Has The U.S. Economy Plunged Into A Depression?

Has The U.S. Economy Plunged Into A Depression?

“Face reality, and that means admitting that “the U.S. economy has plunged into a depression.”

This is already the worst economic downturn that America has experienced since the Great Depression of the 1930s, and we are right in the middle of the largest spike in unemployment in all of U.S. history by a very wide margin.

Of course, it was fear of COVID-19 that burst our economic bubble, and fear of this virus is going to be with us for a very long time to come.  So we need to brace ourselves for an extended economic crisis, and at this point, even Time Magazine is openly referring to this new downturn as an “economic depression”.

Needless to say, there will be a tremendous amount of debate about how deep it will eventually become, but everyone should be able to agree that our nation hasn’t seen anything like this since before World War II.

In order to prove my point, let me share the following 10 numbers with you…

#1 According to a study that was just released by the National Bureau of Economic Research, more than 100,000 U.S. businesses have already permanently shut down during this pandemic, and that represents millions of jobs that are never coming back.

#2 The Federal Reserve Bank of Atlanta is now projecting that U.S. GDP will shrink by 42.8 percent during the second quarter…

“A new GDP forecast from the Federal Reserve Bank of Atlanta for the three months through June estimates an unprecedented drop of 42.8 percent. The bank describes the data as a “nowcast” or real-time, compared with the official government report of GDP, which is dated. The first-quarter preliminary data, which showed a 4.8 percent dip, included a limited period of impact from COVID-19.”

#3 On Friday we learned that U.S. retail sales were down 16.4 percent during the month of April, and that is a new all-time record.

#4 U.S. factory output was down 13.7 percent last month, and that was the worst number ever recorded for that category.

#5 U.S. industrial production fell 11.2 percent last month, and that represented the worst number in 101 years.

#6 On Thursday, we learned that the number of Americans that have filed initial claims for unemployment benefits during this pandemic has risen by another 2.9 million, and that brings the grand total for this entire crisis to 36.5 million.  To put that number in perspective, at the lowest point of the Great Depression of the 1930s only about 15 million Americans were unemployed.

#7 According to the Federal Reserve Bank of Chicago, the real rate of unemployment in the U.S. is now 30.7 percent.

#8 According to a survey Fed officials just conducted, almost 40 percent of Americans with a household income of less than $40,000 a year say that they have lost a job during this crisis.

#9 One study has concluded that 42 percent of the job losses during this pandemic will end up being permanent.

#10 According to a professor of economics at Columbia University, the U.S. homeless population could rise by up to 45 percent by the end of this calendar year.

We have never seen economic numbers this horrifying, and more awful economic numbers are coming in the months ahead.

At this point, things are so bad that even Fed Chair Jerome Powell is openly admitting that he doesn’t really know how long this new economic downturn will last…

“This economy will recover…We’ll get through this. It may take a while. It may take a period of time. It could stretch through the end of next year,” Powell said during a rare televised interview that aired on “60 Minutes” Sunday night. “We really don’t know. We hope that it will be shorter than that, but no one really knows.”

In the months ahead, there are a few sectors that you will want to keep a particularly close eye on, and one of them is the commercial real estate market.  The following comes from Zero Hedge

“Fast forward to today, coronavirus outbreak, and the ensuing lockdown, has essentially frozen the commercial real estate market. Buildings that were once used for restaurants, offices, hotels, spas, and or anything else that is classified non-essential have seen soaring vacancies.

This is single handily sending the commercial property market into chaos. As vacancies soar, tremendous downward pressure is being put on almost every asset class tied to commercial real estate.

The latest TREPP remittance data compiled by Morgan Stanley showed a quarter of all commercial mortgage-backed securities (CMBS) could be on the verge of default.”

I am personally convinced that we are on the precipice of the greatest commercial real estate implosion in American history.

As the dominoes tumble, it is going to send wave after wave of devastation through the financial industry, and it is going to make the subprime mortgage meltdown of 2008 look like child’s play.

