The risks of investing in most U.S. stocks have been extremely high for a host of reasons:
Interest rates have been rising nearly nonstop since August 2010. Energy and food prices have catapulted sharply higher. The U.S. housing market has been declining relentlessly. The labor market has been in dire straits with new hiring stagnant. Plus the stock market has been severely overvalued and overbought.
I’ve outlined these arguments in previous Money and Markets columns. And they are no less valid today. But now, the case for a bear market just got a lot stronger.
Three New Bearish Developments
First, QE2 will soon be history, and
QE3 is becoming more and more unlikely.
You may well remember Fed Chairman Ben Bernanke bragging about how a rising stock market — especially small caps — was a result of his quantitative easing. Well, I agree. The stock market rally since last summer has indeed been based almost entirely on the Fed’s quantitative easing — outright money printing that merely encourages more risk taking and speculation.
But he also said this is a “positive” outcome, and on that score I think he’s dead wrong. Gains that are bought and paid for by the Fed’s funny money are nothing more than a speculative bubble that’s prone to a bust much like tech stocks in the late 1990s or housing in the mid 2000s.
As long as Mr. Bernanke can keep the funny money flowing, this aspect may be papered over. But now various Fed officials have stepped up and spoken out against an additional round of quantitative easing.
So when QE2 has run its course and hopes for QE3 vanish, there will be nothing left to support this levitated, overvalued stock market.
Second, inflation and inflation
expectations are on the rise.
Outside of the U.S., inflation is actually old news. It has been obvious for quite some time that inflation is the inevitable consequence of reckless monetary and fiscal policy. Now, for the first time in nearly three decades, it’s also becoming more obvious in the U.S. as well.
The chart below shows just how price pressures are starting to creep into the U.S. economy; and as usual, producer prices are first in line to feel the heat, with consumer prices sure to follow.
That’s very dangerous for the stock market. Why? Because history shows that stocks perform very poorly during times of rising inflation. And a fast change in inflation expectations has triggered some of the worst bear markets in history — especially when markets were overvalued!
If this relationship still holds — and I can’t imagine any reason why it shouldn’t — U.S. stocks will soon be in for a nasty surprise.
Third, consumer sentiment
has just taken it on the chin.
The University of Michigan Consumer Sentiment Index plunged from 77.5 in February to 67.5 in March. Drops of this magnitude are rare. But when they happen, they send the message: Look out below!
As you can see in the chart above, this indicator’s history is impressive …
There was a similar large drop in August 1990, another in September 2001, and a third one in October 2008. All three were associated with recessions and turned out to be big sell signals for the stock market.
Has this indicator ever been wrong?
Only once in recent years, but for a good reason: Consumer sentiment gave a false signal in September 2005, when Hurricane Katrina hit U.S. shores. But there’s no such event today and no excuse to ignore this indicator.
Bottom line: I continue to recommend caution. Plus, consider some insurance in the form of inverse ETFs, like ProShares Short SmallCap600 (SBB) in the $27-$28 range. This fund is designed to rise in value when the S&P SmallCap 600 Index 100 declines.
Best wishes,
Claus
{ 29 comments }
Investing in the stock market is always risky. The long term trend is still up however. Until that changes it’s better to be long than wrong.
Claus. Your track record is impressive. It’s hard to argue that the market isn’t overbought right now. It seems that the market is bullet proof and bad news just doesnt register. Question is, how do we know when to go short? These artificial booms, as you know, can last years. Keep up the good work.
The downward pressures are unprecendented –
insolvent cities and states
no significant employment improvement
energy costs driving everything up
individual buying power is zeroed out while businesses like GE enjoy -60% tax (they MAKE $ on taxes)
home prices seem to be on the way to 1980 levels
most Americans are one illness away from bankruptcy
$ – devaluation is only being postponed as other currencies are under even more pressure
the PIIGS threaten to take down the EU economy
middle-east tensions will most certainly spike energy even higher
lack of materials and products from Japan will drive up manufacturing costs
The ONLY brite spot is that 2% of the population are spending (on themselves) like drunken sailors after the Bush Tax Cuts gave them a reprieve. Tiffany’s and Lexus’ sales are soaring.. Didn’t help employment but it helped many pals of GOP Congressmen.
