This is a copy of the August 21, 2021 update for our MarketCycle Wealth REPORT website.

This month’s blog will show the daily thinking process that we go through at MarketCycle Wealth Management and also at our paid membership site: MarketCycle Wealth REPORT (link below).  Every year we post a free copy to readers of our blog.

But first, I’d like to review our predictions from over the past couple of years and what we got right and what we got wrong.  These predictions were taken from past blogs and private client market updates.

Our correct predictions:

1. We stated that the economy would NOT collapse following the ‘Covid pandemic panic’ and at the exact bottom (to the day) we stated that the economy would actually become even stronger, with a roaring bull market and rapid employment gains and we further stated that the U.S. would continue to lead in strength relative to all other regions and countries.
2. We stated that the USDollar would not collapse, as so many others were warning… and that currencies would basically drift sideways for a prolonged period.
3. We correctly called the bottom and top and correction of Bitcoin, almost to the day.
4. We said that although the Federal Reserve was already dumping its unprecedented 2020 ETF purchases, that they would announce that they would start to “taper” in 2021.  They announced such on August 18, 2021.  In the past year, the Fed has increased its Treasury-bond ownership from 15% of all T-bonds to 27% of all T-bonds.  It is STILL buying $125-billion worth of bonds per month and this is with record stock market highs, high employment, wage gains and palpable inflation!  
5. And we maintained our stance that there would be no rate hike. The Fed still says “2023” but MarketCycle’s indicators have predicted that, although there could be a rate hike in late 2021, we will likely get the first rate hike in 2022.
6. We saw inflation coming as early as the first week of April of 2020 and this is now the most important financial news story although inflation may now be peaking and even drifting somewhat lower, as we also predicted.  Inflation will remain at a relatively high level for some time to come since both manufacturing and retail inventories are totally wiped out, causing higher prices all around.  Coming wage increases will add significantly to inflation levels and as inflation rises over the next 15-ish years, wages will have to keep pace in a sort of self-reinforcing feedback loop… you will make more but you will have to spend more. Even U.S. Social Security payouts will be increasing, including for 2022.
7. So, we said that while inflation would eventually go to the moon in the 2030’s, that it would initially present with multiple parabolic spikes and their subsequent corrections.  The most recent (first) spike is already showing signs of backing off.
8. In very early 2020 we said that all commodities, including oil, would take off and present investors with opportunities.
9. We said that TIPs and gold were good portfolio assets although gold may lag other industrial and energy commodities.
10. We said that bonds would gyrate and that investors would, going forward, have to take a tactical approach (and that bond “buy & hold” would be dangerous for the next 15 years).
11. We said that India would lead China in relative strength and that it would do so by a wide margin; it certainly has.
12. We felt that while rising inflation should cause emerging markets (like Brazil) to beat developed markets ( like Germany), that in reality, developed markets would excel (but still lag the U.S.), and they did.
13. We said that the U.K. would show stronger relative strength than would Europe, although just this week we began to see some signs of weakness in the U.K. relative to Europe.
14. We said that convertible bonds would beat preferred shares.
15. Right at the bottom, we stated that the March Covid-crash bottom would present a major buying opportunity for highly discounted (and leveraged) Closed-End-Funds.  MarketCycle added roughly 20-25% to our client portfolios.
16. We felt that value stocks would catch a bid in 2020 but that growth stocks would (again) overtake them in 2021 and that large-cap momentum stocks were a good way to play this.
17. We felt that technology stocks would take a hit and then recover.  That said, we also now feel that stock, sector and factor selection will be of vital importance going forward and that stock indexes (like the S&P-500) will no longer outperform.
18. We very accurately called the tops and bottoms and pullbacks, usually to the day.  For the last pullback, one day before the occurrence we predicted a rapid 5% drop that would recover rapidly… it pulled back just shy of 5% and then did recover fully within a few days.

What we got wrong:

1. We (probably correctly) predicted that a bear market was coming in June of 2020, but the Covid-panic unexpectedly pushed the date forward by three months.  Black Swan (unexpected & rare) events cannot be predicted in advance but this one hit in an already weakening market, which we did foresee.  LESSON LEARNED.  The prior time that we had called an official “bear market” was in December of 2007 and this proved to be extremely important and correct and profitable for MarketCycle since we pre-moved to extended-duration Treasury-bonds for 15 months (and shorted the market for 11 months); we made a bundle when everyone else was getting killed by falling markets.
2. We felt that Chinese stocks would be somewhat stronger in 2021 than they currently are (but to still lag other emerging markets, especially India); we failed to foresee the Chinese government interfering to such an extent in its own markets.  LESSON LEARNED.  On August 18, 2021, CNBC (financial website & channel) ran the following headline:  “Hard lesson for global investors; Chinese companies do not make the rules in China.”   
3. Normally dangerous high-beta stocks were stronger than we felt they would be and because we started a brand new stock bull market only 1.5 years ago, we should have known better.  LESSON REMEMBERED.  Please note that today high-beta stocks are no longer either a safe or a good investment choice.  High-beta stocks are high-volatility stocks and in a new roaring bull market, volatility causes rising spikes of profits.  The correct pick now would be mid-to-large cap lower-volatility and quality stocks; lower risk stocks will now beat higher risk stocks.

