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The Debt Ceiling Is A Cliff — And We Keep Raising It

Fiat money extends the debt cycle and traps citizens in ever-increasing inflation — but bitcoin forces a reckoning.

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Fiat money extends the debt cycle and traps citizens in ever-increasing inflation — but bitcoin forces a reckoning.

The Longer We Wait, The Harder We Fall

On Friday, October 15, 2021, U.S. President Joe Biden signed legislation raising the government’s borrowing limit to $28.9 trillion. Many Americans are now accustomed to this recurring bureaucratic process and don’t think much of it or its consequences. Two sides fight, they get close to a deadline (and sometimes pass it!) and eventually raise the “debt ceiling” so they can fight over it again some months later.

We Americans, as a collective and a government, are deciding to delay paying our bills. At an individual level, we understand what happens when we don’t pay our own bills. But what happens when the most powerful nation today stops paying bills? To understand the effects of this — and how we got here in the first place — we need to study history. Let’s start with a simple short-term debt cycle.

Lending And The Short-Term Debt Cycle

The short-term debt cycle arises from lending. Entrepreneurs need capital to bring their ideas to fruition, and savers want a way to increase the value of their savings. Traditionally, banks sat in the middle, facilitating transactions between entrepreneurs and savers by aggregating savings (in the form of bank deposits) and making loans to entrepreneurs.

However, this act creates two claims on one asset: The depositor has a claim on the money they deposited, but so does the entrepreneur who receives a loan from the bank. This leads to fractional reserve banking; the bank doesn’t hold 100% of the assets that savers have deposited with it, they hold a fraction.

This system enabled lending, which is a useful tool for all parties — entrepreneurs with ideas, savers with capital, and banks coordinating the two and keeping ledgers.

Lending aids the creation of new goods and services, enabling the growth of civilization (Source).

When Times Are Good

When entrepreneurs successfully create new business ventures, loans are repaid and debts are cancelled, meaning there are no longer two claims on one asset. Everyone is happy. Savers and banks earn a return, and we have new businesses providing services to people thanks to the sweat and ingenuity of the entrepreneurs and staff.

The debt cycle in this case ends with debts being paid back.

When Times Are Bad

When Alice the entrepreneur fails at her business venture, she is unable to repay her loan. The bank now has too many claims against the assets that they have, because they were counting on Alice repaying her loan. As a result, if all depositors rush down to the bank at once to withdraw (a “run on the bank”) then some depositor(s) won’t get all of their money back.

Depositors rushing to withdraw from a bank they believe to be failing (Source).

If enough entrepreneurs fail at once, say because of an “Act of God” calamity, this can cause quite an uproar and a lot of bank runs. However, the debts are still settled, either through repayment to depositors or default, leaving depositors without their money.

The debt cycle in this case ends with some portion of debts defaulting.

The debt cycle either ends with payment or default — there is no other option. When borrowing overextends, there must be a crash. These crashes are painful but short and contained.

The Mini Depression Of 1920

The year 1920 was the single most deflationary year in American history, with wholesale prices declining almost 40%. However, all measures of a recession (not just stock prices!) rebounded by 1922, making the crash severe but short. Production declined almost 30% but returned to peak levels by October 1922.

This depression also followed the 1918–1920 Spanish Flu pandemic and came one year after the conclusion of the First World War. Despite these massive economic dislocations, the crash was short and now relegated to a footnote in history.

Finance writer and historian James Grant, founder of Grant’s Interest Rate Observer, noted about the 1920 Depression in his 2014 book “The Forgotten Depression, 1921”:

​​"The essential point about the long ago downturn of 1920–1921 is that it was kind of the last demonstration of how a price mechanism works and the last governmentally unmediated business cycle downturn.”

The Free Market And Hard Money Curtail Debt Cycles

When an economy runs on a hard money system, free market forces rein in excessive borrowing and thus keep the debt cycle short.

What Is Hard Money?

Hard money is a form of money that is expensive for anyone to produce. This ensures a level playing field: Everyone has to work equally hard to gain money. Nobody can create money and spend it into the economy without incurring a cost almost equal to the value of the money itself. Gold and bitcoin are two examples of hard money, mining them requires so much time and energy that it’s almost not worth it to do so.

All those miners won’t run themselves (Source).

How Do Free Markets Rein In Borrowing?

Free market forces are crucial to limiting speculative manias. On one side, you have lenders and savers who hope to make a return on their capital, while on the other, you have borrowers hoping to take borrowed money and turn it into more money.

In a free market that utilizes hard money, there are two options to conclude the extension of credit: Debts are repaid, or debts are defaulted on. The greed of lenders wanting more return on their capital by making more loans is kept in check by the risk of default. The greed of borrowers wanting more capital is kept in check by the burden on their future self or business from increased debt.

This applies at an individual level as well: As any borrower increases their debt pile, they become riskier and riskier to lend to. That risk means lenders will demand to be paid a higher interest rate on their loan. That higher rate makes it harder for the borrower to borrow more, leading them to either turn toward paying down some of their existing debts or default outright.

These forces keep lending in balance, cutting down speculative manias before they go too far.

