Mike
10-19-2015, 08:47 AM
Watch lists are updated, see the High Growth Stocks section to view. I am only invested currently on the long side, but I see the 200-day is looming above the NASDAQ and won't get excited until that interaction is over. I could easily be short by the end of the week. My mental model for the current period is the time after the 2010 Flash Crash where it took a little more than 4 months for the market to recover. We are now about two months after the August 24 bottom. If and when a real trend begins I don't know what direction it will be.
I have little insight into what the Fed policy will be going forward however I think they are trapped into low-interest rates for the foreseeable future. Simple math says if rates returned to a long-term average of 4% that servicing the $18-Trillion debt would cost over $700 billion per year. This would be a budget buster and the political pressures would be incredible. There also seems no credible effort to rein in debt growth. Of course, who in their right mind thinks that we can solve a debt problem by layering on more debt? Zero interest rate policy has caused misallocation of assets. In particular, low-interest rates have caused or at least enabled an $18 trillion expansion of corporate debt since 2007 (compounded annual 5.9% rate). Much of this debt has gone into share buy-back programs. Cheap borrowing has also fueled a large expansion in oil producer debt. Oil producers are in the crosshairs as $50 oil doesn't allow them to cover their current debt service. The US Energy Information Administration says that the onshore oil producers currently pay out over 80% of operating cash flow in debt service. This level is unsustainable and an industry shakeout is in process. I couple this observation with the following chart and the possibility of a future recession is on the table at a time when the Fed is almost out of ammunition.
32811
So in the next two years I expect a bone-crunching bear market to unfold. In the meantime, like always I play the trend that is front of me. We entered a trendless market in early 2015 and may now be in a medium-term or long-term downtrend with a countertrend rally. Predictions like these seldom unfold the way I expect however if getting short in a big way turns out the right thing to do in the nearterm it will be this view that helps me get there. It will be the right thing to do eventually.
I have little insight into what the Fed policy will be going forward however I think they are trapped into low-interest rates for the foreseeable future. Simple math says if rates returned to a long-term average of 4% that servicing the $18-Trillion debt would cost over $700 billion per year. This would be a budget buster and the political pressures would be incredible. There also seems no credible effort to rein in debt growth. Of course, who in their right mind thinks that we can solve a debt problem by layering on more debt? Zero interest rate policy has caused misallocation of assets. In particular, low-interest rates have caused or at least enabled an $18 trillion expansion of corporate debt since 2007 (compounded annual 5.9% rate). Much of this debt has gone into share buy-back programs. Cheap borrowing has also fueled a large expansion in oil producer debt. Oil producers are in the crosshairs as $50 oil doesn't allow them to cover their current debt service. The US Energy Information Administration says that the onshore oil producers currently pay out over 80% of operating cash flow in debt service. This level is unsustainable and an industry shakeout is in process. I couple this observation with the following chart and the possibility of a future recession is on the table at a time when the Fed is almost out of ammunition.
32811
So in the next two years I expect a bone-crunching bear market to unfold. In the meantime, like always I play the trend that is front of me. We entered a trendless market in early 2015 and may now be in a medium-term or long-term downtrend with a countertrend rally. Predictions like these seldom unfold the way I expect however if getting short in a big way turns out the right thing to do in the nearterm it will be this view that helps me get there. It will be the right thing to do eventually.