INVESTMENT STRATEGY LETTER #734

HOW BAD WILL IT BE?

The truth is, nobody knows how many people in the US will be infected with the corona virus, how long the pandemic will last, or what effect it will have on our economy. Estimates of GDP loss in Q2 2020 range from -11% to -30% for the US and unemployment is forecast from 10% to 20%. Goldman Sachs just reported that it sees Q2 2020 at -34% GDP  and a 15% jobless rate. I believe that if the Goldman scenario is true, their worst case scenario would be devastating to the country and will take years for us to recover. However, the Goldman report goes on to say that this worst case -34% 2ed quarter scenario, will be followed by the fastest recovery in history, with a 19% Q3 2020 growth rate. I disagree with the recovery scenario.

First of all, we do not know when the pandemic will end in either the US or on a worldwide basis.  On Sunday 3/22, there were 30,000 case of virus in the US. This Sunday 3/29, there are 124,686 confirmed case and 2,100 deaths, which doubled in 72 hours. Now, two days later, (3/31) there are 165,482 cases and 3,186 deaths. As I said in ISL 733, “Still most of the country is not affected, ‘yet.’ The key word here is ‘yet.’ Some 75% of the reported cases are in metropolitan areas that voted for Clinton; therefore the Trump areas want an early end to the ‘stay-at-home lockdowns’ and business closures.” I expect rural  Trump Red States to be effective next, while the Blue States and metropolitan area will reach a crisis stage of limited hospital equipment and medical personnel.  President Trump now says the ‘stay- at -home -lockdowns,’ will go on to May 1st.. However, this early lifting of the shutdown could have a devastating effect on deaths from the virus. So, let’s keep track of the corona virus cases and deaths. If they continue at the present exponential rate, we will need another 30 day extension to the shutdown. Although, this will have a continued effect on the economy, this should not be a difficult decision. As I said in ISL 733, “This reminds me of an old Jack Benny joke ‘You’re money or your life’ says a robber. Jack Benny pauses and says, ‘Wait, I’m thinking!’  Not funny!”

WHAT ARE THE LONG LASTING REPERCUSSIONS?

Good Question! A lot will depend on the extent of the corona virus worldwide.  Apparently from what I read, I believe the following: 1) The effect on Emerging Nations will be more devastating than in the developed world, because they do not have the resource (hospitals etc.) to deal with the crisis and many live in overcrowded conditions (India, refuges etc.). Also the European economy, with low growth, which hasen’t yet recovered from the 2008 crisis, will have a difficult time recovering (especially European Banks!).  The US depends on a healthy global economy. In my opinion, it will take a couple of years for a worldwide recovery in a best case scenario. On a worst case scenario for next year, this virus or an ‘air born virus,’ may return, crippling the world economies for a longer time. 2) The ‘Stimulus Package, will be slow to roll out. In the meantime a lot of small business will go bankrupt, never to return. The US loans are said to be forgivable, if business keep their employees. In most cases I believe the business owners will take the money to meet their immediate needs and not retain an expensive payroll. Big business will get $500 billion. Trump unencumbered, will decide which business survive and which fail. In my opinion the Big Corps will use this money to destroy their smaller business competitors, as the banks did in 2008. 3) Big corporations will use this crisis and their privileged position, as an opportunity to continue to automate with labor saving machinery. Low paid workers will continue to see their wages decrease and jobs limited. High tech college graduates will also see their jobs diminish as ‘Artificial Intelligence’ invades their privileged status. 4) In spite of what the Fed is doing, I expect a many as 10% of the S&P companies to default ion their bonds. Also mortgage bonds will once again be threatened, as people stop paying on their mortgage payments or rent. What about the massive amounts of derivatives outstanding that crippled the banks and insurance companies in 2008? 5) I believe even when the stay-at-home quarantine is lifted, consumers will be slow to take on their old habits. People will stay cautious, and will be reluctant to venture out to restaurants, theatre and sporting events. The ‘Depression Generation’ were so badly hurt from the lessons of that event, that they became very reluctant to spend and remained economically conservative their whole lives. I believe the long term effects of this ‘Virus Generation,’ will have the same effect. 6) The federal government paid $580 billion in interest in its last fiscal year on $22 trillion of debt. What will happen when interest rates go higher and the interest on the current (so far) $25 trillion debt costs us more the entire budget does now?  7) How will we (the taxpayers), ever pay down this debt?

MY PROJECTIONS HAVE NOT CHANGED

In my business career as a broker, I lived through three market crashes of 50% or more. Before a bottom was reached, the 1973- 1974 crash took about 2 years and the 2000 and the 2008 crashes took a year. I can remember thinking at the beginning of these crashes, that a 20% decline represented a ‘buying opportunity.’  Many Invertors today have never lived through one of these 50% decline events. So I can understand why many of you are optimistic, However, I believe that the Financial Industry has not truly fully disclosed stock market risk to the investing public.  Instead the Financial Industry gives the false advice that, “on the long term, the stock market will always recover.” Keynes has a famous quote that states “in the long run, we will all be dead.” Because of my experience, I will tell you “to never grab a falling knife.” If I am wrong about my downside projection, and I hope I am, waiting a little longer to buy is worth avoiding the risk, should I be right!

If thing get as worse, as I think they will, real support won’t develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a ‘worst case’ scenario my Dow prediction is 10,000 – 12,000, my S&P prediction is 2,000 or below and my NASDAQ prediction is 5,000 or lower. This Bear Market will probably last six to nine month or longer, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year! “Read ’em and weep! These are the cards we have been dealt.

THIS TIME IT’S DIFFERENT- EIGHT CENTURIES OF FINANCIL FOLLY?

Readers of this blog know that I often refer to the book: This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff. Barron’s Magazine recently spoke with Rogoff about how this coronavirus crisis. This is an edited version of the discussion. Barron’s: How does the fallout from this pandemic compare with the Great Depression? Rogoff: The real big question is how far we’ll come back. All the things being done are extremely important and this will be won or lost on the health front…. On the peak-trough, the U.S. probably won’t hit Great Depression levels. But if you look at the world [economy]— on the depth of this downturn—there is a good chance it will look as bad as anything over the last century and half. If we are back to 95% of normal in two years, it will be a lot better than the Depression. Barron’s: Bulls are looking for a v-shaped economic recovery in the fall. What do you think? Rogoff: I’m skeptical. There’s too much lasting damage to small businesses—to airlines, hotels, the financial sector. If you are locking people in their houses for two months and thereafter three weeks for periods of time [when there are re-infections or flare-ups]… We get a C- or worse on that. Where is testing—and hazmat suits? We were ill-prepared …. If we aren’t solving the health problem, we are still going to suffer mightily. Europe has similar issues… A big question [to the scope of the recovery] is what happens in Europe because the scale of this is bigger than the euro crisis. Barron’s: What are some of the weakest spots investors should be watching? Rogoff: Capital is racing out of emerging markets at a faster rate than in the Asian currency crisis. The graphs are off the chart. And dollar-denominated debt for emerging markets was soaring and growth was falling. Corporate debt, especially in the U.S, If the economy stays at pause long enough, there are still going to be massive corporate defaults…We’re not going to let our banking system collapse. But we could be in a situation in a worst-case scenario like Europe, where the banking system was moribund [postcrisis]; it is a lot of the reason why Europe has stagnated. Barron’s: Is there any silver lining? Rogoff : We are lucky this isn’t worse and we are getting a whiff of what can happen in a highly urbanized and globalized world. We will figure it out in a constructive way. Hopefully this will be a wake-up call. https://www.barrons.com/articles/harvards-rogoff-shares-his-take-on-coronavirus-crisis-51585653300

Carl M Birkelbach  3/31/2020

DOW 22,115  ( Noon EST) Down  Down 1.0%%

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

 

 

 

 

 

 

 

 

INVESTMENT STRATEGY LETTER #733

From ISL #731: A RALLY IS OVERDUE- USE IT TO SELL  

Last week, saw the biggest stock market rally since 1938. Great up 12.84%! Wall Street is saying, “The worst is over, come on in, the water is fine.” Don’t believe it, or you could drown. States and cities have done all they can to stop the spread of the virus by encouraging personnel ‘stay-at-home lockdowns.’ The Federal Reserve has done all it can (lowered interest rates to zero, added trillions of dollars of liquidly to the banking system, bought $2 trillion more bonds for quantitative easing, offered $500 billion in a three-month repo, etc. etc.). Also the Federal Government has done everything it can to stimulate the economy, as it has passed  massive tax cuts and a $2.2 trillion Stimulus Package. There is an old saying on Wall Street “buy on the rumor, sell on the news.” Well, the good news is out. Now what? Will this stimulus be enough to prevent a recession, or more importantly will the growth of the virus be stopped by the lockdowns? In my opinion, all that has been done won’t be to enough to stop the growth of the virus or prevent a severe recession.