The Lengthening Of The Debt Cycle

Powerful entities — like governments — can use their sheer power to make them a less risky borrower.

Over the past century or so, we’ve seen many governments take on debt so that they can lend to individuals and businesses, especially during hard economic times. Those loans help individuals and businesses pay their bills and debts, easing the pain of a crash. However, this lending by governments does not resolve debts; it simply transfers debt from private individuals to the government, putting it in a large pile of public debt.

That debt didn’t disappear (Source).

Governments can build such a huge pile of debt because lenders know that a government has special tools for paying back that debt. You and I may not be able to seize the property of others in order to pay our debts, but a government can. Even the bastion of the free world, the United States, seized the privately held gold of its citizens in order to keep itself afloat in 1933.

This government debt issuance leads to a lengthening of the debt cycle. The depth of each drop is tempered, but the unwinding of debts is not completed — it is only delayed. Frequent short and sharp downturns are transformed into longer cycles with infrequent but devastating collapses.

This brings us back to the debt ceiling: The reason our politicians keep having this debate is thanks to ongoing debt issuance by our government in order to fund bailouts during downturns as well as government outlays that exceed government revenues. All this debt climbs on top of that massive $28+ trillion pile of public debt.

The U.S. Debt Clock (Source).

However, at some point, even powerful governments feel the heat from angsty lenders and need a new set of tools. Throughout history, governments in a corner have employed another tool to service their debt and continue to prolong the debt cycle: debt monetization. The U.S. government opened this toolbox in 1971 by disconnecting the U.S. dollar — and all global currencies — from gold thus creating the fiat currency system we still live with today.

Fiat Currency And The Third Tool for Ending Debt Cycles

Fiat currency, like that friend who only calls when he needs something, shows up often in history but never stays for long. “Fiat” roughly translates from Latin as “by decree.” Fiat currency is thus money which derives its use — and value — by decree from a governing body. Fiat currency is not hard money; the governing body often (solely) reserves the right to create the currency and distribute it through some mechanism.

In a fiat currency system where depositors are placing fiat currency into banks, we have a new trick for unwinding debts.

Monetization: A New Tool For Ending Debt Cycles

Remember how bad times in the debt cycle led to the bank having more claims against their assets than assets on their books? Within a fiat currency system, the governing body can now solve this little ledger problem by just creating more currency. Poof, everyone gets paid.

We call this tool for ending debt cycles monetization, because we “monetize” the debts by paying them with newly created currency.

Today, we often call these governing bodies that create currency “central banks,” and together with their partners in government we believe these entities are capable of “softening” the frequent crashes endemic to an economy with any kind of lending. We like lending, because when it goes well, everyone benefits, so this fiat currency system appears to be a decent way of easing the pain of downturns.

The Effect Of Monetizing Debt

We already know that paying down debts costs the borrower, whereas defaulting on them costs the lender. Many central bankers and politicians would like to drown you in jargon at this point, leaving you with the impression that monetization solves the painful dilemma of pay or default, even if they can’t articulate just how.

So who foots the bill when we monetize debts?

When debts are monetized, new currency enters circulation, diluting the value of all the existing currency in circulation. This dilution of value of new currency is felt through inflation, which we’re hearing a lot about lately.

Those citizens who work on a fixed salary or wage and keep most of their net worth in the currency suffer from inflation the most, while those closest to the government and banking system with most of their net worth in non-cash assets benefit. It is those former citizens, the ones furthest away from the currency “spigot” and least aware of the effects of inflation, who pay for debt monetization.

The endgame of debt monetization is hyperinflation, which occurs when the central bank decides to go bananas and print, print, print to pay down every debt. Zimbabwe, Venezuela, and pre-WWII Germany come to mind. This is not a pretty event for anyone involved. Unlike defaulting or paying down debt, where effects are contained to the lenders and borrowers involved, monetization leads down a road ending in not just economic collapse but societal collapse.

The cost of one kilogram of tomatoes in Venezuelan bolivars in 2018 (Source).

Monetizing debt has serious costs, so operators of fiat currency systems must act cautiously. However, monetizing debt throughout history has often been more politically favorable than paying or defaulting, likely owing to the fact that it’s harder for people to understand who is footing the bill.

Governments And The Never-Ending Debt Cycle

Now that we understand how fiat currency enables debt monetization, let’s jump back to governments and their giant debt piles.

The government debt to national GDP ratios of every nation in the world, pre-COVID (Source).

As a government’s pile of debt grows, it becomes ever more difficult and painful to pay it down, default on it or monetize it. Nobody from the politician to the politically connected elite to the welfare recipient wants budget cuts in their area, especially in the name of paying down the public debt. Defaulting would mean lenders would lose confidence in the government, demanding higher interest rates in order to make further loans thus forcing budget cuts. Debt monetization, taken too far, rips apart the fabric of society.

This results in an increasing desperation by the government to keep the status quo intact. Just keep the debt growing and push the problem onto the next generation.

