Stock Market

A Step Towards Common Sense

By David Stockman  |  September 12, 2019

It’s the question of the day, the week, the month, the year, the entire damn era, submitted shortly before this morning’s open by Sven Henrich: “What is the true state of markets and the economy without central bank intervention?”

Negative Interest Rates Don’t Stimulate Growth

Sven’s query was prompted by Mario Draghi’s announcement that the European Central Bank has cut its deposit rate to an all-time low of -0.5% and will resume bond purchases to the tune of EUR20 billion a month as of November.

Of course, the entire German yield curve slipped back into negative territory following the announcement, with the 30-year bond paying -0.09%. That’s what you see below in an image shared by Holger Zschaepitz. Note too that the DAX, Germany’s primary equity index, tumbled hard from intraday highs in the minutes after the announcement.

Monetary central planners want you – need you – to believe negative rates stimulate growth.

However, at the same time he’s taking rates further into negative territory, Draghi is cutting the eurozone’s GDP forecast for the next three years. And he’s restarting “quantitative easing” because of recession fears but says the risk of one is low.

They have no idea what they’re doing.

Trump’s Contribution to the Madness

And we haven’t even touched on the Tweeter-in-Chief’s latest contribution to the debate: “Trump says Fed ‘boneheads’ should cut interest rates to zero ‘or less,’ US should refinance debt”.

Now, there’s little doubt about the “Fed ‘boneheads’” part; they are. At the same time, more easy money is not the answer to what ails the global economy. But discussion of it – especially when the Donald’s takes his turns – is bound to cause a lot of volatility. And wait until the calendar turns to 2020.

The increasingly desperate incumbent will do anything he must to hold the White House. Tossing John Bolton to the ash heap is a “peace” move. Everything from here to next November is scorched-earth… he’ll run against “Pocahontas the Socialist,” invading immigrants, vaping, and the Fed.

Those boneheads think they have the tools to contain what’s coming. I doubt they do.

The bottom line is the rules of the game have changed, as I note in the September issue of The Stockman Letter, which we’ll publish on Friday. And we’re setting up to take advantage of what’ll ensue…

That’s the main reason we’ve brought aboard Michael Coolbaugh, here with his second Thursday commentary on markets

Making Sense of Madness

By Michael Coolbaugh

Published in 1841, Extraordinary Popular Delusions and the Madness of Crowds is an early study of crowd psychology by Scottish journalist Charles MacKay. In this book, MacKay is quoted as saying, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

Value vs. Growth

If you’ve opened a financial publication over the past week, chances are you’ve heard about the whole “value” versus “growth” debate. There is also a very high probability the punchline for those articles is that the rotation towards “value” is a very bullish sign for the overall markets.

The rationale behind this argument is that “value” is often associated with sectors like Industrials, Energy, Materials, and Banks.

In other words, investors are now buying stocks that typically benefit from a cyclical upswing in the economy.

The other argument is that this broadening out of buying activity is typically a good indication of healthy market breadth. When you hear someone mention “breadth.” They’re referring to the amount of stocks that are powering the overall market movements.

In general, when markets are rising, one would want to see a lot of individual stocks rising.

Not All Stocks are Created Equal

Now, you’re probably wondering, “What in the world is he talking about? If the market is rising, aren’t individual stocks rising as well?”

Problem is, the way most market indices are created, not all stocks receive an equal weight.

Said differently, the largest companies receive the largest weights. What we find is the market index can rise with only a few individual stocks rising; think Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOGL).

OK, so if these are all good things, shouldn’t we be loading up on stocks?!

Well, Not So Fast…

As markets approach their peak, it’s common for investors to eschew the safer, sturdier stocks that many consider “value.”

Let’s take a look at Chevron (NYSE: CVX). Despite Chevron offering a basic good which our lives depend on (no, not all of us own a Tesla) and the fact that, based on multiple fundamental metrics, it’s a strong company, its total return since the beginning of 2014 is a lousy 21.9%.

When you compare that to Amazon’s stellar 364% total return over the same time period, you begin to see what I mean! When Amazon is roaring higher at about 70% per year, who would want to own boring old Chevron?!

The short answer is, this is classic human behavior. We’re all enticed by the shiniest new toy, and when we continue to make gobs of money, humans often throw all caution to the wind.

Outside of the anomaly that was 2015 and 2016, which could be argued was skewed by massive fiscal and monetary stimulus around the world, we see that these extreme turning points in “value” often coincide with major market tops (see 1999 and 2008).

For those of you who were invested in the stock market during the dot-com bubble of 1998 to 2000, you’re probably saying, “Well sure, but today is nothing like the mayhem that unfolded in the late ’90s.”

To that, I say, “Are you sure?”

Before It’s Too Late…

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR