Risks and Opportunities
The tech giants who’ve made 2024 “magnificent” aren’t letting up as the year winds down. The Nasdaq 100 (the everything-bubble-market index leader) gained for the fourth week in a row on broad strength across the entire chip-technology complex. The tech-heavy index rose 0.8% to an all-time high this week, while other major US stock indexes struggled. The S&P 500 slid 0.7% on the week, while the blue-chip Dow Jones Industrial Average dropped by a more pronounced 1.8%.
Despite the bullish seasonal tendency to enjoy a Santa Claus rally and the ongoing enthusiasm for what an incoming Trump administration might deliver, all is not quite holly jolly. We must remain vigilant for a potential Grinch intent on undermining the bullish narrative and preparing to steal Christmas.
The S&P 500 advance/decline ratio has been negative every day this month. That qualifies as only the 11th time there’s been a negative breadth streak of such magnitude in the history of the index. Given record sky-high valuations and overextended technicals, the narrowness of the stock market’s advance continues to flash unhealthy warning signs.
Adding to the concern, Deutsche Bank revealed that its measure of consumer expectations for income increases has suddenly, completely, and entirely diverged from what’s been a very tight historical correlation with expectations for future stock market gains. In the past, as consumers expected increasing future income gains, consumer expectations for future stock market gains also popped accordingly. Makes sense, right?
Well, post-Covid, expectations for income gains have languished below the historical average. At the same time, and in a distinct break with the past, expectations for stock market gains have skyrocketed to all-time-high territory. That sudden divergence from such a tight historical relationship is a development to take note of. In HAI’s view, it at least confirms the extreme and mature state of our current market bubble. At worst, it could be an indicator of early stage crack-up-boom dynamics in a market that’s dangerously unhinged.
Recent data from Reddit Wall Street Bets’ sentiment gauge confirms we’re in crazy times. By its measure, sentiment today is as jubilant as the unprecedented post-Covid days of endless stimy-binging when trillions in government checks were sent direct to American households. This time, however, we’re right back to those same sentiment extremes without any stimy checks or expectation of higher income.
At this point, almost everybody is completely all-in on the market, with expectations for uninterrupted ever-higher stock prices in perpetuity. In HAI’s view, that’s an exceptionally dangerous expectation.
While seemingly every market participant (with their brother and sister) apparently knows the market will only and always continue to march higher, recall from last week’s HAI that Warren Buffet and his Berkshire Hathaway behemoth have spent 2024 selling assets ($127 billion-worth, year-to-date) at the most aggressive pace in the company’s history. In fact, the relentless selling has left Berkshire with its largest ever percentage of cash in the portfolio. Historically, when Buffet significantly grows the Berkshire cash pile, it’s time to start seriously worrying.
Buffet and Berkshire, however, are not alone. Corporate insiders are singing the exact same tune. According to the executives and directors actually running the companies trading on the major market exchanges, this is the most appealing time to cash out since the last major market top at the end of 2021. In fact, the average insider sales-to-buys ratio for the trailing 12-month period is a staggeringly lopsided (and overwhelmingly bearish) 95:5. What’s worse, month to date, December is on pace to top the naughty list with a series-worst ratio of 99% sales to just 1% buys! In HAI’s view, when it comes to this particular insider metric, it’s definitely best to weight what insiders do over what they say.
It’s not just excessive valuations that have Buffet and insiders historically cautious. We are also seeing signs of a notable cooling trend in the labor market. As HAI mentioned several weeks ago, the Quarterly Census on Employment and Wages (QCEW) for Q3 revealed that the non-farm payrolls establishment survey overstated Q3 job growth by a whopping 1.2 million payrolls. The poor performance of the non-farm establishment survey has been widely blamed on badly malfunctioning assumptions embedded in the establishment survey’s birth/death model.
Now, if we overweight nonfarm payrolls’ sister survey—the household survey—given that it has a much larger sample size, a higher response rate, and no birth/death model distortions, we find that total private employment in November fell by an eye-popping 415,000 jobs. Furthermore, the household employment survey has total national employment at eight million fewer jobs than the establishment survey (a record divergence). In other words, while the popular establishment survey points to a strong labor market with record levels of national employment, the household survey objects and argues that we are well past peak employment for the cycle and have already fallen back to early 2023 levels of national employment.
Now, the unemployment rate is derived from the household employment survey, not the establishment survey, and that’s why, despite a strong establishment survey job report for November, the unemployment rate as of last Friday increased to 4.247%, up from 4.1% previously. Furthermore, the November jobs report showed that permanent job losers hit a three-year high, individuals with extended unemployment (27 weeks or more) hit a 22-month high, and the median number of weeks for Americans to remain unemployed jumped to 10.5—the high since December of 2021.
In addition, the University of Michigan released some highly intriguing employment data last Friday. The UMich survey on “higher unemployment expectations” has one of the best track records for flagging turning points in the labor market. All told, by combining the outsized 14-point drop in those who felt the employment environment would stay the same with the significant 12-point increase in those expecting higher future unemployment, UMich warned that November may have been a negative inflection point for the labor market. In fact, the combined negative 26-point swing in those two measures was the worst in 30 years outside of the Covid pandemic. If past is prologue, similarly sharp monthly drops in employment expectations would forecast an unemployment rate jumping to a recessionary 5.4% a year from now.
