Have you ever bought a house that looked great and passed inspection with flying colors, only to find later that the builder cut every corner possible? What you had hoped would be a dream home and a lucrative investment turned out to be a money pit. Analogous things can happen with any kind of investment, of course, but it is as frustrating as it is costly.
What’s true of individual investments can also be true of markets and even economies. Sellers (including multinational corporations and nations) can be remarkably skilled at hiding weaknesses. And when crowds are involved, the emotional component—a huge factor even in individual purchases—can be overwhelming.
As true as this is, and as often as it happens, you’d think that investors would be wise to it by now. Unfortunately, that’s not the case. Emotion still dominates investing for the “weak hands”—those who are not sophisticated or highly skilled investors. (Though it has undone more than a few strong hands, as well.)
The McAlvany analysts have been describing what happens in bear market rallies when strong hands take the opportunity to sell vulnerable investments to weak hands. When the bear resumes, the weak hands, as usual, take the brunt of the losses. In this manner, the strong become stronger and the weak become weaker. It’s the way of the world, and has been since long before Wall Street existed.
Many financial professionals are fine with this process. As long as they get their commissions, they don’t care why investors trade or how much they gain or lose. But not every financial professional is okay with the way of the world. Many of them would like to see the underdog—whose net worth is somewhere south of the GDP of Lichtenstein—come out on top of the market when things turn topsy-turvy.
If that description includes you, your first clue that the below analysts are on your side is that they publish their work daily or weekly, year after year, free of charge. Their analysis is broad, it’s deep, and it’s clearly not beloved of the powers that be. They favor investments that are remarkably and consistently strong and steady, and that come into their own when the money pit inevitably collapses.
- Just when you thought it was safe to go back in the water
- The Fed has met the enemy—and it works in the Eccles Building
- If we’re not saving, we’re losing
- When the S&P 2 > S&P 498
The McAlvany Weekly Commentary: The new year has continued—and even increased—the jubilant response to Jerome Powell’s perceived policy pivot in late 2023. Retail sales, mortgages, new home building, employment, expected sales, and of course equities are all strong. Consumer sentiment is the highest it’s been in 2½ years. This ship is unsinkable. Full speed ahead! But Captain Powell has been informed by something called leading economic indicators that there are icebergs ahead. Will he heed the LEIs? Will anybody? Markets often follow patterns. David points out an important one: “In a major market top, there is the initial decline, followed by a significant rally… It’s the secondary decline, not the first one…that does most of the damage. That secondary decline is a high probability here in 2024.” The hosts discuss the dynamics behind this pattern, which clearly apply to most investors today.
Credit Bubble Bulletin: Doug also cites statistics indicating markets on fire, following which he tellingly notes that, “Seems the Fed is in a pickle of its own making. It was a mistake to begin talking rate cuts with conditions so loose and markets booming. The economy was administered a shot of adrenaline, pushing the timeline for economic weakness and resulting rate cuts out closer to election time. If the Fed is determined to get cuts underway, it will have to lean hard on weaker inflation data, while disregarding the speculative market bubble and notably loose financial conditions. That would be a mistake.” If you’re confused about how monetary and economic policy are interacting with markets and politics, this is the place to clear things up. Doug also explains the severe economic times in China: “panic has begun to take hold in Beijing.” Both the US and China face severe long-term problems, but for the latter the future is now.
Hard Asset Insights: If like Harry Truman you’re looking for a one-handed economist (no “on the one hand, this; on the other hand, that), you’re in luck. With regard to our current market boom, “Are we in the clear? Will Goldilocks economic conditions reconstitute and prevail indefinitely? Are we now fundamentally economically healthy? Are we set to avoid a hard landing in a newly reaccelerating economy?… The answers are no, no, heck no, and don’t bet on it.” In characteristic form, Morgan explains the strength of this response, capping off his analysis with this stunner: “2023 was just the eighth year in history in which the U.S. suffered negative net national savings (NNNS). “A condition of positive net savings is, as [economist] Dr. [Lacy] Hunt puts it, ‘a requirement for an increase in the capital stock and a better way of life’. In short, without positive national savings, ‘resources are insufficient to cover depreciation, and the capital stock, critical for the standard of living, shrinks’.” Cars don’t run without gas. Economies don’t run without savings. America’s running on “E”.
Golden Rule Radio: Rob and Miles begin the program this week with an overview of the Treasury market, noting that we have much more debt than there is demand for at present. The most recent auction was significantly undersubscribed. While auctions last year saw little demand for 10- and 20-year Treasurys, this auction added a disinclination to buy 5-years as well. Clearly, the risk of holding longer-term Treasurys is getting too much for the market to bear. The hosts also quantitatively describe the immense stress the consumer is experiencing, and break down the real nature of the S&P 500’s recent strength—hint: it’s really the S&P 2. Miles extends that thinly distributed success story to the Dow as well. The hosts then turn to gold and note that the Aden sisters, who use a different discipline than Miles to analyze markets, expect very similar results in the gold price. This is often an indication of analytical strength. If that’s the case here, expect a buying opportunity in gold soon, followed by resumption of gold’s secular rise in dollar price.