I don’t see your case for optimism. My GLD has been glittering since I bought at $87.
GE -60% tax liability while their worldwide assets are protected by the Pentagon protection racket scheme of; fund US, the Pentagon, for protection or else………! The same holds true for many other corporations as well. Admiral Mullen in August 2010 declared the national debt is a threat to national security and it, the Pentagon,is the proceeds from the Treasury bond proceeds that funds the Pentagon/spy agencies. A threat to national security, the Pentagon, is funded to protect US from threats to national security. The USG has become dysfunctional along with the CORPORATE WELFARE KINGS that feed at their WELFARE TROUGH of government’s forced contributions, withholding taxes, which are then doled out to them. Let’s get real, the graft and corruption taking place in the USA by the USG is so blatant now that the politicians and their partners in crime don’t even try to hide it anymore, they just tell us that they are going to continue stealing taxpayers money, forced contributions, to continue their insane criminal empire.
Mr. Vogt, in the past you’ve stood out from the crowd in properly defining and using the term inflation, which is an increase in the supply of money or money substitute. Straying from the narrow path, in this article you seem to equate inflation with rising prices. When they occur broadly across an entire industry or economy, rising prices are the result of inflation, the blame for which lies squarely on the shoulders of the Federal Reserve. Inflation and rising prices are related; however, it is a relationship of cause and effect. Blurring the distinction makes rising prices seem a mysterious phenomenon rather than the direct result of money and credit creation by the Fed.
I think the Market will likely be Bullish thru the end of the year. We are close to a possible good size rally in the next couple weeks so from April into June-July the market should move up. Then a mid to late summer pullback into the fall and then a final rally into maybe early 2012. Then I suspect that those Inverse ETF’s like QID will work. Right now, It will still be “Buy the Dips” based on my weekly chart analysis until June or July. One could Short the late summer selloff but need to be nimble when the fall rally starts. But when 2012 comes, I think we will see a major top. At that point, I think the market could be Shorted. But I would not just buy and hold those inverse funds. They are made for trading, not for holding long term, so only trade them for the trend and then step out and NEVER hold them when they go negative to your purchase price. Just sell and get out to survive another day. Never hope and pray they will come back. Been there, done that! Alan
I believe that Claus has made a good point and also agree to keep riding the bull. HOWEVER, I have moved my stops up to lesson the burn if it does crash.
Klaus–
You are more of the Austrian tradition of economists than others at Weiss and tend to be early with your predictions. Nothing wrong with that if you don’t go broke waiting. At 85, I am necessarily a short-term trader and follow your general guidance rather than longer term recommendations–as with other Weiss advisers. I can’t wait a year to be right.. Consequently, I have 27% precious metals and miners, 43% cash and very short-term equivalents, 15% ETFs (mostly USL) and the rest in foreign currencies. Within these categories, I am 17% short in yen,euros, averages, and all three major US treasury notes an bonds . Ghengis Kahn would agree. Thank you for your analyses of the past several years. Lee
I agree that the current fundamentals argue for a bearish outlook, however, I believe that we did get an 8% correction from latest highs, and I believe that the FED are also aware of the risks of pulling out of QE program so soon, and the potential crash of the stock markets. So unless inflation gets really ugly, like a 5% CPI plus, I strongly doubt that the stock markets are under any real threats of turning trends. I think however that the uptrend from the 2009 lows that we have witnessed is over, and that we may trade in a consolidation for a few month now due to fundamentals arguing for a downside and FED funny money pushing the stock markets even higher.
Best regards,
I agree that stocks in general will be in for a “nasty surprise,” but that surprise may be nothing but a continuation or acceleration of current market behavior: ongoing Fed monetization of debt and QE1,2,… depressing interest rates and buoying up most stocks while silver and other select commodities are driven up exponentially. Claus doubts that there will be a QE3. How can there not be more QEs when the alternative is economic collapse–a fact that every politician is aware of?