But at least bankruptcy lawyers will have plenty of work.  Last week we learned that J.C. Penney filed for Chapter 11 bankruptcy protection, and of course the bankruptcies that we have seen so far will just be the tip of the iceberg.

I think that politicians all over America are going to deeply regret overreacting to COVID-19, because nobody is going to be able to put the pieces back together now that our economic bubble has burst.

Sadly, very few people understood how shaky our debt-fueled economic “boom” was, and ultimately it didn’t take that much to push us into a new economic depression.

And now every additional crisis that comes along is just going to escalate our economic troubles.  This is going to be one very long nightmare, and there will be no waking up from it any time soon.

Even before COVID-19 came along, homelessness had become a massive problem in many of our major cities, and now tent cities are rapidly multiplying in size.

There is going to be so much economic pain in the months ahead, and it could have all been avoided if we had made much different choices as a nation.

But we didn’t, and so now we all get to pay the price.

Mr. Snyder wrote this article and I respect his opinion. I am not taking issue with his story, but he is a respected conservative voice in a world of noise.

So, I ask you, what if he is correct in his judgment and collapse is coming sooner than later?

Are you prepared for what is going to happen to your retirement and investment account values?

Are you sheltered from those accounts declining 40%? 50%, 60%, or more.

The Wealth Preserver Membership can protect your account from any stock market collapse. Please know that until it does collapse, your investments continue to grow as usual. 

P/E Ratio: The Over/Under Value Market Indicator

P/E Ratio: The Over/Under Value Market Indicator

In section 5 of yesterday’s post I quickly introduced an investment topic called the Shiller P/E (CAPE).

This is the most significant, proven, long-term directional indicator that has ever existed for long-term stock market direction.

It is not a daily or weekly trading system but can certainly help you know which direction the market is moving as it reaches a top or bottom.

The Shiller (CAPE) P/E Ratio is now famous, yet forgotten because most Financial Advisors either keep it under wraps or have never been taught its true power. Essentially, a high P/E means Over Priced stocks.

The chart below is the Shiller P/E Ratio dating back to 1880.

As you can see, the median P/E since 1880 is 15.77 and that is enough data to understand that historically investors over the last 140 years have recognized that a share of company stock should be roughly 16 times its earnings.

In clearer terms, if a company made $1, its share price should be $15.77.

Horrible Investor Value

Now, take a look at the chart above to view the Over Valued and Under Valued P/E Levels.

When the Shiller (CAPE) is 20 and above, stock prices are too high for a long-term buy and hold strategy. Performance will likely remain poor for up to 20 years.

Most importantly, any time the P/E rose above 20, it eventually and ALWAYS back down below 10, typically below 7, before it bottomed.

As you can see in the image below, when the Shiller P/E Ratio rises above 20, it can take many years for values to get back down. The year of the great depression brought the P/E back in line within 4 years. However, outside of great depression, it takes up to 20 years or longer to get stocks back to a fair price.

Our current period dating back to the 1999 top is still declining back to fair prices. Here’s the point: Buying the stock market when the CAPE P/E Ratio if the S&P500 index is above 20 is an immense risk of little to no return on your money.

Great Investor Value

Now, when the Shiller (CAPE) hits 10 or below, then it is an amazing time to Buy and Hold the market indexes or any stock of value. Historically, a P/E of 4 – 7 will allow you to to perform extremely well over the next 7 – 20 years. In fact, you will perform 10,000% – 30,000% or better. That is what buying at the right P/E price point will do for you.

For a little clarification, had you invested $10 in the S&P500 on January 1, 1985 (P/E ratio of 10.36), today you would have over $3,500! Not bad for timing with the Shiller P/E!

So lets look to see if this is a great time to be a Buy and Hold Investor like in 1985?

Reviewing the same chart (below) modified to include colors indicating when to invest for optimum Buy and Hold performance.

Avoid Buy & Hold investing if the Shiller P/E value is within the Red area.  This area has proven to deliver returns similar to bank accounts if you deduct inflation from the return. Not good.

