The Morning Line
[The following went out last month to clients of my friend Doug Behnfield, a wealth management advisor and senior vice president at Morgan Stanley in Boulder CO. Like your editor, he is skeptical that consumer inflation can persist for long with the U.S. economy in recession and a bear market in progress. Deflation is coming, he says, along with a further decline in stocks of at least 20% from early July’s lows. Doug has been recommending long-dated Treasurys both as a defensive investment and for potential long-term capital gains from falling interest rates. RA]
On January 11, 1987, the Denver Broncos played their last playoff game of the season at the Cleveland Browns. It was rainy and muddy. With 5 minutes left to play, the Broncos had the ball on the two-yard line after a muffed kickoff return and the score was 13-20, Cleveland. Legend has it that as the huddle was called on the two, ProBowler and offensive lineman Keith Bishop said to the team; “We got ‘em right where we want ‘em!” Through a series of runs and passes, sacks and scrambles, John Elway led his team 98 yards to score a touch-down to tie the game. The Denver Broncos won in overtime and went on to the championship game.
The first half of 2022 is characterized by a bear market in stocks with the S&P 500 down 20.58% and the NASDAQ down 29.51%. While shorter maturity bonds were down much less, the longest duration Treasury and municipal bonds were just as bad as stocks. The Index of long Treasury Strips was down 27.90%1 and the CEF Connect Index of National Leveraged closed-end Municipal Bond Funds was down 20.1%2 . Here, at the end of the first half of 2022, we are staring at the worst start to a year for stocks and bonds in decades. We got ‘em right where we want ’em.
Supply Shocks Could Fade
The combination of a loss of upward price momentum and very disappointing economic data are the primary causes of the stock market decline. Unexpected CPI inflation and a powerful pivot toward rate hikes by the Fed are the primary cause of the rising bond rates and resulting price drops, but the prospect of Fed hikes and rising interest rates across the yield curve hurt stocks too. Under normal circumstances, recessionary economic conditions and a bear market do not coincide with growing inflation for very long. The oil price shock in 2008 ended halfway through the Great Recession and in the process, CPI inflation reversed from 5.6% in July of 2008 to -2.1% (deflation) in July of 2009 . In this case, the increase in inflation has not only been long, but steep and broad as well. Because the current price increases have occurred globally and are almost entirely attributable to supply shocks, they could fade quickly. The Fed’s hawkishness has already had a severe negative impact on demand for housing, autos and discretionary consumer goods in general. David Rosenberg characterized the current environment and likelihood of a recession this year as follows:
“This is as close to a slam dunk call as there is — and the fact that the Fed is pushing back hard, in fact, with a 4%+ real GDP growth view for the second half of the year, is actually pretty scary. Then again, going back to every recession since 1970, not once did the Fed economics staff see a recession — even when the downturn began the very next month. The spending intentions numbers were simply horrible in the UMich report. Auto-buying plans dropped to an all-time low, and for homes, plans are the weakest they have been since July 1982. The overall “buying conditions” index sank to its lowest level ever — the “good time to buy” a big-ticket durable is down to the November 1952 reading.”
From Inflation to Recession
There is plenty of evidence that the narrative on Wall Street is changing from Inflation to Recession. Along with it, supply bottlenecks are easing and the price of commodities such as metals, grains, lumber, oil and natural gas appear to be rolling over. Higher mortgage rates and record high home prices have ground the housing market to a halt, just as over a million rental units are scheduled for completion in the next months. If weakness in the economy (that appears to be leading to recession) should continue, the result may be similar to 2008-2009, i.e., deflation and lower interest rates. In the meantime, because of very disappointing consumer spending data, the Atlanta Fed, who had just reduced their estimate of the just-completed second quarter from 0.3% to -1.0% on June 30, has sliced it to -2.1% on July 15 . This is a very steep, negative trajectory for the economy.
Mike Wilson, Morgan Stanley’s Chief Investment Officer, is anticipating that we will be in recession as the year draws to a close and if so, the stock market is vulnerable to at least an additional 20% stock market decline from current levels. He also states that, under these circumstances, long-duration Treasury bonds should be added to portfolios, even as equity exposure should become much more defensive. He has been remarkably prescient, particularly since the markets started becoming much more difficult last fall.
