Parsing Out Dystopia: Part Two - The Stock Markets

The Great Virus Retraction.  From 29,000 to 20,000 in a matter of days.  An enormous wipe out of wealth.  A good rally today.  As you can see, there is a battle on for the 22,000 support level.  Can the markets hold?

The longest bull market in history ended last week with the fastest decline into bear market territory since the Great Depression.  The major culprit was (and remains) COVID-19 but there were other factors too.  The News media is in such a frenzy about the 200,000 virus sufferers (and the possible spike in future cases, of course) that you don't get to hear much about what's happening to the other 7.5 billion humans out there.

The Russian-Saudi oil war plays some role in the market crash as well.  Oil is now worth about 1/3 of what it was just a few years ago.  "Cheap credit" and the resulting massive consumer debt is another, actually even more fundamental, factor.  In fact, the dramatic collapse in oil prices and the record amount of worldwide debt (consumer, corporate, and government) would probably have eventually caused a market correction anyway, although it likely would not have happened in the "over-the-cliff" fashion that we saw last week.  

As I mentioned in a 2019 post, I thought something like this (albeit not as drastic) would happen later in 2020, with a full-blown recession in 2021 - regardless of who is president.  We are not in a recession yet.  So it still may not happen until next year.  But the "virus crash" could accelerate everything, despite the fact that the Trump administration does not see a recession in the near future.  (Of course not.  That might harm his chances for re-election.  In fact, Trump has downplayed the reality of things from the beginning.)

The markets (Dow Industrials, S&P 500, Nasdaq) are not reflections of past or present activity so much as projections of the future, or, better put, a gambling bet.  The markets are tanking not because everything is going to hell economically in America or globally, but because the chances increased that it might go to hell.

Here are a list of historic "firsts" for this sudden bear market as appear in an article on MarketWatch.com:

• The S&P fell from its 52-week high to its 52-week low in less than three weeks.

• The Bloomberg Barclays U.S. Corporate Bond Index lost more than 7% in a week.

• The New York Stock Exchange suffered its most intense cluster of 90% down days (where 90% or more of NYSE-traded stocks closed lower for the day).

• S&P 500 (cash and futures) hit the circuit breaker and triggered a trading halt four times within a few days.

75% of all stocks are at their 52-week low right now.  One thing about panic selling, which is what we are seeing now, is that the wilder it gets the greater the buying opportunity it creates.  From a Technical Analysis perspective, the Dow has fallen too far, too fast and gotten too far away from the 200-day Moving Average.  Generally speaking, the further away a market gets from the 200-day MA (up or down), the sharper the snapback toward that moving average. Theoretically, we should expect some sort of aggressive return toward that average whenever this crash ends.  As you can tell from the chart above we are about 6,000 points under the average so an abrupt return to it might be in order. 

When might we see that?  According to this excellent article written by John Mauldin in Forbes yesterday: "Dr. Mike Roizen, chief wellness officer at the Cleveland Clinic, thinks there is an 80% chance that by the end of April we will have seen the total number of cases peak and begin declining, and that the coronavirus is like its predecessors." Mauldin writes that he is personally waiting for "peak panic" to start buying dividend paying stocks.

If we have to wait another 6 weeks for the "snapback" to start (assuming past experience is still relevant in this market) it will likely be very aggressive because the distance between the 200-day MA and the Dow (or any other index) could be even further then than its current historic point today.  The Dow has never been 6,000 points away from its 200-day MA.  Ever. 

Percentage-wise is another story so far.  The 1987 crash happened in a single day - down 22% in one day, still a record.  The 1929 crash lost 23% in two days and a jaw-dropping 89% (!) in less than three years.  Overall, this crash has lost over 30% so far.  That gives you some idea of what we just experienced.  It's wild!

The graphic at the top shows you what happened the past six months up through today.  Let's broaden our view and look at the Dow over the last three years...

