Topping Process in the 9th Inning

Corporate earnings just don’t matter much in 2017- Washington does U.S. equities reached new all time highs in the first quarter of 2017 under the guise that President Trump’s proposed policies would be a Goldilocks scenario for the stock market- large tax cuts for corporations and the wealthy, fiscal stimulus through infrastructure spending, and a green light to remove many government regulations thought to be stifling big corporate expansion and small business creation. But last week’s stunning blow to replacing Obamacare may have put all those plans in jeopardy for the time being.

As we noted in our last post, the market averages have moved since the Trump election in lockstep with the perception of what his policies may do to spur economic growth. Typical of the last eight years, the markets have moved higher and chose to worry about bona fide concerns later. This approach combined with near zero interest rates has lead to a very large multiple expansion of the S&P 500 despite sub 2% growth for over eight years now. Needless to say the markets are in nosebleed territory.
Part of this can be seen in the market’s approach to hard vs. soft economic data. For example. the market rose over 150 points this Tuesday based almost entirely on the soft date marker known as consumer confidence. It is nuts to think that such a broad state of mind could ever really be measured at all, but since it beat expectations the market soared. Now square that against the very hard and real data of economic growth. At present the Atlanta Federal Reserve, who has for many years been the most accurate predictor of GDP growth (with by far the lowest estimates each quarter) now projects GDP growth in Q1 this year to be just 1.4%, far lower than the pathetic levels seen since 2008. Yet the market snores.

Trouble lurks below too when one looks at several key sectors of the US economy. It was reported in March that industrial production fell for the 29th consecutive month. That has never occurred before in US history without a recession soon after. Banks have reported fairly significant loan growth declines since December of last year.The automotive sector in particular is flashing red, as their channel stuffing moves over the past few years has insured there will over capacity in that sector for many years. Oil prices are down some 15% from a month ago and department store sales have also plunged, all leading to fresh worries about widespread defaults in these sectors that are so highly leveraged.
Combined with weakened growth prospects is the looming deadline for the US government to run out of money to pay its debts. It is widely reported that date will be April 28th and without Congressional approval for an increase in the debt ceiling we will face again huge uncertainty. Just before the Continuing Resolution was signed in 2013 the markets plunged on the uncertain prospects and the market’s will again unless an accord is soon reached. Given the recent debacle last week on Obamacare repeal, is there anyone who thinks that extending the debt ceiling will go smoothly? The so-called Freedom Caucus in the Republican party isn’t likely to bend over on this one either.
Another catalyst to take note of is the US current deficit with is today just a hair below $20 trillion (see the debt clock tab on our home page). We are expected tor each that level in late April which will only galvanize some moderate and fiscally conservative Republicans to thwart our out of control deficits. We must realize that much of the large rally since 2013 has come as a direct result of the open ended extension of the deficit agreed to by all parties in DC. It is very likely that without the resulting additional multi-trillion dollars in deficits since that we could have slipped into a recession.

This serves to underscore a core theme we have advanced here- that the pathetic sub 2% growth we have seen in the US economy since 2008 would have been far worse without these debt fueled measures. Together with a $4 trillion plus Federal Reserve stimulus nearly all the gains in the stock market since 2008 are debt fueled and thus are subject to the forces of deflation when the Kondratieff Winter hits full stride.
Many must wonder when will that happen. The inevitable plunge in the stock market has been delayed far longer than so many had believed because of the outsized measures described above. For those who are asking when it will happen I will point them to www.danericselliottwaves.blogspot.com. I have been following their charts for over five years now and have found them to be the best. For years I subscribed to Robert Prechter’s Elliott Wave site but was let down by how they kept getting the primary count wrong by being foiled by Bernancke’s relentless QE & ZIRP. So I turned to Daneric’s in 2013 and was at first puzzled by how they were so hesitant to call for the crash. They were no doubt projecting one but their count had it being extended into the next decade. FYI- their primary count has the market topping this spring for and making a concerted decline beginning in 2018 and lasting at least until 2021. I would urge all of our readers to check out this site each week. It is updated 3-4 times a week and does not require a subscription.
It is quite sad that financial markets have devolved to the levels we see today. Our business and government leaders fail to see the merits of long wave economic cycles that form the basis for Kondratieff Wave theory. I would hope that when the global economy and financial markets implode that we as a people could then take steps to make sure that future generations never approach the situation and conditions we now face. For those who believe in the principles of K-Wave theory and believe we are near the worst phase of the Kondratieff Winter, it may be prudent to begin hedging your portfolios. There are now scores of very liquid ETF’s that trade on the New York Stock Exchange that offer investors a form of insurance against any financial crisis that may come to pass.

[originally published on the 3rd April]