DEATHS IN THE US DOUBLED IN 72 HOURS 

Last Sunday there were 30,000 case of virus in the US, today there are 124,686 confirmed case and 2,100 deaths, which has doubled in 72 hours. Still most of the country is not affected, ‘yet.’ The key word here is ‘yet.’ Some 75% of the reported cases are in metropolitan areas that voted for Clinton; therefore the Trump areas want an early end to the ‘stay-at-home lockdowns’ and business closures. For example, Jerry Falwell Jr. has decided to reopen Liberty University in Lynchburg Kentucky. From a public health standpoint, he is inviting into this small town, 16,000 ‘petri diches’ of student, from all over the country, that have possibly been expose to the virus. This will be the first test to see how the public of this small ‘Republican’ town reacts to an early end to regional quarantines. I think we are 60 day away from any real lifting of the ‘stay-at-home shutdowns.’ This creates a dilemma, as a 60 day further shutdown will be devastating to the economy, in spite of the recent $2.2 trillion dollar ‘Stimulus Package.’  However, the lifting of the shutdown would also have a devastating effect on deaths, from the virus. This should not be a difficult decision. However, there is an old Jack Benny joke “You’re money or your life” says a robber. Jack Benny pauses and says, ” Wait, I’m thinking.” Not funny!

Atlantic Magazine reports that the actual figure of those infected by the virus could be 245,000 (not 124,686) and growing exponentially.  The actual cases are unknown as many with the virus particularly in rural area, just stay home and fight it out. They believe the pandemic is now accelerating beyond the capacity of our health care system, which is tragically not ready for this crisis, even though the US spends 18% of our GDP on health care. Hospitals are short of testing kits, masks, gowns, gloves, respirators and healthcare workers are themselves becoming infected. See https://www.theatlantic.com/health/archive/2020/03/how-will-coronavirus-end/608719/ How will the pandemic end? By Ed Yong in Atlantic Magazine.

WHAT WOULD AN EARLY END TO THE STAY-AT-HOME POLICY DO?

In response to the worsening economic situation President Trump has said, “Our country wasn’t built to be shut down. America will, again, and soon, be open for business. Very soon. A lot sooner than three or four months that somebody was suggesting. Lot sooner. We cannot let the cure be worse than the problem itself.” President Donald Trump then said that he wants the nation “opened up and just raring to go by Easter.” This  date is just  two weeks away and few health experts believe this will be sufficient time in containing the spread of coronavirus. For years pundits wanted to know how Trump would react to a cries, now we know. As unusual he uses ‘spin,’ self-praise, blames others, lacks empathy, disregards expertise, distorts facts, is impatient with criticism and dismisses science. He cannot ‘bully’ COVID-19 into submission. The President has reputably played down the problem telling us earlier “we have it well under control’ and has touted unproven medications. If we end the ‘stay-at home policy’ early Imperial College has concluded that if left unchecked, that by the end of summer, the pandemic, “will directly kill 2.2 million Americans.” I hear some saying (Republicans in Texas for example), that some 2 million deaths is a small part of our population and is worth the price of saving the economy. Sure let us old geezers die. However, letting the virus spread, may in the long run, have a worse effect on the economy and the lives of Americans, than any 60 day extension of the quarantine would have. I believe that either way, (end or extend the stay-at home policy’), the effects of the virus on the 2020 economy will be devastating.

THIS COULD BE WORSE THAN THE BUSH 2008 GREAT RECESSION

It is estimated that only 10% of workers can successfully work at home and many who cannot work from home, have already been laid off. That’s why last week 3.3 million people filled for unemployment payments. As the layoffs have just began mid-month, there are probably many that who have not yet applied. Also there are many workers off the grid, who don’t qualify for unemployment benefits; such as part-time and low-wage workers, independent contractors and the self-employed. For those, the $1,200 check won’t go very far to meet living expenses, especially for rent and mortgage payments. The full repercussions of business being shut-down and some 200 million people self-quarantining is still to be felt in economic terms.  The worst case scenario would be devastating to the country and will take years for us to recover! Estimates of GDP contraction in Q2 2020 range from -11% to -30% for the US and US unemployment is forecast from 10% to 20%. ver. We are still feeling the effect of the Bush 2008 economic ‘Great Recession.’ I believe, the effects of the economic shutdown could be worse than 2008, both financially and emotionally.

HOW DO WE PAY FOR THE $2 TRILLION STIMLUS PACKAGE https://www.cbsnews.com/news/coronavirus-stimulus-package-pay-united-states/

Last year, 83% of Americans told the Peterson Foundation pollsters that politicians should try to lower the U.S. debt. When President Trump took over the presidency, Federal debt was $19,428 trillion. Because of giving tax breaks to the rich, US debt soared to $23 trillion. The new Stimulus Package will increase total US debt to $25 trillion. This will create five problems:  Problem 1) This brings US total debt at over the warning line of 100% of GDP. Problem 2) In order to finance this debt, the Fed will borrow the $2 trillion from investors by selling U.S. government bonds. The money that investors use to buy the bonds could come from their cash accounts, but more likely it will come from selling other investments, like corporate bonds or the stock market. Problem 3) The Fed may buy some of these bonds itself. During the last 2008 crisis, the Fed bought some $4 trillion in bonds (Quanative Easing) and still holds some $3 trillion of these bonds. Recently the Fed has vastly expanded its purchases of various bonds as the coronavirus crisis weighs on the economy and strains our financial system. The Fed now holds some $6 trillion of corporate bonds and other securities tied to assets like real estate and auto loans. This artificially props up their long-term value of these bonds, as investors exit those markets for the presumed safety of government debt. How much of this debt that the government holds, will be worthless? Problem 4) The federal government paid $580 billion in interest in its last fiscal year on $22 trillion of debt. What will happen when interest rates go higher and the interest on this debt costs us more the entire budget does now? Problem 5) How will we (the taxpayers) ever pay down this debt?

MY PROJECTIONS HAVE NOT CHANGED

If thing get as worse, as I think they will, real support won’t develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a ‘worst case’ scenario my Dow prediction is 10,000 – 12,000, my S&P prediction is 2,000 or below and my NASDAQ prediction is 5,000 or lower. This Bear Market will probably last six to nine month or longer, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year! “Read ’em and weep! These are the cards we have been dealt.

Carl M Birkelbach  3/29/2020

DOW 21,636  Down 915 Down 4.06%%

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

 

INVESTMENT STRATEGY LETTER #732

WHAT SHOULD YOU DO? (FULL DISCLOSURE)

Because I have been right about this decline, a lot of people are asking me what should they do, buy or sell? I wish I knew! For one thing, just because I have been right lately, doesn’t mean I have a special direct line to the answer. For one thing, I have been wrong for a long time. I issued the first Lone Bear Letter 1/23/2015, when the Dow was 17,672. Had you listened to me then, you would have missed out on the entire second half of the Great Bull Market from 2015 to 2020. However, if you had instead invested in a CD’s at 3% a year, that would have offset every 500 points in the Dow per year and for five years that’s 2,500 point. That would leave you about even now, with a current 20,100 Dow. But like me, you would have missed out on the thrill of making all that money on paper, but avoided the agony of defeat, that most investors now feel.

Anyway, what you should do now, depends a lot on your age, what kind of cash flow you have to meet your expenses and how diversified you are in other asset like  cash (money markets, CD’s etc.). So, ask your professional investment adviser, what is best for you.

If you read my blog page titled In a time of universal deceit, telling the truth is a revolutionary act” which is a quote by George Orwell; you will see that I believe that the Financial Industry has not truly fully disclosed stock market risk to the investing public.  Instead the Financial Industry gives the false advice that, “on the long term, the stock market will always recover.” Keynes has a famous quote that states “in the long run, we will all be dead.” The point being, if you are older and depending on the stock market for retirement, the stock market may not recover from any decline, in time for when you need the money.  During the period between 2000 and 2008 the stock market went down more than 50% twice, which was devastating for people who were retiring or sending their children to college. If you invested in the Dow in 1998, it wasn’t until 2011, that you got your money back. Therefore, in full disclosure, I believe I should tell investors that investing in the stock market is dangerous and that most people, ‘the average American,’ should treat stock market investing only as a speculation and not as a form of savings. Simply stated, most people should not gamble with their savings in the stock market.

I would like to see the Federal government sponsor a ‘Retirement Savings Fund’ that guarantees a 3 ½% return. (The rate would go up if the Fed fund rate goes higher). A Federal government sponsor a Retirement Savings Fund is needed. It would really help with the average American and their saving planning and keep the ‘average investor’ out of the stock market.  This would make retirement planning a lot easier and safer.

So, my answer to the question, of what should you do, is for most older people to not invest in the stock market, or if you are older, treat stock investing as a speculation with money you can afford to lose. For you younger people and you older people that qualify, the opinion of what I say in this blog does not take in consideration your personal financial situation or your goals. My opinion is just that, my opinion of what I think the stock market will do, based on my questionable expertise.

