We wrote about cycles in the stock market and the 7-year corrections. It is time to revisit that.
We are a nation of consumers – obese locusts devouring the resources of the earth enabled only by record debt. Debt levels have now reached their 2008 peaks…right before the Great Recession.
- Total consumer debt reached a record $12.8 trillion. The prior peak was $12.7 trillion in 2008.
- Since the financial crisis, auto loans and student loans have soared. Auto loans are now at $1.2 trillion, up 70% from the depths of the recession in 2010.
- Student loans have reached an incredible $1.3 trillion.
- Total credit card debt has reached $784 billion, the highest level since the fourth quarter of 2009.
Wall Street is the Temple of Capitalism, Finance is its religion, and fear and greed are its sacraments. Fear and greed are not based on wisdom, logic or faith. The warning signs are being ignored in a greedy race for every new stock market high.
This is not meant to be a prediction of any kind. I cannot even predict my own behaviour for the next 12 hours since phone calls and family needs arrange my day. These are warning signs that we are setting up for that cyclical correction of the type we had in 1973,1980, 1987, 2000, 2007.
Valuations are at levels only seen in 1929 and 1987.
The CAPE ratio (cyclically adjusted price-earnings ratio), a valuation measure applied to the S&P 500 devised by Yale economist Robert Shiller, is higher today than it was on Black Monday. In fact, it’s only been higher at two other moments in history: heading into the stock market crash of 1929 and the dot-com bubble of 2000. Today the Shiller CAPE, ratio, is above 30 when its average is 16.8
The trading 12-month GAAP price/earnings ratio was about 20 times earnings in 1987 compared with 23 times today.
Since PE valuations of broad indexes ignore stocks losing money adding them takes the PE of the Russell from 26 to a more realistic P/E of 78.(combined market cap /all component companies trailing earnings)
Since its 2009 lows, the S&P 500 SPX, is up more than 250%, the second-longest bull market ever, which should put you on guard.
Trading Behavior is a warning
The small-cap stocks and broader indexes are flat and have turned down to below their 200-day averages.
Dow Transports – A traditional leading indicator has broken down and since they move the goods and products they should participate in the boom?
NYSE exchange – more stocks are making 52-week lows than are making 52-week highs triggering the Hindenburg Omen. Five such signals recently are only tied with 2007 and 2000 leading up to both corrections.
Political and other considerations
The Federal Reserve is now unloading the $4.5 trillion-dollar portfolio of mortgages it bought which has propped up Real Estate prices. Selling 4.5 trillion dollars of mortgages will reprice all fixed income securities. Never fight the Fed is a ‘truism” in trading circles.
The “business leader” president has shut down his Business Councils amid massive defections and so far his agenda is a mystery.
Korea and Iran remain nuclear thorns in our side while civil unrest and racial tensions fill the news. This President is likely to abandon the nuclear deal with Iran.
We have not paid back the trillion-dollar bailout passed by Congress in 2007 for all those “shovel-ready projects’ and we are certainly not prepared for another correction so soon.
“Make American Great Again’ is not a new idea. The American foreign policy of Isolationism in the 20’s and 30’s was a diplomatic and economic doctrine that aimed at self-advancement to make the United States economically self-reliant. The policy of Isolationism in the 20’s and 30’s attempted to isolate the United States from the diplomatic affairs of other countries and limiting foreign competition by imposing high import tariffs (Taxes).
Tearing up N.A.F.T.A. and recent trade skirmishes with England and Canada over jets…are but the beginning.
My conclusions are that a cyclically inevitable correction and a bear market must follow.
This selfie generation is best described here: 2 Timothy 3 v2 – For people will love only themselves and their money. They will be boastful and proud, scoffing at God, disobedient to their parents, and ungrateful. They will consider nothing sacred.
We need this Global Correction for two reasons:
- A loving God must take away our idols to save us….and tear down what separates us from Him.
- On a larger scale – the crash of 1929 set the stage for the Messiah’s of the 1930’s. That decade gave us the leaders that promised their nations a solution to the economic meltdown of 1929. Stalin, Franco, Tojo, Tito, Mussolini, Hitler. They also brought us a World War.
There are new Messiah’s waiting to capitalize on the coming economic meltdown. My bible says 10 in fact ….and so we watch events unfold..…