Tuesday, January 9, 2018

Stock Market Overview -- Key Economic Turning Point

Key Economic Turning Point...

Repeating Economic Cycles. Economic cycles commonly reoccur throughout history, but they more rhyme than duplicate themselves.
Each overinflated stock market move or bubble, tends to get more extreme than the last one, because there is more wealth to chase it, which is concentrated in the top 1% to 0.1%, and grows exponentially, which is not the case with income levels.
Stock Market Bubble History. The greatest bubble of our lifetimes was the tech bubble in the Nasdaq, from late 1994 into early 2000, which was built over a period of five years -- the typical time frame for most stock market escalated bubbles.

The current stock market bubble, from 2011 to present day, is an anomaly. The Federal Reserve and global Central Banks unprecedented quantitative easing and zero interest-rate policies, for nearly 9 years, has artificially driven this stock market advance, further explained within the below section titled, "Stock Market Stimulus Defined."

Their actions have now outstripped the tech bubble in time as well as total point and percentage gains -- making this the greatest stock market bubble in modern history, except, now, that dubious honor goes to that crpytocurrency, Bitcoin.

Internet Sector Similarities. Bitcoin and the other cryptocurrencies are following a similar path to the Internet sector of the last tech bubble, between late 1998 and early 2000.

The Internet index went up eight times in a little more than a year, and then collapsed 93%, compared to the 78% decline in the Nasdaq -- now that's an extreme bubble!

Most of damage occurred within one year, with the initial sharp decline in the first few months, where investors lost 50% in just a few months. Therefore, this is why it's better to make investment changes early, like the soon-to-be-Billionaire's Rothschild, Kennedy and Carnegie did in the late-1920's -- being contrarians, at peak levels of greed -- just prior to a significant change in economic conditions as well as a major stock market decline.

Investor Emotions Amplify Various Economic Indicators. Global markets have always moved through varying levels of "Greed and Fear." These emotions produce extreme moves to both overbought and oversold conditions, with similarities throughout history.

Currently, there are similar conditions to the stock market tops of March 2000 and October 2007, with a number of economic and investment indicators. 

For example, consumer confidence has increased to an extreme level of 132, eclipsing the previous peak of 128, just a few months after the stock market peak of 2000. This current level of exuberance easily exceeds the consumer confidence level of 110 during the 2007 stock market top, further illustrating the extreme level of exuberance and complacency.

Furthermore, US consumers continue to splurge at an accelerated rate, with personal spending rising 0.6%, as Americans decided to splurge on holiday products and services, even as personal income rose by a lower than expected rate of 0.3%. 

There has been historical changes in income, spending, and savings, because as Americans splurged in November and December of 2017, the personal savings rate continuing to decline, tumbling from 3.2% to 2.9%, the lowest since November 2007, which is when the stock market peaked and one month before the recession started.

Also, strangely, the collapse in savings took place even as US wage growth actually surprised to the upside, rising at 4.5%, more than the core consumer spending of 4.3%, for the first time since December 2015.

However, despite this favorable wage environment, Americans were not only unable to save, but saw collective savings declined by $41 billion in November 2017 to $426 billion.

The dramatic savings decline and spending surge, incidentally, coincides with the surge in credit card usage. The 13-week annualized balances of non-revolving credit ($2.791 trillion) and revolving credit ($1.011 trillion) in the US has gone completely vertical in the last few months of 2017, rising by 6.5% to around $3.8 trillion as of October 31, 2017 -- fast approaching the all-time bubble high of $1.02 trillion for revolving credit (credit cards), hit in the summer 2008.

This 6.5% level of debt increase is more than double the rate of increase for US Gross Domestic Product (GDP) or wage growth, making it clear just where Americans "purchasing power" comes from -- a troubling signed and yet another confirmation that US household savings are almost gone. 

So, what hot new Christmas gadget has Americans suddenly willing to max out their credit cards to purchase? Well, google search engines has offered some trends or clues that it might not be a gadget or anything tangible, but actually "how to purchase a cryptocurrency, like Bitcoin, with a credit card" -- a disturbing trend.

The Flattening US Treasury Yield Curve. An area of concern is that the US treasury yield curve continues to flatten, from the 2-year note all the way out to the 30-year bond. Meaning, the spread in yield received for a two-year note compared to the 30-year bond, is narrowing.

Currently, the spread in yield between the two-year and the 10-year note is at barely 1/2 of 1% or 53 basis points -- the flattest yield curve since the stock market top of 2007, just prior to a 50% decline in equities, and the beginning of a recession as well as financial crisis.