However, if the Shiller P/E ratio value is within the Green area, you can buy the S&P 500 Index and make significant long term returns.

Great Investor Value

Now, when the Shiller (CAPE) hits 10 or below, then it is an amazing time to Buy and Hold the market indexes or any stock of value. Historically, a P/E of 4-7 will allow you to to perform extremely well over the next 7 – 20 years. In fact, you will perform 10,000% – 30,000% or better. That is what buying at the right P/E price point will do for you.

For a little clarification, had you invested $10 in the S&P500 on January 1, 1985 (P/E ratio of 10.36), today you would have over $3,500! Not bad for timing with the Shiller P/E!

So lets look to see if this is a great time to be a Buy and Hold Investor like in 1985?

Reviewing the same chart (below) modified to include colors indicating when to invest for optimum Buy and Hold performance.

Avoid Buy & Hold investing if the Shiller P/E value is within the Red area.  This area has proven to deliver returns similar to bank accounts if you deduct inflation from the return. Not good.

However, if the Shiller P/E ratio value is within the Green area, you can buy the S&P 500 Index and make significant long term returns.

The point of this entire article is to let compare where we are today relative to 140 years of real data. 

Significantly, every single time there “was a significant crash or two” associated with the decline back to value. Here is reality:

At a Shiller P/E Ratio of 26.97, we are not nearly as high as 44 in 1999. But, just to get back to a normal Shiller P/E bottoming area below 10, the stock market will have to drop by 62% from here!

27 – 10 = 17

17 / 27 = -62% 

If you are a Buy & Hold Investor, you should know that based on history dating back to 1880, you are NOT  positioned for strong buy and hold returns. In fact, you are dreadfully positioned right now though 2032. 

Can you afford a 45%-60% decline back to value. Its progressing to that as you read this historical lesson.

You must find a strong, well proven, historically accurate system that allows you to invest when the markets are moving up, on the sideline when the markets head down, and back in when they head up again.

You will do vastly better that Buy & Hold if own a Monthly, Weekly, or Daily professional trade signal platform that will help guide you through the next 20 years. Your membership will put you light years ahead of everyone else who is Buying and Holding at precisely the wrong time as history has proven.

We will help get you to where you want starting today following simple Green and Red lights.

The P/E Ratio Is Screaming At You

The P/E Ratio Is Screaming At You

The P/E Ratio Is Screaming At You so today I am laying the groundwork for tomorrows post. So lets get started and learn about the P/E Ratio.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. P/E ratios are used by investors and analysts to help determine the relative value of a company’s shares in an apples-to-apples comparison.

It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time. The ubiquitous P/E ratio is typically the first metric investors learn on their journey towards financial freedom.

One of the biggest mistakes I see new investors make is their use of the P/E ratio because the P/E ratio has some significant drawbacks that you should be aware of before we teach you the profitable and proven benefits of this indicator.

Today, lets cover 5 points the ratio will not teach us and tomorrow we will learn precisely how it can tell us which direction the markets are going shortly. 

What the P/E Ratio Teaches us is vitally important so first we have to quickly learn what it does not teach us. 

1. Price is not a good measure for what a company is worth

The first issue with the P/E ratio is the ‘P’ part of the formula. Typically, the ‘P’ stands for the share PRICE which corresponds to the market capitalization of the company. But there’s a problem with using only market capitalization. Market cap only represents the contribution of equity shareholders. Which means it doesn’t include any debt or cash on the balance sheet.

If you want to know the true worth of a company surely you need to include debt and cash? To do so, it’s better to use an alternative such as enterprise value which is the market cap, plus total debt, minus cash. Often, the market cap of a company will be similar to the enterprise value but sometimes it can be vastly different. GE, for example, has a market cap of over $52 billion but it’s enterprise value is more than double that at $111 billion. If you use market cap you get a lower P/E ratio than if you used the enterprise value. So by substituting market cap with enterprise value the formula immediately becomes more useful.

