Saturday, June 30, 2018

Timing the Crash?

Knowing that something is going to happen is one thing, knowing when that something is going to happen is another.

People a lot smarter than me have said all along that timing the market is for chumps.   We may be able to spot trends, but it is hard to know when these trends will change.  I thought the real estate market would crash in 2005, but it kept on, in zombie mode, until nearly 2008.  I suspect we are seeing the same thing happening today - I am reading the same headlines I read back in 2007 about how houses are so unaffordable.  something has to give.

And similarly, many prognosticators are saying the market will tank - or at least a recession will occur.  But when?  That is the tricky part.  Predicting the future is difficult business, unless you are Faith Popcorn.  Her method is nearly foolproof - simply predict every possible thing, and then later on, pick only those answers you got right as "proof" of your prognostication abilities.

So, with that in mind, I will jump in with both feet and offer my utterly un-expert opinion as to when the market will tank:  2020.

We would be having a mild recession by about now, but Trump ginned up the economy by passing these tax cuts.  This threw gasoline on the fire of a dying bull market, keeping it flaring up for another 18 months or so - enough to safely get him past the mid-term elections and keep the Senate at least intact.   The trick is whether he can ride this wave until November 2020, or like George Bush, see it all fall apart a few months before the election in 2008.

The problem with the tax cut is that it is like taking methamphetamine.  You are living large today, but there will be a price - a steep price - to pay tomorrow.  And in this case, the price is debt - massive debt on the part of the government, started under Obama, but now accelerated under Trump.   With less tax revenue, we will have more deficit spending.  Throw in higher interest rates, and we will be back where we were in the 1970's with interest payments taking up more and more of the government budget.

Now throw in personal and corporate debts.  The latter is the reason so many "brick and mortar"stores are going out of business.  Amazon didn't sink Toys 'R Us, $5 Billion in debt incurred by KKR, Bain, and others, did.   And it is the same story across the board with these private equity deals.  The "vulture capitalists" throw in a billion or two, use the company's own equity to borrow money to buy the place, and then run it into the ground, getting back their initial investment in the form of management fees, interest payments, and whatnot.

A reader asks me how a company can be purchased by using the company's own equity - it makes no sense!   I have to agree with him, but that is capitalism in America today.  In a way, it is no different than buying a car on time, I guess. You walk into the car dealer, put down a pitiful amount of cash, and then walk away with a car, financed using the equity of the car.  Of course, you are upside-down on that loan from the get-go.  So was Toys 'R Us.  But I digress.

The debt problem will be exasperated by rising interest rates which in turn are driving inflation.  More and more borrowers will default when rates and thus monthly payments go up.  And the only HEMP program that will help them will be legalized marijuana, if Jeff Sessions doesn't put a stop to that.

But what about our flash-fire economy?   Unemployment is down!  Everyone is back at work!  Wages are up! The stock market is, uh, going up and down like a see-saw.   Signs, my friend, signs.  These are the same predictors that in the past have foreshadowed recession. When unemployment is too low, wages skyrocket.  All this talk of raising the minimum wage to $15 and whatnot is pointless today - there are wage wars going on at nearly every business.  Even in remote rural areas, we are seeing billboards advertising jobs.  The local fast-food places have competing signs - offering $11 an hour to START there!   $15 isn't far behind.  And hey, maybe they will have to start offering full-time benefits, too, right?  Crazy!

But rising wages are increasing production costs - as are the tariffs on imported steel and aluminum.   This in turn is slowly increasing inflation, which will rise more rapidly as this effect snowballs.  The net result is, like in the 1970's, rising wages merely keep pace with inflation, and thus the middle-class doesn't come out ahead.  With rising interest rates on debt, they come out behind.

Now throw in some collapses of some local housing markets that are overheated - exasperated by the new tax law that eliminates home interest and property tax deductions for many people.  Home ownership is no longer looked upon as some tax-dodging goldmine as it was in the past.   Toss in a demographic that is seeing fewer young people graduating from high school and college in the next few years, and we may see demand for housing slacken.

These things go in cycles.  And we will see this cycle repeat, again and again, over time.  The key is, how dramatic do you want the cycles to be?  A gradually growing economy as under Obama, followed by a mild recession?  Or dramatic gains followed by catastrophic losses?

And in that regard, the signs from the stock market are most troubling.   Two things preceded the big crash of 1929.  First, farmers started going bankrupt years before.  And today, they are doing likewise. Farm suicide rates have risen, according to some sources, by a factor of five.  Economic pressures are given as the primary cause.  Nearly half of all farmers have a second job to help make ends meet.   This is the same sort of pattern we saw in 1927 or thereabouts.

The second thing is volatility.  You may recall just a few months ago, how people were "investing" in derivatives that were based on the volatility index.  They were betting on the market remaining steady.  Again, this is 1927 all over again - when even the local grocery clerk was investing in the market - and the market went nowhere but up.   But before the big crash of 1929, we saw a lot of see-saw action, as the markets went up and down.   People still want to invest in the markets - they want to make a lot of money, and in many cases, have to make a lot of money in order to survive.  I know a lot of retirees whose retirement plans are predicated on a perpetual 10% return on their investment.  Nice work if you can get it.

The markets are going up and down because of uncertainty.  And the uncertainty is being driven, for the most part, by one man and his twitter account.   We have reached a new level of absurdity in our country - the twitter economy.   One tweet from you-know-who and markets can rise or tumble, or a company's stock can skyrocket or tank, overnight.   Everyone, it seems, is looking for signs, in these tweets - signs of where the market is heading.

Meanwhile, other signs, the most basic ones, are being ignored.