 

Bull market?  A recent quote from Picton Mahoney about what would cause the bull market to continue:  “Households are now sitting on a mountain of excess savings, over $3-trillion, providing considerable resources for a consumer binge.  Consumer spending will likely be turbocharged for a number of years to come.  And wealth created by investment account gains will likely further support consumption levels as we approach a full economic reopening.” 

 

MarketCycle Wealth  REPORT

For August 21, 2021  

Important note about the REPORT signals:  The individual asset signals shown below are determined by combining the following 11 criteria…

1. The trend direction of the individual asset
2. Relative strength of the individual asset against all other assets
3. Relative strength of all regions and countries relative to their peers
4. Where we are in the current cyclical market cycle
5. Where we are in the longer-term secular cycles
6. Where we are in the inflation cycle
7. Global Central Bank activity
8. Global currency relative strength and trends
9. Accelerated inflation data
10. Accelerated economic data
11. How much measurable risk is currently in the market

 

STOCKS…

United States:  very BULLISH    

Developed markets (ex-U.S.):  weakly BULLISH

     Japan:  weakly BULLISH  

Emerging markets (mostly commodity producers):  CAUTION

     China:  CAUTION

     India:  very BULLISH

Leader in RELATIVE STRENGTH:  United States 

GROWTH or VALUE:  GROWTH

Strongest SECTORS:  consumer cyclicals, consumer staples, financials, healthcare and technology

Global private equity:  BULLISH

 

• SECULAR U.S. stock outlook (effective October 1, 2011):  Bull markets will be stronger than usual
• SECULAR Emerging market stock outlook:  Bear markets will be more severe than usual

 

 

BONDS…    

U.S. Treasury-bond, 30 year:  CAUTION  (can offer portfolio protection and hedging)   

U.S. Treasury-bond, 10 year:  CAUTION

U. S. fixed-rate corporate bonds:  CAUTION  

U.S. floating-rate assets (and TIPS):  BULLISH

U.S. high-yield corporate bonds:  BULLISH

U.S. preferred shares:  CAUTION

U.S. convertible bonds:  BULLISH  

Emerging market high-yield bonds:  CAUTION

• SECULAR fixed-rate outlook:  Bear markets will be more severe than usual. 

 

 

COMMODITIES…

Gold:  BULLISH   (can offer portfolio protection and hedging)

Oil & energy:  BULLISH

Industrial metals:  BULLISH

Lumber:  weakly BULLISH

U.S. home price appreciation:  BULLISH

 

• SECULAR commodity outlook (effective October 1, 2011):  Commodity bear markets will be more severe than usual 

 

 

CURRENCIES…

U.S. Dollar:  CAUTION 

Euro:  CAUTION

Yen:  CAUTION

Emerging market currencies:  CAUTION

Note:  All currencies are gyrating sideways and this could persist. 

 

 

RISK ASSESSMENT…  

• Calculated future U.S. economic-RECESSION probabilities (markets can correct without being in recession):  LOW
• Global (ex-U.S.) Economic Weakness Indicator:  BULLISH
• U.S. Federal Reserve’s Survey of Professional Forecasters:  BULLISH  
• Are energy costs HIGH enough to crush the economy?  NO
• Are energy costs LOW enough to stimulate the economy?  NO
• Hindenburg Double Omen within past 6 months:  Just had one but require a second one in September to confirm
• If post correction, does the VIX Rate-of-Change show that a near-term bottom may be in?  N/A
• High-yield to T-bonds – price divergence:  BULLISH
• High-yield to T-bonds – spread:  BULLISH
• S&P-500 to T-bonds – spread:  BULLISH
• Global (ex-U.S.) stocks to T-bonds – spread:  BULLISH
• Percent of S&P-500 stocks above-to-below the 200 SMA – divergence:  BULLISH
• S&P-500 Price to Momentum – divergence:  BULLISH
• S&P-500 monthly RSI – divergence:  BULLISH
• S&P-500 Advance/Decline Price Line:  BULLISH
• S&P-500 Advance/Decline Volume Line:  CAUTION
• Small-cap Advance/Decline Volume Line:  CAUTION  (as we move into the mid-cycle, we expect small-caps to show relative weakness)
• Small-cap direction of 300 day Simple Moving Average:  BULLISH
• Micro-cap to large-cap divergence:  CAUTION  (erratic behavior of micro-caps might be caused by the new phenomenon of “Robinhood Traders”)
• Small-cap momentum:  BULLISH
• Mid-cap momentum:  BULLISH
• Large-cap momentum:  BULLISH
• Dow Theory divergence:  CAUTION  (could be a false signal because of Covid related airline weakness)
• Home construction divergence (triggers early):  BULLISH
• Lumber price divergence (triggers early):  BULLISH
• Copper price divergence:  BULLISH
• Cyclically Adjusted Price-to-Earnings Valuation Ratio:  BULLISH
• Warren Buffett Valuation Metric:  BULLISH
• Q-Ratio Valuation Metric:  BULLISH
• U.S. 3-month:10-year interest rate yield-curve:  BULLISH
• Likely future direction of U.S. interest rates:  FLAT then UP
• 12 month trend of inflation levels:  INFLATIONARY 
• Inflation/Deflation Extremes Indicator:  BULLISH  
• Volatility trading-range:  BULLISH
• Un-employment trend (leads employment data):  BULLISH
• U.S. Leading Economic Indicators EXPANSION or CONTRACTION:  EXPANSION
• U.S. stock market combined SEASONALS (updated monthly):  CAUTION
• Is there too much BULLISH ENTHUSIASM in the stock market?  NO 
• ∗∗ Calculated chance of a multi-week stock market CORRECTION of >10%:  only slightly above AVERAGE 
• ∗∗ Calculated chance of a multi-month stock market RECESSION of >20%:  NONE  
• ∗∗ Calculated chance of a multi-year global DEPRESSION of >50%:  NONE 
• Minor OVERSOLD Indicator most recent buy-the-dip date:  March 23, 2020   
• Major OVERSOLD Indicator most recent buy-the-dip date:  March 23, 2020 
• U.S. SECULAR THEME… “MY” Ratio (investing demographics) is bullish until 2029
• U.S. very-long-term SECULAR THEME… inflation or deflation:  INFLATION 