The free market can bring an end to this debt cycle by simply “shorting” (selling) government bonds (loan contracts), making it more expensive for the government to borrow. However, a fiat currency system makes this difficult, because the central bank can print unlimited fiat currency and use it to buy bonds. Since the central bank incurs no cost to print currency, they are the ultimate player in the market. An investor who sells government bonds is destined to lose to a central bank that will never stop buying, so most investors go along with the game. This destroys the free market’s ability to bring an end to overborrowing.

Central banks for the past 50 years have proven to us, unequivocally, that they will support their governments’ borrowing habits and fight off the free market that would keep the debt cycle in check.

Interest rates for major government bonds have trended down since the early 1980s, following the birth of a global fiat monetary system in 1971 (Source).

When central banks buy government bonds, they pay for them with newly printed currency. This is what I mean by monetizing debt. Too much of this, and we get the hyperinflation scenario we all want to avoid.

As debts climb, all options — from paying and defaulting to monetizing — become more and more painful. So what is a government to do in order to continue lengthening the debt cycle?

We’re Doing This For Your Own Good

Continuing the borrowing bonanza without an unwinding force by the free market requires governments to employ tools of a more authoritarian or subversive variety. The United States has a long and well-hidden history of these tactics, from seizing the gold of its citizens in the 1930s to partnering with oil-rich despots in the 1970s to issuing jargon-clad explanations for quantitative easing during the Global Financial Crisis of 2008.

Monetary debasement is the powerful government’s tool of choice to forego the inevitable, but sustaining that tool’s power requires preventing free individuals from forcing a return to rationality. As public debt rises, governments will consider new measures to kick the can such as:

  • Raising revenue through increased taxation like unrealized capital gains.
  • More intense financial surveillance and controls to stabilize the currency’s value.
  • Legal workarounds to mint trillion dollar coins to further dilute the currency supply and “monetize” the problem of excessive government spending.

As long as governments like the United States continue to overspend, bailing out every short-term debt cycle, they will simply delay paying the bills and either increase the severity of an eventual unwinding — via payments or default — or trigger a collapse of society through debt monetization. We will all pay for a century of foregone debts through some combination of increased taxation, inflation and loss of freedom.

Waking Up

When will we wake up and see this system for what it is? Unfortunately, most probably never will. They will blame immigrants or billionaires, depending on their political bent, for the ills of our time. They will continue to defend the system, even as the tightness of its controls and severity of its punishments increase.

“Many of them are so inured and so hopelessly dependent on the system that they will fight to protect it,” (Source).

This knowledge is your power. Now that you see the trajectory of the long-term debt cycle, what steps will you take to bring a better future?

The realizations I’ve written here are the reasons I buy, hold and support Bitcoin — an accessible form of hard money that can support a modern, digital and global economy. Bitcoin is a lifeline extending to a world where debt cycles are kept short and crashes are contained, where governments are robbed of a critical tool for lengthening the end of the debt cycle into a societal collapse. Supporting Bitcoin forces governments to be rational yet again, to balance their budgets and pay down debts, to avoid monetization.

Will you be part of the solution or part of the perpetuation?

This is a guest post by Captain Sidd. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

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Economics

“Black Friday” Plunge As Market Rattled By Covid Variant

In this 11-26-21 issue of "Black Friday" Plunge As Market Rattled By Covid Variant

"Black Friday" As Market Plunges
Time To Buy Oil
Yes, Interest Rates Will Matter
Portfolio Positioning
Sector & Market Analysis
401k Plan Manager

Follow Us On:…

Published

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In this 11-26-21 issue of “Black Friday” Plunge As Market Rattled By Covid Variant

  • “Black Friday” As Market Plunges
  • Time To Buy Oil
  • Yes, Interest Rates Will Matter
  • Portfolio Positioning
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


Is It Time To Get Help With Your Investing Strategy?

Whether it is complete financial, insurance, and estate planning, to a risk-managed portfolio management strategy to grow and protect your savings, whatever your needs are, we are here to help.

Schedule your “FREE” portfolio review today.


“Black Friday” As Market Plunges

Last week, we discussed the weakness of the underlying market as “FOMO” had returned to the market.

“The only concern we have is the lack of breadth as of late. As shown, the number of stocks above the 50-dma turned sharply lower this week. Furthermore, they are well below levels when markets typically make new highs. The same goes for the number of stocks trading above their 200-dma’s.”

Chart updated through Friday.

S&P 500 technical update

Over the last couple of weeks, the market has been warning to the risk of a downturn, all that was needed was a catalyst to change sentiment.

That occurred as news of a new “Covid” variant broke, stocks marked “Black Friday” by plunging firmly through the 20-dma and support at recent lows. Notably, that downside break broke the consolidation pattern (blue box in the chart below) that began in early November. While there is some minor support around 4550, critical support lies at the 50-dma at 4527. That support level also corresponds to the September peak.

With mutual fund distributions running through the first two weeks of December, there is additional downside pressure on stocks near term. However, our “money flow sell” signal is firmly intact and confirmed by the MACD signal. Such suggests we continue to maintain slightly higher levels of cash.

S&P 500 money flow signal RIAPRO

Notably, the market is getting oversold near-term, with the money-flow signal depressed. Such suggests that any further weakness will provide a short-term trading opportunity. As discussed last week, the statistical odds are high that we will see a “Santa Rally” as most professional managers will position for year-end reporting.