Claus’ “nasty surprise” I’m afraid will be measured in the same commodities that have already been “surprising,” including primarily silver*, while stocks trade essentially in the range already established over the past few months, losing value mainly due to general increases in the cost of living. Among speculative instruments the only ETF I would consider now is AGQ–the only ETF that has produced fairly consistent government-currency profits for me over the past year on out of the money calls. I agree with prior comments that inverse ETFs on the major indexes have not been rewarding.
*…despite Larry Edelson’ s protestations to the the contrary that have already cost his adherents the opportunity to buy silver at far lower prices–but that is another story. Silver, and to a far lesser degree gold, should have relatively clear sailing to $60, the absolute peak established by the Hunt brothers back in 1980, when, as in that time, there may again be some form of government intervention, perhaps even an attempt at government confiscation and nationalization of domestic silver mines and metal.
I don’t know if the Fed is going to raise interest rates above actual inflation.The may raise them higher than phony reported inflation but that won’t really fool the markets.As long as the Fed is devaluing the fiat then likely real assets,priced in fiat Dollars, direction will be up.That goes for China too.Actual inflation there is reported to be over 10% and they aren’t raising their interest rates anywhere near that.The U.S. is in much worse condition and it’s not likely the Fed or Obama wants to see a collapse into another recession.We are already running huge deficits and another downturn means higher social spending,lower taxes and maybe $2Trillion a year deficits.What a mess we make when we worship a massive,wasteful,inefficient govt.
Jon,
Some of the DOW sectors have already reached or surpassed their share prices prior to the financial crisis. When the remaining sectos begin to do the same such as banking, they will push the DOW higher. As you’ve probably heard, in high tide, all boats rise.
The Weiss pundits just don’t get it. With each new high, they claim this will mark the next precipice but our economy keeps coming through.
I’ve been to Brazil, big deal….I believe in AMERICA.
The consumer index numbers aren’t good; that’s a fact. Consider also Q and Case-Shiller 10 p/e. So the message is not “if” the market will collapse, only “when.” But point taken: the “when” must be known with some level of certainty before shorting. Unfortunately, it is not certain that Big Ben can’t shove through Q3, notwithstanding growing (justified) anxiety about burdening future generations with crushing debt. In the meantime, day trade, buy penny stocks, or whatever if you like risk. If not, get out the old bond ladder.
It cheeses me big time that ordinary folks are being made to pay in this way for the mistakes of the super-rich, who courtesy of Ben are now richer than ever. No wonder the Tea Party is taking off.
All the fundamentals point to a stock market decline, I had inverse ETFs at the time of the last decline and did well at the time. However Weiss were forecasting further doom and gloom with the Dow going to 5000. I kept my inverse ETFs and lost all my gains as the markets recovered. I lost money again since October last year with inverse ETFs and currently with inverse silver and inverse on European stocks. The problem has been that the fundamentals have been overridden with money-printing around the world which fuel stock gains whether in the US or the UK (where I am) or Europe or Japan. This money supply issue has to be figured in more seriously if the model is to be a better predictor than it has been. It would be good if the various Weiss personnel got around a table and worked this out, I subscribe to a number of them and their advice often contradicts. This makes it difficult to use.
To agree with Nigel, all these guys seem to have completely missed the effect of all the money printing. If we had been working on the advice of Jesse Livermore to follow the trend over the last year instead of constantly trying to anticipate reversals, we would be much better off now.
I bought the inverse ETF when you told me to last time around and we are still holding. Now with losses of 50% to 80% on all of them when do we sell???
I agree with Nigel, where was the call on the rising stock market due to the money printing, I missed most of that. I remember reading another web site suggesting what was going to happen from QE1 and QE2, in hindsight it was very accurate but i went with the weiss bear perspective, I’m still waiting for the down turn ? Havnt made much money yet ?
Right As Rain!
AND
The ‘unknown Huge Influence’: The Fed, itself (who Else).
They are propping the stock market with their ‘New Found Wealth’ (heavily influencing ‘other’ markets, as well?) and may/may not continue to do so.