 

 

S&P-500 shown as of Saturday, August 21, 2021… most likely path is to touch and then scoot along the new upper dashed line as it did in 2013-2014 when the Fed was last tapering, but we’re watching closely.

 

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Graham & Dodd:  “The essence of investment management is the management of risks, not the management of returns.”

Ralph Wagoner:  “The market is like an excitable dog on a very long leash in New York City, darting randomly in every direction.  The dog’s owner, who ultimately determines the primary direction (trend), is walking from Columbus Circle, through Central Park, to the Metropolitan Museum.  At any one moment there is no predicting which way the pooch will lurch.  But in the long run, you know he’s heading northeast at an average speed of three miles per hour.  What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog and not the owner.”–

MARKET CYCLE  —  TREND FOLLOWING  –  DUAL MOMENTUM  —  GLOBAL MACRO  –  HEDGE FUND 

 

 

Thanks for supporting us…  Steph Aust

 

 

This month we’re going to divert from our typical investing information format and I hope that readers will forgive both the transgression and the preaching.  It’s an easy read.  And I promise that this will be the last negative posting for awhile, although this one, like the others, offers a solution.

Natural resources are finite and many are non-renewable and subject to permanent depletion in a world where the human population continues to both expand and to permanently destroy fragile ecosystems.  It doesn’t matter what one’s personal beliefs are, we all want to live on a beautiful, clean and abundant planet.  We all want to leave the world better for our children and grandchildren.  And of course none of us actually wants to waste money, so the action steps shown below are a win/win proposition.  Many individual small steps by many different individuals would make a big impact on our planet’s health.

An unhealthy planet is costly.  Global warming causes the climate to change. Historically, global warming comes from any one of five possible causes and only one of them is viable today.  Gigantic meteor strike?  No.  Huge volcanic eruption?  No.  Earth wobble causing a pole shift?  No.  Large, steady increase in solar energy?  No because according to both NASA and NOAH that have tracked this in real time for many decades, there has been no meaningful change in solar energy or solar activity since the start of the Industrial Revolution.  This leaves increased carbon in the air caused by humans burning a truly massive amount of carbon, especially during the past 50 years, and scientifically we know this to be true and it even passes the ‘common-sense test.’  But regardless of what you personally believe is the cause, we know that every degree Celsius of warming costs, on average, 1.2% in global GDP growth (Gross Domestic Product).  This is an enormous number.

This morning as I sit here and type, I look out my window and the mountain range that begins its rise just one mile down the road is totally obscured by smoke.  2-million acres are currently burning up in the western half of the United States and the smoke is so thick here on the east coast, 2000 miles away, that if I open my home’s windows, the smoke detectors start screaming.  I’m not kidding.  Record heat and record drought.  Just the other day the hottest temperature ever recorded on Earth occurred on the California/Nevada border, reaching 135 degrees Fahrenheit.  It seemed like a wake up call, but it went un-noticed.  And now we hear that elevated parts of Europe that had zero chance of ever being flooded are currently under water… beautiful and historic cities destroyed in just two days of torrential rain.

 

 

In about 20 years, if left unaddressed, there will be a confluence of environmental and economic problems that will reshape how all humans live and what type of (barren?) world our children will be forced to live in.  The current rush into outer space is being caused by people that realize that this planet is in trouble… as if humans could ever be happy or healthy living on Mars.  Common sense tells us that humans are perfectly designed to live only on this perfectly designed Earth.  But it is still not too late to alter our course.

 

 If you make even one small positive change, you are then part of the solution.  So, what simple & easy things can one person do?