READ EM AND WEEP

With the above disclosure in mind, I will now give you my opinion of what I think the stock market will do.  Because no one wants to hear bad news, my opinion of what to expect is not good. The phrase “read ’em and weep” is often said in poker when someone has a winning hand, as the others “weeps” over their loss. This expression can also refer to things that cause distress to others. With this in mind, I believe this Bear Market will probably go a lot lower and last six to nine month, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year. What is now happening, is it appears that most investors do not believe the positive political ‘spin,’ that is being given about the virus and  the its effect on the economy or in plans to keep the economy out of a recession or depression. (See Surprise Deflation.).

Recent C.D.C.’s scenarios were depicted in terms of percentages of the population. Translated into absolute numbers by independent experts using simple models of how viruses spread, the worst-case figures would be staggering; “if no actions is taken to slow transmission, between 160 million and 214 million people in the United States could be infected over the course of the epidemic.” The point here is that a lot of is being done (closing of schools, restaurants, hotels, travel etc. and ‘shelter in place), so the infected rate should be lower than the worst case scenario. However, it seems pretty obvious by now, that investors are not calmed by all the excessive actions by the Fed that are ‘desperately’ trying to add liquefy to the banking system and have driven interest rates down to zero. The key word here is ‘desperately.The Trump Administration used most of its economic bullets (tax cuts to the rich, low unemployment, low interest rates and increased corporate debt)  in order to stimulate an already overheated economy. The problem caused by the virus pandemic, cannot be solved by the ‘monetary initiatives’ of the Fed; it is the growth of the virus that is worrying everyone. What about Federal Fiscal initiatives?”

What has been working is regulation by State and local governments to close schools, restaurants, hotels, travel etc. and initiate ‘shelter in place initiatives. The Trump administration ‘rhetoric’ has done more harm (don’t worry, go to work), than good, to slow the growth of the virus. In today’s press interview, Trump wrongly claims FDA ‘approved’ drug chloroquine to treat the coronavirus. Chloroquine is used to treat malaria, lupus and rheumatoid arthritis. Chloroquine has not been approved by the FDA to treat the coronavirus — and nor has any other drug, the FDA made clear in a post-briefing statement that said “there are no FDA-approved therapeutics or drugs to treat, cure or prevent COVID-19.” Then the president mocks and berates an NBC reporter for asking a question about the country’s covid-19 fears. Dismissing science and demeaning the free press isn’t helping and the Dow that was then up for the moment, but quickly went down 913 points, after Trumps meltdown comments. So much for calmness, in the middle of a storm.

The Trump Administration is now seeking ‘fiscal initiatives’ to send relief to areas of the economy that will need it. However, because of political partisanship and the way legislation works, funding may be a long way off and more complicated than is now being presented.   It may be too early to tell, but this pandemic could be worse than the 2008 Great Recession. Then, we only had a crippling of the Economy, not a shutdown.

If thing get as worse, as I think they will, real support won’t develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a ‘worst case’ scenario my Dow prediction is 10,000 – 12,000, my S&P prediction is 2,000 or below and my NASDAQ prediction is 5,000 or lower. This Bear Market will probably last six to nine month or longer, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year! “Read ’em and weep! These are the cards we have been dealt.

WHAT SHOULD WE DO?

In 2008 we saved the banks, so their executive officer could get huge bonuses, while millions of Americans lost their homes to bank foreclosures.  Then, we could have gotten the government to simply guarantee the CMO’s and mortgages; thereby saving both the banks and the homeowners (Obama’s fault). THIS TIME WE HAVE TO DO BETTER. Today Trump mentioned delaying rent and mortgage payments, to help those hurt by the virus. DUMB! Doing this will hurt those holding the mortgage (banks) and those who receive the rent (landlords). This might hurt the economy more than helping rent and mortgage payers. 1) My suggestion is that the government should make direct payments on mortgages and rent for qualified individuals. The payments should be made directly to mortgage holders and landlords. This would save the payers and the payees. 2) My second suggestion is to let the Big Corporations like General Motors and other corporations go bankrupt. Let stockholder and bond holders except the loss of holding risky investments, (that’s capitalism).Then with clean balance sheets, the government could loan the companies funds to get back on their feet and hire employees without their past debt burden.  I would add one caveat: In order to receive government money, CEO”s and top management could not earn more than 62 times the average worker’s salary. (Now they earn 250 to 500 time the average worker’s salary.) This would encourage higher salaries. 3) Create a Federal Pandemic Department Agency to fight this pandemic and prepare for and further pandemics.  The director should have Secretary status and serve on the Cabinet.

3/20/2020

DOW 19,175  Down 913 Down 4.55%%

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

INVESTMENT STRATEGY LETTER #731

A RALLY IS OVERDUE- USE IT TO SELL

Up 1,049! Hurrah! Maybe we can get a few more up days in before the new cases of the virus start flooding in. Results from the tests can take a while and also until now, there have been few test kits made available. I expect that for those who were exposed, (airports, foreign travel etc.), new cases will begin to show up in the next couple of weeks and will show an exponential grow of US cases.

WORST CASE SCENARIO: Yesterday’s New York Times Reports: “Scientists tracking the spread of the coronavirus reported on Monday that, for every confirmed case, there are most likely another five to 10 people in the community with undetected infections.” The C.D.C.’s scenarios were depicted in terms of percentages of the population. Translated into absolute numbers by independent experts using simple models of how viruses spread, the worst-case figures would be staggering if no actions were taken to slow transmission. Between 160 million and 214 million people in the United States could be infected over the course of the epidemic, according to a projection that encompasses the range of the four scenarios. WORST CASE SCENARIO:That could last months or even over a year, with infections concentrated in shorter periods, staggered across time in different communities, experts said. As many as 200,000 to 1.7 million people could die.

BEST CASE SCENARIO: If I am wrong and there is not an exponential growth of cases, the markets may go through an early elongated bottoming process (not a V), with a 20,000 DOW IND being the bottom. However, all indications are, that the worst it yet to come.

I continue to worry about the 80% of people who live from pay check to pay check. It looked as though for a while that Mitch and Pelosi were going to get along and pass some comprehensive measures to help these people. As of now, it appears that chaos will prevail and any help will be delayed and misspent.

THERE ARE FIVE GROUPS OF STOCK PERFORMERS (Examples)

Group 1 (Best) only fell to 2019 levels:  Apple, Dow Utilities, Walmart, Netflix and Facebook

Group 2 (Average) fell to 2017-2018 levels: Dow Ind, NASDAQ, S&P, Russel index , Emerging Markets Index, JP Morgan, Caterpillar, Hong Kong Index

Group 3 ( Below Average) fell to 2016 levels: Dow Transports, Russia RSX, Japan N225.

Group 4 (Bad) fell to 2010 levels:  England  FTSE, Germany DAX, General Motors, Wells Fargo Bank. BNP Paribas bank, IBM, Boeing

Group 5 (Worst) fell to 2002 levels and below: Deutsche Bank, Credit Swiss, Barclays bank, Ford, HBC bank,

The big question is, will the performance slide up or down? I think they will slide down as follows:

Group 1 will slide down to the 2017- 2018 levels,

Group 2 will slide down to 2016 levels

Group 3 will slide down to 2010 levels  

Group 4 will slide down to 2002 levels and

Group 5 will slide out of existence or be saved with massive bail-outs.

CARL M BIRKELBACH

3/17/2020

DOW 21,237 up 1046 +5.2%

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

 

INVESTMENT STRATEGY LETTER #730

THE FED IS NOT THE PROBLEM – IT’S THE VIRUS!

The Dow is down 2,000 points, and then is up 2,000 points! As I said in ISL #729, “On a short term basis, the market will probably continue to fluctuate back and forth by 500 to 1,000 point ranges. One must remember that over 80% of the market is controlled by algorithms of the Big financial firms.  They love the volatility; while the average investor detests it…Remember ‘Don’t grab a falling knife.’  Hopefully there will be a lot of rallies. Use them to sell and go short.”  My Downside objectives are 16,000 to 18,000. See below for a worst case scenario. It is the virus that has everybody concerned. We have NO idea of the extent of the virus, or its growth.

It seems pretty obvious by now that investors are not calmed by all the excessive actions by the Fed that are ‘desperately’ trying to add liquefy to the banking system and have driven interest rates down to zero. The key word here is ‘desperately.’ The Trump Administration used most of its economic bullets (tax cuts to the rich, low unemployment, low interest rates and increased corporate debt)  in order to stimulate an already overheated economy. The problem caused by the virus pandemic, cannot be solved by the Fed; it is the growth of the virus that is worrying everyone. Because of the lack of testing, we have no idea how many people in the US have it or how fast it is growing. The markets hate uncertainty! And unlike the 2008 crisis or the wars in Afghanistan, everybody is affected; from the sports fan to restaurant patrons and its owners.

It has been reported that the people occupying the bottom 40% of our economy have less than $400 to survive any economic crisis. Now suppose you are one of these millions of people and have lost your job, as many have or will during the many shut downs, or you have to stay home from your job because your children are home from a closed school. The income for many of these millions of Americans has stopped. How are you going to pay for food? Certainly your rent or mortgage bill will have to go unpaid. Let’s say you are an employer who has had to close your business and your income has stopped. How will you afford to pay for paid sick leave? New legislation is still pending in the Senate to help you. However, even if the legislation eventually passes, how do you apply for it and how long will it take, if you qualify, to get the money? In the meantime your negative cash flow (entrepreneurs also have to eat), will not be able to pay for employees who are not working or your rent. As daily life grinds to a halt, so will the US economy!

