Looking at the "relatively flat" market over the last 1.5 years (see graph below) and knowing about most of the economic fundamentals in the US economy (revenue growth, high corporate earnings, low unemployment, high positive sentiment, etc.), one would think that this market (which just broke out into "new high" territory), would have a long way to go up from here. And, most likely, without any major screw-ups by the Fed, the White House, Congress, China, etc., that should be the case for the rest of this year. But, that’s not all to this story. READ ON…
MIPS Performance in 2019 (thru 7/5/19)
MIPS44 (+7.5%) and MIPS/Nitro 55 (+8.3)
As shown above the MIPS models have done "OK" in the short-term, with a current "sky-is-the-limit" outlook for the remainder of 2019. But the long-term outlook is another story. According to my analysis and what most indicators show me, sometime in the next 12 months we should expect a hefty market drop. This is mainly because of the "abuses" from the "big guys" like the Fed, Goldman Sachs, Morgan Stanley, major financial institutions, large banks and mutual funds, etc. (aka "fat kats"). I say the ‘big guys’ are to blame because we "little guys" do not have nearly enough money to move any of the markets or financial components.
Below are "some" of the major ramifications from these abuses that have disrupted the normal workings in many areas of the financial/economic world:
1) Trade tariffs – Very disruptive, without well thought-out consequences.
2) Corporate buy-backs – All corporate giants have spent fortunes buying back their own stocks instead of using their money to make better products, expanding their territories, sharing with their employees, etc. Of course, their object is for the company to lower its number of shares outstanding, so that even with no other improvements, their earnings/share ratio can go up even without "earning" going up at all. This makes the top management look good with no contributions/improvements coming from them. In fact, every year the execs of many large companies "earn" large bonuses for obtaining higher earnings/share ratios even though their earnings for the year were lower, but the number of outstanding shares (after buy-backs) were even "more lower". The fat-kats are the big winners from buy-backs in the long term.
3) Interest Rates – Out of desperation, the Fed in the US and the European Committee overseas, have kept interest rates very low in order to protect their jobs. It seems that they are almost always out-of-sync with their countries’ economics. In fact, in some countries the interest rates are "negative" meaning that bond buyers pay the bond owners (the lenders) some annual % to own their bonds instead of getting annual yields for themselves, as per the norm.
4) Inverted Bond Yields – At this time, we are experiencing a situation that rarely occurs, but when it does happen, over 80% of the time a "recession" comes within the next 12 months. This is when the yield on 10-year Gov’t bonds drop below the yield on 3-month Gov’t bonds ("Inverted"). This means that investors are comfortable with short-term bonds but NOT with long-term bonds (not comfortable with the future).
5) Country Debt vs Gross Domestic Product (GDP) - Because of mismanagement in many countries throughout the world (even in Europe), their countries’ debt is several times greater than their GDP. In some, their debt is over 3 times higher than their annual production. That sure makes it tough, if not impossible, for them to pay back their national debt. This will ultimately lead to these countries either going bankrupt or having to devalue their currency, either of which could lead to a worldwide financial meltdown. Sadly, even in the USA today, our country’s debt is over 75% of our GDP.
6) Margin Debt – Driven by greed, investors will buy (or short) stocks "on margin" (i.e., with borrowed money). Too much margin debt can be very dangerous, as in the Crash of 1929 (when margin debt was extremely high). Margin is dangerous because, with 2x margin, if what you buy drops 40%, you would lose 80% of your original investment. At this time, margin debt in the USA is near its all-time high in the last 50+ years.
7) Shift from Stocks to Bonds - In the last 2 years, there has been a major shift by the fat kats in the money they are investing in bonds that is coming from their stock holdings. That is a bad sign for the stock market in the near future because when the big guys bail out on high volume at the top, they ‘cause’ market tops (just like their high volume buying near the bottom "causes" market bottoms).
The above could surely result in a market correction or crash in the next 12 months.
Stay tuned in and let MIPS guide you like it did in 2008 !!!
Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC