11 Oct Tales from the Economic Dark Side*

Tales from the Economic Dark Side

Markets alternate between optimism and pessimism in a struggle that pits bulls against bears. Since optimism generally prevails, long-term investors – the bulls – most often have the happier endings. Markets go up more often than they go down. There are exceptions … or exceptional periods, of course – the crashes of 1929 and 1987, the long bear market from 1973-82, the dot-com bust of 2000, and the Great Recession of 2008-09 being the most memorable examples. However, the unprecedented 10+ year bull market that started in March 2009 and has seen the Dow Jones Industrial Average quadruple has provided more than ample reward to the bulls who rode out the 2008-09 market meltdown. The obverse, of course, is that it has left the bears frustrated … and poorer. Today’s TLR therefore pays homage to the bears for the pain they’ve endured by airing their current pessimism in Tales from the Economic Dark Side. TLR continues to believe in the near-term health of the U.S. economy and in the strength near-term durability of American stock market valuations (see “Should You Be a Contrarian?” in the September 9^th TLR) …, but as a cautionary note, it’s worthwhile remembering that even a broken clock is right twice a day.

Investors are fond of trying to pick tops and bottoms. For the non-professional, attempting that feat most often leads to an unhappy unprofitable ending. Amateurs are outmatched at every level. Market professionals have access to better, more current data (for example, contemporaneous satellite tracking of factory and retail parking lots and traffic patterns) and more sophisticated analytical tools. They have greater experience and a deeper understanding of history, financial realities and market cycles. After all, professionals are full-timers and amateurs are only … amateurs. The stock market nevertheless is the world’s largest and most enticing casino and the fact is that amateurs seem sanguine about the entrance fee professionals extract in order to allow them to play in that great big market casino. Professionals – most conspicuously high frequency traders – skim the easy profits off the top of amateurs’ bets in a manner equivalent to “The House Take.” In a casino, The House has an edge over its customers, and that edge means that The House, over time, always makes money. In the stock market, professionals have an edge. As a group, they too always come out ahead. Amateurs, being human, nevertheless appreciate the ability to play in the stock market casino as much as gamblers enjoy visiting the tables in Las Vegas. And the stock market casino is so much more fun! It’s constantly moving and there are so many ways to play! It provides players with the ability to brag about their investment successes and remain mum about their losses. It also allows players to base their bets on non-mathematical, non-technical and non-fundamental considerations, like politics and President Trump’s tweets (see, for example, “The Twitter Market” in the September 2^nd TLR).

What follows therefore is a compendium of many of the current Dark Side economic risks to the U.S. economy and the continued health of America’s stock markets. Some of these already are on amateurs’ radar screens. All, and more, are on the professionals’ screens:

1. Professionals understand that the economic cycle hasn’t been repealed. Booms and busts are a norm in human society and, accordingly, the global economy will reach a time when there is a recession (see, for example, “Is This Time the Same?” in the August 21^st TLR). The only question is when. Gary Shilling, an economist with an enviable record of forecasting market turns, believes that a recession already has begun (see “The Coming Recession” in the July 17^th TLR).
2. Business conditions are deteriorating. Federal Express’s CEO recently pointed out that “The global economy continues to soften … driven by increasing trade tensions and policy uncertainty … and we are taking steps to cut capacity.” His statement was followed by the news that U.S. capital spending has weakened from 5.5{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} growth to ~2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}.
3. With short-term/overnight “repo rates” jumping in September to previously unheard-of levels, something’s broken in the global monetary system. In tacit acknowledgement, Federal Reserve Chairman Powell this week stated that the Fed soon will begin expanding its balance sheet, the functional equivalent of yet another round of “quantitative easing.” QE has successfully sparked economic growth over the past decade, but there is widespread skepticism about how much impact it will have today (see, for example, “Managing The Economic Cycle (Part 1)” in the May 8^th TLR, “Managing The Economic Cycle (Part 2)” in the May 10^th TLR, “The Central Bankers’ Dilemma” in the March 22^nd TLR and “The Fabulous Federal Reserve” in the April 19^th TLR).
4. Projections of global and U.S. growth for 2019, 2020 and 2021 are being annoyingly downgraded (e.g., by the Organization for Economic Cooperation and Development, the World Trade Organization, the IMF (which has cut its forecast for global growth to 3.2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, the weakest rate of expansion since 2009) and the Business Roundtable).
5. Negative interest rates continue on over $15 trillion of sovereign debt …, and interest rates in the U.S. are heading in the same direction. It’s unclear what effect this will have on economic growth and business investment (see “Foggy Economics” in the October 7^th TLR).
6. Stock market technicals are poor (with Dow Theory pointing to a market downturn, market breadth narrowing, volumes declining on up days and increasing on down ones, corporate profits deteriorating, and household debt, student debt and auto debt at unsustainable levels).
7. The U.S. yield curve has inverted, a “sure sign” (according to students of economic history) of an impending recession.
8. The U.S. budget deficit continues to grow with the 2019 amount estimated at $984 billion and with total Federal debt now approaching $23 trillion.
9. The IPO market has cratered withered, and with it the value of “Unicorn” start-ups as well as the $100 billion SoftBank Vision Fund.
10. America’s Trade Wars with China, the EU, and other countries continue to escalate, negatively impacting U.S. and global manufacturing, agriculture and trade.
11. Brexit weighs heavily on the UK and the EU, and is causing the British Pound and the Euro to sink.
12. The UK, Italy, Germany, Mexico and Brazil (five of the world’s 20 largest economies) are on the brink of recession with Singapore and Hong Kong also facing significant economic headwinds.
13. With the German economy in trouble, the EU is in trouble, which means the European Central Bank is in trouble, which means that German banks are in trouble, which means that German savers are in trouble, which means the German economy is in even more trouble, which means that the EU is in even more trouble, which means that ….
14. And let’s not forget the perilous state of American domestic politics, including the Trump Impeachment process and the radical and radically expensive policy platforms of several Democratic Presidential candidates.