CORPORAT DEBT WAS A PROBLEM BEFOR THE VIRUS!

As reported in ISL #729 From Julia La Roche Yahoo Finance March 14, 2020, financial expert Ed Altman says: ‘A lot of marginal companies are going to be forced out of business’ “Corporate US debt to GDP is at its highest level in all of recorded history. 50% of that debt is BBB, or one level above junk. Decreased cash flows and less corporate debt demand in a US recession, will probably stop buybacks and lead to insolvency in the junk bond market…. We ran our tests looking objectively at the health of BBB companies at the end of 2019 when everything was going great, and we came up with more than 30% looked vulnerable to a downgradeTHIS WAS BEFORE THE CORONA VIRUS!

Also As reported in ISL #729 from the March 12 edition of the Economist Magazine: To get a sense of the potential damage in other countries The Economist has done a crude “cash-crunch stress-test” of 3,000-odd listed non-financial firms outside China. It assumes their sales slump by two-thirds and that they continue to pay running costs, such as interest, rent and wages. Within three months 13% of firms, accounting for 16% of total debt, exhaust their cash at hand. They would be forced to borrow, retrench or default on some of their combined $2trn of debt. If the freeze extended to six months, almost a quarter of all firms would run out of cash at hand.”

The US Corporate debt was in trouble before the Pandemic. The 2008 bail-out saved the banks, but caused 7.8 million foreclosures. The Trump Administration is to once again focus on helping the Big corporations, not poor income individuals or the Middle class! Before the virus, most low income individuals were barely getting by on minimum wages. Evictions are 6,300 a day. That is 4 evictions every minute. Today the United States, as ranked against other nations is 37th in Health Care, 35th in meeting basic human needs, 36th in basic education, has the highest first day infant mortality rate and the highest child poverty rate of 21% among industrialized nations.  That’s one in every five children living in poverty! We were in trouble before the pandemic. This virus pandemic will make life ‘desperate’ for many.

Making the crisis worse

From the very beginning, the Trump administration has blown any reasonable response to the pandemic. First the President downplayed the crisis by saying that this is no worse than the flu and to go to work. Then Trump overstated banning travel from Europe, not indicating that U.S. citizens and Green Card holders are exempt. This resulted in a panic at airports over the weekend, where thousands of passengers (all suspected carriers) were thrown together in an effort to beat the ban. Let’s say 1% had the virus. Because of the shoulder to shoulder crowds, how many have since spread it?  The figure is expediential. We don’t know how many people have the virus, because there is inadequate testing. Possible new legislation calls for free testing. Sounds like free health care for all.  Still, how many undocumented immigrants will show up for testing?

WORST CACE SENARIO

It is too early to tell, but this could be worse than the 2008 Great Recession. Then, we only had a crippling of the Economy, not a shutdown.  However, I believe, in a worst case scenario more than 10% of S&P 500 companies could file for bankruptcy, not to mention the thousands of small business that will go out of business. I obviously worry about defaults on corporate debt and loans to banks.

As I said in ISL #729 “What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 8.16 (today a low of 6,56 down 20%). My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 5.40. (today a low of 4.03 down 25%). That’s a 35 year low! DB was as high as 149, now 5.97.(today a low of 4.99 down18%).  Each rally is met with another new low! What are these falling bank charts telling me? Trouble!”

If thing get as worse as I think they will, real support won’t develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a worst case scenario of 10,000 is a likely scenario. This Bear Market will probably last six to nine month, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year.

A worst case scenario could also call for President Trump to call for a complete Marshall Law shutdown of everything, including The House and the Senate. Yes, it can happen here!

 CARL M BIRKELBACH

3/16/2020

DOW 20,186 Down 2,999 or 12.94%—- A NEW BLACK MONDAY?

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

INVESTMENT STRATEGY LETTER #729

The Corporate Debt Bubble

Over the past decade governments and bankers have tried to redesign the financial system so that it acts as a buffer that absorbs economic shocks rather than as an amplifier that makes things worse. Banks now face a stern test from the covid-19 virus and the economic ruptures it has triggered, not least a Saudi-led oil-price war. My concern is in the world’s ocean of corporate debt, worth $74trn. In October 2019, I quoted form an article titled Seeking Alpha, a Reprint August 14, 2019 by Ariel Santos-Alborna. What he said, is now truer than ever. “Corporate US debt to GDP is at its highest level in all of recorded history. 50% of that debt is BBB, or one level above junk. Decreased cash flows and less corporate debt demand in a US recession, will probably stop buybacks and lead to insolvency in the junk bond market.” THIS WAS BEFORE THE CORONA VIRUS!

From Julia La Roche Yahoo Finance March 14, 2020, titled:Bankruptcy expert Ed Altman: ‘A lot of marginal companies are going to be forced out of business’ Altman, who is a professor emeritus at NYU Stern School of Business added that even before the virus, the fundamentals of companies and markets were already showing “a lot of warning signs.” Altman told Yahoo Finance, pointing out that the average economist is now forecasting “around a 60% chance of a recession” within the next 12 months, up dramatically from before the outbreak. That means a lot of companies kept afloat by cheap borrowing costs could be in real trouble. Altman contended that many of them should actually go bankrupt, because “they are zombies and have been kept alive” by historically low rates.

Altman, who pioneered the financial-distress sniffing ‘Z-Score’, a formula he created more than 50 years ago for predicting bankruptcies , suggested ratings agencies are often slow to recognize when companies need to get downgraded. “We ran a Z-Score test on BBB companies in the United States year-end 2019. And, in a downturn, a big downturn which happened in ’08 and 2002 etc. , maybe 10% the rating agencies say get downgraded,” he said. “We ran our tests looking objectively at the health of BBB companies at the end of 2019 when everything was going great, and we came up with more than 30% looked vulnerable to a downgrade” Altman told Yahoo Finance. “And that’s going to happen…and when that happens, a lot of marginal companies are going to be forced out of business” THIS WAS BEFORE THE CORONA VIRUS!

From March 12 edition of the Economist Magazine: Companies came out of the 2007-09 financial crises in a relatively sober mood, but since then have let rip. Global corporate debt (excluding financial firms) has risen from 84% of GDP in 2009 to 92% in 2019, reckons the Institute of International Finance. The ratio has risen in 33 of the 52 countries it tracks. In America non-financial corporate debt has climbed to 47% of GDP from 43% a decade ago, according to the Federal Reserve. Underwriting standards have slipped. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. Outside America the figure is 39%. Firms that you might think have rock-solid balance-sheets—AT&T—have seen their ratings slip, while others have been saddled with debts from buyouts. Naughty habits have crept in: for example, using flattering measures of profit to calculate firms’ leverage.

In China over the past months, financial distress and forbearance has been widespread. One multinational says China has relaxed its payment terms with suppliers in China. HNA, an outrageously indebted conglomerate than runs an airline, has been bailed out. To get a sense of the potential damage in other countries The Economist has done a crude “cash-crunch stress-test” of 3,000-odd listed non-financial firms outside China. It assumes their sales slump by two-thirds and that they continue to pay running costs, such as interest and wages. Within three months 13% of firms, accounting for 16% of total debt, exhaust their cash at hand. They would be forced to borrow, retrench or default on some of their combined $2trn of debt. If the freeze extended to six months, almost a quarter of all firms would run out of cash at hand.

“The near-certainty of rating downgrades and defaults in the travel-related and oil industries, and the possibility of a broader crunch, is of concern. Credit derivatives, ( 5 x more than 2008), the most actively traded part of the fixed-income markets, have recoiled. The CDX Index, which reflects the cost of insuring against default on investment-grade debt, is at its highest level since 2016, as is the ITRAXX crossover, which covers riskier European borrowers. Out of the public eye, privately traded debt may now only change hands at heavily discounted prices. (NO liquidity)The issuance of new debt has “dried up”, says the head of a big fund manager. This could fast become a serious problem because firms need to refinance $1.9trn of debt worldwide in 2020, including $350bn in America.”

“Who, then, can act as a source of stability and fresh lending? Some big cash-rich firms such as Apple could grant more favorable payment terms to their supply chains. Private-equity firms have capital to burn. But in the end, much will rest on the banks, which have the relationships and flexibility to extend credit to tide firms over. America’s banks have their flaws (see above). Some banks like Goldman Sachs is sitting on $180bn of loans and lending commitments with ratings of BBB or below. Outside America the picture is less reassuring. Europe’s banks make puny profits, partly because interest rates are so low; Italian banks had a return on equity of just 5% last year. Since the virus struck, the cost of insuring their debt against default has flared up, hinting that they could yet become a source of contention. State-backed banks in China and India will do as directed by politicians. But they are already laboring under large bad debts.”