As in most cases, Bob Farrell’s observation that “It’s the market that makes the news, not the news that makes the market”, applies to our current environment. We have seen continuing deterioration in stock prices and the counter-trend rallies are becoming less significant. On the other hand, it appears that a meaningful trend change has occurred in bond yields and prices. Note that the solid line in the following charts is the 50-day moving average. It is widely followed in technical analysis as an intermediate trend indicator. The 50-day moving average for bond yields had been up since Christmas but has recently reversed down in somewhat dramatic fashion. The S&P 500 is firmly entrenched in its downtrend that began at the beginning of the year.
Lowering Fed Expectations
Needless to say, unlike football, investing is not a game. The first half of 2022 has been brutal for the performance of both stocks and long-term bonds. It really does appear that the tide has turned and the risk of recession is beginning to dominate the narrative in the investment community, even as the weight of the evidence is less supportive of continuing high inflation readings. Commensurate with the weak economic data that has been seeping in and the bond market rally since mid-June, expectations for further Fed rate hikes have been pared back substantially. Even as Fed hike expectations have been coming down, expectations for cuts have moved up on the calendar.
This change in Fed expectations from 4.0% down to 3.25% (.75% decline) on the Fed Funds rate has been accompanied by a .70% decline in the 10-year Treasury bond yield and .46% decline in the 30 year Treasury bond yield. At this point in time, the weight of the evidence (while still a bit muddy) points to lower interest rates and a continuing rally in long-duration bond prices.
Last week’s price action served to remind us that big rallies and even entire bull markets are driven mainly by short covering. This doesn’t happen by accident; Wall Street’s quasi-criminal masterminds set short squeezes in motion using news as a catalyst. The booby traps they employ are more or less predictable, but they succeed anyway because DaBoyz can count on short-covering bears to panic every time under certain conditions. On Friday morning, for instance, in the wake of a 75-basis-point rate hike by the Fed, trade-desk capos jockeyed index futures into position so that a tough resistance that had thwarted them a day earlier and overnight could be dynamited into oblivion.
The chart shows more than 14 hour of head-butting at a 4109.25 ‘hidden resistance’ I’d disseminated to subscribers a day earlier. The target had worked precisely, allowing them to jump on the trend. Some reported exploiting it in two ways: 1) getting long for the ride to it; and 2) getting short when it was hit. This could have produced a profit of as much as $1,400 per contract. However, profiting from a short at the top would have required waiting until an hour prior to the opening bell, since that’s when the Street’s lieutenants began to work their carnival midway illusions.
How to Exhaust Sellers
It was a piece of cake, since they’ve been practicing ever since the Grandaddy of All Bull Markets took flight in 2009. They simply pulled their bids, just as they’ve done hundreds of times over the last decade, allowing index futures to plummet ahead of the opening bell. This trick completely dried up selling, leaving stocks no way to go but up when the opening bell rang. At that point the carny men simply stepped aside and let short-covering panic accomplish what mere bullish buying could not. Lo, within 60 minutes, they’d succeeded in goosing the futures past an otherwise impenetrable resistance.
The same ruse was employed countless times over the course of the bull market. Oddly enough, bears keep falling for it. Every time. To be fair, this is because they are set up in ways that continue to mutate so that the latest tactics are not easily recognizable. Last week produced a textbook example, with equity shares, particularly the beaten-down FAANG stocks (a.k.a. ‘the lunatic sector’), screaming higher on horrendous earnings news. Microsoft, Google and Amazon all released dismal reports after the close, but their respective shares reacted, over two days, as though the economy were booming.
A Perverse Outcome
Under the circumstances, no one should have been surprised on Wednesday, when a the big Fed rate hike kicked off a rally that picked up steam as the week wore on. If you could have seen the news coming two weeks ago — lousy earnings from corporate giants and a killer blow to the economy from the Fed — you’d have been short up the wazoo. And so everyone was, tricked into shorting the rumor and then having to buy bad news. To give the evil geniuses and capos their due, the conditions they seized on to kick off a rip-roaring short squeeze were as perfect as could have been imagined, putting nearly everyone on the wrong side of the trade. That’s why on Friday, with the rotten news out of the way, stocks continued on their psychotic rampage, rallying as though recession, putrid earnings and abysmal consumer sentiment were of no concern.
