Category Archives: Markets

Market Waves, Demand, and Disinflationary Trends

Stock Prices Wave – bearish

Stock Prices / Volume Waves – bearish

Stock Prices / Volatility Waves – bearish

Momentum Wave – neutral

Stock Prices Intermediate Price Trend – bearish

Economic Demand

Participation Rate

The labor force participation rate decreased to 61.4% in September 2020.

Claims

After falling steadily for months, first-time unemployment claims have been elevated since early August, hovering between 800,000 and 900,000 and leading economists to fear the jobs recovery has lost steam.

Slightly more than half the 22.1 million net jobs lost in early spring as states shut down nonessential businesses to curtail the outbreak. 

The good news is that millions of jobs that were lost in the spring were in fact temporary. The bad news is that we are not even close to a bottom in the rise in permanent job losses which is happening at a faster pace than the Great Recession.

Recovery – Permanent Jobs

Openings

Total nonfarm payroll employment rose by 661,000 in September, below its February level by 10.7 million, or 7.0 percent. Employment in leisure and hospitality increased by 318,000, accounting for almost half of the gain in total nonfarm employment in September.

In April there were 18 million more unemployed than job openings. Since then the gap has closed somewhat, there are 7.1 million more unemployed than available job openings. As a result, there were just over 2 unemployed workers for every job opening.

Middle Class Income Expectations

Middle- and lower-class people continue to experience job loss, food insecurity, unable to pay bills, and eviction or foreclosure. The Census Bureau’s latest Household Pulse Survey shows 59.2 million Americans expect someone in their household to have a loss in employment or take a pay cut ahead of the presidential elections.

AND the need for a second stimulus package is presently mixed with Senate majority leader McConnell saying that many Republican senators believe the economy has already seen enough stimulus. 

Demand

The reality is demand/GDP has been on a downtrend since before the Great Recession and we may very well had been headed for recession before the pandemic.

Deflation

Euro Zone

The eurozone’s pandemic-hit economy sank into its second consecutive month of deflation in September, intensifying pressure on the European Central Bank to consider injecting more monetary stimulus.

Headline consumer price inflation fell to a four-year low of minus 0.3 per cent in September, below the expectations of economists surveyed by Reuters and down from minus 0.2 per cent in August.

It is the first time the eurozone has had two consecutive months of deflation since 2016, despite the ECB subsequently launching successive bond-buying programs totaling trillions of euros and cutting interest rates deep into negative territory.

The ECB’s money pump (bottom graph) has run at breakneck speed as total assets at rose six-fold from 1999 and then spiking above €6 trillion this year. All the major central banks put up hundreds of billions of emergency funding from early February to mid-March, providing trillions in liquidity operations.

The ECB cut interest rates an unprecedented 39 times alongside other central banks. These collective actions, though, did not underpin stocks — which collapsed 40% over that time. The view that the ECB, the Bank of England, or even the Fed can bolster stocks by printing money runs contrary to all available evidence.

Japan

In August, the Consumer Price Index (CPI) inflation fell to 0.2%. CPI excluding food prices fell to -0.4% plus energy fell to 0.1%.

US

Now everything depends on US stimulus: The stock market, the wealth of the wealthiest, and consumer spending – thereby not only the entire US economy but also imports from other countries, and thereby the economies of China and the rest of the world.

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Since 2008 money and credit growth have been slowing.

Recently, credit card balances and other revolving credit fell “unexpectedly” by $3 billion in August, to $950 billion, the lowest since July 2017, and a level first obtained in September 2007.

Credit card balances and other revolving credit fell a devastating 9.5% from a year ago.

Money velocity has dropped over 30% year over year through September 30th.

Conclusion

A 2nd stimulus will obviously prolong the temporary recovery. Temporary in the sense that the jobs that haven’t returned by now will not be coming back means that the more reasonable U-6 unemployment rate combined with low productivity will continue to dampen consumer demand and inflation, short, intermediate, and long-term. The only question remains when will deflation hit the US.

Secular Outlook

The charts above reflect deflationary headwinds and thus increased downward pressure lies ahead for prices.

Stocks should trend lower due to deflationary concerns, and below-average returns are ahead of us as the larger secular bear unfolds.