In my opinion, unless the U.S can avoid a recession (not with the corona virus shutting down the economy), or can legislate a massive bank bailout (Which is also doubtful. See ISL Letter #727 HAS EVERYONE FORGOTTEN ABOUT ONE OF TRUMPS FIRST EXECUTIVE ORDERS  “PREVENTING TAX-PAYED BAIL-OUTS”), the upcoming economic recession maybe worse than the ‘Great Recession ‘of 2008!

The Fed Acts

Now with the corona virus, our economic weakness worldwide will be exposed. What is worse is that in the US, we have used all our ‘bullets’ to prop up an already robust economy. The Federal Reserve and the federal government cannot use the normal monetary and fiscal stimulus to offset a recession, because interest rates are already low, taxes have already been cut, the annual budget is already at a 1.5 trillion dollar deficit and unemployment is at record lows.

In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent. Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.

When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. Since then The United States’ central bank has funneled roughly $500 billion into the repo market in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding repos on the Fed’s balance sheet.

On Wednesday March 11,2020, the Fed said it would increase the amount of overnight repo operations from at least $150 billion to at least $175 billion. In addition, it extended the date for a $45 billion two-week repo operation that was supposed to end  April 13. Finally, there will be three $50 billion one-month term operations, the first of which happened Thursday.

On Thursday March 12, 2020 The Fed announced a bold new initiative in an effort to calm market tumult amid the corona virus meltdown. In all, the new moves pump in up to $1.5 trillion into the financial system in an effort to combat potential freezes brought on by the corona virus. This was the second day in a row and the third time this week the Fed has stepped in. Stocks staged a sharp turnaround from earlier losses, though some of those gains were pared.

One part of the announcement saw the Fed widen the scale for its $60 billion worth of money the Treasury purchases, which to now had been confined to short-term T-bills. Under the new regime, the Fed will extend its purchases “across a range of maturities” to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The central bank will begin purchasing coupon-bearing securities, something market participants have been clamoring for since late 2019.The purchases start Thursday and will continue through April 13.The second part of the new operations will see the New York Fed desk offer $500 billion in a three-month repo operation and a one-month operation. The offerings will happen on a weekly basis through the remainder of the program. In addition, the Fed will continue to offer at least $175 billion in overnight repos and $45 billion in two-week operations. Repos are short-term operations in which financial institutions provide high-quality collateral in exchange for cash reserves they use to operate.

The extraordinary moves came amid extreme market turmoil created by uncertainty over the corona virus pandemic. Government bond yields earlier this week cascaded to record lows amid reports of liquidity issues in the market and fears of a global recession. However, questions remain whether the Fed can arrest the market’s issues on its own. Wall Street has been looking for an aggressive fiscal response and has yet to get it from Washington lawmakers.

On Friday March 13, 2020 President Trump announced ‘A National Emergency’ and the Dow shot up 1985 points!

The question now is, when is enough too much?

As Gang Hu, managing partner at WinShore Capital hedge fund, told Bitcoin Magazine. , “If they (Fed) overdo it, then we’re going the other way” — economic downturn. “If you listen to the Fed, the Fed is aware of this,” Hu said, referring to the gravity of adding several hundred billion dollars into these markets. “If this $500 billion becomes $1 trillion or $2 trillion, then the average American should worry. But now, the Fed’s argument is that we’ve gone too far with shrinking the balance, that since September [2019] we’ve had too little in reserves and that this has hurt the system.”

Dennis Lockhart, former head of the Atlanta branch of the Federal Reserve, likened the Fed’s open market operations to a “trial and error” exercise in a CNBC interview. Lockhart also noted that he doesn’t equate these liquidity injections with quantitative easing — the Fed’s practice of purchasing long-term Treasury bonds to print new cash. Quantitative easing, Hu assented, tries to control long-term interest rates with reliable, long-term liquidity; repo market intervention, conversely, controls interest rates for immediate short-term liquidity. Still, the final effect is the same — the Fed purchases assets to flush banks with cash. And like the Fed’s quantitative easing during the Great Recession (which led to the inflated balance sheet of over $4 trillion we have today), the uncharted territory for these repos is that ultimate question: Where do they end?

Hu believes that they will begin winding down and the market will stabilize around April 15, 2020 — federal tax day. But he said that it will be a “challenge to unwind this thing” and that it will be a painstaking process. “I trust that they will do it slowly, gradually, because you can’t ask the bank to pay you $100 billion in one day,” Hu said. With no clear end in sight and billions in liquidity entering a little-known yet crucial market for the U.S. financial system, some Americans might be wondering if and when the dam is going to break. Or how much capital needs to enter the system to keep the leverage from flooding the levee. The banks were being stressed before the corona virus. Now what?

Now What?

On a short term basis, the market will probably continue to fluctuate back and forth by 500 to 1,000 point ranges. One must remember that over 80% of the market is controlled by algorithms of the Big financial firms.  They love the volatility, while the average investor detests it.

As stated above I worry about defaults on corporate debt and loans.  What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 8.16. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 5.40.That’s a 35 year low! DB was as high as 149, now 5.97. Each rally is met with another new low! What are these falling bank charts telling me? Trouble!

On a longer term basis, the real economic fallout from the ‘corona virus’ outbreak won’t begin to be seen until the Second Quarter. A lot depends on government action and the extent of how many people in the US get the virus. I think the figures will be big, because there are many people without a health care provider or can’t afford the deductible and don’t forget the 11 million undocumented immigrants that won’t dare see a doctor. I think the markets will say affected for the rest of the year, as weakness in the BBB bond market and banks will have a sobering effect on the markets.

Remember ‘Don’t grab a falling knife.’  Hopefully there will be a lot of rallies. Use them to sell and go short. Our first goal of 22,500 has been achieved. If thing get as worse, as I think they will, real support won’t develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower! This Bear Market will probably last six to nine month, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year.

Once again, won’t it be ironic, that if a Democratic wins the Presidency, it will be the second time in a row (2008), that the Republicans leave him an economic disaster?

Carl M Birkelbach

Dow 23,185    3/14/2020

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

 

 

 

INVESTMENT STRATEGY LETTER #728

3/13/2020 

DOW UP 1,985! BE CARFUL! I WOULD NOT WANT TO OWN STOCKS OVER THIS WEEKEND. I EXPECT MUCH MORE BAD NEWS ABOUT THE INCREASE OF THE VIRUS IN THE US. EVEN TRUMP. PENCE, BARR AND IVANKA HAVE BEEN EXPOSED.

A NATIONAL EMERGENCY? HAS EVERYONE FORGOTTEN ABOUT ONE OF TRUMPS FIRST EXECUTIVE ORDER ISSED “PREVENTING TAX-PAYED BAIL-OUTS”??????? 

EXECUTIVE ORDER 2/3/17

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

Sec. 3. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

DONALD J. TRUMP

THE WHITE HOUSE,
February 3, 2017.

3/10/2020

Awaken! Goldman Sachs calls for the end of the Bull Market

To quote David Kostin chief U.S. equity strategist at Goldman Sachs, he writes that the historic fall in interest rates is unlikely to prevent a “collapse” in second- and third-quarter profits.After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end.” The stock strategist slashed his midyear S&P 500 forecast to 2,450, meaning the investment bank now sees the market falling another 15% beyond Tuesday’s close to levels not seen since December 2018. That is, the bank now sees the market down another 15% on top of its 14% loss incurred over the last month. Of course , just to keep you patriotic hubris investors in the market,  Kostin did add that he expects, ”a rebound in the back half of 2020 to boost the S&P 500 to 3,200 by year’s end, 11% higher from current levels.” Yea Sure! And Warren Buffett says, “The market collapse in 2008 was much more scary.” So far! Of course in 2008, we had the collapse of the banks. However, some bank stocks have already collapsed!

 Collapse of the banks stocks.

What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 9.25. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 6.04. That’s a 35 year low! What are these falling bank charts telling me? Trouble!

HBC was at 16 in 2000, now 5.49 a 11 year low. The worst chart is that of Deutsche Bank. Reaching a high of 189 in 2007, it is now at 6.75! This is of course, is the bank that loaned Trump $175 million dollars before the election, when no one else would. This loan saved Trump from his 5th bankruptcy and allowed him to run for President. Do you know why DB gave him the loan? In a New York Time’s article dated September 29, 2018, “Retired Supreme Court Justice Anthony Kennedy’s son loaned President Donald Trump over a billion dollars for his real estate projects, The New York Times reported. Justin Kennedy was the head of Deutsche Bank’s real estate capital markets division and loaned to Trump when other banks wouldn’t.”  Could this be why Justice Kennedy’s retired and gave Trump an opportunity to shift the balance of the Supreme Court to the right. Did Russia have anything to do with the Trump loans? DB has big Russian connections and loans with Russian oil and gas companies. The Russian Oil and Gas companies cannot services their deb with oil below $50 per barrel. VanEck Russia ETF (RSX) was at 59 in 2007, now at 19.97. Watch out below for a lot of US and worldwide corporate debt.

