Editor’s note: Regular Market Minute readers are well aware of the stock market volatility that started in February. And we’ve showed you the best ways to profit as the market chopped around. But recently, we’ve warned that a significant drop could be on the horizon.
Today, Bill Bonner Letter coauthor Dan Denning shows you how he and the Bonner & Partners team are preparing for the worst…
By Dan Denning, Coauthor, The Bill Bonner Letter
In late January, I wrote to Bill Bonner Letter subscribers and warned that the stock market was an avalanche in the making. All it needed was a gunshot to set it off.
The gunshot went off 7 trading days after we published. I’m talking about the “trigger” that led to a 10% correction in the S&P from an all-time high. It was the fastest such correction ever, according to Ryan Detrick of LPL Financial Research. The Dow’s 10% correction was the fourth-fastest since 1897.
If there’s one point I could make to you today, it’s this: You ain’t seen nothing yet.
A Dress Rehearsal
The kind of move Bill and I are expecting isn’t a correction. It’s a cyclical peak, the crumbling of a great mountain of leverage (margin debt). It’s a complete reset of the American financial system.
This is a system burdened by massive and unpayable public debts and governed by inept and corrupt policymakers. A system where phony QE money has pumped up stock values by no less than $10 trillion over the last 10 years. A system where sound money is a dead concept and cash is headed to the gallows.
A 10% correction is a small preview of how quickly something more severe could happen. The speed of the move proves how fragile the market is. There’s more where that came from.
Think of this as a dress rehearsal.
Not to beat a dead bull, but this correction was easy to see coming. And we’re not out of danger yet. If you look back at stocks in February, you see that all of the valuation metrics were off the charts. They still are. It’s why I told you the market was like an avalanche in search of gunshot. That gunshot came on February 2 in the form of a report on rising wages.
The conventional wisdom is that the wage report stoked fears of higher inflation in 2018. Higher inflation would give the Federal Reserve wiggle room for three or even four small interest rate rises this year. Both stocks and bonds shuddered at the thought.
Yet, at writing, the Dow Jones Industrial Average is nearly back over 25,000. The market-cap-to-GDP ratio peaked on January 26 at 150.8%. Even after the correction, it stands at 144%. Robert Shiller’s Cyclically Adjusted Price Earnings Ratio (CAPE) is at 33.12, second only to the 44.19 level it reached in December 1999. Stocks are still expensive by historical standards. Very.
And margin debt hit $642.8 billion in December 2017, according to the Financial Industry Regulatory Authority (FINRA). I told readers of The Bill Bonner Letter back in August of 2017 that total margin debt stood at $540 billion. But that was just for margin debt of NYSE member firms. The FINRA data includes other firms in addition to the NYSE.
The NYSE, incidentally, no longer keeps margin debt data on its website. But net margin debt, or margin debt as a percentage of the total market value of NYSE-listed stocks, hit 1.31% in December 2017. That was a new all-time record. The previous record was 1.27% in 2000, according to Goldman Sachs. The data goes back to 1980.
By the way, there are several versions of what’s called “the Buffett Indicator.” The one I prefer is dividing the market capitalization of the Wilshire 5000 ($28.3 trillion) by the most recent nominal GDP number from the Bureau of Economic Analysis ($19.3 trillion).
No matter which one you use, they all show markets being overvalued.
The Big One
They may be boring, but if you want to know where trouble is coming from you’re going to have to watch interest rates. The notes from the January 30–31 meeting of the Fed’s Monetary Policy Committee were perceived as “hawkish” by investors. By that I mean there was nothing in them to change the belief that the Fed could hike interest rates three or four times this year (presumably by a quarter point, or 25 basis points, each time).
Goldman Sachs reckons if the 10-year rate gets to 4.25% by the end of the year, stocks could fall by 25%. That’s an overly complicated way of saying that debt is a drag on growth. When credit growth slows and rates go up, debt gets more expensive (and outstanding debt gets more expensive to service).
If that sounds gloomy, the below chart from the Fed confirms it. The grey lines on the chart are recessions. You can see that nearly all of them are preceded by a cycle of rate rises by the Fed. We’ve had five quarter-point rises in the Fed funds rate since 2015. How many will it take to cause a recession?
Definancialize Your Life
Now is a perfect time to start “definancializing” your life. That means reducing your exposure to an overly complicated financial system that, either because of outside attack or its sheer complexity, is prone to collapse.
The first thing to do is to review my asset allocation strategy, which you can find right here. Bill and I are calling it the “new permanent portfolio.” It’s designed to prepare you for any scenario the markets can throw at you.
Also, check out the box below for five tips for preparing for an uncertain financial future. This isn’t strictly investment advice, but they’re all ways to help you prepare for what could be coming. I practice these habits in my own life, and I find myself all the better for it…
Five Steps to Preparing for an Uncertain Future
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Don’t wait for the bang. Use the market’s recovery to implement what we’ve suggested.
As I mentioned above, February’s correction was a dress rehearsal. The main event is yet to come…
Regards,
Dan Denning
Coauthor, The Bill Bonner Letter
P.S. U.S stocks have recovered from February’s fall. But as I’ve shown, the next correction is coming. And when it does, it may not be an accident. The coming crisis may be orchestrated by a group right here in America. I call them “the Oathkeepers.”
The mainstream media won’t pick up on this story. But I recently published a book with the whole story. I reveal who the Oathkeepers are, what they’re planning for America, and what you can do about it today. Get the details here.