Just remember, nothing is guaranteed. We can only make educated guesses.

Will The Fed Slow Their Roll

While “Black Friday” usually marks the beginning of the retail shopping season, the question is whether the new “variant,” which is flaring concerns of additional lock-downs, will reverse the current economic recovery. As Barron’s notes, it will be worth watching the Fed closely.

“Fixed-income markets are signaling that the Federal Reserve will have to increase interest rates sooner than expected, which could put a dent in the stock market.

The yield on the 2-year Treasury note has gone from 0.5% in early November to 0.64% as of Wednesday. The move suggests that investors expect the Fed to raise interest rates to combat inflation that remains higher than expected because of soaring consumer demand and supply chains that are struggling to match demand.

Indeed, minutes released Wednesday from the Fed’s meeting earlier this month show that members of the central bank are prepared to increase rates sooner than previously anticipated if inflation remains high.”

Of course, this was before “Black Friday” sent yields plunging 10% lower in a single day. Suddenly, the bond market is starting to question the sanity of hiking rates in the face of an ongoing pandemic.

Bonds technical update

While many pundits have suggested higher interest rates won’t matter to stocks, as we will discuss momentarily, they do matter and often matter a lot.

The surge in the new variant gives the Fed an excuse to hold off tightening monetary policy even though inflationary pressures continue to mount. But, what is most important to the Fed is the illusion of “market stability.”

What “Black Friday’s” plunge showed was that despite the Fed’s best efforts, “instability” is the most significant risk to the market and you.

More on this in a moment.



Time To Buy Oil?

Once a quarter, I review the Commitment Of Traders report to see where speculators place their bets on bonds, the dollar, volatility, the Euro, and oil. In October’s update, I looked at oil prices that were then pushing higher as speculators were sharply increasing their net-long positioning on crude oil.

We suggested then that the current extreme overbought, extended, and deviated positioning in crude will likely lead to a rather sharp correction. (The boxes denote previous periods of exceptional deviations from long-term trends.)

Oil Rates Dollar, Traders Are Pushing Oil, Rates & The Dollar. Are They Right?

The dollar rally was the most crucial key to a view of potentially weaker oil prices. Given that commodities are globally priced in U.S. dollars, the strengthening of the dollar would reduce oil demand. To wit:

The one thing that always trips the market is what no one is paying attention to. For me, that risk lies with the US Dollar. As noted previously, everyone expects the dollar to continue to decline, and the falling dollar has been the tailwind for the emerging market, commodity, and equity ‘risk-on trade.” – June 2021

Portfolio, Rates, S&P 500, energy, yield

Since then, as expected, the dollar rally is beginning to weigh on commodity prices, and oil in particular.

oil dollar technical chart.

While the dollar could certainly rally further heading into year-end, oil prices are becoming much more attractive from a trading perspective. The recent correction did violate the 50-dma, which will act as short-term resistance. However, prices are beginning to reach more attractive oversold levels.

There are also reasons to believe higher oil prices are coming.



Higher Oil Prices Coming

The Biden administration released oil from the “Strategic Petroleum Reserve,” attempting to lower oil prices. He also tasked the DOJ to “investigate oil companies for potential price gouging.” These actions are thinly veiled attempts to regain favor with voters but will not lower oil prices.

Oil prices are NOT SET by producers. Instead, speculators and hedgers set oil prices on the NYMEX. Think about it this way:

  • If oil companies are setting prices to “reap profits,” why did oil prices go below ZERO in 2020?
  • Furthermore, would producers need to “hedge” current production against future delivery?

There are two drivers reflecting positioning by speculators and hedgers:

  1. The expected supply and demand for oil; and,
  2. The value of the dollar.

The more critical problem comes from the Administrations’ attack on production over “climate change” policies. As noted in Crude Investing: Energy Stocks & ESG (kailashconcepts.com):

This isn’t rocket science.  Look at the sharply lagging rig response to the rise in energy prices post the Covid crash. This is an anomaly. 

According to history, there should be ~1,300 rigs in operation today based on current oil prices. With only ~480 rigs running today, oil’s prospects may be bright over the long haul.”

Portfolio, Rates, S&P 500, energy, yield

With output at such low levels, OPEC+ refusing to increase production, and “inefficient clean energy” increasing demand on “dirty energy,” higher future prices are likely.

If the economy falls into a tailspin, oil prices will fall along with demand, so nothing is assured. However, the ongoing decline in CapEx in the industry suggests production will continue to contract, leaving it well short of future demand.

Portfolio, Rates, S&P 500, energy, yield
Chart courtesy of Kailash Concepts

That is the perfect environment for higher prices.


In Case You Missed It


Higher Interest Rates Will Lead To Market Volatility

Did “Black Friday’s” plunge send a warning about rates? Last week, we discussed that it isn’t a question of if, but only one of when.

I showed the correlation between interest rates and the markets. With the sharp drop in rates, it is worth reminding you of the analysis. It is all about “instability.”

