No Comfort in a Correct Prediction

Trying to guess what the economy and the financial markets will do occupies an entire industry. And, within that industry of financial services, opinions vary greatly. That makes the job of prediction even more difficult because so many bright people have such diametrically different points of view. Which set of views is correct?

Having come from that industry, and maintaining a keen interest in the economy, we have shared our opinions with you, the readers of The Prickly Pear. Matters of personal finance should be of interest to all of us, especially when going into difficult times.

We have suggested in a series of articles, that many negative trends have been forming and that 2022 would be a “risk-off” year. Among these are: monetary and fiscal tightening, a flattening or inversion of the yield curve, serious inflation, an oil price shock, a food price shock, China is going back into lockdown making supply chains worse, a seriously overvalued stock and real estate markets, a vicious bear market in bonds, a complete breakdown of law and order at the Southern border and in dozens of major cities, overall excessive debt, a war that likely is just the opening battle in a broader conflict, an unwinding of the Bretton-Woods era monetary arrangements, dreadful political leadership, and environmental extremism that paralyzes rational policy responses. Whew!

The Democrat’s response to the inflation they have unleashed is to raise taxes! Either you get skewered with high inflation (a hidden regressive tax) or you get skewered with a direct tax on whatever income your can earn. Screwing the public seems to be the best Democrats can give us in policy options.

These are all important trends, each of which standing alone, would spell trouble. Rarely have we seen quite so many problems link arms and confront us at the same time.  For that and other reasons, we suggested that the classic 60-40 approach taken by most money managers would not work, as both stock and bonds would be declining at the same time.

These fundamental macro events and now being joined by technical deterioration within the stock market, such as busted long-term trend lines and the penetration of long-term moving averages.  Margin debt appears to have peaked out, internal divergences have formed, and price momentum is turning negative.  Defensive areas of the market are now outperforming growth.  Historically speaking, these are not good signs.

In short, the “wealth effect” of an ever-rising market may have gone into reverse gear.

We suggested that 2022 would be a difficult year for investors and the economy which would justify investors taking serious steps to de-risk their portfolios.

A recent headline in Market Watch was that stocks have had the worst opening for the year since 1939. It gives us little comfort to report that most of our predictions seem to be playing out. We mention them not to brag but only to catch your attention and ask you to enter these on the credit side of the ledger, to balance out the eventual errors that we will surely commit.

We have been correct to warn you of a “risk-off” year.  Did you take action to reduce risk?

But if we did not get your attention before, we hope we have the credibility to have it now.

Things are getting worse.  You need to have a discussion with your financial advisor if you have not already done so.

There are tangible signs the economy is weakening, even beyond the surprisingly weak GDP numbers for the first quarter.  This is coming even earlier than we expected.

Demand for home mortgages is falling.

Consumer sentiment is growing sour.

Industrial production is slumping and the demand for trucking is slipping.

Some stock market indices such as the broad Russell 2000 and the NASDAQ Composite  have fallen somewhat below the necessary level to label the market “bearish.”

The damage to stocks is more than the averages suggest.  Something close to 45% of all stocks on the NASDAQ are down more than 50%.  ARKK, the techno-laden ETF run by the now-famous Cathi Wood is down 70%.  Darlings of the lockdown like Peleton and Zoom have also lost about 70%.

The global bond market has crashed, wiping out over so far about $8 Trillion.

There has been a severe decline in the Japanese Yen to a 20-year low (the third-largest economy) and the Chinese Yuan is wavering.

Are we starting a round of competitive currency devaluations and beggar-thy-neighbor policies like the 1930s?

In summary, a number of markets are in trouble, the economy is in trouble, and real estate looks frothy and vulnerable.

The FED runs a high risk of policy error, which is jamming up interest rates with the economy already weakening.  That potentially could make things worse. To flip flop again, and reverse course, would signal they are not serious about inflation.  The FED has painted itself into a corner and there is no painless way out.

There are certainly some positive things going on, that is for sure.  Elon Musk buying Twitter is one. But the preponderance of data and market action suggests that recession is now a higher probability than before.

The one silver lining in all this is that most people will rightly blame the Democrats for wild inflation in food and fuel and, the wreckage in their 401ks. A feckless foreign policy encouraged Russia and likely China to take advantage of our weakness.  Biden, supposedly an experienced operator in the US Senate for years, seems incapable of compromising with reasonable opposition.

Actually, he seems incapable of uttering a coherent sentence.  Behind him of course,  is the cackling and vacuous Kamala Harris, the woman of color and imbecility.

We could be moving into a political leadership vacuum.

Aggravating the problem, they both peddle the lie that opponents to their socialist and racist initiatives are “white nationalists” that is a security threat to the very existence of the Republic.  And now, we have the Department of Homeland Security forming a board to oversee “truth”.  It is straight out of Orwell and scary as hell.

With this twisted view of reality, political compromise to address the many problems we face is likely impossible.  After all, you can’t negotiate with terrorists like Republicans, can you?  And, why would Republicans in their right mind wish to deal with people who have labeled them white supremacists? Well, there is the one lady from Wyoming…

Only after a thorough drubbing of Democrats in the mid-term elections, is political consensus likely.  But the election will likely be too late to reverse many of these trends from wreaking damage to household and corporate net worth.

As we have stated previously.  We will be very lucky to dodge a recession and bear market.  Don’t leave your financial planning to luck alone.