Speaking of the recession, let me credit Rick’s Picks subscriber Matt Barnes with spotting it months before Wall Street’s best and brightest even began to acknowledge it. As we noted at the time, his shipping-pallet business had fallen off — as clear a sign of a nascent business downturn as an economist could have asked. On the logic of Matt’s insight, we said back in February that a recession that even now has yet to be officially acknowledged had begun. This will be no ordinary recession, let alone a quick one, so I’d suggest staying closely tuned to Rick’s Picks if you don’t want to be distracted or confused by the shamelessly dishonest spin Wall Street’s PR machine will be putting out in the months ahead.
[With stocks in a boring, stage-managed bear rally, we go well off the beaten path in this week’s commentary with a discussion of the amygdala. Let me explain. Since 2020, I’ve lost four close friends over political differences. I’d known all of them for at least 30 years and one for 65 years. All had rejected my contention, among others, that the 2020 election was fixed. However, my goal was not to convince them of this, but merely to get them to concede that those who believe it are not crazy. Alas, this apparently was asking too much of friendships, even childhood ones. Click. End of phone conversation. End of relationship. This seemed odd and even baffling, particularly since all my politically conservative friends have had similar experiences of being ghosted by childhood friends over seemingly nothing.
Even more striking is that without a single exception, it was the liberal who terminated the friendship. What’s going on here, I asked a longtime friend who is not just apolitical, but a formidable outside-the-box thinker and Mensa member. His response was startling but entirely plausible: There is a physiological basis for ghosting, he wrote, and it is tied to liberals’ deepest fears about survival as a species.
He lays out his theory below. Although the essay will take 10 minutes to read, you’ll be rewarded with a fascinating explanation of an alarming phenomenon that has touched tens of millions of us but which has not been written about much if at all. Please circulate the essay to anyone who might find it interesting, especially liberal friends who have stopped taking your calls . At the author’s request, I have not identified him. RA ]
Many of us have noticed that our liberal friends are more likely to ‘ghost’ us than the other way around. Typically, they terminate our friendships in ways that are meant to be final. Their way of doing so ranges from slipping away to kissing us off with a righteous display of indignation and disgust. Here is a theory to explain why this seemingly irrational behavior is, for them, perfectly normal.
The brain can be thought of as having three discrete centers influencing one’s psychology: the conceptual cortex, the imaginal cortex and the midbrain, where the amygdala is located. While the theory of hemisphere specialization is somewhat out of vogue, the generalizations about function still apply, in that people are obviously more one style than the other. These styles and the part of the brain that regulates them can be simplified as follows:
Conceptual cortex: Logical reasoning, mathematical, scientific, use of tools, calculation, planning. It’s on the left side (if you’re right-handed, otherwise the opposite). The word ‘reasoning’ would be a good grouping of these functions. Extreme version: uber-nerd, the kind of people you’d want to design a space craft guaranteed to get you home.
Imaginal cortex: Intuition, imagining what is not but can be, visualization, creativity and ‘higher’ emotions of caring and compassion. It’s on the ‘right’ side (if you’re right handed, otherwise the opposite). The word ‘idealism’ will be used to group these functions. Extreme version: overt mom-figure, the person you want to talk to when you need encouragement and positivity.
Midbrain: the ‘animal’ brain, housing the amygdala, the part responsible for desire or repulsion (and therefore the anchor of addictions). It’s called the ‘fight-or-flight’ sector of the brain, but that’s only true if you’re a bird; otherwise, it’s more literally the ‘kill or outrun’ center. Humans’ better ability at running and development of killing tools are why we became the dominant animal on earth. The amygdala therefore is a basic switch for the human, deciding what is desirable (that for which it wants more) and what is a threat (that which it tries to eliminate). Like the immune system, and one’s sense of taste, it rejects what is not quickly recognized as desirable — i.e., turns on or off, with no middle setting.
Repetition Strengthens Habits
Neurological examinations have determined that what one thinks about often tends to rewire the brain so that those cogitations happen more efficiently. “What fires together, wires together” is a laboratory maxim that summarizes this. One can think or imagine virtually anything, based on the brain’s existing ‘wiring.’ However, if one practices a task repeatedly, brain cells grow dendrites, the many ‘fingers’ emanating from the cell body, to perform the task more efficiently. This makes repetitive tasks and thoughts happen with more efficiency, while less-exercised thought uses the pre-existing connections.