The chart below is the monthly “real,” inflation-adjusted return of the S&P 500 index compared to interest rates. The data is from Dr. Robert Shiller, and I noted corresponding peaks and troughs in prices and rates.

interest rates vs S&P 500

To try and understand the relationship between stock and bond returns over time, I took the data from the chart and broke it down into 46 periods over the last 121-years. What jumps is the high degree of non-correlation between 1900 and 2000. As one would expect, in most instances, if rates fell, stock prices rose. However, the opposite also was true.

Interest rate changes vs S&P 500

Rates Matter

Notably, since 2000, rates and stocks rose and fell together. So bonds remain a “haven” against market volatility.

As such, In the short term, the markets (due to the current momentum) can DEFY the laws of financial gravity as interest rates rise. However, as interest rates increase, they act as a “brake” on economic activity. Such is because higher rates NEGATIVELY impact a highly levered economy:

  • Rates increases debt servicing requirements reducing future productive investment.
  • Housing slows. People buy payments, not houses.
  • Higher borrowing costs lead to lower profit margins.
  • The massive derivatives and credit markets get negatively impacted.
  • Variable rate interest payments on credit cards and home equity lines of credit increase, reducing consumption.
  • Rising defaults on debt service will negatively impact banks which are still not as well capitalized as most believe.
  • Many corporate share buyback plans and dividend payments are done through the use of cheap debt.
  • Corporate capital expenditures are dependent on low borrowing costs.
  • The deficit/GDP ratio will soar as borrowing costs rise sharply.

Critically, for investors, one of the main drivers of assets prices over the last few years was the rationalization that “low rates justified high valuations.”

Either low-interest rates are bullish, or high rates are bullish. Unfortunately, they can’t be both.

What “Black Friday’s” plunge showed was the correlation between rates and equity prices remains. Such is due to market participants’ “risk-on” psychology. However, that correlation cuts both ways. When something changes investor sentiment, the “risk-off” trade (bonds) is where money flows.

The correlation between interest rates and equities suggests that bonds will remain a haven against risk if something breaks given exceptionally high market valuations. The market’s plunge on “Black Friday” was likely a “shot across the bow.”

It might just be worth evaluating your bond allocation heading into 2022.



Portfolio Update

We made no substantive changes to portfolio allocations this past week given due to the holidays. Generally, the week of Thanksgiving is a poor indicator of market sentiment given the “inmates are running the asylum.”

Therefore, despite the market swinging around a good bit this past week, we will re-evaluate our positioning and holdings when institutional traders return to their desks next week.

However, as a reminder:

“Over the last two weeks, we took profits in overbought and extended equities. We also shortened our bond duration by trimming our longer-duration holdings. Such actions rebalanced portfolio risk short-term. In addition, we run a 60/40 allocation model for our clients; such left us slightly underweight equities and bonds and overweight cash.”

Portfolio allocation model.

Despite the sell-off on Friday, the bullish bias remains strong. We also remain in the “seasonally strong” period of the year, and the seemingly endless supply of money continues to flood into equities.

However, as discussed most of this week, mutual fund distributions will begin in earnest and continue through the second week of December. Such suggests we could see some additional volatility and potential weakness in the market as those distributions get made.

Critically, any correction will provide a decent entry point for the year-end “Santa Claus” rally and the first week of January, which tend to be strong. Therefore, we will try and take advantage of that.

While Friday’s plunge likely shocked you out of your “tryptophan-induced” coma, I hope you had a Happy Thanksgiving.

See you next week.

By Lance Roberts, CIO


Market & Sector Analysis

Analysis & Stock Screens Exclusively For RIAPro Members


S&P 500 Tear Sheet

SP500 Tear Sheet

Performance Analysis

Market Sector Relative Performance

Technical Composite

The technical overbought/sold gauge comprises several price indicators (RSI, Williams %R, etc.), measured using “weekly” closing price data. Readings above “80” are considered overbought, and below “20” are oversold. The current reading is 65.83 out of a possible 100.

Technical gauge RIAPRO

Portfolio Positioning “Fear / Greed” Gauge

Our “Fear/Greed” gauge is how individual and professional investors are “positioning” themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, to more likely the market is closer to a correction than not. The gauge uses weekly closing data.

NOTE: The Fear/Greed Index measures risk from 0-100. It is a rarity that it reaches levels above 90. The current reading is 80.55 out of a possible 100.

Fear Greed Gauge

Sector Model Analysis & Risk Ranges

How To Read This Table

  • The table compares each sector and market to the S&P 500 index on relative performance.
  • “MA XVER” is determined by whether the short-term weekly moving average crosses positively or negatively with the long-term weekly moving average.
  • The risk range is a function of the month-end closing price and the “beta” of the sector or market. (Ranges reset on the 1st of each month)
  • Table shows the price deviation above and below the weekly moving averages.
Risk Range Report

Weekly Stock Screens

Currently, there are four different stock screens for you to review. The first is S&P 500 based companies with a “Growth” focus, the second is a “Value” screen on the entire universe of stocks, and the last are stocks that are “Technically” strong and breaking above their respective 50-dma.

We have provided the yield of each security and a Piotroski Score ranking to help you find fundamentally strong companies on each screen. (For more on the Piotroski Score – read this report.)

