Mixed Sentiment and
Composite Indexes; Bad to Horrific Economic Outlook; Debt Crisis Looming; Relax
Nonetheless!
By the
Curmudgeon with Victor Sperandeo
Preface:
We re-iterate that readers should NOT pay much, if any, attention to financial
markets until the COVID-19 pandemic stabilizes and new cases/deaths start to
level off. Doing so, with the volatility
expected, will surely raise your anxiety levels.
Instead, we highly recommend participating in video meetings of your
choice, reading good books, talking with friends and family, practicing
meditation and deep breathing, listening to relaxing music, etc. At least till the Shelter in Place orders are
lifted.
Introduction:
At its recent low on Monday March 23rd, the S&P 500 had
fallen much faster and by much more than any bear market in post-World War II
history during its first 23 trading days. Indeed, it was off by about -34%,
more than six times greater than any bear market post-1945. The intensity of
volatility over the past 5 weeks has been especially noteworthy, reaching
all-time highs based on many measures.
As we expected and noted in last weeks post - Curmudgeon/Sperandeo:
Perspective: U.S. Economy and Stock Market Implode in Just 21 Trading Days!,
there was a huge three day rally from Tuesday to Thursday, before Fridays ~4+
% selloff in the popular averages.
Lets examine what stock market sentiment, trend indicators, and the near-term
economy are saying now.
Sentiment and Market Trend Composite Indicators:
Its a mixed picture.
Investor sentiment from AAII's weekly survey are showing bearish
readings right now, despite the big rally this week. Thats not surprising after the 23-trading
day market stock market crash. Only
32.9% of respondents reported as bullish this week, down from 34.4% last week.
Bearish sentiment increased to 52.1% from 51.3%.
As of Saturday night March 28th, the Timer Digest top ten
stock timer consensus is Bearish with 2 Bulls, 7 Bears, and 1
Neutral. The Top Long-Term Timers are Bearish
with 1 Bull, 5 Bears, and 4 Neutral. To a large extent you should ignore such
expert market timers or even take their consensus as a contrary indicator.
That is because they seem to be always wrong when you need their advice most
(almost all were bullish at the top and throughout the first 3 to 4 weeks of
the bear market)!
Leutholds Major Trend Index (MTI) ticked
up this week to 0.90 which is only slightly bearish (0.95 to 1.05 is
considered neutral).
The late and great Richard Russells Primary Trend Index (PTI) is bullish
by 6 points and slightly above its 89 day moving
average:
U.S. Economy will be Bad to Horrific:
Thought Thursdays off the charts 3.3M new initial jobless claims report
was bad? It certainly surprised
economists who had forecast only about 1M new claims.
Did you notice last weeks Michigan Consumer sentiment index
report? At 89.0, it dropped 11.9
Index-points in March. That was the
fourth largest one-month decline in nearly a half century [1.]. The Index of Consumer Expectations, at
79.7, decreased by a whopping 13.5% or 12.4 index points from the February 2020
reading of 92.1.
Note 1. The steepest monthly decline
in this index was barely larger at -12.7 Index-points in response to the
deepening recession in October 2008, and there were two declines of 12.2 points
in response to the 1980 recession and Hurricane Katrina in September 2005
.
;
.
Chief Economist Richard Curtain wrote: There is no silver bullet
that could end the pandemic as suddenly as the military victory that ended the
Gulf war. To avoid an extended recession, economic policies must quickly adapt
to a new era that will reorder the spending and saving priorities of consumers
as well as the relative roles of the public and private sectors in the U.S.
economy.
.
The economic numbers are going to get a whole lot worse,
which is very scary if you still have a job or live off your investments.
Economists surveyed by Fortune predict a -8% to -30% drop in 2nd
quarter GDP and an unemployment spike that will grab headlines for many weeks. St. Louis Fed President James Bullard said
U.S. unemployment could rise to 30 percent in a few months.
Shadowstats John
Williams wrote: Pending Economic Impact of Pandemic: Likely the Deepest
Headline GDP Drop in Modern History (Post-World War II Reporting). From commentary 1430:
- Financial-System Insolvency Laid Bare by the Pandemic, as
Circumstances Accelerate Towards a Hyper inflationary Great Depression.
- Federal Reserve Moves Towards Unlimited Currency Creation.
- While the Federal Government Promises Unfettered Deficit Spending.
- All Looking to Bailout Wall Street and the Banks, and to Provide Some
Consumer Liquidity Relief.
-->It's going to be very, very ugly. That implies that, for no other
reason (like technical analysis of historic bear market price patterns), we
will see a re-test of last Mondays stock market lows, especially if volatility
persists. Please see Stock Market Outlook below for more insight and
perspective.
Feds Bazooka Monetary Programs and Unprecedented Fiscal
Stimulus:
The response of both the Federal Reserve and the U.S. federal government
have been unprecedented. The Fed has stated that its willing to provide unlimited
monetary stimulus, announcing program after program, as its balance sheet
exceeds $5 trillion for the first time.
Similarly, the $2.2 trillion fiscal stimulus package passed by
Congress is more than double the $800 billion package passed in 2009 to ease
the Great Recession.