If we are to abandon Stocks (per se), and Bonds, and US $……….
then, where to?
Check out the Index of leading Economic Indicators at:
http://www.ny.frb.org/research/directors_charts/ibcd_17.pdf
The LEI has done an excellent job of predicting the major booms and busts. It typically levels out and goes negative months before the market begins to drop. It is currently moving upwards at a very healthy pace with no sign of even leveling off. Corporate profits are accelerating and the P/E ratio is modest. In addition the market benefits from the doom and gloomers since the scary news keeps people on the sidelines with plenty of cash to put in the market later on.
If inflation is inevitable why hasn’t it occured in Japan. Their govt has borrowed up to 2X GDP, over twice US govt. debt , and are still in a deflationary enviroment. Just because we are currently seeing a price spike doesn’t mean we cannot fall into a deflationary depression. This is what usually occurs when their is unsustainable debt like we have here and in Japan and in Europe. This is a question no one seems to address.
You have been a bear for some time now. Sadly, anybody who listen to you since last year must be flat broke right now….
Thanks for your analysis anyway. It must be very energy consuming, isn’t it?
Nigel, Mike, so true. Why aren’t Americans on the streets protesting? Wall St is making bucket loads out of this money printing while the working & middle classes pay for it & will pay more in the future. The money printing has changed the stock market. So many trading patterns have been broken & it all coincides with the money printing. Head and shoulders top that got busted. So many. The Brits wrote ‘blame Wall St’ on their placards; they should have included ‘& Bernanke’. I’ve been waiting for people in the PIGS to realise the double standard – Bernanke prints money & exports the problem around the world; the PIGS are supposed to suffer cutbacks, austerity measures. The world needs to wake up and see it for what it is. The PIGS may as well drop the Euro & default or be given printed Euros i.e don’t play Bernanke’s game. The longer it goes on the worse the end result.
I agree with many of the comments above regarding the manipulation / corruption in the Government and Wall Street. I am a certified public accountant and a certified internal auditor and I am appalled at how the SEC, regulators, rating agencies, government, Wall Street executives and CPA’s abdicated their responsibility and authority. This abdication created and enabled the mess were are in. This country threw fairness and justice by the wayside. Wall Street and the government also think people are too stupid to figure out that they are allowing the “form” of their transactions to trump the “substance” of what they are actually doing. Many, many people in Florida have been hurt by the financial crisis.
In my opinion, the “form” of their activities and transactions is really a wealth transfer and an acceleration of a structure that allows a small group to become more wealthy at the expense of the middle class. This is an abomination. I am a capitalist and I loved America deeply in the past. This is no longer the case. Until the politicians and Wall Street start acting in an ethical manner and work to create a financial and legal infrastructure that is fair, transparent and competitive, I will be numb to all the BS that is published, spoken and written about how this country is improving and working to fix the economy. They must think we are idiots.
I hope Americans vote all these politians out. Greenspan and Bernanke were treated like Gods and the Wall Street executives think they can play hard ball in the big leagues. I lost all respect for them. By the way, my husband was a chairman of a bank holding company before he retired in the mid 1990s. He was badly hurt via significant financial losses and a stroke because of the financial crisis. He never thought that the bankers could screw up a regulated financial industry like they did. Also …
I recommend people to buy the DVD the “Money Masters – How the International Bankers Gained Control of America” by Patrick Carmack and directed by Bill Still. If you haven’t seen it, you will disturbed after you watch it.
I agree that inverse ETFs are very risky. Being long is risky too. The market is on a bull run until the inflation really hits hard. Once that happens there will be no stopping the downdraft, but that could hit years from now, or later this year. The point is that no one knows, and when the collapse comes it could be very sudden and have no warning.
But QE3 is guaranteed no matter what. The Federal Defecit is so huge that there is no way to finance it without printing money. Big Ben has to do QE forever just to keep the Federal Government operating. The government wil ltake care of itself first and foremost.
I’ve noted that many inverse ETFs historically show mostly downtrends with very short peaks. Maybe the best plan is to set sell prices in advance in case they peak when you are not in front of your computer.