• Turning off the water while brushing one’s teeth can save 1,800 gallons of water per person, per year.
•  A low-flow shower head will use 10 gallons of water during a 5 minute shower; a regular flow shower head wastes a full 25 gallons in 5 minutes. It requires 50 gallons of water to fill a tub for a bath.
• Turning down one’s thermostat by 1° will cut heating bills (and energy use) by 3%.
• There are 5 trillion non-biodegradable cigarette butts thrown out of car windows each year.
• Institute a mug (and a metal utensil) policy in one’s office. Americans throw away 25 billion non-biodegradable polystyrene cups per year.
• Use permanently reusable metal coffee filters at work.
• If all U.S. households would pay their bills online it would save 19 million trees and over 2 billion tons of carbon dioxide and almost 2 billion pounds of trash.
• Most electrical appliances (and chargers) move to standby mode when turned off, requiring them to continue to use 40% of their full running power. Plug them into power strips and turn the strip off when they are not in use. If all Americans did this, it would save the amount of power annually that is generated by 26 power plants.
• There are 180,000 tons of small batteries thrown away each year in the U.S. alone. Rechargeable batteries are the obvious choice.
• Attach a rain barrel to gutter downspouts. An average home’s rooftop, even in a relatively dry state, could collect a total of 17,000 gallons of water each year… 65% of the annual needs for that home.
• A trigger nozzle on a garden hose will save as much as 6 gallons of water per minute.
• Recycling all newspapers in the US alone would save 130 million trees per year.
• Use natural pesticides in order to save the birds and the bees.
• One bat will eat 1,000 mosquitoes per night, so put up a ‘bat box.’
• Get a bicycle… walk… burn a calorie.
• Drive cars until they die; next time purchase a fuel efficient hybrid car.
• Re-gift gift wrap.
• An inefficient lawnmower uses almost as much fuel as a car… go electric or use a push-rotary whenever possible (on small lawns).
• Switch to low energy LED light bulbs.
• Avoid plastic bags… take reusable cloth bags to the grocery store.
• Scraping rather than pre-washing dishes before putting them in your dishwasher would save each household 7,300 gallons of water per year plus the energy that it takes to heat the water.
• Inserting a “low flow” device in our toilets ($20 and 10 minutes time) would save 50 billion gallons of water per day across the globe.
• Attaching an after market bidet to your toilet ($50) will eliminate 90% of toilet paper use (did you catch the pun there?)
• Pre-heating ovens (except when baking pastries) is a complete waste of energy.
• Recycling all glass containers would stop Americans from burying 13 million TONS of glass waste per year. Glass takes one million years to decompose.
• When an appliance breaks, replace it with an Energy Star appliance. If everyone in America slowly replaced all of their appliances, it would save literally trillions of dollars of wasted fuel each year.
• When making decisions, always remember that oil is ultimately a finite commodity and we have a high likelihood of running (permanently) low beginning around the year 2035.
• Get a clothesline.
• Use green and recycled materials when building or remodeling.
• Go vegan to instantly cut your carbon footprint in half!  I understand that this particular bullet point will really upset some readers, but I’m plowing ahead anyway (and I wish that WordPress would allow me to insert a smiley face here!).  After working with patients for over 25 years, I came to understand that some people feel that a triple bypass heart surgery is less extreme than is going on a plant based diet.  I do get it.  And I’ve also heard so many people say: “I’m just one person and what can one person do that will make a difference?” This is the answer and I’ve personally been vegetarian and then vegan for the past 50 years of my life (I don’t normally push it… most people don’t even know).  Veganism is the fastest growing global lifestyle movement in history with the number of adherents doubling every single year; this is massive exponential growth.  51% of climate change is directly related to meat, fish and fowl consumption.  The Earth’s 8-billion people kill 3-billion animals per day, every day and that adds up to over 1-trillion animals killed per year.  To produce just one pound of meat requires 2,500 gallons of clean water.  91% of the Amazon rainforest destruction has been done to raise animals for slaughter or to grow grain for them to temporarily live on.  30% of all of the Earth’s land-mass is now devoted to raising the animals that we kill & eat and this leads to massive soil erosion and desertification as well as polluted water systems from manure & waste runoff.  The world’s aquifers are running on empty.  Cattle produce 20% of the methane that is released into the atmosphere. Methane is 23X worse than carbon dioxide as a greenhouse gas.  Modern fishing utilizes truly gigantic fishing nets that scrape the ocean floor and extend up to the surface, destroying and killing literally everything in their path; 95% of the big fish (as in sailfish and swordfish) are already gone.  Most oxygen is produced in the oceans and if this complex cycle is disrupted, then nobody is going to be able to breath.  I do know first hand that people can, fairly easily, go plant based and live to tell about it.  The only side-effect is improved health and longevity for both ourselves and for our planet. And of course organic, local vegetables and fruits are both affordable and tasty.
• Plastic degrades into microscopic particles when dumped into our oceans (which is where most global trash goes) and some believe that this will kill all ocean life within 30 years.  Fish cannot breathe in plastic contaminated water.  Recycle.  Help to encourage third-world countries to stop dumping their trash into the oceans.  MarketCycle’s large 2020 charitable donation went to The Ocean Conservancy specifically for this reason (and we helped to sponsored the building of children’s playgrounds in inner cities in 2019).
• Compost all kitchen (and lawn) scraps that are not of animal origin. It benefits one’s garden while connecting us to the repeating cycles of life. Small yard waste, such as autumn leaves, can be shredded in an electric garden shredder before composting.  If kitchen and yard scraps end up in garbage landfills, they produce tremendous amounts of methane gas.
• Buy organic local produce in season to reduce oil consumption by 40%.
• Fix leaky plumbing. A slow faucet drip can waste 20 gallons of water per day.
• We should check the insulation in our homes. There are companies that will check this for free.  Heating and cooling makes up 70% of the energy use in most houses.
• Grow some organic food, even if it is one plant in one pot.  It’s fun!
• Buy recycled products. Buy local when possible.
• Skip the coffee stirrer to save 138 billion plastic straws per year.
• Take a train instead of a plane.
• Recycle your own printing paper by using both sides of the paper.
• Diapers add 3.5 million tons of waste to landfills each year… use cloth or environmentally friendly disposable diapers instead.
• Re-use a cloth napkin instead of paper. Landfills receive one billion pounds of paper napkins per year.
• Using “cruise control” gives 15% better automobile mileage.
• Batch errands. Take a friend.
• Turn off lights. If no one is in the room, the light isn’t helping anyone.
• Keep one’s fireplace damper closed in winter or warm house air will be rapidly sucked out through the chimney.
• Donate rather than throw away.
• Financially support organizations that are part of the solution.

