Investors must shift quickly from postelection analysis to the latest word from the Fed since October’s market meltdown.General Electic (GE) shareholders know exactly what Raoul Pal means about adding into a selloff, the stock has been decimating shareholders who added on every dip or initiated a position waiting for the big turnaround (click on chart):
After Wednesday’s postelection rally, some might be entertaining a fairy-tale ending to the week for stocks that involves less fiscal easing and a less vigorous pace of raising interest rates by the Fed. On the contrary, cautions Kit Juckes, global macro strategist at Société Générale.
“I know how this Goldilocks story will end—she will be chased out of the house by an angry (bond) bear,” says Juckes who sees the rally sooner or later bumping into higher 10-year bond yields and a Fed determined to hike (though not Thursday.)
Those bears just won’t stop. And that leads us to our call of the day from former hedge-fund manager Raoul Pal, co-founder of Real Vision, who says equities are topping as a recession knocks on the door.
Pal says in an interview that the current setup for stocks “feels like 2007,” with volatility on the rise, as he rattles through a laundry list of unsettling economic signals, including a rising debt burden, with mortgage rates on the rise.
Consumers are saddled by all manner of debt from health-care costs to student loans, and piling up credit-card delinquencies. He said consumers also are sidestepping the purchase of big-ticket items and are using credit cards to pay for necessities like clothing and food.
“It is the last hurrah being financed by credit cards in things that have no asset value,” Pal asks.
Pal says the fragile stock market is really being held together by Alphabet’s Google (GOOGL) basically an “ad stock” that faces a shrinking global ad market and potential slowdown from weakening global growth. “If Google breaks, everything goes with it,” he say.
He was calling for a recession in 2016. In a bear market, which could be looming, he says there is only one way to survive: “What you have do to trade in that situation is keep your powder dry, reduce into the selloff if you’re short, then you add into the big bounces.
“If you try to add into selloffs, you’ll have your face ripped off,” says Pal. Right now, he’s just waiting for the economic data to back up what he has been seeing under the surface and then everything will start to meltdown at the same time. He’s shooting for the first quarter of next year. Maybe.
All I can say is really smart money has been shorting GE shares since the high to mid-20s and it has been a relentless downturn ever since with no end in sight.
It's another brutal Monday on Wall Street. At the close, the Dow is down 602 points (2.3%), the S&P is down 55 points (2%) and the Nasdaq 206 points (2.8%).
Not surprisingly, following the CBS 60 Minutes report of Europeans taking back their data, the FANG stocks are getting pummelled on Monday hitting the broader tech sector (XLK) which is at a critical level here (click on image):
If tech shares continue to slide lower than their 50-week moving average, we will see broad-based losses in the stock market and the buyback bull won't make a difference.
I wouldn't panic just yet. Lately, markets always start the week weak, pop on Wednesday and finish off so-so. I'm being facetious but it's the truth.
Still, there's a lot of pain out there and even shares of the mighty Goldman Sachs (GS) are getting clobbered on Monday accounting for over 100 points decline on the Dow (click on image):
I know all about the 1 MDB Fund scandal but this feels a bit overdone, at least technically, and may present a nice short-term buying opportunity even if I'm short banks over the next two years.
But buying the dips in a bear market isn't easy because you don't know how low stocks can go and how long this bear market can last.
Are we in a bear market? No, not yet, but a few more weeks like this and we will be and many stocks are already in a bear market, declining below their 200-week moving average, unable to come back.
On Friday, I explicitly recommended you steer clear of cyclical stocks like energy (XLE), financials (XLF), and industrials (XLI) and focus on defensive sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ), and hedge that stock exposure with US long bonds (TLT).
The fact that oil prices keep sliding lower and king dollar keeps surging higher also confirms my fear that the global economy is slowing in a meaningful way.
However, it's important to note even though markets are getting slammed on Monday, nothing goes down in a straight line, we will see volatility leading up to the Fed's December meeting where barring a stock market crash, it's widely expected it will hike again (according to my friend: "no thanks to Trump tweeting about how Powell shouldn't raise rates, effectively cornering him to act in December and raise rates").
Anyway, I started with an article which cited Real Vision's co-founder, Raoul Pal, because he came out recently with a very gloomy 50- minute clip on the coming retirement crisis which I embedded below.
Now, on its website, it states Raoul writes and publishes an elite macroeconomic and investment strategy research service called the Global Macro Investor for the world’s leading hedge funds, pension funds, banks and sovereign wealth funds.
I have to say, I used to invest in top global macro hedge funds, and if any of them came up with some of the stuff Pal comes up with, I'd tear them to bits. A friend of mine sent me the clip below and he loves Pal and Real Vision, I'm less enamored and viewed it through a very critical lens.
First, I want all of you to first take the time to watch this clip, Pal is right, most Americans haven't saved enough and there's a looming retirement crisis as most people will outlive their savings and succumb to pension poverty.
Second, as I've stated many times here, America's private and public pension crisis is deflationary because as people retire with little to no savings, or meager pension payments which might be cut, they will spend a lot less during their retirement and that will impact consumption in a negative way.
But Pal then goes on to make these ridiculous assertions on the US labor force participation rate which has actually been on the rise lately, tying it to everything from gas prices to restaurants to bond yields.
The chart with gas prices and the US labor force participation rate doesn't take into account the over one billion Chinese and Indians who will come out of the agrarian economy to live in the city and drive a car.
Also, the US has better demographics than Europe, so I don't know where he gets his doom and gloom scenario on demographics is destiny and "it's all baked into the pie."
More importantly, as I discussed with a friend, people are putting off retirement for as long as possible and the US can still decide to privatize Social Security which will send stocks much higher.
In other words, depending on how bad it gets, you don't know how all this will play out in the future and how US policymakers will respond at that time.
What else? He shows a chart of an index he concocted to claim the Fed will significantly increase its balance sheet to over $8 trillion but get ready for stocks to crash by over 50%!
Excuse me, on the one hand, you're stating the Fed will do whatever it takes to bolster risk assets but on the other hand, you're stating stocks are toast because of demographics and baby boomers retiring in droves. There's a huge inconsistency there.
Not surprisingly, he ends up by recommending cryptocurrencies even though he admits "some ICOs are a scam" (insert roll eyes here).
Look, I happen to agree with Pal on some things but other arguments are extremely weak and laughable. We will have another bear market, it's going to be long and painful, deflation is headed our way, the Fed will engage in QE infinity, markets will be volatile, but it won't be the end of the world.
The biggest problem, and my friend and I were discussing this earlier, is people are stupid with their money, the Instagram generation loves spending money on things they don't need with money they don't have, is indebted like crazy, knows central banks will backstop their reckless behavior, and continues acting recklessly.
In effect, reckless over-indebted consumers are being rewarded and frugal savers are being punished. As my friend lamented: "There should have been a washout in 2008, we would have had a painful five year period but then began growing from a much more solid footing."
I sort of agree but the cost of killing the economy back in 2008 would have brought us over the edge and into the abyss, so it was better to extend and pretend for another ten years and have global central banks backstopping the whole charade.
Anyway, take the time to watch Real Vision's Raoul Pal discussing the coming retirement crisis. Try to watch it all and please don't slice your wrists or go selling all your stocks after you hear his gloomy predictions (all these guys know fear sells subscriptions!).