2. EPS is not a good measure of company earnings

Just like the ‘P’ in ‘P/E’ is inadequate, the ‘E’ part of the formula is also misleading. Typically, the ‘E’ represents earnings per share which is usually reported as the trailing twelve month EPS or in other words the net profit over the last 12 months.

The problem here is that EPS or net profit contains many different components and is therefore not necessarily a good indication of the real profitability of a company. For example, net profit is reported after accounting procedures such as depreciation and amortization.

These techniques are often used to massage the books, by inflating profits and pushing out losses. On top of that, net profit may include interest and tax payments, both of which are individual to the company and not necessarily useful for observing what profit a business is actually making.

So instead of using EPS or net profit, a better option is to use EBITDA which stands for earnings before interest, taxes, depreciation and amortisation. In other words, it is the true earnings before all those components have made their mark. And so, instead of using the trusted P/E, which is market cap divided by EPS you can see it’s better to use a more comprehensive formula such as enterprise value divided by EBITDA.

3. P/E ratios are lagging metrics

Now we’ve looked at the limitations of the formula, you should understand that P/E ratios (like most financial metrics) are inherently misleading because they are lagging metrics. To put it plainly, when you plug in the earnings part of the formula you are typically using past data, typically the trailing 12 month EPS (or EBITDA).

Clearly, the problem with this is that the last 12 months of earnings are not necessarily predictive of the next 12 months. For example, consider a company that has a market cap of $1 billion and in the last twelve months reported net profit of $100 million. That would give it a P/E ratio of 10 which historically would make it cheap and an attractive buy.

But consider that the last 12 months were, in fact, a stand out year for the company based on a series of unusual economic events unlikely to occur again. And in fact, the company usually makes only $20 million a year, not $100 million. With a net profit of only $20 million, the P/E ratio would be 50 which is historically a high and unattractive multiple.

In other words, the stock is priced at 10 times last year’s earnings but 50 times next year’s earnings. The stock either needs to decline in price to bring the P/E back to a more realistic level or it needs to grow its earnings in line with last year’s stand-out numbers.

Either way, you can see that buying the stock based on last year’s earnings is a flawed strategy because it doesn’t consider future earnings or the historical earnings average.

4. P/E cannot be used for unprofitable companies

Divide any number by a negative and you end up with another negative. And so is the problem when using the P/E ratio for any company that reports negative earnings (of which there are many!). Consider, for example, the market cap for Uber which is currently $56 billion. And consider the latest 12-month EBITDA which was -$8.2 billion. 56 divided by -8.2 results in a P/E ratio of -6.8. So if low P/E ratios are good then Uber must be outrageously cheap.

But of course, we know it isn’t because the negative P/E doesn’t tell us anything. All it tells us is this company hasn’t reported any profit in the last 12 months. In other words, the P/E ratio for any unprofitable company is meaningless, except perhaps to say that this is a stock that may not provide any return unless it can soon get itself profitable. In a similar vein, the P/E ratio has limited ability when used to compare across industries.

Low growth industries such as conglomerates or utilities typically command lower P/Es which cannot be compared to other industries such as tech stocks which often have high P/Es or negative P/Es. Essentially, the P/E ratio is limited in its ability whenever the main consideration is growth or profitability.  

5. The Shiller P/E Ratio

The cyclically-adjusted price-to-earnings (CAPE) ratio of a stock market is one of the standard metrics used to evaluate whether a market is overvalued, undervalued, or fairly-valued.

This metric was developed by Robert Shiller and popularized during the Dotcom Bubble when he proved (correctly) that equities were highly overvalued. For that reason, it’s also casually referred to as the “Shiller PE”, meaning the Shiller variant of the typical price-to-earnings (P/E) ratio of stock.

It’s most commonly applied to the S&P 500, but can be and is applied to any stock index. The main benefit is that it is one of several broad valuation metrics that can help you determine how much of your portfolio should reasonably be invested into equities based on the current relationship between the price you pay for them and the value you get in return in the form of earnings.