The Trump Dow.  It started out like a rocket and then has struggled though steadily gaining altitude until...crash!  As you can see, it has crashed through its previous lowest low, a bear market confirmation in Dow Theory terms.  From a Technical Analysis perspective, the MACD is ridiculously negative, way over-extended.  More than it has been for beyond these past three years.  But the RSI and the Slow Stochastics are not singling "buy" yet.  It will be interesting (and a real sign of strength) if the Dow rallies back up to 22,000.   

Morgan Stanley believes a snapback might be in order and that it might be time to add some stock risk for "longer term investors."  Basically, some stocks are at great values right now even though their price might fall some more.  I think I'll take Mauldin's advice over Morgan Stanley but your mileage may vary.

I'll wait.  The near future is hard to predict because we don't know how the virus and the oil war and the debt problem will play out.  The debt is the biggest problem financially speaking.  COVID-19 will eventually be brought under control (hopefully) but no one has been doing anything about government, corporate and individual debt which has skyrocketed since I wrote about the $10,000,000,000,000 government debt back in 2009.  

What about my old friend Dow Theory?  This article today mentions Richard Russell, the investment guru that got me into gold many years ago and advised me so well during the Great Recession.  Russell is no longer with us and I can't help wondering what he'd have to say about all this.  He would likely talk about his concern with the 200-day MA, the debt, gold, the significance of 90% down days, and buying stocks when they are great values.  If John Mauldin is correct, those values are a few weeks away yet.  

As far as Dow Theory itself, the second graphic shows that we have broken through the previous lowest lows set in May 2019 and December 2018.  That is a clear sell signal.  My personal opinion is that this historic bull market has run too hot for too long and we were due a correction anyway.  The coronavirus has turned that correction into a crash.  We will have to wait and see where the new support level will be.  Again, we are likely a few weeks away from that.

Is a recession inevitable?  Yes, there will be a recession but no one knows when.  The US economy was going strong before Trump took office and it remains strong.  But the combination of the pandemic, the oil war, and the looming debt crisis almost no one is talking about will ultimately prove to be too much.  Again, I still see a recession by 2021 if not sooner.

This article from Seeking Alpha, another investment site I follow, remains somewhat bullish in spite of everything.  The author takes a "big picture" view that this bull market trend started in 2009 and points out that that trend line sits at around 22,000 for the Dow.  His perspective is interesting and we should keep the larger perspective in mind as we address the immediate carnage.  There is a battle going on for this 22,000 support level in the Dow.  

That level is now broken.  After crashing through that support level, the Dow rallied today and closed at 21,237.  On February 21 the Dow was over 29,000.  As I said, that's more than a 30% loss.  Some stocks did better, of course.  Many did worse.  Everyone, including me, has lost money.

So far, I have taken the advice of an article I read in the The Atlantic.  Do nothing.  Like everyone else, I am losing a lot of money (on paper) right now.  But, on the bright side for me, I'm 75% in cash.  Which makes any possible buying opportunity more attractive.   Short-term.  A couple of years at most.  The snapback should be fairly aggressive so its a realistic time-frame to make some money.

I don't want my money tied up too long, however.  That's because there is a problem confronting us that is greater than the virus.  Namely, servicing a entire world swimming in debt.

This problem will begin to hit the global economy before this decade is out.  There is no bigger problem confronting the future of the US and global economies than the monsterous debt we created for ourselves.  This is quite obviously a dystopian landscape - where vicious, uncontrolled viruses are nothing compared to the financial damage humans are doing to themselves. 

In economic terms it is all going to be about debt.  When the virus has done whatever it is going to do, soon thereafter it is all going to be about the debt.  Why?  Because, as John Mauldin says in this great free report, in dystopia the traditional "business cycle" is dead.  We no longer have them.  Instead, we have credit cycles.

And the current credit cycle is in an almost unimaginable bubble.  If you add it all up, the world's consumers, businesses, and governments are in the hundreds of trillions of dollars of debt and commitments, vastly greater than global GDP.  I've never thought of anything in the hundreds of trillions before.  This is new to me.  It's mind-blogging how much the world is in debt.  Within 20 years every penny the US government spends will go to Social Security, healthcare, and interest on the epic debt itself.  Every.  Single.  Penny.