Bears also will point out that the Middle East is a powder keg that could ignite at any moment, India and Pakistan are at each other’s throats (with both possessing nuclear weapons), hypersonic weapons are becoming all the rage (see “The High-Tech Arms Race” in the May 13^th TLR), ISIS is making clear progress in the Sahel region of Africa, South American countries are facing political, economic and environmental turmoil, and China and Russia continue to flex their muscles with neighboring countries.

The U.S. and global economies no doubt are facing headwinds, some of which are potentially of hurricane force. There truly is a potential economic Dark Side. All of the foregoing risks are real risks. Any one of them, as well as others, could blow up the U.S. economy (if not the world). However, there is no sign as yet of any such imminent blow up (the markets, for example, quickly shook off the successful, and technologically sophisticated, Iranian attack on Saudi Arabia’s refining facilities) or that growth or earnings are about to dip into negative territory. That does not mean that the markets are positioned for growth. At best, they are likely to be range-bound. TLR believes that, for the present at least, the Force is most likely to remain with us.

Finally (from a good friend)

SIGN ON A SHOE REPAIR STORE:
“We will heel you
We will save your sole
We will even dye for you.”

SIGN ON A BLINDS AND CURTAIN TRUCK:
“Blind man driving. ”

SIGN OVER A GYNECOLOGIST’S OFFICE:
“Dr. Jones, at your cervix.”

SIGN IN A PODIATRIST’S OFFICE:
“Time wounds all heels.”

SIGN ON A SEPTIC TANK TRUCK:
“Yesterday’s Meals on Wheels.”

SIGN AT AN OPTOMETRIST’S OFFICE:
“If you don’t see what you’re looking for,
You’ve come to the right place.”

SIGN ON A PLUMBER’S TRUCK:
“We repair what your husband fixed.”

SIGN ON ANOTHER PLUMBER’S TRUCK:
“Don’t sleep with a drip. Call your plumber.”

SIGN AT A TIRE SHOP:
“Invite us to your next blowout.”

SIGN ON AN ELECTRICIAN’S TRUCK:
“Let us remove your shorts.”

SIGN IN A NON-SMOKING AREA:
“If we see smoke, we will assume you are on fire and
take appropriate action.”

SIGN ON A MATERNITY ROOM DOOR:
“Push. Push. Push.”

SIGN AT A CAR DEALERSHIP:
“The best way to get back on your feet – miss a car payment.”

SIGN OUTSIDE A MUFFLER SHOP:
“No appointment necessary. We hear you coming.”

SIGN IN A VETERINARIAN’S WAITING ROOM:
“Be back in 5 minutes. Sit! Stay!”

SIGN AT THE ELECTRIC COMPANY:
“We would be delighted if you send in your payment on time.
However, if you don’t, YOU will be de-lighted.”

SIGN IN A RESTAURANT WINDOW:
“Don’t stand there and be hungry; come on in and get fed up.”

SIGN IN THE FRONT YARD OF A FUNERAL HOME:
“Drive carefully. We’ll wait.”

SIGN AT A PROPANE FILLING STATION:
“Thank Heaven for little grills.”

SIGN AT A RADIATOR SHOP:
“Best place in town to take a leak.”

SIGN ON THE BACK OF ANOTHER SEPTIC TANK TRUCK:
“Caution – This Truck is full of Political Promises.”

*┬® Copyright 2019 by William Natbony. All rights reserved.