S&P 500 Growth Screen

Market index growth screen

Low P/B, High-Value Score, High Dividend Screen

dividend growth screen

Fundamental Growth Screen

fundamental growth screen

Aggressive Growth Strategy

aggressive growth screen

Portfolio / Client Update

This past week, we took no substantive actions in portfolios. Such is because Thanksgiving week usually trades on very light volume.

“Given the more exceeding levels of FOMO in the market currently, we remain weighted towards equity risk. Therefore, from a portfolio management standpoint, we must continue to press for portfolio returns for clients. However, don’t mistake that as a disregard for the underlying risk.

Over the last two weeks, we took profits in overbought and extended equities (F, NVDA, AMD). We also shortened our bond duration by trimming our longer-duration holdings. Such actions rebalanced portfolio risk short-term. In addition, we run a 60/40 allocation model for our clients; such left us slightly underweight equities and bonds and overweight cash.

Santa Claus Rally, Santa Claus Rally Is Coming, But Will Markets Correct First?

The best opportunity to increase equity would come from a correction in early December as mutual funds distribute their annual gains. Such would provide a better entry point for the year-end “Santa Claus Rally.”

As we move closer to the end of the year, I will review our annual performance in both primary models and discuss what we expect as we head into 2022. With the Fed on course to taper their balance sheet, and the market forecasting 3-rate hikes, next year will likely be an entirely different “ball game.”

Portfolio Changes

There were no changes this past week.

As always, our short-term concern remains the protection of your portfolio. Accordingly, we remain focused on the differentials between underlying fundamentals and market over-valuations.

Lance Roberts, CIO

Have a great week!

The post “Black Friday” Plunge As Market Rattled By Covid Variant appeared first on RIA.

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Economics

“Black Friday” Plunges As Covid Variant Rattles Markets

In this 11-26-21 issue of "Black Friday" Plunges As Market Rattled By Covid Variant

"Black Friday" As Market Plunges
Time To Buy Oil
Yes, Interest Rates Will Matter
Portfolio Positioning
Sector & Market Analysis
401k Plan Manager

Follow Us On:…

Published

on

In this 11-26-21 issue of “Black Friday” Plunges As Market Rattled By Covid Variant

  • “Black Friday” As Market Plunges
  • Time To Buy Oil
  • Yes, Interest Rates Will Matter
  • Portfolio Positioning
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


Is It Time To Get Help With Your Investing Strategy?

Whether it is complete financial, insurance, and estate planning, to a risk-managed portfolio management strategy to grow and protect your savings, whatever your needs are, we are here to help.

Schedule your “FREE” portfolio review today.


“Black Friday” As Market Plunges

Last week, we discussed the weakness of the underlying market as “FOMO” had returned to the market.

“The only concern we have is the lack of breadth as of late. As shown, the number of stocks above the 50-dma turned sharply lower this week. Furthermore, they are well below levels when markets typically make new highs. The same goes for the number of stocks trading above their 200-dma’s.”

Chart updated through Friday.

S&P 500 technical update

Over the last couple of weeks, the market has been warning to the risk of a downturn, all that was needed was a catalyst to change sentiment.

That occurred as news of a new “Covid” variant broke, stocks marked “Black Friday” by plunging firmly through the 20-dma and support at recent lows. Notably, that downside break broke the consolidation pattern (blue box in the chart below) that began in early November. While there is some minor support around 4550, critical support lies at the 50-dma at 4527. That support level also corresponds to the September peak.

With mutual fund distributions running through the first two weeks of December, there is additional downside pressure on stocks near term. However, our “money flow sell” signal is firmly intact and confirmed by the MACD signal. Such suggests we continue to maintain slightly higher levels of cash.

S&P 500 money flow signal RIAPRO

Notably, the market is getting oversold near-term, with the money-flow signal depressed. Such suggests that any further weakness will provide a short-term trading opportunity. As discussed last week, the statistical odds are high that we will see a “Santa Rally” as most professional managers will position for year-end reporting.

Just remember, nothing is guaranteed. We can only make educated guesses.

Will The Fed Slow Their Roll

While “Black Friday” usually marks the beginning of the retail shopping season, the question is whether the new “variant,” which is flaring concerns of additional lock-downs, will reverse the current economic recovery. As Barron’s notes, it will be worth watching the Fed closely.

“Fixed-income markets are signaling that the Federal Reserve will have to increase interest rates sooner than expected, which could put a dent in the stock market.

The yield on the 2-year Treasury note has gone from 0.5% in early November to 0.64% as of Wednesday. The move suggests that investors expect the Fed to raise interest rates to combat inflation that remains higher than expected because of soaring consumer demand and supply chains that are struggling to match demand.

Indeed, minutes released Wednesday from the Fed’s meeting earlier this month show that members of the central bank are prepared to increase rates sooner than previously anticipated if inflation remains high.”

Of course, this was before “Black Friday” sent yields plunging 10% lower in a single day. Suddenly, the bond market is starting to question the sanity of hiking rates in the face of an ongoing pandemic.

Bonds technical update

While many pundits have suggested higher interest rates won’t matter to stocks, as we will discuss momentarily, they do matter and often matter a lot.

