Below we look at the facts and numbers behind three great myths: 1) strong markets, 2) a robust trade war and 3) a surging economy.
History Speaks from Montana to Manhattan
This summer a buddy and I spent a day wandering the beautiful, rolling hills that surround the infamous battle of Little Big Horn, where in June of 1876, the arrogant Lt. Col. George Armstrong Custer (who loved to read about himself in the papers) and 268 of his brave men, met their violent end against a consortium of at least 2000 legitimately angry Native Americans.
By the way, the arrogant guy on the right is me 😉
History—and not just market history—is full of philosophical lessons and useful metaphors.
When the first few waves of Custer’s troops (under Major Reno) made their initial assault on the combined Lakota, Arapahoe and Cheyenne forces camped near the Little Big Horn River, the Indians were initially quite shocked. And within a few minutes of the attack, even more so.
Was it the great power and élan of the 7th Calvary, their fancy Remington rifles and well-fed horses that shocked them?
They were amazed because it took them only a few minutes of doing the math in their heads to quickly realize that these white guys were incredibly out-numbered and certain to get, well…massacred.
In short, they couldn’t believe the suicidal arrogance of Custer’s attacking army.
As one Arapahoe warrior, Water Man, later recalled: “At that time the sun was at [9:00AM]. There were not many soldiers and I knew they would be beaten because there were many Sioux and Cheyenne.”
Funny thing about numbers—sometimes they point out the obvious. They can predict massacres in battle as well as in markets, and today, like in 1876, the power of math is no different.
Our markets, alas, are heading toward a Manhattan massacre. Custer should have ran home. Instead, he went all in…
What about you?
Nobody Likes a Massacre
Of course, cavalry officers, like Wall Street investors, don’t like to think about losing, and they really don’t like to think about massacres, however rare or unpleasant they might otherwise be.
Today, as investors trot blissfully unaware toward their own version of a market “Little Big Horn,” they prefer stories of glory rather than warnings or intelligence reports from their scouts.
Yesterday’s WSJ was full of such glories and equally devoid, as usual, of any sound intelligence. It headlined the record-breaking NASDAQ as well as Trump’s breakthrough trade deal with Mexico and America’s continuing economic surge.
In short: 1) markets are (all-time) strong, 2) trade is improving and 3) the economy is surging. Three great pieces of market-making news.
Well, as we market “scouts” at Signals Matter will tell you—all three of these headline reports, are…lies.
The Current Spin Cycle
In a world increasing manipulated by MSM spin, journalist (rather than analyst-based) financial news, nosebleed stock market highs (intoxication) and tired memes of “fake news” from the political left, right and center, sober voices of reason just get lost in the fog of over-information and disinformation that pours down on us daily.
We are literally drowning in it.
But rather than ask ourselves why, most investors passively riding this crazy market wave (to a perceived paper wealth that seems to never end) naturally prefer burying their heads in the sand rather than opening their eyes.
That is, they prefer martinis over castor oil. One is more fun than the other.
After all, when markets are ripping, no one wants to concern themselves with facts, warnings, common sense, math or pesky little reminders of market history or the debt time bombs ticking beneath our market party-wagons.
We get it. Facts, after all, are often kill-joys, and the current party going on in the markets hates a kill-joy. I mean really: why would anyone feel worried as markets break new highs? Indeed, we at Signals Matter think they can go even higher. Dangerously higher.
Then again, Custer never worried about the number of arrows flying past him (or the warnings of his Crow and Pawnee scouts) until he ran out of bullets and men…
Furthermore, in a world where opinions pass for truths on a daily basis from The Onion to the New York Times, who knows what or whom to believe any more.
Bears and bulls alike have so many smooth-talking and persuasive pundits. From gloom-and-doomers to white-collared super bulls, one can find a blog, webinar, smiling-interview or headline to confirm whatever bias (fear, hope or delusion) one choses.
Here at Signals Matter, we approach markets a bit more agnostically. We have no religious preference for bears or bulls, just data, and today’s data recognizes the bull in the tape and the bear growling in the corner.
Such realism helps us beat the markets, which we’ve been doing for years—no matter how crazy they have been, are, and will continue to be.
And as for me, like just about everyone, I enjoy the sound of my own opinions. It’s a human-all-to-human weakness, and to those who know me, a source of either amusement, respect or annoyance…
This is why closeted know-it-alls like myself need to occasionally step away from the sound of their own adjectives and keyboard clicks to remind themselves and others that some facts are in fact objective; more importantly, they matter more than opinions.
And as for yesterday’s WSJ headlines, let’s, well… fact-check them, O-kay?
Lie #1—Markets Are Strong
Wittgenstein, among others, warned us to be careful with words. That is, we need to be more precise with our adjectives. As for markets being “strong,” a more precise choice of words would be helpful…
But “high” (as any college-age pot smoker knows) is not the same as “strong” (as any star quarterback or ace pitcher knows).
Yesterday’s S&P 500 closed at 2897, its index up 85% from the pre-08 crisis peak of 1562 in October of 2007.
That’s, well: high. Realllyyyyy high.
And remember how confident markets felt in 2007? You know—right before they got massacred… Yet if we look back upon those arrogant days with bemused grins, why are we not cringing today as history repeats itself?
After all, 2007 was a crazy bubble, and 2008 was a painful disaster. But by pure math, today’s markets are even more crazy, and the correction ahead will be mathematically an even greater (and longer) disaster—and yet, no one wants to see this?
The ironies do abound…
In fact, if you compare the current market peak to the disaster that was the last peak just 11 years ago (and even adjust it for inflation), today’s insanely over-valued market peak (bubble) is 55% higher than the last bubble.
If you still think this is safe territory for going long the markets for more glory and return (risk, math and facts be damned), that is, if you still think this is rational, then you are akin to Custer ignoring the pleas of his junior officers and scouts.