Over time, for reasons of gender, upbringing, attitude, disposition and habit, people tend to be either more on the conceptual side or the imaginal in overall thinking. Their brains have an inherent or evolved way of working in that way, so that changes –literally, altered electrical conductivity — become less likely. As noted above, the neurons of the brain that ‘fire together’ end up ‘wiring together’, hardening one’s mindset. Because of this, people end up being mainly reason-biased or idealism-biased, and because this is reinforced physiologically, a level of entrenchment or positionality forms. Intrinsic to this hard-wiring of habits is the involvement of the amygdala, the part of the brain that either loves/desires more of something or decides to kill it or run away from it. Because of the survival instinct’s crucial role in propagating humankind, the energized amygdala will always override the cortex no matter how illogical the thought process.
One could loosely categorize ‘conservative’ thinking as more conceptual and based on reason, and ‘liberal’ thinking as more imaginative and based on higher feeling. The former is more cautious for survival’s sake, the latter more creative to advantage, for one, the development of tools to conquer animals. The two modes operating discretely could be compared to the accelerator and brake pedal of a car. Without the former the car goes nowhere (stability); but without brakes, the car crashes (death). One wants stability first, the other wants what’s ideal. Conservatives are more closely tied to logical thinking, which by nature must not exclude data lest a given solution be clumsy and inefficient or untethered from science. They dwell in a reality where contradictions are acceptable and in which we strive to improve our lives gradually rather than by heedlessly embracing some ideal as a goal. Dealing with improvements must happen at a doable pace, and the details must be worked out to give the process the best chance of success.
Liberals tend to complicate the process by adding in ideals they believe are important to the advancement of society. Anything that thwarts those ideals would need to be changed no matter what the cost or difficulty. Deciding when to stay the course or change it for something better is a thought process common to all of us as individuals. But here’s the problem: Each style of thinking is connected to the amygdala, with its primitive wants and needs. It likes something and wants more of it, or it sees something as a threat and either tries to destroy it or create distance from it. A little of both exists in everyone. Dedication to one version or the other results either in stagnation of the status quo, or more change than a system can absorb without falling apart. (See Alvin Toffler’s best-seller Future Shock for a deeper explanation.)
It therefore follows that when idealistic thinking is dominant, whatever stands in its way will be rejected at the ‘animal’ level by the amygdala. If you really want dessert, rational concerns about sugar intake and weight gain get outvoted. If at that same dinner your host rejects having dessert because she is watching her weight, your rational side might accede for reasons of politeness or because you don’t want to appear gluttonous: reason vs. desire. Extending this to more complex issues, we find there are conservative and liberal frames of mind and that, respectively, they imply avoiding actions that could cause problems, or a ‘damn-the-torpedoes’ idealism that seeks improvement at any cost. At the level of political discourse, there is constant tension between the desire to improve our lives gradually; or alternatively, rushing to achieve change at a pace that risks a crack-up (i.e., all accelerator pedal and no brakes).
Over the last decade or so, liberal idealism has found expression in a ‘new-speak’ vocabulary that is more symbolism than substance. Here’s a sample list, although it has been metastasizing too quickly to be considered complete or even current: embrace, supportive, victims, protect, vulnerable, safe space, equity, speak your truth, start a conversation, empower, systemic racism, transectional, diversity, inclusive, people of color, transformational, toxic masculinity, hate crime, Black Lives Matter, white (as a pejorative), Karen (as a class-war slur), trust the science (but don’t ask about the data). And let’s not forget the projection of fear of resistance with the blame-thrower’s favorite: anything-phobic.
These words, as far as liberals are concerned, have an elevated, totemic quality that conveys idealistic intent and a feeling of ‘betterment’. And while it’s true that betterment is intended, the words giving voice to this world-changing goal are sufficiently vague to be provocative, often deliberately. For example, although Critical Race Theory (CRT) is advanced as a way to ‘start a conversation’ about race, it is being taught in classrooms where whites have been excluded, ostensibly so that people of color can express themselves freely. The inherent racism of this rankles conservatives, but liberals ignore the head-slapping contradictions and press on anyway.