The surge in the new variant gives the Fed an excuse to hold off tightening monetary policy even though inflationary pressures continue to mount. But, what is most important to the Fed is the illusion of “market stability.”

What “Black Friday’s” plunge showed was that despite the Fed’s best efforts, “instability” is the most significant risk to the market and you.

More on this in a moment.



Time To Buy Oil?

Once a quarter, I review the Commitment Of Traders report to see where speculators place their bets on bonds, the dollar, volatility, the Euro, and oil. In October’s update, I looked at oil prices that were then pushing higher as speculators were sharply increasing their net-long positioning on crude oil.

We suggested then that the current extreme overbought, extended, and deviated positioning in crude will likely lead to a rather sharp correction. (The boxes denote previous periods of exceptional deviations from long-term trends.)

Oil Rates Dollar, Traders Are Pushing Oil, Rates & The Dollar. Are They Right?

The dollar rally was the most crucial key to a view of potentially weaker oil prices. Given that commodities are globally priced in U.S. dollars, the strengthening of the dollar would reduce oil demand. To wit:

The one thing that always trips the market is what no one is paying attention to. For me, that risk lies with the US Dollar. As noted previously, everyone expects the dollar to continue to decline, and the falling dollar has been the tailwind for the emerging market, commodity, and equity ‘risk-on trade.” – June 2021

Portfolio, Rates, S&P 500, energy, yield

Since then, as expected, the dollar rally is beginning to weigh on commodity prices, and oil in particular.

oil dollar technical chart.

While the dollar could certainly rally further heading into year-end, oil prices are becoming much more attractive from a trading perspective. The recent correction did violate the 50-dma, which will act as short-term resistance. However, prices are beginning to reach more attractive oversold levels.

There are also reasons to believe higher oil prices are coming.


https://bit.ly/2Tqetau

Higher Oil Prices Coming

The Biden administration released oil from the “Strategic Petroleum Reserve,” attempting to lower oil prices. He also tasked the DOJ to “investigate oil companies for potential price gouging.” These actions are thinly veiled attempts to regain favor with voters but will not lower oil prices.

Oil prices are NOT SET by producers. Instead, speculators and hedgers set oil prices on the NYMEX. Think about it this way:

  • If oil companies are setting prices to “reap profits,” why did oil prices go below ZERO in 2020?
  • Furthermore, would producers need to “hedge” current production against future delivery?

There are two drivers reflecting positioning by speculators and hedgers:

  1. The expected supply and demand for oil; and,
  2. The value of the dollar.

The more critical problem comes from the Administrations’ attack on production over “climate change” policies. As noted in Crude Investing: Energy Stocks & ESG (kailashconcepts.com):

This isn’t rocket science.  Look at the sharply lagging rig response to the rise in energy prices post the Covid crash. This is an anomaly. 

According to history, there should be ~1,300 rigs in operation today based on current oil prices. With only ~480 rigs running today, oil’s prospects may be bright over the long haul.”

Portfolio, Rates, S&P 500, energy, yield

With output at such low levels, OPEC+ refusing to increase production, and “inefficient clean energy” increasing demand on “dirty energy,” higher future prices are likely.

If the economy falls into a tailspin, oil prices will fall along with demand, so nothing is assured. However, the ongoing decline in CapEx in the industry suggests production will continue to contract, leaving it well short of future demand.

Portfolio, Rates, S&P 500, energy, yield
Chart courtesy of Kailash Concepts

That is the perfect environment for higher prices.


In Case You Missed It


Higher Interest Rates Will Lead To Market Volatility

Did “Black Friday’s” plunge send a warning about rates? Last week, we discussed that it isn’t a question of if, but only one of when.

I showed the correlation between interest rates and the markets. With the sharp drop in rates, it is worth reminding you of the analysis. It is all about “instability.”

The chart below is the monthly “real,” inflation-adjusted return of the S&P 500 index compared to interest rates. The data is from Dr. Robert Shiller, and I noted corresponding peaks and troughs in prices and rates.

interest rates vs S&P 500

To try and understand the relationship between stock and bond returns over time, I took the data from the chart and broke it down into 46 periods over the last 121-years. What jumps is the high degree of non-correlation between 1900 and 2000. As one would expect, in most instances, if rates fell, stock prices rose. However, the opposite also was true.

Interest rate changes vs S&P 500

Rates Matter

Notably, since 2000, rates and stocks rose and fell together. So bonds remain a “haven” against market volatility.

As such, In the short term, the markets (due to the current momentum) can DEFY the laws of financial gravity as interest rates rise. However, as interest rates increase, they act as a “brake” on economic activity. Such is because higher rates NEGATIVELY impact a highly levered economy:

  • Rates increases debt servicing requirements reducing future productive investment.
  • Housing slows. People buy payments, not houses.
  • Higher borrowing costs lead to lower profit margins.
  • The massive derivatives and credit markets get negatively impacted.
  • Variable rate interest payments on credit cards and home equity lines of credit increase, reducing consumption.
  • Rising defaults on debt service will negatively impact banks which are still not as well capitalized as most believe.
  • Many corporate share buyback plans and dividend payments are done through the use of cheap debt.
  • Corporate capital expenditures are dependent on low borrowing costs.
  • The deficit/GDP ratio will soar as borrowing costs rise sharply.

