Quarterly Update – Deja Vu? HealthCare, Recession? Russia? Hate your neighbor? And More

MarketCycle Quarterly Update

10 THOUGHTS  (and portfolio performance & print function are given below).

1)  Deja vu?  Steve Mnuchin, President Trump’s selection for Treasury Secretary, has revealed (on June 12, 2017) a 150-page plan to eliminate recent banking and financial and consumer protections.  80% will be passed without Congressional approval via the changing of ‘rules.’  Changes include reducing restrictions on big banks’ ability to trade, package and sell exotic assets (which is what lead to the 2008 financial collapse), easing annual stress tests for the big banks (so that nobody knows if they can handle the next financial collapse) AND reducing the powers of the Consumer Financial Protection Bureau (so that consumers & taxpayers are, once again, left holding the bag).

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2)  Healthcare?  (Actually, we have symptom care rather than true health care.)  The following map shows that it is the states containing the most Trump supporters that are down to ‘zero or one’ healthcare insurers (shown in red and tan).  If Obamacare is eliminated, then it likely also eliminates the additional 3.8% tax on investment profits that had been imposed in order to help pay for it.

3)  Recession?  From the recent Macro Hedge Fund Conference in Abu Dhabi:  The global velocity of money has been falling for two decades because debt continues to compound at a faster pace than does Gross Domestic Product (GDP) growth.  This means that the government money being thrown at the economy is not going anywhere and is not doing much good but if the Central Banks were to drop their accommodative stance, then economic recession is the only possible outcome.  Further rising of interest rates will guarantee an end to economic expansion.  Acording to the discussion, the U.S. 10-year Treasury-yield has nearly doubled since the summer of 2016 which suggests that the U.S. economy will (obviously) eventually slow down.  The near term view is for U.S. 10-year rates to fall to 1.6% by the end of 2017.  MarketCycle currently holds extended-duration Treasuries (and PUT insurance on the S&P-500) as portfolio “insurance” since risk levels have temporarily increased.  Even though this might (or might not) slightly cut into MarketCycle’s profits this summer, it reduces our risk by a large amount.

4)  Overbought?  Technology, MarketCycle’s largest holding, has outperformed and yet the sector is still well below its historical average and ultimately (long term) has much further to run.  (Chart courtesy of Business Insider.)

5)  Russia?  On June 16, 2017, in a surprisingly bipartison move, the Senate overwhelmingly voted (97-2) to pass a measure that sanctioned Russia and also put a halt to the proposed $500-BILLION Arctic oil deal between Russian (Vladimir Putin) controlled Rosneft Oil and U.S. based Exxon Mobile (Rex Tillerson had been the CEO of Exxon when working out the deal with Putin; Russia was his first visit after being appointed U.S. Secretary of State by President Trump).   The deal would have been funded by Kremlin linked Russian bank Vnesheconombank which is lead by a Putin appointed ex-KGB agent that has been directly linked to espionage by U.S. intelligence agencies.  For the Russian sanctions to become active (and thus stop the oil deal), President Trump would be the one that must sign the sanctions into law.  If he does not sign, then the Rosneft/Exxon deal would go through as planned and it would be, by far, the largest business deal in the history of the Universe.  Not to be outdone, Russia has already moved a huge military force into the Arctic region.

In early June, the Trump administration removed multiple marine mammals & animals from the Endangered Species List.  On June 29, 2017, President Trump announced that he wanted to open up the fragile Arctic National Wildlife Refuge to energy development.  “Drill, baby, drill.”  He hopes to raise $2-Billion in revenues from leases but this would reap many multiples of this for the oil and gas companies.  (This revenue was already included as incoming money in his current budget proposal.)  He further stated that all waters off of Alaska and also on the East Coast of the U.S. should be open for drilling, whether currently protected or not, and that he will work toward this end (no pun intended).

The big banks, oil companies and drug & chemical companies are the “Three Amigos” that rule the world.