Americans would not be dodging red/blue sniper fire if our hard-wired brains were preoccupied with individual choices about whether to have dessert. Unfortunately, decisions about far more important things are increasingly playing out between whole segments of society, in ways that have solidified and widened our conflicts. Because of the perceived threat each side represents to the other, both sides have hardened their positions. This explains how the discourse has broken down as each side has dug in deeper. Scores of millions of amygdalas have reached the ‘fight’ level of conflict, so that ‘accept/reject’ thinking rather than compromise has become dominant. Remember: the amygdala’s main priority is survival. That means deciding what you’re having for dinner will always be less concerning than ensuring you’re not about to become someone else’s dinner.
So now we begin to understand why liberals’ intolerance has crept into the red zone, even as they pre-emptively and often ridiculously claim it is their political foes who are intolerant. As this pose has hardened and grown increasingly irrational, the would-be idealists have come to believe that speech unaligned with specific code words and re-definitions threatens their very survival. They’ve reacted in the extreme by seeking to imprison people for speaking their minds – most recently, former Trump advisor Steve Bannon — and by attempting to cancel ‘phobics’ who have merely expressed dislike or disapproval of some supposedly aggrieved minority.
In a society deeply dedicated to the principle of free speech, it seems shocking to political conservatives that so fundamental an aspect of self-governance is under assault. The pernicious trend may have peaked, however, with Biden’s attempt to create what came to be called the ‘Ministry of Truth’. While his administration’s Big Brother approach to vetting the facts behind the news may have stirred up liberals’ amygdalas, the idea was so widely scorned and ridiculed that its abortive launch cost them a key battle.
So why do liberals ‘ghost’ friends as though their survival depends on it? Because it does depend on it, since the need to advance their ideals operates at the level of physiological addiction. A mainstream media that works overtime to satisfy that addiction has only hardened the circuitry of the liberal brain. An ironic consequence is that their depredations — verbal, legal, political and even physical — have at last stirred up enough backlash to overwhelm the liberal project when Congressional elections are held in November. How will their fiercely enraged amygdalas cope with this likely disaster? One shudders to imagine the consequences, since even recent Supreme Court decisions have turned more than a few liberals not merely angry, but homicidal.
There was a point last Thursday when virtually all of the hundred or so market symbols I track were ‘red’ except for the U.S. Dollar Index. This was unusual and unsettling but hardly mysterious, since the dollar’s strength was the reason everything else was falling in value. The trend unfortunately is only just beginning and eventually will overwhelm the global economy and banking system. Any observer could have seen this coming, although few did. Even now, only hard-core deflationists understand the dire implications that a strong dollar holds for mountainous debts that have piled up around the world. Nor is it generally understood why hyperinflation is an extremely unlikely option for liquidating this debt, since it would destroy creditors – i.e., the Masters of the Universe – as a class. Deflation is not only far more logical, it already appears to have begun sucking asset values toward worthless singularity with power that ultimately will grow irresistible.
The possibility of a ruinous debt deflation was once considered looney-bin talk. I was virtually alone in writing about it in the early 1990s. I even suggested at the time, in think-pieces published in Barron’s and the San Francisco Examiner, that a short-squeeze on the dollar could bring on deflation precipitously. My floor-trading background made this scenario seem not merely plausible, but likely. It still is, I believe, and it seems predictable that it will begin with a small disturbance in the credit markets that quickly causes short-term lending to dry up. Borrowers unable to roll their loans as usual will be forced to settle in cash, an unfamiliar medium of exchange in the world of finance. This will cause ripples of panic overnight, but don’t bother lining up at the door of your bank before dawn, since the $25k to $50k that branches typically keep on hand may not be enough, even, to pay off the first two or three depositors in the queue.
If you think of deflation as an increase in the real burden of debt, you’ll begin to understand it better than most eggheads. They say it’s a decrease in the money supply, and although that’s technically correct, it is a useless concept because no one has the foggiest notion how much money is out there. Moreover, trillions of new dollars can be borrowed into existence overnight by speculators merely thinking expansively (i.e., bullishly). The illusory wealth that results can work wonders in a bull market, making investors and even mere homeowners think of themselves as geniuses who can get richer and richer without doing much work. Those closest to the banks that are the source of the illusion have the boats and planes to prove it.