Stock Market Stimulus Defined. The past 9-years of economic stability and the rally in equities has been the result of $15 trillion of quantitative easing, provided by Central Banks worldwide, which all started in the fourth quarter of 2008, mostly ending in late-2015. Then, $6 trillion in company stock buybacks as well as corporate spin-offs, and various merger and acquisition's incentivized the rally to continue in global equities.

These actions, along with the artificially low interest rates, has allowed companies to borrow at very low rates, issue corporate bonds, and leverage their balance sheets for further corporate stock buy-backs as well as various mergers and acquisitions.

Private Equity Inflows. Further proof of concerned complacency is the $187 billion of funds now flowing into private equity for various mergers and acquisitions, the second highest level, since the third quarter of 2008, just prior to the major stock market decline and the economic recession. 

Ballooning Margin Debt. Margin debt -- the leverage that investors use to purchase additional shares of stock -- has ballooned to $620 billion, exceeding all prior levels reached through previous stock market tops. These leveraged positions could accelerate a stock market decline, since investors maybe forced to liquidate them to meet "margin calls" requirements.

Stimulus Changes. These incentives to elevate the stock market could be coming to an end, since the Federal Reserve has decided to start reducing its $4.5 trillion balance sheet, through the sale of US treasuries and mortgage back securities, and with plans to liquidate $50 billion monthly, representing $600 billion annually, going forward.

In addition, the European Central Bank plans to begin reducing their balance sheet as well, starting at the beginning of 2018, which will also put price pressure on US treasuries and global Government Bonds.

The lack of demand for such a large sale of US treasuries, US mortgage-backed securities and European Government Bonds, from countries like China, Japan, Germany and Italy, could cause Bond prices to fall and yields to rise, raising the current $20 trillion US deficit even further, due to the larger interest payments. 

Currently, China and Japan are selling some of their large US treasury and mortgage-backed security holdings to raise the necessary funds to support their own countries' economies and various stimulus programs. Italy is facing nearly an 18% delinquency rate for a variety of their Government obligations, and could eventually have similar financial problems like Greece, but the European Central Bank will discover that it is simply too big to bail out.

The Growing US Deficit. The US deficit is likely to grow, over the next ten years, from $20 to $30 trillion or more, because of the new tax reform measures, the lack of entitlement as well as government spending cuts, and the higher interest-rate payments for various US treasury and mortgage-backed security obligations. 

The ballooning Government debt will prevent any form of desired economic growth, even with the new individual and corporate tax cuts, offered through the tax reform plans, which will end up costing $2.5 trillion over the next 10 years.

Anticipated Economic Results from the New Tax Reform. US companies, on balance, are already paying below the new corporate tax rate, declining from 35% to 21%. In fact, the typical effective tax rate -- the amount paid minus depreciation -- could be as low as 13% over the past years, when looking at a refined number of how much the US government is actually collecting.

Over half of the Fortune 500 companies that were "consistently profitable," from 2008 to 2015, paid an effective tax rate of 21.3%, but these estimates may be overstating what the US government actually is getting from corporations.

The size of the tax decrease actually looks fairly small, since the new tax cuts will likely only contribute about 0.3% to GDP growth over the next two years, with the changes likely to result in a net tax reduction in corporate tax liabilities.

Equipment Automation for Retailers. The new tax rates will allow the effective cost of buying new equipment to drop, and the savings from reduced payroll costs could jump by at least 20%. In other words, firing employees may save more money by replacing them with cost-effective machinery, making over 8 million retail industry jobs vulnerable to automation within 10 years.

Retailers have for years considered advancements in technology to automate anything from warehouses to check out, in hopes of saving money, space and time. 
The investments required for automation, though, can be steep and the returns are not always offset by short-term labor savings, but could change under the new tax law.

Companies will now be able to write off the cost of new equipment immediately rather than over an extended period of time, thereby lowering their short-term taxes -- making money worth more now than in the future.

Meanwhile, as the corporate tax rate is reduced, companies may choose to keep a greater share of their income, which means they can pocket more savings, achieved through cost cutting, like laying off workers.

For example, a retailer will pocket $14 more of every $100 (14%), from laying off a worker in 2018 than in 2017, a jump of more than 20%, with the effective cut in the corporate tax rate.

Retailers are in a particularly distressing time, with rising minimum wages, changes in shopping behavior, and large Online retailers. They are desperately trying to stabilize their cost structure, including by making stores smaller and more profitable.

People's decisions about what they want to buy will change as prices for various products are adjusted -- simple economies of scale.

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