The Corporate Debt Bubble

In October 2019, I quoted form an article titled Seeking Alpha, a Reprint August 14, 2019 by Ariel Santos-Alborna. What he said, is now truer than ever. Corporate US debt to GDP is at its highest level in all of recorded history. 50% of that debt is BBB, or one level above junk. Decreased cash flows and less corporate debt demand in a US recession, will probably stop buybacks and lead to insolvency in the junk bond market. This may lead to another wave of possible bank bail outs and increases in sovereign debt. A big recession now, could lead to a  Russian, Chinese, Japanese and European  economic recession.  The same is true in the US. In my opinion, unless the U.S. creates inflation, (which it is doubtful that we will or can) or can legislate a massive bank bailout (which is also doubtful), the upcoming  economic recession maybe worse than the 2008 ‘Great Recession.’

As wages have remained relatively stagnant for decades, credit has become the engine of economic growth in the U.S. and the default of excessive credit is the primary driver of past recessions. With the transportation sector rolling over, reduced consumer spending, reduced semiconductor sales, global  Mortgage Rates are at its lowest level in seven years,  the yield curve inverting and the yet to be felt economic effect of the corona virus,  there appears to be a certainly of a growth rate cycle slowdown. I believe the bull market’s excess is undoubtedly in the US corporate debt sector. Corporate buybacks through issuing debt and cash flows has been propping up equity markets. So when cash flows decrease in the next recession, less net buyers of BBB debt in a flight to safety and many BBB corporations become downgraded to junk (the % depends on the severity of the recession), the share buybacks currently propping up the equity market will come to a screeching halt and nothing will be left to support current equity prices. Worldwide debt is even a bigger problem, (See comments on Russia above), as China has flooded the debt market with worthless loans to unsuccessful national corporations and Europe and Japan appear to be facing an economic slowdown because of the corona virus. Merkel says, as many as two thirds of the German population may eventually be affected!

The Coronavirus Effect

Now with the corona virus, our economic weakness worldwide will be exposed. What is worse, is that in the US, we have used all our ‘bullets’ to prop up an already robust economy. The Federal Reserve and the federal government cannot use the normal monetary and fiscal stimulus to offset a recession, because interest rates are already low, taxes have already been cut, the annual budget is already at a 1.5 trillion dollar deficit and unemployment is at record lows.

On Sept. 30, 2019 The Federal Reserve Bank of New York added $63.5 billion to the financial system, using the market for repurchase agreements, or repo, to relieve funding pressure in money markets. Banks asked for $63.5 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of U.S. Treasury and mortgage securities. In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities—frequently Treasury bonds—in exchange for a short-term loan. The term of these loans can be as short as overnight. The banks were being stressed before the corona virus. Now what?

Dow projections

Rather than repeating myself about the problems, look at my previous ‘Posts’ about the corporate ‘debt bubble,’ problems in China, lower GDP forecasts at below 2% etc. and all the ‘Pages’ Lone Bear Letters 1-14, Downside Projections, etc.  All can still be applied, only worse.  Because the markets went so high for 11 years without a correction, the current correction, I believe, will be devastating.

STAY FULLY INVESTED? The financial industry approves of the Efficient Market Hypothesis Theory (EMHT), which proposes that it is impossible to beat the market by trading in and out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false sense of contentment. Everyone I talk to, is not worried. That makes me worry! They are all saying they are going to ride this decline out and ‘the market always bounce back.’ Trained like Pavlov’s dog by the Big Financial Industry,to just hold while professional short the market, some investors may not outlive this Bear Market or a long economic recovery period! The Dow in 1998 was 9,000 and was still at 9,000 in 2009, eleven years later. Not everyone is positioned to ‘buy and hold’.

Won’t it be ironic, that if a Democratic wins the Presidency, it will be the second time in a row (2008), that the Republicans leave him an economic disaster?

Carl M Birkelbach

Dow 25,018

3/10/2020

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST

Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

Lone Bear Letter #15

Awaken! Goldman Sachs calls for the end of the Bull Market

To quote David Kostin chief U.S. equity strategist at Goldman Sachs, he writes that the historic fall in interest rates is unlikely to prevent a “collapse” in second- and third-quarter profits.After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end.” The stock strategist slashed his midyear S&P 500 forecast to 2,450, meaning the investment bank now sees the market falling another 15% beyond Tuesday’s close to levels not seen since December 2018. That is, the bank now sees the market down another 15% on top of its 14% loss incurred over the last month. Of course , just to keep you patriotic hubris investors in the market,  Kostin did add that he expects, ”a rebound in the back half of 2020 to boost the S&P 500 to 3,200 by year’s end, 11% higher from current levels.” Yea Sure! And Warren Buffett says, “The market collapse in 2008 was much more scary.” So far! Of course in 2008, we had the collapse of the banks. However, some bank stocks have already collapsed!

 Collapse of the banks stocks.

What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 9.25. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 6.04. That’s a 35 year low! What are these falling bank charts telling me? Trouble!

HBC was at 16 in 2000, now 5.49 a 11 year low. The worst chart is that of Deutsche Bank. Reaching a high of 189 in 2007, it is now at 6.75! This is of course, is the bank that loaned Trump $175 million dollars before the election, when no one else would. This loan saved Trump from his 5th bankruptcy and allowed him to run for President. Do you know why DB gave him the loan? In a New York Time’s article dated September 29, 2018, “Retired Supreme Court Justice Anthony Kennedy’s son loaned President Donald Trump over a billion dollars for his real estate projects, The New York Times reported. Justin Kennedy was the head of Deutsche Bank’s real estate capital markets division and loaned to Trump when other banks wouldn’t.”  Could this be why Justice Kennedy’s retired and gave Trump an opportunity to shift the balance of the Supreme Court to the right. Did Russia have anything to do with the Trump loans? DB has big Russian connections and loans with Russian oil and gas companies. The Russian Oil and Gas companies cannot services their deb with oil below $50 per barrel. VanEck Russia ETF (RSX) was at 59 in 2007, now at 19.97. Watch out below for a lot of US and worldwide corporate debt.

The Corporate Debt Bubble

In October 2019, I quoted form an article titled Seeking Alpha, a Reprint August 14, 2019 by Ariel Santos-Alborna. What he said, is now truer than ever. Corporate US debt to GDP is at its highest level in all of recorded history. 50% of that debt is BBB, or one level above junk. Decreased cash flows and less corporate debt demand in a US recession, will probably stop buybacks and lead to insolvency in the junk bond market. This may lead to another wave of possible bank bail outs and increases in sovereign debt. A big recession now, could lead to a  Russian, Chinese, Japanese and European  economic recession.  The same is true in the US. In my opinion, unless the U.S. creates inflation, (which it is doubtful that we will or can) or can legislate a massive bank bailout (which is also doubtful), the upcoming  economic recession maybe worse than the 2008 ‘Great Recession.’

As wages have remained relatively stagnant for decades, credit has become the engine of economic growth in the U.S. and the default of excessive credit is the primary driver of past recessions. With the transportation sector rolling over, reduced consumer spending, reduced semiconductor sales, global  Mortgage Rates are at its lowest level in seven years,  the yield curve inverting and the yet to be felt economic effect of the corona virus,  there appears to be a certainly of a growth rate cycle slowdown. I believe the bull market’s excess is undoubtedly in the US corporate debt sector. Corporate buybacks through issuing debt and cash flows has been propping up equity markets. So when cash flows decrease in the next recession, less net buyers of BBB debt in a flight to safety and many BBB corporations become downgraded to junk (the % depends on the severity of the recession), the share buybacks currently propping up the equity market will come to a screeching halt and nothing will be left to support current equity prices. Worldwide debt is even a bigger problem, (See comments on Russia above), as China has flooded the debt market with worthless loans to unsuccessful national corporations and Europe and Japan appear to be facing an economic slowdown because of the corona virus. Merkel says, as many as two thirds of the German population may eventually be affected!

The Fed Acts

Now with the corona virus, our economic weakness worldwide will be exposed. What is worse, is that in the US, we have used all our ‘bullets’ to prop up an already robust economy. The Federal Reserve and the federal government cannot use the normal monetary and fiscal stimulus to offset a recession, because interest rates are already low, taxes have already been cut, the annual budget is already at a 1.5 trillion dollar deficit and unemployment is at record lows.

In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent. Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.

When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. The United States’ central bank has funneled roughly $500 billion into the repo market since then in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding repos on the Fed’s balance sheet.

Update March 14, 2020

On Wednesday March 11,2020, the central bank said it would increase the amount of overnight repo operations from at least $150 billion to at least $175 billion. In addition, it extended the date for a $45 billion two-week repo operation that was supposed to end  April 13. Finally, there will be three $50 billion one-month term operations, the first of which happened Thursday.

On Thursday March 12, 2020 The Fed announced a bold new initiative in an effort to calm market tumult amid the coronavirus meltdown.In all, the new moves pump in up to $1.5 trillion into the financial system in an effort to combat potential freezes brought on by the coronavirus.This was the second day in a row and the third time this week the Fed has stepped in. Stocks staged a sharp turnaround from earlier losses, though some of those gains were pared.