Delusion has found you. (Sorry, that’s just my opinion.)
Lie #2: Trade War Victories
I’ve written about the disastrous timing of our “Trade War” here and here, and the facts speak for themselves and aren’t worth repeating now, but are certainly worth clicking above if you have yet to read our “scouting reports” …
But as for the most recent headline, namely the “breakthrough” with Mexico, well… I chuckle.
Essentially, the so-called new trade victory against Mexico amounts to little more than a PR stunt rather than a “breakthrough.”
In this latest “art of the deal,” we got Mexico to raise its automotive labor costs to $16/hour in order to balance the scales in the US manufacturing sector, where similar labor costs in the US are at a minimum of $25/hour.
Wait. Do the math. Does $16 = $24?
What a breakthrough…
Lie #3: Our Surging Economic Recovery
In the backdrop of a market bubble/peak that is now 55% “peaky-ier” than the 08 bubble/disaster, it is accurate to at least admit that the current markets are surging…
But to say that also means our economy is surging or recovering is just, well: not precise.
Again, let’s look to math and facts rather than my smug one-liners.
As markets (driven exclusively by central bank low rates and money-printing) rose 55% up and to the right, median household income in the US climbed by just 1.2% in the same 11-year “recovery.”
In short, the stock market (home to the upper 10%) roared at a rate of 45X of Main Street’s median household income.
Folks, I’ll say it again: there’s a huge difference between a stock market bubble and an economic recovery. The bubbleheads in the media, from left, right to center, Politico to the WSJ, just don’t get this.
Take unemployment. Supposedly, we are at record-breaking U-3 unemployment lows. But as I’ve mathematically explained elsewhere, the figures provided by the BLS in DC are effectively, well, just BS…
The statisticians in Washington have conveniently left out of their employment equations more than 96 million adults who have simply given up even looking for a job.
Equally, if not more disturbing, is the fact that the US just isn’t producing an income anymore—certainly not enough to justify these historically unprecedented market highs. Again, this is not opinion—it’s math, as cold and unequivocal as a blood test or an SAT score…
In the same 11-year period were inflation-adjusted markets rose by 55% in the US, our industrial production rose by only 3% and total labor hours across all business sectors climbed by only 5.4%
I know. Boring stuff, right? Labor hours and industrial production…But those things are what measure an economy, not a market bubble.
You don’t need a graduate degree form an Ivy League holding tank to see that Wall Street’s mega bubble indexes have dramatically and grotesquely out-paced our Main Street economy.
Again: this is math, not bravado.
How It All Ends?
But to keep it simple, it really comes down to this: The world in general, and the US in particular, is enjoying a debt-driven market party unlike anything Tom and I have seen in our trading and investing careers—and unlike anything our markets have seen in US history.
We are literally and mathematically living in the greatest bull market in US history—which is why most investors have become so complacent, risk-averse, Custer-cocky and well…dumb.
But think about it: our lives, our companies, and our nation live on debt–$70T of it to be precise.
The vast majority of the companies reaching new highs in today’s surging markets are trading on over $7T in stock buy-backs levered through low-rate debt and trading on momentum rather than earnings or common sense (true PE multiples are at 30X folks and the CAPE indicators are screaming neon warning signs).
Stated otherwise: low rates have made us debt promiscuous. Gluttons. And promiscuity rarely ends well in any context…
If markets are driven by over-indebted companies enjoying low rate orgies, it goes without saying that the orgy ends when the rates go from low to high, which is coming to a bond market near you (or Turkey, or Italy or name your zip-code).
Don’t believe me? Ok. Back to the math…
As of Q2 2018, the after-tax income of all the S&P 500 companies was approximately $280B, which represents a 15% gain in real profits over an 11-year period (which, btw: hardly justifies the 55% gain in the S&P for same period…)
But it gets scarier…
Aggregate Net Income for the S&P came it a $290B for Q2 of 2018. Yet the debt on the balance sheets of those same S&P companies came in an aggregate $7T (yep, trillion, with a “T”).
Again, please do the math: $290B of net income against $7T in debt = a disaster in the making. A Little Big Horn…
In this backdrop, if interest rates (i.e. the cost of money) go up even 1.5% (or 150 basis points), the corporate interest expense for all those companies pushing markets to bubble heaven will cost them over $90B (after-tax) per quarter.
Read that again—the math part: $90B per quarter in debt payments. Those kind of payments are gonna kill earnings—which means markets are gonna fall faster than Custer.
That debt binge—the one that has generated the largest and fakest bull market in the history of US trading—is gonna destroy the very market it made.
Investors too arrogant, complacent or ill-prepared for this are gonna get scalped.
When It All Ends?
Market-timing is a tarot-reading. Those asking the “when” rather than the “how” are asking the wrong questions and missing the point.
It’s easy to mock those warning of icebergs or an outnumbered army, because when one feels safe, the warning bells sound like chicken-littles.
But if one understands debt markets, debt-bubbles and the interest rates that drive markets, the “when” is fairly easy to track, and for Signals Matter subscribers, even easier to follow.
Market timing (and the critics of it) is not the point at all—common sense and market education/awareness is.
The key lesson here is too see the whole field, not the monthly highs. The warning signs are obvious.
Whether the market tanks this month, this year or the year after is not the question. Just like whether Custer and 270 men attacked 2000 Indians in June of 1876 or November of 1879 is not the point.
The real point is the numbers had sealed his fate long before he galloped blissfully into the black hills and his slaughter—and it’s no different in today’s markets.
Whether the first market arrows hit you next week, next month, next year or even the year after, the end result is still the same: it’s gonna hurt if you don’t trade defensively, carefully and modestly.
In other words, do the math before you shout “attack! “or “buy!”