The Financial Times says the increase in fiscal
spending and loans in the U.S. this year alone will reach more than 10% of
gross domestic product (GDP). Thats
larger than the rise in the U.S. federal deficit through financial crisis years
2008 and 2009 combined.
Of course, that will lead to $4 trillion dollar deficits,
but thats the day after tomorrows problem. Or is it? See Victors comments below on the exploding
U.S. debt.
These efforts will likely dampen the economic fallout that has already
begun to take place, but the full impact that will be realized is still largely
unknown. The spike in new jobless claims to 3.3 million coupled with the sharp
drop in Consumer Sentiment indicate that the ongoing economic damage will
be significant for the next few months, if not longer.
..
Victor: When Will Debt Become an Issue?
Debt has not yet been an issue for the U.S. economy or financial
markets. Even the bond vigilantes are a
thing of the past. That will all change once the national debt becomes so large
that paying interest on the debt becomes a major government budget item and a
burdensome percentage of projected tax revenues.
President Trump signing this so called Stimulus
Package into law on Friday guarantees the end of the U.S. political system
as we know it in 10 years (or maybe less time).
Heres why:
The national debt is currently $23.5 trillion with an additional $1
trillion budget deficit forecast in January by the CBO for the 2020
fiscal year, which ends on September 30th. But that was BEFORE the
economic toll of the coronavirus could be factored in!
With the $2.2 trillion fiscal stimulus package, $2
trillion in estimated reduced tax revenues collected, and additional
unemployment insurance/social programs required to mitigate a recession, I
estimate the fiscal 2020 budget deficit to be ~$4.7 trillion.
[Im not alone in forecasting such a large U.S. budget deficit. Ben Ritz wrote in Forbes that America Is On Track For A $4 Trillion Deficit In 2020.]
As a result, the U.S. national debt will be $28.2 trillion by
9/30/2020. Lets be a bit conservative
and say its 28 trillion.
Now project ten years, as the CBO does, and use the long-term trend of U.S.
debt increases from 6/30/71 (which was $398 billion) as we went off the Gold
Standard internationally in August 1971. From June 30, 1971 to March 2020 -or
48.75 years- the debt compounded at an 8.72% annual rate.
Assume $28.5 U.S. stated national debt as of September 30, 2020. When
compounded at the 8.72% annual rate, it would result in a 2030 U.S. stated debt
of $64.6 trillion! And thats NOT
INCLUDING off balance sheet budget items or the Feds (monopoly money) balance
sheet which is now $5.3 trillion and going higher!
The historic (from 1926) average all duration U.S. Treasury paid interest
rate is 5.99%. Lets round that to
6%. Apply that 6% rate to a $64.6
trillion U.S. national debt and you get $3.88 trillion of interest payments in
2030.
Curmudgeon Note: Yes, we know that no one believes interest
rates will ever be normalized again. But
even at a 2% interest rate youd have ~$1.3 trillion in interest payments on
the 2030 national debt. See Victors
remarks below relating to 2030 interest payments as a percent of U.S. tax
revenues.
..
...
...
What will collected tax revenues
be? From 2000 to the present time, U.S. tax revenue has grown at a 2.85%
annual rate. Being very generous, lets
use the current projected CBO base number of $3.632 trillion for September 30,
2020. So, in ten years the U.S. will
receive $4.819 trillion in tax revenue assuming no more recessions or tax cuts.
Assuming the amount of interest as a percent of revenue is 81%. OK, say the
average interest rate on U.S. treasury securities is 3%. Thats $1.94 trillion which would be 40% of
tax revenues in 2030!
Perhaps, now you see that the interest on the U.S.
national debt will be impossible to pay in 10 years time.
You can borrow to create debt, but any loan shark will tell you... you
cant borrow interest- to pay interest. The dollar will be cremated. The result
will be HYPER-INFLATION (as John Williams has also forecast for quite
some time)!
..
Stock Market Outlook (Curmudgeon):
Does any of the above tell us where the stock market is going after the
largest three-day rally in almost 90 years (since 1931)?
It could possibly be one to sell or sell short on rallies to hedge a
portfolio in the near term. Too early to
buy, but there might be good long-term value from these levels, especially
considering all the monetary and fiscal stimulus thats now in place. That puts
the market somewhere between a sucker's rally and a long term buy.
Hence, we advise investors to do little or NOTHING until volatility
subsides and the COVID-19 new cases/death curves flatten.
.
.
Closing Quotes:
When an investor focuses on short-term investments, he or she is observing
the variability of the portfolio, not the returns in short, being fooled by
randomness."
Nassim Nicholas Taleb
The stock market is the story of cycles and of the human behavior that is
responsible for overreactions in both directions.
Seth Klarman
Unless you can watch your stock holding decline by 50% without becoming
panic-stricken, you should not be in the stock market. Warren Buffett
Where wealth is health, bankruptcy is death.
John Maiorana (oohGiovanni)
.
.
Good luck and till next time
.
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies and government
policies. Victor started his Wall Street
career in 1966 and began trading for a living in 1968. As President and CEO of
Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and
development platform, which is used to create innovative solutions for
different futures markets, risk parameters and other factors.
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