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The growth outlook for the fourth quarter is opaque, because there is no way to determine when supply chain disruptions will begin to unwind. A reluctant recognition of higher inflation by the Federal Reserve is developing, as supply chain bottlenecks are holding up inflation longer than previously thought. There are currently 72 container ships off the port of Los Angeles which cannot deliver some 550,000 containers coming from Asia. This is due to a lack of investment in US ports over the past 10 years, as well as a shortage of qualified truckers, and may continue into 2022.. Consumers have been warned that Christmas shopping may be severely impaired by empty shelves this year.

Complicating...
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The predominant theme in the second quarter was inflationary pressure in the financial markets, and how this might impact the Federal Reserve’s policy decisions on interest rates. The inflation rate in May was 5% compared with a year earlier. Year-on Year price increases in almost all commodities have been very elevated, evidenced by the copper market (+51%), wheat (up 21%), US median home prices (up 23%), and oil (up over 50% this year).


The Federal Reserve believes that this inflation is transitory, and appears elevated due to the “look-back” effect, i.e., the fact that the basis of comparison was so low last March, April, and May.


In June, the Fed raised its expectations f...

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One year ago, GDP growth was expected to be 4.8%. Instead, it’s now projected for 2020 at -4%, the largest drop in modern history. Simultaneously, world stock markets increased in value from $80 trillion to $100 trillion even as S&P earnings per share dropped by 15% last year.

This strange stock market behavior can be explained by the sheer size of the stimulus thrown at the Covid-19 crisis. Essentially, the Fed threw $4.5 trillion at the $300 billion problem of lost Covid-19 wages. The enormity of this government stimulus overcame any economic downturn, uncertainty, or political tension. Another $1.9 trillion of stimulus was announced last week by president elect Biden. Two other facto...

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Investors wondering why the stock market continues to rise as we face the worst economic conditions since the Great Depression need only look at the Federal Reserve’s balance sheet, which has increased in size by $3 trillion since February.


That represents printed money which the Fed is using to purchase Treasury bonds, mortgage bonds, corporate bonds, and asset backed securities, which brings the total amount of printed money to $7 trillion. In doing so, they have driven bond yields down, which justifies a higher multiple for stocks.
This is currently the only reason for a rising stock market. Markets have become completely divorced from reality, and stocks in particular are ignoring th...

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Stock market indices have shrugged off Iran, and begun the year by moving higher. Unless Iran chooses to somehow disrupt the supply of oil to the West, it is unlikely to have much of an impact.

There has been consistent selling in the U.S. by retail investors in 2019. Flows have been drifting out from retail investors and into the hands of companies buying back their own shares. Assuming that there is no recession in 2020, and assuming that Donald Trump is re-elected, retail investors may experience FOMO, or a fear of missing out. Historically, the period of mid-October through May is a good period for stocks, but January is, on average, particularly good for small cap stocks. The relative pe...

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In September, Trump tariffs were imposed on $112 billion more of Chinese imports. Trump now threatens to increase this to $550 billion. As a result, the World Trade Organization has now slashed its forecast for 2019 trade growth to 1.2% from 2.6%. The Chinese, Indian, Japanese, and U.S. economies are slowing. The European economy is slowing dramatically, and is now seen growing at zero in 2019. Germany is slowing because as Chinese companies export less to the U.S., they purchase less German machinery. This, plus the uncertainty of Brexit, has German companies nervous about investing.

In the U.S., the ISM manufacturing index, an important indicator for the health of the economy, contracted in...

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The New York Federal Reserve now sees a risk of recession at 33% in the next twelve months. When this indicator rises above 30%, a recession typically follows, although sometimes with a delay of 12-24 months.

The global economy is slowing nearly everywhere, but the U.S. is perceived by many as being in great shape, particularly if measured by the stock market. However, signs of a slowdown are looming in housing, construction, automobiles, and the industrial sector, in the latter case due to trade tensions between the U.S. and China. Purchasing manager Indicators are slowing, both in services and manufacturing, and the rest of the world is cause for concern, with Chinese, South Korean, Japanes...

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The first quarter of 2019 was the best for stock prices since 1998, to such an extent that some caution may be advised in the short term. While the stock market has been climbing, Wall Street analysts have been lowering earnings estimates for the first quarter. In fact median EPS estimates have fallen by 7.2%, which are some of the largest cuts to S&P 500 earnings estimates in years. This is a source of concern.


It’s often a good exercise to be mindful of “the dark side”, even when the market is rising. Fully 1/4 of all the Russell 3000 index, which represents 98% of all US stocks, operate at a loss. Last year, 83% of all IPOs came to the market with negative earnings. Real ...

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The Sleep of Reason Produces Monsters- Francisco Goya, 1799




Investors enter the fourth quarter with elevated and asymmetrical downside risk until after the elections, likely subsequent interest rate hike, and probable market shakeout. There will be ample opportunity to reinvest at lower levels.



The U.S. election should be seen as binary, as the outcome is still uncertain despite any outrageous recent findings about the candidates. The financial risks of a Trump presidency are large, and Wall Street is underestimating the influence of the anti-establishment sentiment which may not be reflected in the polls. If Trump wins, there be sharp adverse effects on the stock market due to:


• His at...

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S&P Global Ratings downgraded its forecast for U.S. growth this year, due to the Brexit vote and lower-than-expected first quarter growth. Chief Economist Beth Ann Bovino announced that she now expects U.S. real GDP to grow by 2.0% in 2016 (down from 2.3% in March) and 2.4% in 2017 (down from 2.5%). S&P now feels that the risk of recession over the next 12 months is now between 20% to 25%, up from 15% to 20% in March. S&P has revised its forecast downward many times for 2016 growth since last year, and yet, the stock market remains expensive due to Central Bank intervention. It should be noted that S&P’s outlook is still higher than the consensus view.



Brexit will certainly bring more...

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