 

 

Brief MARKET SUMMARY:  On Saturday July 17, 2021, I sent a Market Update to clients stating that the stock market was about to go down “very soon” and that the final loss would be around 5% and that it would then recover rapidly.  On Monday July 19, 2021, just two days later, the Dow fell (intraday) 946 points and this represented a 4.5% loss off of the market top.  It then recovered over the next three days.  This drop almost instantly corrected enough of the weakness so that the stock market could proceed higher.  S&P-500 @ 4600 sooner rather than later.  As I’ve been repeating since early 2009, we are in the Secular stock bull market of our lifetimes.  The S&P-500 is going to go beyond 10,000 and it won’t end for another 8-ish years, so gird up your loins and invest full throttle (but avoiding downturns is the key to making real profits).

MarketCycle’s accounts, including our many overseas accounts, have been correctly positioned in U.S. stocks and assets since early April of 2009 (after having been ‘short,’ and extremely profitable, all during the 2008 Financial Crash):

 

MarketCycle is here to help you; contact me with any questions that you might have even if you do not become a client, I’m here to serve.  I personally reply to all legitimate email comments or questions.

There is a ‘Contact’ tab on the website’s top banner right next to the ‘Client Account Login’ tab.  PDF and print functions are at the bottom of this page.

 

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MARKET CYCLE —  DUAL MOMENTUN  — TREND FOLLOWING  — HEDGE FUND 

Inflation is like a shark moving just below the surface; it is something that most people would instinctively want to avoid.  Inflation is currently in its infancy, it is a tiny toothless shark, but I can guarantee you now that the Central Banks will find it difficult to muster the courage to wrestle with it when, further into its adult life, it grows into the churning beast of hyper-inflation.

Rising inflation causes an increasingly expensive world where prices can eventually go parabolic (hyper-inflation).  The painful solution to these chronic high prices is either setting slightly higher interest rates right now, or setting REALLY high interest rates in about 10 years, or stupidly waiting for the parabolically higher prices themselves to put a total halt to the economy at a much later date.  Obviously the first choice is the best, but we won’t find the courage to act.

During the coming eight years I expect ‘bouncing’ inflation, as a sort of practice run, where inflation makes around 3 separate strong climbs followed by an equal number of abrupt deflationary drops (basically bobbing up and down) before beginning to steadily grind much higher during the 2030’s.

The chronic deflation (falling prices) that we had encountered during the past decade has evaporated and inflation is now at a relatively high level by comparison.  Most authorities say that this is transitory, meaning that higher prices will last for only a few months in duration.  Right now the recent parabolic spike in ‘materials’ inflation has already backed off somewhat and the relative strength has rotated into ‘energy’ & ‘gold’ inflation.  However, if you consider the somewhat obscure U.S. economic indicator known as the Logistics Manager’s Index, going back to normal within a few months may not be in the cards.  This index asks the corporate supply chiefs of important corporations where they see inventory, transportation and warehouse expenses now and 12 months out.  The gauge, with its 90% accuracy rate, currently shows higher inflation still in place 12 months from now.  It will be difficult to get supply to match with demand and this may hamper any meaningful drop in commodity or retail prices.  In fact, about the only thing keeping a roof over prices right now is the fact that the velocity of money (the speed of the movement of already printed money) is historically still at the slowest pace ever (there is still almost $2-Trillion sitting on the sidelines in the United States alone).

Thirty years ago I started putting together the puzzle of what would happen longer-term to stocks, bonds and commodities and gold.  I can not-so-humbly say that I’ve been accurate so far.  I understand market cycles and inflationary cycles and secular cycles and very few money managers know about or even care about these subjects.  What I did not originally know was what specific & unusual events (Covid-19) would come into play to assist in the slow-motion cyclical changes that I saw coming.  I do admit that I expected the rotating leaders of both U.S. political parties to spend endlessly and then to just print money in order to pay for it all; each leader in turn doing those things that would ultimately set the framework for hyper-inflation in the 2030’s followed by hyper-deflation in the 2040’s.  So what I see is our irrational fear of experiencing mild discomfort now causing inescapable and significant financial pain much further down the road.  We seem to have a phobia about raising interest rates even though doing so would be a temporary solution to both the falling USDollar (USD) and to the rising inflation.  When the Fed recently merely mentioned the possibility of rising rates in 2023 the USD strengthened dramatically during the next three days.

So, on June 16th, the Federal Reserve announced that despite the current high levels of inflation, that they would absolutely not be raising interest rates for another two years.  TWO YEARS.  The stock market immediately fell, thus indicating that it didn’t like the response because it was both too early AND too late.

In the United States, we have already printed our way to an additional $6-Trillion+ in “pain relief” in just the past year and we are now discussing printing many times that amount.  The problem is that the resultant inflation (ultimately from money printing causing USD devaluation) will hit the vulnerable and disadvantaged much more than the rich.  We will lift up the poor now with expensive social programs and direct payments, only to later crush the poor because the bill for all of this will eventually come due.  Even good causes are not free.  And if we excessively weaken the USD in the process, then we will have to pay more Dollars for everything that we buy, including necessities like food, and that is what inflation actually is.

