Japan with a 574 TRILLION yen balance sheet months ago and threatening to “do more!” Look at the ECB that is running out of bonds to buy. Once they own too much of anything I don’t believe they can “print” money and buy it again leaving only one way for assets to go- DOWN because of no demand. The artificial demand created in the past 10 years has us in a situation where more just may be the problem going forward.
With all of this uncertainty and far more than I can put into a short note like this it sure makes sense to me to diversify my assets and include commodities and hard assets as well as traditional holdings to create a portfolio that may have a little more of a chance at profiting from what may be coming down the pike.
The sheer numbers needed to keep this artificial system propped up are becoming even more absurd than they have been and are growing exponentially. This leads me to believe that REAL assets that can’t be “printed up” out of nowhere like stocks, bonds, derivative contracts, cash, etc. will be the preferred method of payment for goods that need to be produced. This is also an area that has not seen the type of gains that we have seen in financial assets over the past few years.
These assets might just allow us to buy low and sell high which is not the case with assets that have been artificially propped up for most of the century.