One part of the announcement saw the Fed widen the scale for its $60 billion worth of money the Treasury purchases, which to now had been confined to short-term T-bills. Under the new regime, the Fed will extend its purchases “across a range of maturities” to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The central bank will begin purchasing coupon-bearing securities, something market participants have been clamoring for since late 2019.The purchases start Thursday and will continue through April 13.The second part of the new operations will see the New York Fed desk offer $500 billion in a three-month repo operation and a one-month operation. The offerings will happen on a weekly basis through the remainder of the program.In addition, the Fed will continue to offer at least $175 billion in overnight repos and $45 billion in two-week operations. Repos are short-term operations in which financial institutions provide high-quality collateral in exchange for cash reserves they use to operate.

The extraordinary moves came amid extreme market turmoil created by uncertainty over the coronavirus pandemic. Government bond yields earlier this week cascaded to record lows amid reports of liquidity issues in the market and fears of a global recession.However, questions remain whether the Fed can arrest the market’s issues on its own. Wall Street has been looking for an aggressive fiscal response and has yet to get it from Washington lawmakers.

On Friday March 13,2020 President Trump announced ‘A National Emergency’ and the Dow shot up 1985!

The question now is, when is enough enough?

Or as Gang Hu, managing partner at WinShore Capital hedge fund, told Bitcoin Magazine. , “If they overdo it, then we’re going the other way” — economic downturn. “If you listen to the Fed, the Fed is aware of this,” Hu said, referring to the gravity of adding several hundred billion dollars into these markets. “If this $500 billion becomes $1 trillion or $2 trillion, then the average American should worry. But now, the Fed’s argument is that we’ve gone too far with shrinking the balance, that since September [2019] we’ve had too little in reserves and that this has hurt the system.”

Dennis Lockhart, former head of the Atlanta branch of the Federal Reserve, likened the Fed’s open market operations to a “trial and error” exercise in a CNBC interview. Lockhart also noted that he doesn’t equate these liquidity injections with quantitative easing — the Fed’s practice of purchasing long-term Treasury bonds to print new cash.

Quantitative easing, Hu assented, tries to control long-term interest rates with reliable, long-term liquidity; repo market intervention, conversely, controls interest rates for immediate short-term liquidity.

Still, the final effect is the same — the Fed purchases assets to flush banks with cash. And like the Fed’s quantitative easing during the Great Recession (which led to the inflated balance sheet of over $4 trillion we have today), the uncharted territory for these repos is that ultimate question: Where do they end?

Hu believes that they will begin winding down and the market will stabilize around April 15, 2020 — federal tax day. But he said that it will be a “challenge to unwind this thing” and that it will be a painstaking process.“I trust that they will do it slowly, gradually, because you can’t ask the bank to pay you $100 billion in one day,” Hu said.

With no clear end in sight and billions in liquidity entering a little-known yet crucial market for the U.S. financial system, some Americans might be wondering if and when the dam is going to break. Or how much capital needs to enter the system to keep the leverage from flooding the levee.

The banks were being stressed before the corona virus. Now what?

Dow projections

Rather than repeating myself about the problems, look at my previous ‘Posts’ about the corporate ‘debt bubble,’ problems in China, lower GDP forecasts at below 2% etc. and all the ‘Pages’ Lone Bear Letters 1-14, Downside Projections, etc.  All can still be applied, only worse.  Because the markets went so high for 11 years without a correction, the current correction, I believe, will be devastating.

STAY FULLY INVESTED? The financial industry approves of the Efficient Market Hypothesis Theory (EMHT), which proposes that it is impossible to beat the market by trading in and out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false sense of contentment. Everyone I talk to, is not worried. That makes me worry! They are all saying they are going to ride this decline out and ‘the market always bounce back.’ Trained like Pavlov’s dog by the Big Financial Industry,to just hold while professional short the market, some investors may not outlive this Bear Market or a long economic recovery period! The Dow in 1998 was 9,000 and was still at 9,000 in 2009, eleven years later. Not everyone is positioned to ‘buy and hold’.

Won’t it be ironic, that if a Democratic wins the Presidency, it will be the second time in a row (2008), that the Republicans leave him an economic disaster?

Carl M Birkelbach

Dow 25,018

3/10/2020

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

Sec. 3. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

DONALD J. TRUMP

THE WHITE HOUSE,
February 3, 2017.

Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

Lone Bull Letter # 14

WHAT STARTS A BEAR MARKET?

I have been writing about a new Bear Market, since the Dow broke above 18,000. Yes I was wrong and maybe I am still wrong. However, all the negatives I have seen since Bear Market Letter # 1 are more prevalent now than ever. I have consistently been saying, that I don’t know what will start a Bear Market, but when it comes it will be one of the worst in our history. Now with the coronavirus, our economic weakness will be exposed. What is worse, is that we have used all our ‘bullets’ to prop up the economy. The Federal Reserve and the federal government cannot use the normal monetary and fiscal stimulus to offset a recession, because interest rates are already low, taxes have already been cut, the annual budget is already at a 1.5 trillion dollar deficit and unemployment is at record lows.

Rather than repeating myself about the problems, look at my previous ‘Posts’ about the corporate debt bubble,’ problems in China, lower GDP forecasts at 2% etc. and all the ‘Pages’ Lone Bear Letters 1-13, Downside Projections, etc.  All can still apply, only worse.  Because the markets went so high for 10 years without a correction, the current correction, I believe, will be devastating.

Remember ‘Don’t grab a falling knife.’  Hopefully there will be a lot of rallies. Use them to sell and go short.

Carl M Birkelbach

2/25/2020

Dow 27,128

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

Reprint. The Debt/REPO’s/Manufacturing Problem

The reprint of three articles that spells out the problem.

The Corporate Debt Bubble|

 Seeking Alpha Reprint August 14, 2019
Ariel Santos-Alborna
Value, portfolio strategy, macro
Summary

Corporate debt to GDP is at its highest level in all of recorded history.

50% of that debt is BBB, or one level above junk.

Decreased cash flows and less corporate debt demand in a recession will stop buybacks and lead to insolvency in the junk bond market.

This may lead to another wave of bail outs and increased sovereign debt.

Increased sovereign debt will lead to Japanese and European-like economic malaise unless the U.S. creates inflation.

As wages have remained relatively stagnant for decades, credit has become the engine of economic growth in the U.S., and excess credit and leverage the primary driver of recessions. The two charts below demonstrate this process. Real wages have remained stagnant since 1973. Around that time we begin to see increases and violent swings in consumer credit change. The reason? Without wage growth, the credit economy must be pumped up to increase consumption (and therefore GDP).

(Source: Economic Policy Institute)

(Source: Trading Economics)

Home ownership, created with debt, increased drastically before the savings and loan crisis of the 1990s and the subprime mortgage crisis of 2008. When homeowners began defaulting, the crisis shifted to banks. Then credit froze as banks held worthless mortgage backed securities until the government stepped in. Government balance sheets assumed most of the banks’ debt and the Fed provided easy credit and ample liquidity through low interest rates and Quantitative Easing to spurn lending. Thus, the seeds were sewn for the excesses we see today in corporate and sovereign debt.

This article demonstrates how an economic slowdown will likely burst the corporate debt bubble. With limited room for increasing sovereign debt levels, the crisis may shift to currencies.

The Corporate Debt Bubble

This bull market’s excess is undoubtedly in the corporate debt sector. Corporate debt has doubled since the 2008 crisis. Corporate debt to GDP is at its highest level in all of recorded history. Naturally, too much debt lowers your credit quality. This is evident by the fact that roughly 50% of the corporate debt market is BBB, or just one level above junk. The explosion of BBB debt can be seen in the second chart below. AT&T has amassed $191 billion of total debt. Ford has $157 billion of debt but a much less manageable 450% debt/equity ratio. General Electric and General Motors are two other companies with debt levels putting them at risk of downgrade.

(Source: St. Louis Fed)

(Source: Bloomberg)

Corporate buybacks through issuing debt and cash flows is propping up equity markets. As the chart below shows, corporations have made up for the reduced demand from institutions (who are net sellers), households, and rest of world. If and when a recession occurs, expect a flight to safety from foreign buyers, pension systems, and financial institutions. This means less buyers of corporate debt and less buybacks.

(Source: Atlas Wealth Management)

So when cash flows decrease in the next recession, less net buyers of BBB debt in a flight to safety, and many BBB corporations become downgraded to junk (the % depends on the severity of the recession), the share buybacks currently propping up the equity market will come to a screeching halt and nothing will be left to support current equity prices. Additionally, the junk bond market is less than half the size of the BBB market and typically faces a lack of liquidity at the first sign of recession. A nearly illiquid junk bond market cannot absorb a wave of BBB downgrades, especially from blue chip companies listed above. A major downgrade will make the junk bond market insolvent, high yield spreads will widen, and companies that rely on junk debt financing will be at risk of defaulting.

