Roadmap to recession, or You Own Too Much Common Stock

A 460 point decline in the DJIA still gives me sticker shock, for back in the day that was a big move. Yesterday the S&P 500 fell 1.9%. Such ought not be a big deal. When you checked your portfolio…did you get a sick in your stomach feeling? If so, you own way too much common stock.

At Independent Stock Analysis we operate under theory that the financial system was going to implode during the financial crisis and Great Recession from a decade ago. The imbalances were monstrous and a cleansing needed to occur. The crises would have been a painful depression had the government and FED not acted decisively. Had the depression been allowed to run it’s course, the event would now be long in the rear view mirror and with only scars preventing it from being a forgotten depression.

Instead, the world doubled down on the wrong prescription and is moving toward Modern Monetary Madness. In fact, when the next recession occurs, the world may well go down that rabbit hole, which would be more painful than the proverbial depression passed over a decade ago. Mainstream Business Week gives an explanation.

Ten years into an economic expansion ought to see government revenue surplus. Instead the U.S. Posts Largest Ever Monthly Budget (Bloomberg): “The budget deficit as a share of gross domestic product is expected to widen to 5.1 percent this year, up from 3.8 percent a year ago, according to projections from the White House Office of Management and Budget. The shortfall is expected to be 4.9 percent of GDP in 2020, and further narrow every year through 2024, according to the estimates.” There will be no tiny narrowing to the outrageousness, but instead an explosion.

Hearken back to the last crisis: Do you remember wishing you were positioned differently as the disaster unfolded? That the available opportunities were spectacular…

…the idea is the same, though the playbook this time is different. A decade ago the question was ‘shall economic deflation or inflation occur?’ Today’s playbook is to be in a combination of cash and gold, and in the years ahead the first the cash converting into shares of your favorite company’s at distressed prices, then the gold. A kind of dollar cost averaging. Over the medium term, this time we know it’ll be inflation as money is printed 10 trillion at a time.

The timing has everything to do with recession: “Recession fears have increased but first quarter growth weakness could be short-lived, as has often been the case with first quarters. We don’t see a recession in the near term, but believe trade policy remains a key factor in the span between now and the next recession.” Schwab

The Roadmap to recession makes a remarkably clear case. Nordea

In the chatter yesterday: An Old Recession Boogeyman—the Inverted Yield Curve—Returns, and It’s Spooking Some Investors. Fortune

Meanwhile, The Retirement Crisis Is Worse Than You Think.

“Global equity markets peaked in January 2018 while US markets peaked in September 2018…We are confident that was only the beginning of a downturn in asset prices from record global leverage and central-bank-driven asset bubbles for this cycle. US asset bubbles only just began to burst at the end of last year as one can see in the chart below.” Crescat CapitalA

A Different Way to Look At Market Cycles by Lance Roberts.

Valuation Determines Return says John Mauldin and here is part 2.

To desperately seek income, as Jeff Saut suggests, will end badly. This recommended strategy is the equivalent to writing naked puts. At the wrong time. Nevermind that in a bull market the covered call strategy sees the investors best stocks called away.

In Ground Rules of Existence John Hussman shares his compelling playbook.

“Fortunately, we believe there are things worth owning. First, we are excited about T-bills at this stage of the cycle. In addition to protecting capital, T-bills are very liquid, provide a competitive yield relative to equities, and allow investors to act decisively when future opportunities return. Second, as it relates to potential equity purchases, we are very attracted to businesses with strong balance sheets” Palm Valley. So, cash and a very small investment universe; we will be talking about this later in the year.

How to position? Cash. And Gold – Preparing for the next move by Alasdair Macleod.

Buy Gold, Sell Stocks Is the ‘Trade of Century’

There is a lot here to ponder. As I have only begun to get back in the saddle, a question to consider: How would you like to be positioned when outstanding opportunity arrives? I am bursting with things to say in the months ahead You know where I stand: You own way too much common stock. It will likely be late April before I post again. Subscribe by email to Independent Stock Analysis to avoid missing the next post.

Triumphant Return

No one has been more out of step with asset markets this decade than me.

As Warren Buffett recently said, “Prices are sky-high for businesses possessing decent long-term prospects.” (The Felder Report). Unfortunately that’s not a good environment for this fellow.

Been wrong for long, yet I’m still in the “There is no bull market without central bank intervention or jawboning” camp. (Northman Trader).

Absent recession, oil looks good. (Goehring & Rozencwajg) This decade U.S. oil & gas production boomed yet the sector has underperformed to near generational lows relative to the whole stock market. And the sector may still offer precious little value. We’ll discuss this in the future.

Copper looks better. (Goehring & Rozencwajg). We’ll discuss this in the future.

The move to 5G in wireless is a big deal. (Gavekal).

The next decade, the 2020’s, I expect to be filled with harrowing opportunity born in upheaval. (Lance Roberts). I’m watching carefully. (Northman Trader).

When the economy rolls over, the stock market is in huge trouble. The credit imbalances today compared to a decade ago are different, and worse than the Great Recession of a decade ago. Thus the positioning of oneself ought to be different.

Already profit margins are under pressure (Blackrock). Long time bear John Hussman eloquently writes like the market peak is definitely in the rear view mirror (Hussman Funds). Watch out below when the margin debt unwinds (Advisor Perspectives) simultaneous to the calm premium ending (Blackrock). The next recession will have to wring out monster excesses (Gundlach).

Getting this right is the opportunity. In today’s world I’m not sure the difference between protecting yourself and seizing the opportunity are a whole lot different. We’ll discuss this much in the future.

It’s been 3 and a half years since my last blog post. I’m back. Posting will be sporadic through April; by May I hope to be rolling on a regular basis.