But reality is about to intrude because expansive thinking has already succumbed to a bear market in stocks that began early in 2022 and a real estate bust that is taking shape with alarming speed. Nor will Fed easing help, even if the quacks who run the central bank were inclined to cut interest rates. For if they did, we would soon discover, as occurred in 2007-08, that even 3% mortgages can crush borrowers when the value of their homes is falling.
A stock-market run-up to new record highs would remedy the problem temporarily. But shares have grown so heavy lately that even the obligatory head-fakes necessary to keep the rubes in the game have failed to materialize thus far. The result last week was that, rather than thinking expansively, investors seemed just an inch from a contractive panic that would have encompassed stocks, bonds, gold and all currencies save the U.S. dollar. A full-blown selling panic has yet to occur since the bear market began in January, but there is no way that this initial phase of the bear can end without one. In the meantime, the dollar’s rise has lurched out of control, setting up a deflationary shock far bigger than any problem the central banks have ever observed, let alone managed. The dollar monster that has walked among us for more than a generation has begun to stalk us, and there is no hiding from it.
How high is the bear rally begun in mid-June likely to go before buyers run out of gas? The 4029.75 target shown in the chart is a logical answer, even if the hubris of billboarding it here could queer its voodoo magic. A run-up to 4029 would represent a 3.1% gain over Friday’s close and a 10.7% move off the June 17 low. Since January, when the bear first showed its fangs after hibernating since 2009, rallies have been relatively subdued, implying shorts have yet to be spooked into covering. Perhaps it’s because the outlook for the U.S. and global economies is so dark that there are few good reasons to be discovered for buying shares. Not that buyers have ever needed reasons, let alone good ones. But even bad ones lack persuasiveness these days, what with the ‘experts’ debating how much recession we’re likely to get.
Triggering off short-covering stampedes will always be a primary concern of the stock market’s institutional sponsors. That’s because short-covering is the only source of buying powerful enough to push the broad average past previous peaks. It also has the miraculous ability to make investors temporarily forget about the wall of worry no matter how mountainous. The effect can produce spasms of mass insanity so overwhelming that even now, with the U.S. economy about to tank, a stock market rally to new all-time highs is not inconceivable.
It is extremely unlikely, however, given that residential real estate has completed a blowoff top; the auto sector is being suffocated by high prices and material shortages; and consumer credit growth has turned down as interest rates rise across the yield curve. Under the circumstances, even if a punitive bear squeeze is overdue, investors shouldn’t get their hopes too high that it’ll come before stocks take another epic leg down. [How bad could it get as the U.S. recession deepens? Click here for Rick’s insightful interview on Friday with Howe Street’s Jim Goddard.]
Bullish seasonality was at gale force last week, but just look at the tired chart! Is this the best that Wall Street’s quasi-criminal masterminds can do? Have they grown so despairing that they can’t even detonate a 100-point short squeeze when Jerome Powell is bloviating on TV? That was manifestly the case, and torpor could not have struck them at a worse time. With dark-purple clouds massing on the economic horizon, the securities world’s thimble-riggers are in a bind, seemingly unable to rally stocks into order to dump them at brutally inflated prices into the hands of rubes, pensioners and widows. The window of opportunity for this is narrowing as economic signs point toward very hard times. Even so, triggering off a rip-roaring bear rally should have been a piece of cake, considering all the help DaBoyz have gotten. The news media, for one, is still playing along with the in-joke about whether a recession is coming. In plain fact one has already begun, accompanied by anecdotes sufficiently troubling to shame the Street’s paid army of deniers, glad-handers and shills. Additional cover has been provided by stockbrokers and financial advisors. Observing a time-honored tradition, they’ve been telling clients to sit tight, since stocks, they assure everyone, are certain to turn around. Trusting clients will do exactly that, sitting on stocks until they finally sell everything with the Dow crashing below 10,000.
Here are a couple of anecdotes that concern manufacturing bellwethers with global reach, Tesla and Boeing. Regarding the former, a friend who owns Tesla’s high-end Plaid model, a luxurious rocket-sled that can smoke a Lamborghini Veneno, was having trouble with a seat belt that wouldn’t retract. His dealer said the electronic part needed to fix the problem was not available and simply gave him a brand new car. Less fortunate are the many motorists seeking collision repairs. We’ve all heard — or experienced — wait times stretching out six months or even indefinitely. Still worse is that there seems to be no relief in sight, so tangled is the distribution network for parts. Similar problems are cropping up in virtually all industries.