Robert Shiller demonstrated using 130 years of backtested data that the returns of the S&P 500 over the next 20 years are strongly inversely correlated with the CAPE ratio at any given time.

In other words, whenever the CAPE ratio of the market is high, it means stocks are overvalued, and returns over the next 20 years will likely be poor. In contrast, whenever the ratio is low, it means the stocks are undervalued, and returns over the next 20 years will likely be good.

Are we under, over, of fairly valued in May 2020?

In tomorrows post we will analyze precisely where we are valued as a market and how InterAnalyst can help you maximize your portfolio growth now.

 

Here’s When The Bear Market Rally Ends

Here’s When The Bear Market Rally Ends

This Bear Market Rally is still not complete but should be shortly and Here’s When The Bear Market Rally Ends.

We are actually still in a bear market rally with today clearly being another ‘green’ day, it is likely the rally will continue until the herd jumps in again.

It is not uncommon what-so-ever to re-touch near a 50% level during voracious bear markets, however, at this point you can actually argue the market is more over-valued now given the environment than when the Standard & Poor’s was near 3400 ironically enough.

The markets are already trying to price in a possible slowdown in the COVID-19 pandemic. But, even if the Pandemic miraculously disappeared today, the massive economic shock won’t disappear anytime soon.

Major indices all over the world have already plummeted into Bear Territories and the recent rally is simply a correction. In fact, if you look at previous bear markets, you will find plenty of temporary Bullish rallies within the larger Bearish move.

So, do not get emotionally carried away by the bull run right now. Shortly, we will be dealing with bad economic data, a bigger than 2008 recession (likel):
  • Falling Output. Less will be produced leading to lower real GDP and lower average incomes. Wages tend to rise much more slowly or not at all.
  • Unemployment. The biggest problem of a recession is a rise in cyclical unemployment. Because firms produce less, they demand fewer workers leading to a rise in unemployment.
  • Higher Government Borrowing. In a recession, government finances tend to deteriorate. People pay fewer taxes because of higher unemployment and they need to spend more on unemployment benefits. This deterioration in government finances can cause markets to be worried about levels of government borrowing leading to higher interest rate costs. This rise in bond yields may put pressure on governments to reduce budget deficits through spending cuts and tax rises. This can make the recession worse and more difficult to get out of. This was particularly a problem for many Eurozone economies in the aftermath of 2009 recession.
  • Hysteresis. This is the argument that a rise in temporary (cyclical) unemployment can translate into higher structural (long-term) unemployment. hysteresis
  • Falling asset prices. In a recession, there is less demand for buying fixed assets such as housing. Falling house prices can aggravate the fall in consumer spending and also increase bank losses. This fall in asset prices is particularly a feature of a balance sheet recession (e.g. 2009-10) recession.
  • Falling share prices. Lower profits lead to lower levels of share prices.
  • Social problems related to rising unemployment, e.g. higher rates of social exclusion.
  • Increased inequality. A recession tends to aggravate income inequality and relative poverty. In particular, unemployment (relying on unemployment benefits) is one of the largest causes of relative poverty.
  • Rise in Protectionism. In response to a global downturn, countries are often encouraged to respond with protectionist measures (e.g. raising import duties). This leads to retaliation and a general decline in trade which has adverse effects.

These factors are not at the top of the news yet cycle right now. But I assure you that when the Corona-Virus takes a back seat to the Presidential Election, the reality will set in and we will witness a new test of the bottom.

So, such rallies as the one we are seeing now will be sold aggressively and markets will plummet into fresh lows. Until a 50%-55% drop has happened, we can’t start thinking about bottom formation.

Conservative investors should continue to follow the Wealth Preserver signals as is proven historically, the signals will protect you from every market crash that matters.

As for Daily and Weekly traders, they should follow their Wealth Maximizer and Maximizer Pro signals according to the Pro’s 5 Minute Secret.