DOLLAR STRENGTH  (Chart courtesy of Wolf Richter):

U.S. NATIONAL DEBT…  This debt has grown by $19,000,000,000,000 since the year 2007.  (Chart courtesy of Charles Schwab):

The Central Banks and the individual treasury departments of countries across the globe are all falling in line.  Even in Germany, with its reliable fiscal discipline, there is growing support to reform the constitutional debt brake in order to permit more deficit spending, mostly on social programs.  And when Central Banks do eventually acknowledge their inflation concerns, it may be too late to avoid the jaws of the shark.

Chronically high inflation is a real problem.  As President Ronald Reagan said in 1978 (the last time we were suffering from stagflation):  “High inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

So, governmental money printing & spending coupled with consumers spending their $-Trillions in Covid-relief checks on anything that they could get their hands on, plus the resultant commodity and oil price increases originating out of supply scarcity, will all lead to inflation.  On top of that, demographic scarcity of human workers will cause eventual wage inflation.  A reluctant and behind the curve Federal Reserve (and all other Central Banks), afraid to cause havoc in a debt-heavy world, will just add fuel to the inflation fire by delaying needed and necessary interest rate increases while everyone continues to “print.”  This is especially bad because monetary policy operates with long and variable lags.

Retail orders are at record highs but manufacturing inventory is extremely low by historical standards, so the result is inflation (because people are willing to pay more for scarce items) and rising commodity prices (because empty retail shelves have to be reloaded with the newly manufactured items that people buy).  Retailers have found one sneaky solution in the concept of SHRINK-FLATION where they use the same packaging but quietly shrink the amount of each item.  As an example, a cereal box is sold at the same size and price but the inner contents shrink from 18 ounces to 14 ounces.  

As Deutche Bank recently wrote to its private clients:  “It is a scary thought that just as inflation is being deprioritized, fiscal and monetary policy is being coordinated in ways the world has never before seen.”

William White, the former Chief Economist at the Bank of International Settlements and the holder of a treasure trove of economic honors, has clearly outlined what I’m attempting to say:

• In the near-term, we will see significant inflationary pressures that will last for more than an additional 12 months (because of the reasons listed above)
•  In the medium-term, inflationary pressures will repeatedly dissipate because excess debt will temporarily dampen economic growth
• In the long-term, we will not be able to avoid hyper-inflation because of monetary excess and the need to liquidate extreme levels of debt

Three of the Founding Fathers and early Presidents of the United States (Jefferson, Madison, Monroe) were from my current hometown of Charlottesville, Virginia.  On September 6, 1784, Thomas Jefferson sent a letter to his neighbor, James Monroe, that included the following sentence:  “No generation should contract greater debts than may be paid during the course of its own existence.”

SUMMARY:  MarketCycle’s scary inflation discussion above (and in other postings over the past year) is ultimately a story about the distant future.  Despite any near-term temporary pullback, we are at the beginning stage of a brand new 8 year Cyclical stock bull market (that started in late May of 2020) within the confines of an ongoing 18 year Secular stock bull market (that started in late October of 2011).  There is not much to fear in the intermediate-term, but investors should very slowly prepare now for eventual inflation.  It is headed our way.  Right now, savings should be tossed into proper investments and this includes some assets that benefit from rising inflation.  I’ll say it again, every penny that can be put toward the markets should be put into the markets!  And of course MarketCycle Wealth Management is here to help with that, as are others.  Knowledgeable professional help does not cost, it pays.

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ADDITIONAL… Written on Sunday, July 4th:

IMO, we’re still in a bull market and recession probabilities 6 months out is still near 0% with expected GDP at 8% and earnings to remain strong for another 6 months.

In the near-term, the stock market may pull back a bit before it can head higher.  Stocks always have to let off pent up steam when they start to overheat, or else they cannot safely move higher.  A temporary and fast pullback for the S&P-500 of perhaps 5% may be in the works and then the S&P-500 is likely to head toward 4600 (revised up as previously suggested) and this would be another record high.  Don’t be surprised if we eventually see the S&P-500 at or beyond 10,000 by 2029.

Relatively stronger in the ‘almost’ near-term:  Dow, Nasdaq-100, technology, ARKK, growth stocks, momentum stocks, low-volatility stocks, quality stocks, dividend-grower stocks, buy-back stocks, gold, bonds, energy commodities, alternative energy stocks, online buying stocks, semiconductors and U.S. stocks in general over other regions

Relatively weaker in the ‘almost’ near-term:  S&P-500, small-caps, material commodities, emerging market stocks, value stocks, high-beta stocks, high-dividend stocks and crypto-currencies

Thank you for reading!

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MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUNDS

Before I start, I’d like to say that MarketCycle Wealth Management was just given a top 5-star rating by Investor .com

War costs more than ‘an arm and a leg.’

Money printing (a term that I am using loosely) to pay for the Vietnam War during the 1960’s,  along with then President Nixon replacing the Federal Reserve Chairman with his very own personal political hack and then taking the USDollar off of the gold (backed) standard, caused the USD to weaken and it naturally followed that the price of commodities and goods went up.  We didn’t earn the money that the United States spent, we essentially just printed it; we pulled it out of thin air.  Inflation is when the excessively created currency gets so weak that it takes “more” of the currency to buy the same item.  If it normally takes $50 to buy a pair of shoes, after high-inflation it takes $100 to buy the same pair of shoes.  Perhaps it takes $200 or $300 or even more to buy the same pair of shoes.  Right now, the inflation rate in Venezuela (at 2500%) is so bad that it might take a year’s salary to buy a pair of shoes and next week it might take two year’s salary.