Likelihood of a Recession

With the transportation sector rolling over, reduced consumer spending, reduced semiconductor sales, global PMI at its lowest level in seven years, and the 2s-10s curve only 160 bps from inverting, we are certainly in the midst of a growth rate cycle slowdown. Despite this, the possibility of a recovery still exists with a dovish Fed cutting amidst these warning signs. I do not believe the Federal Reserve can kick this can down the road and prevent recession for another several years. The reason? They told us the probability is low.

The NY Fed probability of recession index has reached 31.4%. Only one time in history has this index reached 30% and a recession not occur in the next twelve months, and that occurred in 1967. A reading above 30% has preceded every other recession in history as the chart below shows. When the NY Fed tells us there is a high probability of recession, investors should listen.

(Source: NY Fed)

Endgame

The U.S. will be forced to bail out overleveraged corporations. With Japan’s debt to GDP ratio at nearly 250% as a precedent, there is no doubt in my mind that the U.S. can take on more debt to prevent a collapse in the high yield corporate sector. However, two issues come to mind: 1) the political will to bail out large corporations. 2) the economic drag of high debt as interest payments consume a higher portion of federal expenditures. Not to mention the $122 trillion dollars of unfunded liabilities that the U.S. will have to finance with deficit spending.

The U.S. has several options. They can ride this monetary experiment ad infinitum and experience several years or decades of economic malaise like Europe or Japan. They can default on their debt. They can enact austerity to get the budget in order. They can grow out of the debt (decreasing debt as a percentage of growing GDP). Or they can inflate the debt away by monetizing it or devaluing the currency.

In a blog post here, I discuss Ray Dalio’s article on macroeconomic paradigm shifts. He believes in a combination of the above: “So there will have to be some combination of large deficits that are monetized, currency depreciations, and large tax increases.” With Modern Monetary Theory at the forefront of economic debates, this likelihood of this outcome has never seemed higher. I believe the second act of unconventional monetary policy will look something like what Dalio describes above.

Risk and Reward by Asset Class

This hopes to answer the so what. If the U.S. erases its sovereign debt through currency devaluation, the prices of gold and bitcoin will skyrocket. I also firmly believe that long term interest rates will reach zero, becoming a boon for bond prices. Disinflation is highly intact, which is why I’m currently neutral on commodities, yet recommend a portion of one’s portfolio in commodities for diversification. I also recommend long volatility positions as a hedge against sharp downturns.

The Fed’s recession index is too strong a sign to ignore. I recommend being underweight U.S. stocks and am neutral emerging market stocks though long-term bullish. This depends on price action of the U.S. dollar, which I cannot determine with certainty. This dynamic may take years to come to fruition, if at all. Yet the possibility makes gold and bitcoin attractive buys at the moment. With gold and bitcoin price action despite global disinflation, I believe investors are beginning to price in the possibility of currency devaluation.

Fed Adds $63.5 Billion to Financial System in Repo Transaction

Latest transaction seeks to relieve funding pressure in money markets

The Federal Reserve Bank of New York added $63.5 billion to the financial system Monday, using the market for repurchase agreements, or repo, to relieve funding pressure in money markets.

Banks asked for $63.5 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of U.S. Treasury and mortgage securities.

In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities—frequently Treasury bonds—in exchange for a short-term loan. The term of these loans can be as short as overnight.

When the Fed adds money to the financial system through the repo market, it is acting as a lender. In typical repo market transactions, lenders can include money-market mutual funds, banks or hedge funds that are seeking to earn a slightly higher rate of interest than what is available from holding very short-term government securities. The borrowers are often banks, securities firms or hedge funds that use the cash to finance positions in the market.

Banks and hedge funds borrow or lend depending on their needs and investment goals.

The Fed began offering repo loans two weeks ago after a shortage of available cash in the financial system led repo rates to climb as financial companies scrambled for overnight funding. The actions marked the first time since the financial crisis that the Fed had taken such actions.

September 2019 Manufacturing ISM® Report On Business®

New Orders, Production, and Employment Contracting

Supplier Deliveries Slowing at a Slower Rate; Backlog Contracting

Raw Materials Inventories Contracting; Customers’ Inventories Too Low

Prices Decreasing; Exports and Imports Contracting

(Tempe, Arizona) — Economic activity in the manufacturing sector contracted in September, and the overall economy grew for the 125th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The September PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. The New Orders Index registered 47.3 percent, an increase of 0.1 percentage point from the August reading of 47.2 percent. The Production Index registered 47.3 percent, a 2.2-percentage point decrease compared to the August reading of 49.5 percent. The Employment Index registered 46.3 percent, a decrease of 1.1 percentage points from the August reading of 47.4 percent. The Supplier Deliveries Index registered 51.1 percent, a 0.3-percentage point decrease from the August reading of 51.4 percent. The Inventories Index registered 46.9 percent, a decrease of 3 percentage points from the August reading of 49.9 percent. The Prices Index registered 49.7 percent, a 3.7-percentage point increase from the August reading of 46 percent. The New Export Orders Index registered 41 percent, a 2.3-percentage point decrease from the August reading of 43.3 percent. The Imports Index registered 48.1 percent, a 2.1-percentage point increase from the August reading of 46 percent.

“Comments from the panel reflect a continuing decrease in business confidence. September was the second consecutive month of PMI® contraction, at a faster rate compared to August. Demand contracted, with the New Orders Index contracting at August levels, the Customers’ Inventories Index moving toward ‘about right’ territory and the Backlog of Orders Index contracting for the fifth straight month (and at a faster rate). The New Export Orders Index continued to contract strongly, a negative impact on the New Orders Index. Consumption (measured by the Production and Employment indexes) contracted at faster rates, again primarily driven by a lack of demand, contributing negative numbers (a combined 3.3-percentage point decrease) to the PMI® calculation. Inputs — expressed as supplier deliveries, inventories and imports — were again lower in September, due to inventory tightening for the fourth straight month. This resulted in a combined 3.3-percentage point decline in the Supplier Deliveries and Inventories indexes. Imports contraction slowed. Overall, inputs indicate (1) supply chains are meeting demand and (2) companies are continuing to closely match inventories to new orders. Prices decreased for the fourth consecutive month, but at a slower rate.

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth,” says Fiore.

Of the 18 manufacturing industries, three reported growth in September: Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. The 15 industries reporting contraction in September — in the following order — are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Wood Products; Electrical Equipment, Appliances & Components; Textile Mills; Paper Products; Fabricated Metal Products; Plastics & Rubber Products; Petroleum & Coal Products; Primary Metals; Transportation Equipment; Nonmetallic Mineral Products; Machinery; Furniture & Related Products; and Computer & Electronic Products.

WHAT RESPONDENTS ARE SAYING…
  • “Second month in a row in which shipments have outpaced new orders.” (Computer & Electronic Products)
  • “Continued softening in the global automotive market. Trade-war impacts also have localized effects, particularly in select export markets. Seeing warehouses filling again after what appeared to be a short reduction of demand.” (Chemical Products)
  • “Business outlook remains cautious. Orders seem to be decreasing, but luckily not as sharp of a decrease as we were expecting.” (Transportation Equipment)
  • “Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China.” (Food, Beverage & Tobacco Products)
  • “General market is slowing even more than a normal fourth-quarter slowdown.” (Fabricated Metal Products)
  • “Demand softening on some product lines, backlogs have reduced, and dealer inventories are growing.” (Machinery)
  • “Business has been flat for us. Year-over-year growth has slowed dramatically.” (Miscellaneous Manufacturing)
  • “We have seen a reduction in sales orders and, therefore, a lower demand for products we order. We have also reduced our workforce by 10 percent.” (Plastics & Rubber Products)
  • “Incoming sales are sluggish for this time of year.” (Furniture & Related Products)
  • “Economy seems to be softening. The tariffs have caused much confusion in the industry.” (Electrical Equipment, Appliances & Components)

MANUFACTURING AT A GLANCE
SEPTEMBER 2019

Index Series Index Sep Series Index Aug Percentage Point Change Direction Rate of Change Trend* (Months)
PMI® 47.8 49.1 -1.3 Contracting Faster 2
New Orders 47.3 47.2 +0.1 Contracting Slower 2
Production 47.3 49.5 -2.2 Contracting Faster 2
Employment 46.3 47.4 -1.1 Contracting Faster 2
Supplier Deliveries 51.1 51.4 -0.3 Slowing Slower 43
Inventories 46.9 49.9 -3.0 Contracting Faster 4
Customers’ Inventories 45.5 44.9 +0.6 Too Low Slower 36
Prices 49.7 46.0 +3.7 Decreasing Slower 4
Backlog of Orders 45.1 46.3 -1.2 Contracting Faster 5
New Export Orders 41.0 43.3 -2.3 Contracting Faster 3
Imports 48.1 46.0 +2.1 Contracting Slower 3
OVERALL ECONOMY Growing Slower 125
Manufacturing Sector Contracting Faster 2
Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.
*Number of months moving in current direction.

Carl M. Birkelbach

 ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Carl does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Carl, his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com