Juggling Dynamite

Nomi Prins has penned a worthwhile summary of current policies, perpetrators and the financial costs mounting in How to set the economy on fire:  Trump’s financial arsonists. Of course, the self-serving financial cartel has been the status quo running us into insolvency long before Trump, but his ‘team’ of banksters are garish indeed:

Nearly every regulatory institution in Trumpville tasked with monitoring the financial system is now run by someone who once profited from bending or breaking its rules. Historically, severe financial crises tend to erupt after periods of lax oversight and loose banking regulations. By filling America’s key institutions with representatives of just such negligence, Trump has effectively hired a team of financial arsonists.

Naturally, Wall Street views Trump’s chosen ones with glee. Amid the present financial euphoria of the stock market, big bank stock prices have soared.  But one thing is certain: when the next crisis comes, it will leave the last meltdown in the shade because our financial system is, at its core, unreformed and without adult supervision. Banks not only remain too big to fail but are still growing, while this government pushes policies guaranteed to put us all at risk again.

There’s a pattern to this: first, there’s a crash; then comes a period of remorse and talk of reform; and eventually comes the great forgetting. As time passes, markets rise, greed becomes good, and Wall Street begins to champion more deregulation. The government attracts deregulatory enthusiasts and then, of course, there’s another crash, millions suffer, and remorse returns.

Ominously, we’re now in the deregulation stage following the bull run. We know what comes next, just not when. Count on one thing: it won’t be pretty.

Further to my recent article ‘Bond bear due for hibernation in 2018?’, my partner Cory Venable has prepared this insightful chart of 10-year US Treasury yield cycles since 1993.

While the overall trend has been lower (solid purple line) throughout, the latter part of each economic expansion(red arrows) has culminated in stock market euphoria and a consensus expectation for rising inflation and interest rate hikes.  This has prompted Treasury bonds to be sold and their yields to jump 65%, 72%, and most recently 106%, before higher interest costs–across the credit spectrum–affect abrupt monetary tightening on a heavily indebted world.  Lower disposable cash flows force spending to falter, job losses, defaults, a liquidity crunch, and the economy to weaken.

At that point the cumulative weight of debt–which has risen higher and higher each cycle–magnifies the financial stress, intensifies the slowdown, and prompts a rush back to the most liquid ‘safe haven’ assets like treasuries, pushing their prices up and yields lower again, while risky assets are liquidated.  Rinse and repeat.

Yields may rise a bit further this time (back to resistance purple line above?), but the pieces are already in place for the next cash crunch phase any day here.

Further to my points in Fun with S&P 500 snakes and ladders, Lance Roberts offered similar evidence yesterday in You should never time the market? and the below chart of  the real S&P 500 total return, over complete secular bull and bear cycles since 1900.

The time noted each cycle (dotted green horizontal lines), is the time it took for markets to recover their losses and return to prior, leverage soaked, secular peaks: 26, 29, 23 years, and the most recent– not yet finished cycle–16 years from 2000-2016. We won’t actually know how many more years full recovery will take in our present cycle, until we have bottomed once more in the next bear market and then counted the years thereafter that it takes to make back the year 2000 price peak.  Who can afford to spend decades just waiting for their capital to make back losses–financially or emotionally? Working to 100 are we?

Lance offers the bottom line: “Markets spend about 95% of their time making up previous losses and the time lost getting there can’t be recovered.”

MOREOVER,  as I have explained, the above chart of total returns over previous secular cycles actually greatly overstates the real life experience of investors, because total return numbers assume no withdrawals are ever made for fees or taxes, pension distributions or ‘living on your dividend income’–no, total return numbers assume that every dividend is fully reinvested in more shares every single quarter, forever.  No lump sums are ever assumed added near tops, and no panicked selling near bottoms.

In short, the above noted decade+ of zero returns are actually a best fantasy-case scenario from present levels.  Buy and holders beware.  Patiently preserving liquidity now, so as to be able to buy income producing assets at the next cyclical bottom clearance sale though? That will finally be ‘investing’ once more.