Boeing’s problems, given the size of the company, are arguably an order of magnitude worse. A friend whose firm sells electronics to the aircraft manufacturer says $400 million airplanes are sitting unfinished for want of parts — sometimes small, relatively inexpensive ones — that are out of stock. The problem is exacerbated by tie-ups at the Port of Los Angeles, where union rules forbid unaffiliated truckers from picking up containers. Electronics components are stuck in Malaysia and Taiwan, the friend said, and some of his backorders stretch out to three years. He notes that morale problems have begun to impact on Boeing’s procurement department. High turnover coupled with the difficulty of finding replacement employees is taking an increasing toll on Boeing’s vast operations. These problems are well known, the friend said, but are being underreported, considering their potential to radiate out to many other sectors of the U.S. economy.
Investors have not been oblivious, but neither have they repriced shares to fully discount further economic disruptions, if not to say chaos, that looks like it could persist indefinitely. That’s why investors should take the calm advice of financial advisors with a grain of salt. The second phase of the bear market begun in January looms and could lurch into gear at any time. The unusually feeble rallies since April eventually will be seen as opportunities for investors who have merely been damaged so far to exit stocks before they receive the coup de grace.
The chart above is intended to take some of the guesswork out of determining how high this presumably doomed stock-market rally is likely to go. Not very, would be my guess. I say the rally is doomed for a few reasons, none of which has anything to do with a U.S. recession that began months ago, or a real estate collapse that is still in the anecdotal stage but quite real and menacing nonetheless. My assessment is based purely on certain subtle technical signs evident in the chart. First is the S&Ps’ breach of a 3656 ‘external’ low recorded back in February. The overshoot was just 17 points, or 0.46%, but that was sufficient to generate a strong impulse leg of weekly-chart degree. What it implies is that any rally off the June 17 low will turn out to have been corrective — or to use a more descriptive word, distributive.
Since we ‘know’ the rally is just a bear squeeze, predicting where it is likely to apex is possible. I have used a ‘reverse-pattern’ feature of the Hidden Pivot Method to calculate prospective rally targets at, respectively, 3966 and 4028. If the S&P mini-futures were to exceed the first by more than 5 or so points intraday, that would imply more upside to the second. Both are bound to show stopping power sufficient to be short-able, and that is what I would suggest to Rick’s Picks subscribers.
Sidestepping a Possible Stampede
This scenario is by no means chiseled in stone, and I would be inclined to give the rally wide berth if it impales the higher number the first time it is touched. That would suggest that a bear rally worthy of the name is under way. If so, it could be expected to continue to whatever height is necessary to cause even your editor to think new all-time highs are possible. So far, though, bears have hung tough, refusing to be spooked into short-covering that would allow portfolio managers to distribute shares to the rubes at fat prices.
In the meantime, as we know, horrendous headlines concerning the economy are rarely sufficient to crash a stock market. But U.S. shares will not long remain a relative oasis for investors when the global economy starts to implode. This is certain because a strengthening dollar has made oil and everything else paid for in dollars increasingly unaffordable for most of the world. Americans benefit from this, but it is the growing cost of paying off debts in strengthening dollars that will be their undoing. Oil prices will plunge in the global downturn, but any relief this will bring at the pump will be overwhelmed by the broadly ruinous effects of debt deflation.
Copper’s long-term chart suggests that the global economy could have one last hurrah once the bear market begun in January has run its course. Copper is reputed to have a PhD in economics because of its supposed ability to predict major turns accurately, In actuality, its track record is pretty impressive. The chart above shows its upturn in 2008 had a months-long head start on the bull market that followed the Great Financial Crash of 2007-08. Copper again proved prescient when the Covid selloff in the first quarter of 2020 turned into one of the steepest bull-market run-ups in history.
