Technically we are already in a bear market.
Most of the world’s major stock markets around the world are down 15% for the year and have had their worst start to a year in the history of the stock market.
The term ‘stock market crash’ refers to a drop of 50% or more in the value of stocks the momentum of which is driven by panic-selling usually induced by bleak economic news.
Well there’s plenty of bleak economic news doing the rounds and what follows is a low-down of the most important of them (let me know if I’ve missed any out)
#1 Corporate Earnings Are Already In A Recession
Here are some numbers:
- Q2 2015: -0.7 percent
- Q3 2015: -1.5 percent
- Q4 2015 (est.): -5.5 percent
As of today’s date 40% of S&P 500 companies have reported earnings for the fourth quarter and this is the first revenue and earnings recession since The Great Recession.
The fact is that the global slowdown has hit corporate earnings hard.
Harder in fact than most people realize since the mainstream press are under-reporting what is actually happening in financial markets.
Most are blaming weak commodity prices which has decimated the earnings of energy stocks.
Interestingly CNN took a different view:
But the earnings trouble isn’t all commodity related. Even if the gloomy energy sector is excluded, S&P 500 earnings would be expected to rise just 0.6%. That’s largely because of the strong U.S. dollar. The dollar has skyrocketed 20% against a basket of currencies since mid-2014 and it’s now nearing parity with the euro. A super-strong dollar hurts big U.S. multinational companies by making products sold overseas more expensive. (Think: iPhones sold in China.) It also shrinks international profits when they’re converted back into dollars.
As pointed out last week I’m 100% out of stocks because of ‘the slowdown in the US economy and the reduction in US corporate earnings also makes me a bear right now’:
Weakening EPS in the US pic.twitter.com/NEidXxYwPk
— David Thomas (@djthomas) January 30, 2016
#2 Central Banks Are Running Out Of Ideas
Janet Yellen raised interest rates at a time when the US and the global economy are both weak because they were forced to.
The asset bubble they created is starting to deflate but raising rates makes it look like a sign of strength and that The Fed is in control of the economy:
With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate
Fed Chair Janet Yellen
Nobody believes her.
At least nobody sane believes her because the economy is not performing well otherwise corporations like Walmart or Lloyds would not be laying people off, stocks and corporate earnings would not be tanking and main street wouldn’t be feeling as glum as it is.
But more importantly the recovery since the financial collapse of 2007/2008 (which is not a recovery at all) is a manufactured bubble – a sort of fake/delusional recovery – whose chickens are daily looking like they are coming home to roost.
#3 Lack of Faith In The Fed And Dollar Devaluation
The Fed induced fake recovery and it’s consequences such as the weakening of the intrinsic value of the dollar has led many to question the legitimacy of The Fed itself.
The gold repatriation programs launched by several countries – most notably Germany – were inspired by a growing lack of faith in the reserve banking system of the United States and US dollar value destruction.
Some have even speculated that The Fed would actually seize the gold of foreign depositors if ever there was a US dollar currency crisis.
In 2013 Forbes noted that the official reason from the Bundesbank for gold repatriation was ‘preemetive’:
Officials at the Bundesbank indicated they have no intention of selling gold, but acknowledged the move is “preemptive” in case a “currency crisis” hits the European Monetary Union.
Zero Hedge also pointed out that a 2014 report from Deutsche Bank cited ‘diplomatic difficulties’ as to the real reason why the gold repatriation program was stopped in it’s tracks:
Germany was pressured to keep its gold in the US after a “diplomatic” line of communication was opened, most likely the result of the Fed making it all too clear clear to the Bundesbank not only who runs the show, but what the assured failure to repatriate Germany’s gold would mean for “price stability”
Tyler Durden, Zero Hedge
Clearly even central banks of the developed world are now waking up to the fact that the stability of some of the world’s currencies is under threat and they are rightly back stopping their own financial systems with the yellow shiny stuff.
The net result is that investors are getting out of stocks and getting into precious metals because the yields from bonds are so low.
So Why Won’t The Stock Market Crash?
Because Janet Yellen and her coterie will probably end up taking interest rates back near zero or below AND launch another round of quantitative easing.
Negative interest rates in the US a possibility https://t.co/mGrpHMALoo
— David Thomas (@djthomas) February 4, 2016
Yellen may actually wait until a crash occurs to give her the mandate to introduce negative interest rates and launch a very very big stimulus plan.
The fact is that the reason for the current bear market in stocks is precisely because The Federal Reserve raised interest rates and they are fighting tooth and nail to hide the fact that a real recovery from 2008 is an illusion.
The central bank of the United States will have to break even more debt and stimulus records if they are to maintain the charade of a healthy economy.
Watch out for future conflicts in the Middle East which have traditionally assisted the US in this regard whether it’s troops on the ground or by proxy such as Saudi Arabia’s recent brow beating.
Either way desperate measures will need to be introduced to remedy a desperate situation; when you inject a sick patient with toxic medicine and that medicine wears off the patient either needs weaning off the medicine or even more toxins to keep him and his fake recovery alive.
The Model Portfolio
The narrative that the mainstream media has been forcing down people’s throats – because hacks always have a short-term perspective – is that the bear market in oil is to blame.
— David Thomas (@djthomas) February 5, 2016
The crash in oil prices has not entered my thinking this week save for its impact on earnings and of potentially investing in some large cap oilers that have seen their stock prices crash in tandem.
Should The Model Portfolio venture back into stocks this website will be updated accordingly.
On the precious metals front, The Model Portfolio has added more physical gold and silver financed by earnings from the new private business – if it’s good enough for central banks it’s good enough for the modest family office at Shares and Stock Markets HQ.
From a very basic level the accumulation of physical precious metals is a hedge against the doomsday scenario of a currency crisis and the financial mayhem that entails.
On another level it is simply a store of value for future generations.
One thing I’ve learnt this week is that precious metals dealers are not adverse to haggling over the prices so if you are interested in venturing into buying gold for yourself, don’t be afraid to task: ‘what’s your best price?’.
Just tell them David sent you 🙂