So after the Vietnam War finally ended, literally everything cost more, and then a lot more.

In order to break the back of inflation, then Federal Reserve Chairman Paul Volker (appointed during President Jimmy Carter’s one term), gradually raised interest rates in the very late 1970’s and then the very early 1980’s, ending up at close to 20%.  Interest rates are currently fairly close to 0%, so imagine rates at fairly close to 20%!  My first home mortgage in the early-1980’s was somewhere around 15% and that creates a crippling monthly payment!

After Volker ‘broke the back of inflation’ with sky high interest rates in 1981, we experienced gentle deflation for forty years, like an autumn leaf gently and slowly falling from a tree, as interest rates drifted downward for that entire 40 year period; it ended just recently.  It took 40 years to go from 20% to 0%.  When rates fall, bond values rise, so bonds, as an asset class, benefited for forty years.

Back in late March of 2020, MarketCycle Wealth Management very accurately called the exact bottom of the Covid stock market crash (to the day).  And during the first week of April of 2020, and before anyone else, MarketCycle called the start of inflation.  By “the start of inflation,” I meant that, in my opinion, it represented the start of a prolonged secular 18-ish year period where inflation slowly and gradually builds for about 8 years, dips during a prolonged deflationary stock market event in the very late 2020’s, and then inflation takes off like a jet for the first 8-ish years of the 2030’s.

So, what’s my point?  Wait, do I even have a point??  Yes, my point is that the money printing to pay for the Vietnam War was nothing, it was trifling, it was insignificant.  Today, we’re talking about real money printing.  It started with monetary actions designed to pull the United States out of the Financial Crash of 2008 (which wasn’t a crash, it was actually an expected bear market).  But since the Covid-19 Crash of 2020 (a true ‘Black Swan’ crash), money printing has taken on a life of its own, especially under President Trump’s hand appointed Fed Chairman and wealthy idiot, Jerome Powell.  The most recent mess started with President Trump and is now in hyper-overdrive with President Biden.  We’re sending monthly checks to every child in the United States.  We’re sending so much monthly money to ordinary citizens that many people refuse to go back to work, post Covid.  The rush of cash has caused consumers to consume; everything imaginable has been purchased in mass and inventory is now kaput.  To make new inventory, commodities have to be purchased and now commodity stockpiles are going kaput.  Vicious cycle.  Money printing directly causes inflation AND ‘free’ money also causes consumers to gobble up every item in sight which also causes a powerful secondary level of inflation as commodities need to be replaced.  It is a vicious cycle that can only be broken by raising interest rates to astronomical levels, just as Paul Volker did in the past.

I recently saw a great (sustainable growth) mahogany porch swing on Amazon for around $150 and I wanted to consume it.  I waited one week to buy and saw the price at $250, so I waited a week for the price to drop again, only to find that it was now $400.  I decided to pass on the swing but still checked one week later to see this price: $550.  That is inflation.  And 8 months ago I ordered and paid for a new bike from ‘Bikesdirect.com’ and it still hasn’t come because wood prices have gone so high that the cost of the shipping crate is “too expensive” and now I’ll “just have to wait until lumber prices come down” and regardless, the bike shop will “lose money on the deal when the bike finally ships in another four months.”  Inflation is like having a hole in your pocket.

Of course, current inflation at this rapidly increased level is transitory; it is likely just a brief prelude to what the chronic hyper-stagflation of the 2030’s might look like.

In the United States, we now want more money in order to pay off everyone’s student loans.  We want reparations for the horror of slavery to the tune of $15-Trillion.  We want free allopathic drug care for all.  We want free pre-K schooling and free community colleges.  We want brand new infrastructure.  We want more powerful weapons.  We want to increase monthly allowances for those who irresponsibly have the most children.  We want to subsidize and fund and retrain.  We’re talking about implementing Modern Monetary Theory where everyone is paid a monthly salary by the U.S. Government just for being alive.  We will print and print and print and print and print (and tax)… and inflation will likely go to unimaginable levels.  But it is a slow moving boat.  At first the excess money will stimulate the economy, perhaps for another 8 years, but eventually the debt will come due and it will have to be paid.

Honestly, I am not making any sort of political statement, some of the above items are quite good for society.  I’m just saying that the market is sensing what’s coming:  INFLATION from money printing.   Well, actually it is sensing eventual HYPER-INFLATION or more likely HYPER-STAGFLATION (stagnant economy coupled with high inflation).  I see the end game as being a debt that is so high that it simply cannot ever be repaid and the Federal Reserve will be forced to drop rates to zero-% and then buy all of the debt of the United States government and make it disappear, interest free, on its hidden books.  Then the USDollar collapses in a deflationary spiral and our grandchildren will be the ones that have to clean up our economic mess  (and it may be too late for our environmental mess to be cleaned up).  But there is likely another 15 years between the party that we are living today and the economic depressionary mess that will have to be cleaned up.