Well before becoming Secretary of State, Exxon CEO Rex Tillerson received a rare “Friendship Award” from Russian dictator and oil tycoon Vladimir Putin (photo taken in front of an image of an oil drilling rig):


6)  Hate your neighbor?  I read THE WEEK magazine from cover to cover each week.  I like it because it always gives both sides of every issue and argument.  I found one section of special interest (in the June 30, 2017 issue) because my current Southern hometown, Charlottesville – Virginia, has been in the national news in regards to the removal of pro-Confederate statues and ongoing Klan rallies.  THE WEEK:  “This is what America has become in 2017:  A land where we are ‘partisans first and neighbors second.’  [According to a recent PEW survey] we’re now a nation where more than 45 percent of Republicans and 40% of Democrats say that the other party is ‘a threat to the nation’s well being,’ and where seething extremists are so commonplace that no one bats an eyelid until shots ring out.  Hostilities between militant liberals and resentful traditionalists have been intensifying for decades, said J. Robert Smith in Americanthinker.com.  As summer comes on, is that ‘long cold civil war’ about to ‘finally turn hot?’    

‘Previous generations had their differences,’ said Niall Stanage in TheHill.com, but they didn’t have internet or cable TV.  Today, Americans ‘choose their news from sources that conform with their existing ideological leanings’ and then get further hardened in their positions by the echo chambers of social media.  The result is that extremists now dominate the debate, and ‘partisan enmity’ continues to grow.  Our political tribes really do fear and loathe each other, said Emily Badger and Niraj Chokshi in NYTimes.com.  A Pew poll last year found that 68% of Republicans and 62% of Democrats are motivated less by their party’s ideas than by the fear the other party’s policies would ruin the country.  ‘This won’t end well,’ said David French in NationalReview.com, ‘but it needn’t be bloody.  Red and Blue America are already sorting themselves into distinct geographical areas, but more likely than a second Civil War is a national divorce, in which the two sides embrace strong states’ rights and live by their own laws and mores in ‘ideologically homogeneous enclaves.'”

Eric Maisel:    “The middle way cannot be achieved by dividing two extremes in half.”

7)  Temporary speed bump ahead?  Investors have been pulling money out of both defensive and cyclical stocks all year even as the price of the stock market heads higher.  This means that fewer stocks are leading the way up and this is a sign of overall (but temporary) weakness.  Much less money has come out of bonds.  Frankly, bond traders are smarter than are stock traders and this also means that there might be a temporary speed bump this summer. (Chart courtesy of Business Insider)

The blue line on the chart below shows that a decreasing number of stocks are involved in the recent bullish run even as the S&P-500 (black line) itself heads higher (the two lines should match).  Again, this is just one sign out of several that shows a possible speed bump ahead.  As goes the U.S. stock market, so goes all global stock markets.  This is NOT the time to short the stock market since we are still clearly in a longer term BULL MARKET and the recession chance out as far as 3 months is less than 3%, which is ridiculously low.  Turbulence, not recession.

8)  Inflation?  No.  Despite all of the talking heads on CNBC and the other financial sites, inflation is not going up, it is still going down.  This won’t last, but it is going down right now and it is just one more sign of increased (temporary) risk in the market.  This chart takes a lot of data, turns it into one line, and then shows the direction of inflation.  The line continues to point down, so the near-term direction of inflation is obviously still DOWN.

9)  Stock bull market?  Yes.  This chart shows the bullish trend channel that is still in effect for the S&P-500. We are in the middle of the late-stage of this current market cycle; this is the only stage (of the four) in which it is difficult to outperform the general market; the other three stages, including the recessionary-stage, are quite profitable.  Sometimes the final push of the late-stage is quite powerful as the last investors, those still on the sideline today, become euphorically bullish at exactly the wrong time.  During the final drawn-out, multi-month market top, the “smart money” will slowly sell their stocks while the “dumb money” finally staggers in to buy high.

10)  Super powerful, long lasting stock bull market?  Yes, quite possibly!  We are now likely already involved in a prolonged period of wonderfulness in the stock market that may resemble the highly profitable period from 1950 to 1968 on the chart below; the current macro-economic picture is almost identical to 1950 where we had taken on a lot of debt and inflation & interest rates were slowly creeping up.  IMO, one should still be holding U.S. assets in U.S. Dollars despite any shorter term mean reversion in currencies… and monitor for and then avoid any impending economic recessions in order to retain profits.

? PORTFOLIO PERFORMANCE 2017 year to date:

  • MarketCycle (currently in “lower risk mode” & shown with fees already subtracted)
  • Buy & Hold Index (roughly 75% stocks and 25% bonds)
  • Hedge Fund Index

Thanks for reading!

Article by Stephen Aust, MarketCycle Wealth Management


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