Market Trends and Secular Outlook

Short-Term Price Wave Trend bearish

Intermediate-Term Price Golden Cross Trendbearish

Momentum Wave Trendbearish

Volume Wave Trendbearish

Volatility Wave Trendbearish

Wave Trend is measured by the Elliott Wave Oscillator. See details

Secular Outlook

Deflation

The chart below shows the degree of Non-Financial Corporate Debt to GDP and Baa Corporate Bond Yield. As you can see up until around 2012, there was a relationship between the two. Then corporate debt took off while yields have kept declining. Ordinarily, this would give off an impression of being a profoundly strange circumstance and likely unsustainable. The undeniable instance of Japan comes into view where rates and bond yields fell during the 1990s, joined by the start of private debt deflation. A comparative circumstance could be growing now with U.S. Debt. Another reason it is currently an ideal time to deflate.

Disinflation

Last Thursday’s arrival of the Core Personal Consumption Expenditures Price Index (PCE) for August indicated a year-on-year pace of progress at 1.6%. Given this proof of higher prices, one may believe the Fed keeping loan fees unaltered for the following three years may begin to change. However, both the 3-month Eurodollar futures and the 2-year Treasury yield were unchanged as the snooze-fest in the front end of the yield curve continues. Keep an eye on Core PCE by all means, but don’t expect the Fed to do anything on rates until well after short-end market interest rates have moved significantly higher.

Income & Spending

August nominal personal income growth declined by 2.7%. Real disposable personal income fell 3.5%. The decrease in income was largely due to the end of the $600/week supplemental unemployment insurance benefits.

Personal spending rose 0.8%.

Source: ZeroHedge

Savings

Here is the problem: lower-income coupled higher spending in a time when the vast majority of Americans were looking forward to more stimulus meant that US consumers rapidly burned through savings. As per the BEA, in August, the measure of annualized savings amount tumbled by $723 billion to $2.435 trillion, the lowest since March and far below the $6.4 trillion peaks in annualized personal savings hit in April.

Source: ZeroHedge

Simultaneously, the personal savings rate crumbled by 17.7% to 14.1%: this implies an astounding 60% of the personal savings built up in the aftermath of the COVID fiscal stimulus tide has now been spent.

Source: ZeroHedge

Conclusion

The charts above reflect deflationary headwinds and thus increased downward pressure lies ahead for prices.

As the following chart reflects, inflation below 1% is bearish for P/Es and thus stock prices.

Source: Crestmont Research

Market Wave Trends and Secular Outlook

Short-Term Price Wave Trend bearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Intermediate-Term Price Golden Cross Trendbearish

Current – 200 Day SMA, Trimmed Mean 20%

Momentum Wave Trendbearish

5 Day SMA – 35 Day SMA (Cap vs Equal Weight), Trimmed Mean 20%

For more on Cap Weight as a Momentum strategy, read: https://www.morningstar.com/articles/967411/is-market-cap-weighting-a-momentum-strategy-in-disguise

Volume Wave Trendbearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Volatility Wave Trendbearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Wave Trend is measured by the Elliott Wave Oscillator. See details

Outlook

Previously we have discussed in the post We now have much in common with this country the role demographics and lower GDP in pressing in interest rates and inflation.

Additionally, we find that Money Velocity (M2V) which runs 16-18 months ahead of PCE, projects a significant deflation in prices.

While money-related easing can prop up asset prices such as stocks it has not been able to combat disinflation/deflation. It basically has failed to help its economy and keep inflation steady to promote economic growth and rising wages.

Late in August, the Fed at long last conceded that it had done everything incorrectly. As Fed vice chair Richard Clarida said while talking about the Fed’s new approach “framework” of Flexible Average Inflation Targeting (or no FAIT), this was “a powerful development in the Federal Reserve’s strategy system and mirrors the truth that econometric models of most extreme business, while basic contributions to money related arrangement, can be and have been off-base.” His view is evident in this chart.

What’s Ahead

Disinflation/deflation will continue to put downward pressure on inflation and P/Es. This all means stocks should move lower, and below-average returns are ahead of us as the larger secular bear unfolds.

Market Trends – 0 Bulls / 5 Bears

Short-Term Wave Trend bearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Intermediate-Term Golden Cross Trendbearish

Current – 200 Day SMA, Trimmed Mean 20%

Momentumbearish

5 Day SMA – 35 Day SMA (Cap vs Equal Weight), Trimmed Mean 20%

For more on Cap Weight as a Momentum strategy, read: https://www.morningstar.com/articles/967411/is-market-cap-weighting-a-momentum-strategy-in-disguise

Volumebearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%

Volatilitybearish

5 Day SMA – 35 Day SMA, Trimmed Mean 20%