You may have noticed that this isn’t another one of my ‘feel-good’ blogs and I do wish that I saw a different future, but nothing has changed in my mind.  In my opinion, we have another 8 great years of easy times because of easy money, and then a decade of worry and economic trouble that we have to prepare for now (by saving and investing every penny), and then we get the 2040’s which I’ll spare readers from having to hear my full thoughts on.  But to sound biblical, out of crisis cometh opportunity and out of ashes cometh fresh new growth… and sometimes we have to hit the bottom of the barrel before we can make any significant bounce toward positive changes.

However, the story for today is that out of money printing comes both growth and inflation… and out of inflation comes rate hikes… and out of rate hikes comes eventual stunted growth.

MarketCycle saw true inflation beginning back in the Spring of 2020 and I now foresee the Federal Reserve ‘talking about rate hikes’ in 2021, then the actual tapering of QE (which they have already secretly started) and then the Fed actually raising rates sometime in 2022 or even early in 2023.

Unlike during the past 40 years, bonds will get killed by these new ‘opposite-direction’ Central Bank actions, and this includes any ‘bond-like-assets’ such as preferred shares (although convertible bonds and high-yield bonds may survive).  So, we must prepare now.

There are assets that benefit from inflation and MarketCycle Wealth Management is already (slowly) rotating client accounts in that direction.  But most investors around the globe have been placed into 60/40 ‘buy-&-hold’ portfolios, and they are about to really get hurt.

SUMMARY:  Future hyper-stagflation with an “inflation is coming” warning shot being fired right now… but we are STILL in the stock bull market of our lifetimes and will remain so for quite awhile yet!  Don’t get side-tracked, take advantage of easy street while you still can!!

Did people spend their Covid stimulus checks on rent and food?  Apparently not.  They seem to have gone on a record consuming spree, gobbling up literally everything.  $2-Trillion is still sitting on the sidelines, waiting to drive up both the stock market and inflation:

Who is the architect of our coming dilemma? 

The National Debt of the United States is already reaching Crazy Town levels:

The early start of inflation is now here and higher consumer prices are the result:

The historic speed of the recent inflation data has surprised some (note the upper right violet colored dot showing the last 10 data points):

Existing home prices and especially new home building prices are through the roof and the trend started in mid-2020:

What is the biggest current worry amongst asset account managers?  Inflation and the Fed’s reaction to inflation.

Will technology be harmed as so many on Wall Street keep repeating?  In my opinion, no.  I believe that technology stocks will lead the market higher for another 8 years:

But now?  Despite the start of inflation, we’re still on easy street because of easy monetary policy.  There is money sloshing around everywhere that you look.  And as I’ve been saying since early April of 2009: “We’re in the stock bull market of our lifetimes.”

The U.S. stock market never moves higher in a straight line, but it continues to zig-zag higher and higher and no, it is not currently overvalued… we should soon see the S&P-500 @ 4500.

Thanks for reading!

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MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUND

I expect the next eight years to be very similar to a combination of the 1960’s and the 1990’s decades, building the conditions for a truly massive inflationary period in the 2030’s.  I further expect innovative & disruptive companies (and their corresponding “dot-com IPOs”) to go gangbusters this decade, similar to the 1990’s, and then to blow up at the end, again, similar to the 1990’s.

In very late 1999, one of my patients gave me a cap that I still sometimes wear.  I had it on this very morning as I was working in the yard.  It had the name of what may have been the very last dot-com company formed before the two year long “dot-com” crash that began in the year 2000.  Investors were horribly damaged in that recessionary bear market.  I cannot state the name of this particular dot-com because the domain name has since been picked up by another company.  This original 1999 company formed with no offices, no warehouses, no furniture, no inventory, no employees; in its entirety it consisted of a name printed on baseball caps and it had put out the word that it would soon be hiring because literally all newly offered dot-com companies went into a booming & euphoric IPO offering state (an IPO is an Initial Public Offering of stock).  Stock shares of these bare bones IPOs were instantly moving into the price range of $-Way-too-much.  Best game in town, until it wasn’t.  The excited woman gave me the cap and told me that she was going to quit her real job to work for this “can’t lose” new company; the same company that went bust about a month later.  Well, the company itself wasn’t harmed because it only consisted of baseball caps and it had nothing to lose, but the investors lost 100% of their investment money.  I made out okay because I didn’t invest in the IPO, but I got a nice baseball cap out of the deal.

Some of the greatest traders/investors of all time saw the bubble that was forming and they began to ‘short’ the market during the second half of 1999.  A ‘short’ means that you are betting that the market will drop.  These same great traders/investors lost half of their money during this six month period.  “Half of their money” may have been upward of a $250-million individual loss in a mere 6 months (one of the most famous investors of the time lost exactly that much).  During the second half of that final year of the bull run, the dot-com (tech mostly) companies went straight up so anyone shorting the market lost money rapidly.  YOU NEVER BET AGAINST THE PRIMARY TREND DIRECTION OF THE MARKET.  So, they not only lost huge amounts of money betting against the bullish run, but they also lost the opportunity to literally make a fortune during the last 6 months of 1999 simply by being bullish in a bull market.  Double whammy.

The great trend trader, Ed Seykota, once said:  “It is not logical to bet against the primary trend direction of the market.”  He was right.  A bull market is a bull market and those people that think that a bull market is actually a bear market are simply and obviously incorrect.

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From Hedgeye:

MARKET CYCLE  —  TREND FOLLOWING  —  DUAL MOMENTUM  —  LOW VOLATILITY  —  HEDGE FUND