So what is it saying now? There are a few things to notice in the chart. Most important is the ease with which buyers pushed past the ‘midpoint Hidden Pivot’ resistance at $3.63/pound (shown as a red line). A decisive move past this impediment is usually a reliable sign that the trend will reach the pattern’s D target, in this case $5.33, It didn’t, however, and that implies the sideways move that has occurred over the last 14 months is a bearish distribution, not a consolidation. To use a Groundhog Day analogy, we will likely face six more months of winter, give or take a couple of months, before the bear market and a still unacknowledged recession have run their course. The downwave could be steep and the recession brutal, since Doc Copper’s expected dive looks all but certain to crush the red line. That makes a further fall to the green line likely. It would amount to a 40% correction from the $5 high and a 33% correction from the current $4.
A Screaming Buy
At $2.78 (the green line), Comex Copper would become a screaming buy, technically speaking. That’s because, under the simple rules of the Hidden Pivot System, the plunge will have created a textbook opportunity to get long ‘mechanically’. The trade would be predicated on a bounce to as high as $5.33. My gut feeling is that the global economy is extremely unlikely to experience a resurgence powerful enough to push copper quotes to those heights. But a false spring seems entirely possible — a monster rally in the context of a long-term bear market that eventually will see the Dow Industrials fall from a current 30,000 to below 10,000.
As if the thimble-riggers at the Fed didn’t have enough to worry about, the dollar turned rabid last week, threatening to transform America’s still-undeclared recession into a downturn for the history books. The greenback’s rally pushed the price of U.S. goods even higher for foreigners while increasing the cost of fuel that they pay for mostly in dollars. In theory the dollar’s strength should have alleviated pain at the pump for U.S. consumers. Unfortunately, however, with the cost of gas and diesel fuel thrusting to mind-numbing new highs each week, the effect has been so muted as to be barely noticeable.
Wall Street has noticed the gathering storm, however, and is doing everything possible to distribute stock to the rubes before pulling the plug. Last week, for instance, Amazon was trading down around $110 a share following a 20-for-one stock split. The idea that stock splits are bullish is a pernicious lie that has gained currency because most investors tend to think that more of anything is better. Now widows and pensioners who owned just a few shares of AMZN at $2000-plus per now have twenty times as many shares. How fabulous is that? They naturally expect those shares to rise eventually to their pre-split price, which would not be unusual in a prolonged bull market. But we are quite possibly in a bear market now, and the outcome may not be so felicitous as AMZN’s peanut gallery might imagine. Whatever the case, you can count on insiders to unload as much of the stock as they can now that shares have become affordable for the masses.
There’s no relief in sight for gas prices that seem headed to at least $10 gallon. The chart above suggests July crude will likely hit $128 this week or early next, a whopping 7.5% gain over last week’s high. But watch out if the futures shred their way past this Hidden Pivot resistance, since that would portend a continuation of the trend to $140, a target first drum-rolled here several weeks ago. It’s a safe bet that Californians will be paying $10 or more for gasoline by then, even if far fewer of them are driving. Realize that it is not consumer demand that has been pushing up prices, or even conspiratorial constraints on supply, but rather a flood of speculative money into energy resources as a hedge against inflation.
The irony is that the coming price collapse in crude will be part of a deflationary tsunami that wrecks the banksters’ moronic shell game. It will occur simultaneously with a real estate collapse that has already begun. Indeed, bidding wars for homes appear to have ceased due to the steep rise in mortgage rates, record-high prices for homes, a dearth of inventory and a scarcity of qualified buyers. These factors have created perfect conditions for a real estate collapse.
Inflation in energy and real estate are similar in that neither contains an escape hatch for investors. Because energy prices cannot continue to rise without eventually throttling the economy, the rally is doomed. But when prices finally plunge, as they must, that will suck the air from a $2 quadrillion derivatives market that was largely built using energy resources as collateral. The collapse in mortgage-backed securities did the same thing to the banking system in 2007-08. This time, although tens of millions of homeowners are sitting on huge paper gains from real estate inflation, none of them can cash out because there are no reasonably priced homes for them to move into.
A well-known quote from the late economist Herb Stein encapsulates the endgame: If something cannot go on forever, it will stop. Inflation is close to that point. When it finally arrives, the economy will not simply level off and enter a glide path to renewed prosperity, stability and economic health. On the contrary, it will experience a wrenching dislocation with no remedy save the kind of brutal price discovery that we have not seen since the Great Depression.