To be sure, the economic data is mixed. HAI isn’t ringing the alarm bells over an economy set for imminent crash. But given that valuations are at record extremes and that everyone is already all-in, record bullish, and totally complacent, any unexpected cracks in the bullish market narrative could cause outsized market pain.
As famed economist and market strategist David Rosenberg said this week, “my big concern is that, looking at how everybody is so concentrated in the same trade, and everybody is all-in on their asset mix, and portfolio managers have almost no cash on hand to deal with redemptions, that when that day [of selling and redemption] happens, where are the buyers going to be?… When this does not last forever, and there’s a head to the exits, given the incredible concentration of money in the stock market, there’ll be a stampede, but there’ll be nobody on the other side of the trade… There will be very few liquidity providers to mop things up.” As Rosenberg often says, “forewarned is forearmed.”
Now, while holly-jolly market seasonality, bubbling bull-market momentum, and high-charged enthusiasm for an incoming Trump administration continue to set index prices and steal the narrative on Wall Street, it’s more important than ever to maintain a focus on the monumental structural challenges we face heading into 2025 and beyond. Topping that list, we face a U.S. fiscal crisis, a global dedollarization movement, and broad erosion of confidence in America’s global leadership that (beyond some promising talk) Trump hasn’t solved yet.
During a Wall Street Journal event this Tuesday, Treasury Secretary Janet Yellen mentioned that before Thanksgiving she called Treasury Secretary nominee Scott Bessent to discuss his presumed new job. On the call, Yellen told Bessent that, “I am concerned about fiscal sustainability, and I am sorry that we haven’t made more progress… I believe the deficit needs to be brought down, especially now that we’re in an environment of higher interest rates.”
HAI has no argument there. In fact, the U.S. just started its latest fiscal year with the biggest two-month increase in the budget deficit on record at $624 billion for October and November. Folks, that’s a very big number. It is so darned big that it easily surpasses its closest competitor—the $435 billion October–November deficit of the supposed extreme outlier Covid-impacted year of 2020.
While there were some calendar shifts that made the reported deficit a bit larger than it otherwise would have been, the fact was unchanged: even after adjusting for those calendar shifts, the U.S. fiscal deficit for October and November was still—by far—the biggest October-November deficit on record.
The recent gargantuan increase in deficit data is a stark reminder not to take your focus off of the massive opportunity in the precious metals complex.
Earlier this week, speaking at the Verona Eurasian Economic Forum and far removed from the distraction of U.S. financial asset bubble hype, the CEO of Rosneft (one of the world’s largest oil companies), Igor Sechin, emphasized that a broad movement among nations to explore alternatives to the dollar-based trading system, especially in light of sanctions and “economic tensions,” is well underway. According to Sechin, the shift away from the dollar in international trade is accelerating, and gold is likely to play a key role in shaping future financial systems.
As Sechin put it, “Using the dollar as an instrument of sanctions is a big mistake because trade will never stop. Both energy security and life in general depend on it. Alternatives will always be found.” Sechin continued, saying, “gold will be the dollar’s main competitor, which mankind has been using for thousands of years for settlements.” Sechin also backed up his claim by noting that according to the World Gold Council, the share of gold in the world’s foreign exchange reserves has grown by almost eight percentage points and reached 20% in the last three years alone.
Crucially, if Sechin’s point is correct, one would expect to see gold rising relentlessly against oil, commodities, and BRICS currencies ever since Russia began facilitating multi-currency commodity trading with gold as net settlement around 2014. That is exactly what’s been happening. We are seeing rising gold-to-oil, rising gold-to-commodities, and rising gold-to-BRICS currency ratios.
In HAI’s view, the reason that multi-currency commodity pricing with net gold settlement is gaining ground and will likely continue to gain ground is twofold. First, as Sechin pointed out, is that the dollar is so often used as an instrument of sanctions. Second, in HAI’s view, is U.S. monetary policy as revealed in the country’s reaction to the 2008 great financial crisis. The world watched as the U.S. used money printing and bailouts to take the easy, politically expedient way out of a financial crisis. The message was clear; the U.S. would also try to print and inflate its way out of its entitlements-fueled debt trap.
So, here we are on the eve of 2025. The U.S. has weaponized the dollar while accelerating a debt spiral almost certain to carry more print-and-inflate consequences. Given the circumstances, no foreign creditor freely acting out of self-interest would choose to store incremental FX reserves in U.S. Treasurys over gold.
After all, as former Fed chair Allen Greenspan (the “Maestro” himself) admitted in an October 2014 interview at the Council on Foreign Relations: “Gold is a currency. It is still, by all evidence, a premier currency, where no fiat currency, including the dollar, can match it.”
In HAI’s view, the glitz, glamour, overvaluation, and risk are currently in financial assets. Conversely, the subtle, under-owned, underappreciated, and undervalued opportunity is in the global trend towards gold.
Weekly performance: The S&P 500 lost 0.64%. Gold was up 0.61%, silver lost 1.77%. Platinum was down 1.02%, and palladium was down 0.40%. The HUI gold miners index was up 0.51%. The IFRA iShares US Infrastructure ETF was off 3.04%. Energy commodities were volatile and higher on the week. WTI crude oil was up 6.09%, and natural gas gained 6.63%. The CRB Commodity Index was up 2.66%. Copper was nearly flat, up 0.01%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 3.33%. The Vanguard Utilities ETF was down 2.61%. The dollar index was up 0.61% to close the week at 106.68. The yield on the 10-yr U.S. Treasury surged 23 bps to close at 4.40%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