Another Leg Down?

Another Leg Down?

We have seen a hefty relief rally but does Another Leg Down loom? For those who are Wealth Maximizer Pro members, you have caught the nice profitable rally, contratulations.

I am seeing some “disturbing” signs that the market is very close to re-testing the lows that we previously have made, or, will it form another leg down loom?.

At the very least, it is 98% certain we will come to test the lows around 2250 at any moment in time. It is possible that we have another final leg down, and I believe that we likely will.

It is important for you to remain patient instead of panic buying and falling into bull trap.

During this last leg down, simultaneously, Gold and Silver will likely sell-off for liquidity reasons. People are now and will continue to liquidate their hidden savings.

Here’s why we know that the last leg down is coming:

The VIX remains incredibly elevated (60+) despite big pops in the markets and has not subsided. This tells you another sell-off is looming. Whats more, it’s supported by many other technical and fundamental factors.

For the market to continue up and ignore these factors would be unprecedented.

Prepare for another drop to the eventual bottom.

Crono-Crash & The Slingshot

Crono-Crash & The Slingshot

Livio,

I exited with the Wealth Preserver on the on March 2nd.  The last couple of bullish days brought to mind the Slingshot, are we there and have we missed the first 2 days. In your recent Celente video post you mentioned we’re entering into a global depression which may be even worse than the Great Depression.

Before all that happens is it possible we see DOW tumble another 5K-10K?

There seems to be an incredible amount of liquidating-at-all-costs mentality at the moment. I worked on an equity desk during the 2008 crisis, and currently at a very small non-bank FX dealing desk and have never seen anything like this. Your feedback is always appreciated.

Thanks,
Victor

“Great Question Victor.

The simple answer is NO.

The worst-case scenario appears to be testing the reversal technical line in the 15,000 level and do not see a drop to 5-10K. That is way too far for a slingshot. 

I see the slingshot build and breakout to new highs by 2023.

However, let’s tale a look at history to guide us on recovery times with similar drops to our current CronoCrash. 

Look at the two charts below.

What you see is that it took 65 months from the 2007-2009 Crash to get back to even.

The 1987 Crash appears to be a likely type of pattern from a timing perspective to our current Crono-Crash. That was a 53% decline and took 24 months to break even.

The 2000 -2003 Bear Market was a 3 year 54% decline and took 81 months to break even. 

If we were to fall on par with those declines, we would be looking at a drop to the mid-15000 level.

Because InterAnalyst members s stepped aside (red signals)  for most of the Corona-Crash, they will miss all those months of recovery just to get back to even.

More importantly, while everyone else is back to even, those who stepped aside will be 100% – 400% ahead of those buy and hold investors who did not step aside of the Corona-Crash.

As for the future, when we get back in (green signal) we could reach the test of just below the 40,000 level happening in 2024.

The January Effect

The January Effect

The January effect describes the tendency for small cap stocks to outperform large cap stocks during the month of January.

This is a well known anomaly that has been discussed in numerous journals and research papers going back as far as 1942 by Sidney Wachtel.

Another study, by Rozeff and Kinney, looked at data between 1904-1974 and found that market returns were as much as five times greater in January than any other month.

Numerous studies have been done since then with differing opinions over the effectiveness of the strategy in recent times.

Some academics suggest that the effect has dwindled in recent years as more investors have become aware of the anomaly.

Others (such as Ziemba) suggest the anomaly has simply moved to December.

As more people become aware of a market anomaly it’s logical that more investors try to anticipate the trade and it either shifts to an earlier time or is arbitraged out.

Explanation

Possible explanations for this anomaly are tax loss harvesting, window dressing (accounting) and investor psychology.

stock market anomalies january effect

Strategy:

You can capitalize on this anomaly by going long a basket of small cap stocks and simultaneously shorting a basket of large cap stocks during the month of January.

This can be achieved with E-Mini futures or ETFs. You may want to initiate the trade at the end of December as the effect seem to gets earlier and earlier each year.

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