Share on facebook
Share on twitter
Share on linkedin
Share on telegram

2020 Theme : Investment Changed For A Lifetime

Starting last summer, I had started warning members that a significant decline in global equities was imminent. At the end of 2019, we were on high alert for what I expected to be one of the more significant equity corrections since the Great Depression. Then at the beginning of 2020 we were actively preparing for it. Even I wasn’t fully prepared for what was to come. Here we are in mid-August and we have already witnessed a historic crash in U.S. stock markets, which was immediately followed by an unprecedented recovery that saw the Nasdaq (and likely, soon the S&P 500) carry back above all time highs, while we watched the global supply chain crumble due to massive global supply and demand shocks at the same time. Central banks ran through the entire 2008 playbook in a matter of a couple months. These policy moves will likely have a long lasting negative impact on the global economy, and market behavior as we know it.

Expectations Vs. Reality

Coming into the year, we expected the U.S. – China tensions, Brexit, U.S. – Iran tensions, and the U.S elections to have a significant impact on market activity, just to name a few key things. We were tracking the high flying U.S. equities markets with the expectation of a strong correction, but had no real idea of what the eventual trigger would be. This is the way of Socionomics, we can see the red flags the market is throwing up, but what will eventually set the crowd off is a bit of a mystery. With that said, there were plenty of themes going on around the world that could eventually spark the mood shift. A global pandemic was not on the list at that time. Now that it is the reality, we must analyze what it all means moving forward. What kind of impact will social distancing have on economic activity, or the impact of central bank actions on rates and equities markets. Curves are flatter around the world and rates are lower. One of the reasons we were anticipating a significant correction in 2020, was the largely liquidity driven markets boosted by low rates and easy policy that began during the Great Financial Crisis. Looking back, U.S. equities topped well before Covid-19 became the threat it is now, and even longer before economic shutdowns actually began. While Covid-19 was a trigger, and certainly a contributor to what we are seeing today, it was not the underlying cause of everything we are experiencing in the financial markets at this time. What we are seeing in the financial markets is a perfect storm of events, policy, and social mood. 


Anomalies Building Up

In other videos and articles we have discussed several anomalies that are occurring right now in the U.S. financial markets. The huge divergence between Growth and stocks, just as large of a divergence between consumer confidence and stocks, the millions of amateur traders that have flooded into the U.S. stock markets, many with long only accounts just to name a few. We also see extreme optimism building up on the long side of U.S stocks, a few big names well outpacing the rest of the indexes. The CBOE Equity Put/Call Ratio remains near extreme lows pointing to a mania for call options. The extremes are almost too numerous to count, but we will share a few charts so you get the idea. 

There are many charts that I have not posted below, such as the CBOE Equity Put/Call ratio which is easy to looks up, the chart showing stock market volume declining during the entire recovery, again, easy to look up. I think everyone gets the point, be careful and be ready. 

MSCI World Financials
S&P 500 & U.S. Consumer Confidence
S&P 500 & U.S. Growth
Tech Stocks Vs. Extreme
Highest Budget Deficit Since WWII
A Few Big Green, Lots Of Red
Bank's Won't Lend
Record Flows Inflation Protection ETF's

A Deflationary Trend Rolls On

To offer some clarity about deflation, first let’s properly define the term. Many economist will simply define deflation as “falling prices”, but this is actually incorrect. Falling prices are a symptom of deflation, but not the definition of deflation. Webster’s defines deflation as follows, ” a contraction in the volume of available money or credit that results in a general decline in prices.” The definition clearly points out that falling prices are a result of deflation, not the definition of it. 

We want to bring your attention to U.S. Yields, actually this also applies to global yields. Back in March, Reuters put out an article that stated, “A collapse in Treasury yields as concerns about the spreading coronavirus sends investors scurrying for low-risk government securities has led some to start preparing for the possibility that the U.S. debt yields could turn negative”. However, yields have been trending in this direction since the 80’s. See the charts below that show the US 2, 10, and 30 year bond yields overlaid with the S&P 500.

The steady decline in global rates is obviously not a result of Covid-19, no matter how many talking heads try to match the current rate situation with pandemic reasoning. This trend started four decades ago. 

To put this into perspective, bond yields are typically viewed as a way to gauge the health of an overall economy. When bond yields are this low, it essentially means the Fed has to beg people to borrow in order to stimulate growth. With bond yields as low as we see them now there is basically a fire sale on money, yet the Fed and other central banks are forced to buy up large amounts of these government bonds to provide that stimulus. 

Once again, I will reference the yield charts below because they are a sign that we are marching directly toward a deflationary environment. 

For a deflationary environment we basically need three things. A build up of money, a build up of credit, and a negative shock to the markets that drives us into risk aversion. The first two charts below show both a buildup of money and a build up of credit to extreme historic levels. The third chart shows the velocity of money (Velocity of M2 Money Stock). Falling velocity is clearly deflationary, during inflation people spend money faster for fear that the currency will buy less in the future. Recently we have also seen personal savings skyrocket, which is another ominous sign of difficult economic times to come. 

In closing, it is important that we look at what the data is showing up in order to better prepare ourselves for what lies ahead. The current picture is not a healthy one, and warning us of the next big event in the financial markets. Become familiar with the word deflation.

Scroll to Top