There will be no money for defense.  There will be no money for parks or pollution control or to even pay government employees.  Of course, they will have to be paid something and parks will have to be open.  We can't imagine life any other way as a people.  How will that happen?  We will simply continue going into more and more debt.

Until the bubble bursts...this will be far more serious than the virus, it will hit virtually everyone without exception.  It will wipe out everything on the balance sheets of the world. Wealth will disappear.  Almost everyone will be worth less than they are today.  This is our dystopian economic future. 

And it gets worse.  Technology will take away tens of millions of American jobs in the next 10-15 years.  Fewer workers is a problem because our whole economy is based on workers buying things.  Yet, that is only one side of the equation.  The other is that fewer workers will be paying in to Social Security, making funding that program even more difficult.

Can you imagine any politician saying we should eliminate Social Security today?  They wouldn't be taken seriously.  Yet, undeniably, Social Security and healthcare will bankrupt this debtor nation in my lifetime.  I fear I will suffer for it but, hey, what am I going to do?  It's not like I have any control over this stuff.  Roll with it.  That's my dystopian motto:  "Just roll with it."

There are some useful strategies that you can implement right now to mitigate the damage and increase your wealth; timing certain ETF's and leveraging your liquidity, if you have any, are both examples.  Buying dividend paying stocks at bargain prices is another.  Everything is being hammered so there should be some nice ones to pick up sometimes soon.  

Those who know what they are doing and aren't terrified by the world can cushion themselves against the many consequences of this inevitable collapse of debt.  Mauldin is basically my financial guru now since Russell died.  He offers specifics about investing in the credit cycle economy.

Mauldin, who has always been a calm voice of reason, surprisingly writes: "As we get into the 2020s, the presidency and Congress will again be whipsawed, and we will begin to discuss Bernie Sanders’ “crazy” universal basic employment idea, or others like it. By then, the idea will not be considered crazy, but the only feasible choice." Got that?  We will see this in the next few years not decades from now.  The reckoning is upon us.

The dystopian world is a volatile place.  Things can go up and down dramatically.  It could take years to reach a certain point and then, suddenly, it erupts in another direction with greater force than expected.  Given enough time, humans will always be surprised by how things turn out. 

There is an unavoidable risk that has to be taken if you are to live the comfortable life, the life of ease where you are left only to deal with your intimate human drama.  I've been lucky enough to live through a couple of incredible bull markets and to be able to invest in them without any debt.

I continue to hold a large interest in gold.  I am uneasy about it.  Investing is always troubling though.  The greatest bull market in history apparently, suddenly, just ended.  If that is true, then we are in some sort of bear market situation.  Gold usually does very well in those scenarios.  But, actually that's not what has happened so far.

The Federal Reserve has been extremely proactive recently.  Two weeks ago it cut the key interest rate 50 basis points, driving back down toward where it was coming out of the Great Recession.  Last Thursday the Fed agreed to inject, if necessary, up to $1.5 trillion (!) into the banking industry.  Then yesterday, unexpectedly, the Fed went even further by dropping interest rates to zero. This is extraordinary, perhaps unprecedented, action over just a few days' time.  

Usually that sort of stuff gets a big rise out of gold.  But, so far, gold has dropped more than $150 an ounce since all this started.  It has held up better than the stock markets and certainly better than oil but, right now, everything is down.  The fact gold is tanking in spite of the Fed's moves indicates what you and I already know, this crash is more about COVID-19 than about financial matters like the debt even though, as I have said, the debt is a part of the downturn.

Eventually, this virus will be brought under control.  The debt will remain.  In fact, it will grow larger.  The Fed actions will have lasting effects.  Gold should do better whenever that situation arrives.  My bet, as it has been for years, is that gold will do fine.  

Bottom line: the stock market crash will present a great buying opportunity soon.  After the virus situation has played out (it could be a few weeks or a couple of years), the debt problem will remain and it will weigh more heavily than ever before.  COVID-19 seems like dystopia today but the debt is our dystopian future.  The virus might change some things but the debt will likely be the end of the the world as we know it.

Note: As always, please remember that nobody knows what is going to happen.  You have to take the best information you can find (not necessarily here for sure!) and place your bets.