WHERE WE ARE
Overall, the Bear’s opinion on the state of the economy is pretty damning. Although, on the whole many think it’s going okay, ticking over nicely give or take the odd slow down, we are in much worse shape than people would like to let on.
“Its like when you go to the doctor, and you say I’m not feeling sick, there’s nothing wrong with me, but still they take your blood pressure and its 180 over 110 – that’s what happening with the markets”. That is to say, on the surface everything appears okay, but delve a little deeper and the cracks begin to show.
At the moment we are entering a period of economic turbulence. The markets are reverting down, and the Bear thinks that we’re looking at that to be the new normal in 2016.
If you take a look at the S&P, he is quick to point out that it has always dropped in line with the rate of high yield spreads. HY spreads have been steadily dropping since 2014, but we’re yet to see the S&P pull in line with them – “that’s happening soon, for sure”, he tells us.
And when it comes to the bond market, the Bear has also got a prediction on where we are heading. At the moment default rates on bonds haven’t gone up, but that’s not to say that isn’t going to happen. If the S&P slides, we’ll see our fair share of companies who are losing profits in the coming few months. That’ll then cause the rate of default on government owned treasury bonds to spike sharply.
When the share of companies losing money is increased, it tells you that pretty soon the bottom line is going to catch up with the top one. And that will become visible as a sudden spike in default rates.
More worryingly, the Bear believes that if oil stays at $35 or below, then that spike could be coming as soon as the second quarter of 2016.
“And with those two charts alone, you can look and say ‘hey guys, its coming…’”
SO WHAT ABOUT WORK?
We go on to talk about the unemployment numbers, which had been in steady decline until last week when they jumped up 10,000. The general consensus is that this is just the start. People who were let go of in Q4 of last year, will have shopped around, tried to find work, and only now be showing in the figures. But those figures are going to hit a massive upswing, and its going to affect a lot of people.
“The last six, seven years, everything was going well for an electrician friend of mine. But a couple of months back it just stopped. On a dime. And now, he has to start laying off people, and put some guys to work on small things just to keep them ticking over. That story is going to be repeated all over.
“But we’re in Texas, so we’re probably feeling it more than most [at the moment]. But if energy goes down, that hurts a lot of people. It hurts transportation, it hurts agriculture, and it vibrates out… just like housing did, just like telecom did.”
So whilst oil stays low, everything else is going to be dragged down with it.
ANY GOOD NEWS?
The Bear reckons that precious metals could be the only good news story of this year. If the default rates on bonds are going up, that rules them out as a port in the storm leaving gold as the only real potential safe haven asset.
“There are strong signs that the precious metals are bottoming out, and I think that gold could go [higher] moving forward.
“In the short term the currencies are going to get hit. Gold is trading as a currency at the moment. And as a currency surrogate it is tanking. But the dollar will drop eventually. There will be more quantitative easing globally, paid off with more inflation… eventually it will be everything vs gold”.
But that could be the only success story. He thinks the jury is still out on oil, which is worrying because traditionally it would have helped. The problem is oversupply, and with “30million barrels of Iranian oil on the ocean [it] can’t help”.
It could, however, be India’s turn to shine, with the economic slowdown in China allowing the potential of India to come to fruition. Added to that, India is a beneficiary of cheap oil, so the timing could be perfect for them.
SO WHEN SHOULD WE EXPECT THE WORST?
Market action like we’ve seen this January is foretelling something. And when markets go to dramatic new lows, as we saw, but momentum doesn’t increase, well that’s the first sign that we are bottoming out.
And how long before that happens? “Well, its hard to say, but two months to six or seven months latest. We are all set up for the market to be bottoming out in Q2 or Q3 this year”.
Right when the Bear is ready to leave us, he gives us a final insight that is worth mentioning, especially when it comes to our mathematic approach to the markets. If you look at the average declines from 2011 to now, well, that’s about 38% he tells us – “almost perfect Fibonacci, if you do the math”.
Do you have an opinion you’d like to share? Do you disagree with the Bear, or do you maybe have some points to add to his argument? Either way, we love to hear from our readers, so if you want to talk to us about the markets, drop us a line and we’ll be in touch about featuring you in a future post.