Regarding QE3 it seems like the split congress will not permit any additional stimulus, so the easing will be purely monetary manipulation. I’d be interested in any predictions as to when that may happen, what form, and who will directly benefit? The last easing seems to have mostly preserved the ‘rally’ in stocks bringing them up almost to their pre-crash P/Es. Maybe the plan is to wait for a bit of a decline, pick up more buyers, then hit the printing presses to keep those buyers in the market?
Thank you Suzanne. Very refreshing to hear from a CPA and former banker. You know better.
Started watching “Money Masters – How the International Bankers Gained Control of America†FREE on you tube. I work for the biggest bank on the brokerage side so I know all to well. The Fed destroyed Main Street for the benefit of Wall Street. This country, the USA, is GONE!!! Never to recover. The Republican’s have seized control, the Democrats were and are no better, and are cutting away the elderly and poor while turning around immediately to give bigger tax break to the corporate elite and welthy elite. They will not stop until this country is a fourth world country!!!
I do hope that someday other countries do refuse to back US Treasuries. Once that does happen, and only then, might the house of cards collapse and a real revolution begin much like what has historically occurred in the Central and Southern America’s. When enough people and their infant children are literally starving then they will revolt violently.
In regard to these propped up markets. the recent A-B-C correction from the 1343 top in the S$P to 1245-or-so clarifies how fast a sell off can wipe out a full years profit. Make no mistake about it that these markets will sell off at some point in the future and that when they do the sell off the sell off will wipe out years of gains.
I am not aware of too many people that understand the now infamous “FLAS CRASH.” Background, Fed pumps POMO through NY Fed into the gang of 12 Wall St. banks. Same gang of 12 have incredible HFTSystems, massive state-of-the-art mainframes that rival the NSA’s Cray’s. It has been reported quarter after quarter how these same gang of 12 have had PERFECT trading results. NO LOSING TRADES!!! Absolutely astounding and ILLEGAL by SEC rules and banking regulations. Anyways, as Madoff said “HAHHH WHAT REGULATION!”
Fed had a vote on the floor of Congress on Friday morning May 7, 2010. Fed and gang of 12 had pre-arranged a market collapse of 1,000 points in order to emsure that the Friday morning vote would restore all the FED powers. Strategy was ordered to turn off all buy orders and allow only sell orders to the floors after the circuit breakers were off for the day and when 1,000 points was reached which had everyone absolutely awestruck to turn off all sell orders and allow only by orders, They accomplished this through the gang of 12 and their amazing trading machines. All traders with brokerage accounts were shut off from trading while the proprietary desks took over ALL of their respective T-1 band widths. The U.S. Congress was subjicated to one of the greatest acts of financial terrorism ever experienced.
Yes, the Fed kept their powers are were granted even greater power and control that fine Friday, May 7, 2010.
I’ve saved over $300,000 in 20 years. The secret: pay yourself first. Each month about $300 went into a group of different investments. Extra birthday money, little windfalls, all got saved/invested. I’ve got over $140,000 in a differed fixed annuity. Then $55,000 in IBonds, money in FDIC insured CD’s,
then stock funds, bond funds, and specialty funds like energy. Some defense and airospace, some
alternative energy funds, a little bit overseas too. This may not sound like much, but we are not high income people, do not get inheritances. We live modestly, and have what we need, plus a little beauty in our lives. But even a little bit invested over time adds up. Keep the faith.
Claus, the first statement in your Mar 30 report stated that “Interest rates have been rising nearly nonstop since August 2010”. I believe that is misleading. According to bankrate.com, the 10 yr US Treasury Constant Maturity is at 3.47% on Apr 6, 2011, and at 3.89% a year ago, so it actually dropped! This ’10 yr US Treasury Constant Maturity’ is an index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity.
If you would, please clarify and substantiate with actual figures of rising inteerst rates, in the U.S. If you are referring to non US markets, please specify.
If the US currency tanks with high inflation and the stock market collapses causing also commodities to collapse as we saw in 2008-09, then you are where you are right now, because the net sum game equals zero. So something is wrong with this prediction LOL.