Critically, for investors, one of the main drivers of assets prices over the last few years was the rationalization that “low rates justified high valuations.”

Either low-interest rates are bullish, or high rates are bullish. Unfortunately, they can’t be both.

What “Black Friday’s” plunge showed was the correlation between rates and equity prices remains. Such is due to market participants’ “risk-on” psychology. However, that correlation cuts both ways. When something changes investor sentiment, the “risk-off” trade (bonds) is where money flows.

The correlation between interest rates and equities suggests that bonds will remain a haven against risk if something breaks given exceptionally high market valuations. The market’s plunge on “Black Friday” was likely a “shot across the bow.”

It might just be worth evaluating your bond allocation heading into 2022.



Portfolio Update

We made no substantive changes to portfolio allocations this past week given due to the holidays. Generally, the week of Thanksgiving is a poor indicator of market sentiment given the “inmates are running the asylum.”

Therefore, despite the market swinging around a good bit this past week, we will re-evaluate our positioning and holdings when institutional traders return to their desks next week.

However, as a reminder:

“Over the last two weeks, we took profits in overbought and extended equities. We also shortened our bond duration by trimming our longer-duration holdings. Such actions rebalanced portfolio risk short-term. In addition, we run a 60/40 allocation model for our clients; such left us slightly underweight equities and bonds and overweight cash.”

Portfolio allocation model.

Despite the sell-off on Friday, the bullish bias remains strong. We also remain in the “seasonally strong” period of the year, and the seemingly endless supply of money continues to flood into equities.

However, as discussed most of this week, mutual fund distributions will begin in earnest and continue through the second week of December. Such suggests we could see some additional volatility and potential weakness in the market as those distributions get made.

Critically, any correction will provide a decent entry point for the year-end “Santa Claus” rally and the first week of January, which tend to be strong. Therefore, we will try and take advantage of that.

While Friday’s plunge likely shocked you out of your “tryptophan-induced” coma, I hope you had a Happy Thanksgiving.


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FTSE 100 plunges to near 3% loss in morning trading on new Covid-19 variant fears

International stock markets including the London Stock Exchange have dropped sharply this morning on…
The post FTSE 100 plunges to near 3% loss in morning trading on new Covid-19 variant fears first appeared on Trading and Investment News.

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International stock markets including the London Stock Exchange have dropped sharply this morning on fears over the potential impact of a new Covid-19 variant that has appeared in South Africa. Early evidence suggests it is the fastest-spreading coronavirus yet and exceeds even the now dominant Delta variant’s infectiousness. The FTSE 100 has lost 2.75% in morning trading.

Other major European indices suffered even more severe sell-offs with France’s CAC 40 down 3.8% in early trading and Spain’s Ibex index suffering a 3.3% fall. The broad-based Euro Stoxx 600 has shed 2.2% to fall to a five-week low.

ftse 100 index

Before European markets opened Asia’s stock markets had suffered from their worst session in three months. The MSCI index covering Asian markets fell by as much as 2% at one point, its biggest loss since August and in Tokyo the Nikkei closed to a drop of 2.5%.

Wall Street exchanges were closed yesterday for the Thanksgiving holiday and will only operate until lunchtime today but futures trading shows the Dow Jones is expected to open down 1% on Wednesday’s close.

Predictably, travel, leisure and hospitality stocks have been hit hardest. London-listed hotels groups InterContinental Hotels Group and Premier Inn-owner Whitbread are down 5.6% and 5.4% respectively and had lost over 7% each at one point this morning. Primark owner Associated British Foods is down 4% and energy giants Shell and BP have shed a little under 5% and 6% of their valuations respectively.

The biggest fallers are, however, again airline stocks which have taken a battering over the past couple of years. British Airways-owner IAG has seen its value plunge by over 13% so far today and EasyJet has shed 11%.

Banking and finance stocks have also taken a hit with the Lloyds Banking Group share price down 5.45% and Standard Chartered also down by a similar amount. Barclays has fallen by 4%.

Stocks that were considered ‘pandemic winners’ like the online groceries delivery and warehouse technology company Ocado have, on the other hand, seen gains. Ocado is up 2.7% today. Assets considered safe havens like high-quality bonds, the yen, dollar and gold have also all seen gains today.

The new virus variant causing panic is the B.1.1.529 variant that has been dubbed ‘Nu’. It shows several mutations which could mean it has the potential to escape immunity built up against other variants as well as transmit faster. The WHO, which has commented Nu has a “number of worrying mutations in its spike protein” is due to meet today to assess the potential risk the new variant might pose.

The UK government last night quickly moved to ban travel from South Africa and four neighbouring southern African countries. Berenberg analysts released a note to investors cautioning:

“At this stage it is too early to assess the potential economic consequences. Any new wave could cause serious economic damage. As one potentially mitigating factor, the world is now on high alert and has ramped up its capacity to develop, adjust and produce vaccines.”

The post FTSE 100 plunges to near 3% loss in morning trading on new Covid-19 variant fears first appeared on Trading and Investment News.

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