Who’s Been Naughty or Nice in the Global Economy?
Where do Stocks, Oil, Cryptocurrencies, and the Entire Global Economy Go From Here?
How Do Stocks and Oil Finish November?
A few weeks ago, I wrote about an early warning signal for a major turn in US stocks and the importance of Nov 21 based on time cycle research. I followed up a week later with further detail on how tech and crude oil are experiencing a shift that could lead broader markets lower. Around Nov 21, both the NASDAQ and WTI Crude Oil broke below recent swing lows. Amazingly, the Thur-Fri (trade date Friday) drop in Crude Oil was 7.8%. Market observers will recall the 2014 Thanksgiving Thur-Fri drop, which was. . . .7.9%. Price has Memory. Interestingly, the S&P 500 and Russell 2000 did not break down below mid-November lows.
Will We Be Crying for Argentina?
External geopolitical events will continue to influence markets. Buenos Aires hosts this week’s political circus, a G20 meeting commencing on Nov 30. Traders will carefully dissect the post-meeting communique. Leaked rumors of an early draft didn’t help the tariff fight narrative. Conventional thinking seems to be that President Trump, weakened by midterm losses and the Mueller investigation, will blink and make peace with the pro-trade world (which is basically everyone). This would contradict his style/approach to just about everything, but it is certainly possible.
Are US Stocks Overvalued; Does it Even Matter?
A chorus of Wall Street bulls and bears have weighed in on well-regarded market valuation metrics, which are all indicating that stocks are overvalued. Mark Hulbert sums up both sides, albeit with a bearish tinge:
“The stock market’s return over the next decade is likely to be well below historical norms. That is the unanimous conclusion of eight stock-market indicators with what I consider the most impressive track records over the past six decades. The only real difference between them is the extent of their bearishness.”
In the same article, Hulbert turns to Jeremy Siegel, a legendary market bull, who makes the effective argument that these indicators have been flashing red for 4+ years during a historic bull market. Here’s the bottom line: markets don’t have to revert to any historical mean along anyone’s schedule. The average investor remains best off taking a multi-decade view and dollar-cost averaging every month. Beyond that, my biases are clear: Price action trumps opinion. And price viewed through a complex systems lens trumps any other approach.
Is the Economy Slowing Down?
It’s trendy to blame the Fed for everything. This is particularly true of our investor class, who have feasted for nearly 4 decades on rising asset prices as the Fed has driven interest rates from the mid-teens to zero, arguably at the expense of working/saver class. It also includes Trump supporters, who are convinced Chairman Powell is going to sink the President’s re-election chances. Market bulls are arguing that the economy is not as well-off as the Fed believes it is, as written here. They would certainly welcome a rate hike pause, which is sure to juice asset prices. The predictive failure of valuation indicators shows that when there are few alternatives, investors will buy stocks regardless of historical valuation levels.
Price action in Crude Oil is important when examining economic growth. Does the 34% drop in Crude Oil since October 3rd imply a broader economic slowdown? The debate is between supply and demand. The basic logic is that if politically motivated supply decisions by UR-OPEC (US, Russia, OPEC) are driving prices, then everything will be just fine when they get together to agree on production cuts, either at the G-20 meeting or the 12/6 OPEC meeting.
If demand is in fact waning, that may be because the global economy is slowing down. Q3 GDP reports, which are still trickling in, show Germany and Japan contracting while the US and China remain in growth mode. Also, the IMF recently released a report warning of slower growth in 2019, driven by the US-China tariff spat. Are the German and Japanese results the exception, or a sign of something more to come?
Do Cryptocurrencies have a Use Case?
Given the hysteria, I feel obligated to join the crypto discussion fray. For a change, I am dispensing with any sort of equivocation. Before I trash cryptocurrencies, let me say that I have begun to study the underlying aspects that make blockchain technology, namely Cryptography, Distributed Computing, and Mechanism Design. The next evolution of providing trust (which underpins our entire society) using digital tools (including AI) is a no-brainer. Learning more here is well worth your time.
Cryptocurrencies are not worth your time. Their markets are opaque, possibly rigged, and require placing trust in all sorts of conflicted actors. It is just impossible to trust cryptos to the same degree you trust regulated banks or the US government. If you are selling trust, then your product has to be trusted.
Michael Novogratz has argued that bitcoin will replace gold, becoming a digital store of value. Bitcoin is NOT a store of value, it is NOT digital gold. Here are my simpleton reasons why:
- Supply: There is a fixed supply of Gold in the world that is not controlled by humans; any promises of a fixed supply of any cryptocurrency are based on trusting the currency’s creators. That means trusting other humans. Good luck with that
- Confidence Others Will Want It: Gold has served as a store of value for much of recorded human history; cryptocurrencies have been around for a decade. I am not sure people really want it, aside from a bunch of speculators and criminals
- People Understand What They are Getting: People like giving each other gold and can understand what it is simply by looking at it. They can go one step further and check its price in their local currency by well-understood units of measure (e.g. ounces). Good luck explaining the details behind proof-of-work and public/private keys to your aunt this Christmas
- Asset Can Be Protected: An entire physical easy-to-understand ecosystem exists to protect your gold (and other valuables). It is called your residence, your bank, your locks, security companies, your safes, etc; Good luck understanding how your bitcoin is kept safe from hackers.
- Easy Verification of Loss: Nothing is 100% secure. But you can pretty easily confirm if your gold has been stolen; Imagine parsing through Solidity computer code to determine if your ether is even there?
We already have digital currencies, the most important is called the US Dollar. What is frustrating are the opaque trust-based processes we have to deal with. Ask anyone who has had to purchase title insurance when buying a home. Faster processing times and more efficient processes (perhaps using underlying blockchain technology) will solve this.
I am repulsed by the ink being spilled applying technical analysis (e.g. here) to cryptocurrencies. These people have no idea where prices will go (nor do I). I can tell you that price momentum is definitely downward. And given that cryptos don’t solve any real problems (including not being a store of value), momentum could carry prices much much lower than anyone crypto-bull would like you to believe. It would not surprise me if that level is zero.
Can We Resurrect Public Sector Confidence?
I have written extensively that confidence in public sector institutions is falling and will continue to fall for another 10–15 years. Unfortunately, our politicians are making this as easy as possible. The combination of declining public sector confidence, insecure politicians, and lurching political shifts is a recipe for public-sector driven event risk.
One specific theme that I agree with is that neither party has done much for America’s working class. This message was brought home in this New York Times article (I noticed it thanks to a tweet from Greg Sands). As the article states, the working class is NOT the poor or the rich. This is a broad-brush statement, but it feels like our traditional politicians have optimized for the poor (Democrats) or for the rich (Republicans) when in power. They cater to these narrow segments on pocketbook issues and employ respective social wedge issues to attract everyone else they need to win. This optimization has caused the working class, who probably care about their pocketbooks above all, to react on both sides. It is this dynamic that similarily drove the Midwestern working class to vote for President Trump and the Queens, NY working class to vote for Representative-elect Alexandria Ocasio-Cortez.
On a positive note, the NYT article referred to a bi-partisan publication by the think tank Opportunity America, in conjunction with the Brookings Institute (liberal) and the American Enterprise Institute (conservative) jointly published a report entitled Work, Skills, Community: Restoring Opportunity for the Working Class.” I plan on reading the entire 136-page report, but for now, it is heartwarming to see a bi-partisan attempt to addressing the challenges of the working class.
Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.