Our logic tells us that since employment has improved to cycle lows, that is great and things must be safe in the economy and investing. On top of this, lending has slowed, so overleveraged households, companies and governments are now being more prudent, which should be good. Well here are the realities of these two metrics, as they should make you think twice about what is coming……
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The first item is bank lending. You would think it would have been soaring for the past number of years, as Central Banks have flooded the banks with capital. But instead, it has been muted and continues to make significant lows. Here is a chart:
Here is a second chart to visually show how commercial and industrial loan growth has died. We must remember that this is the fuel for an economy that has performed in a lacklustre fashion. Does this also reflect that companies are now tapped out and cannot borrow to do stock buybacks and increase dividends? The end of this cycle is near.
As we stated, lending is the fuel behind economic growth and corporate earnings. Therefore it has become a necessity behind stock market returns. The last two times that lending fell aggressively was at the beginning of a recession and stock market crashes (technology crash and financial crash).
So what logical conclusion or probability can we come to? Risks are high that we are near a time of recession and major rollover in the stock market. Debt is what has driven corporate earnings up. Without this stimulus, weak earnings can get downright ugly. And never forget that we are in the second most expensive market we have ever seen. The most expensive was just prior to the technology crash of 2000-02.
The second concern is job growth. Yes, numbers have been very good in the US and Canada, but it appears we are at the end of this positive trend. Look at what happens at peak employment:
It looks on the surface to be a busy chart, but the reality is, once you break it down the message is clear:
- The light blue line is the S&P500. The scale is from 1950 to 2017, so it looks like nearly a straight line up but the reality is, there are major corrections and crashes in this period.
- The dark blue line shows the Unemployment Rate (scale on the right side). The peak was in the early 1980’s, but we nearly hit that level in 2009, just post stock market crash.
- The red lines reflect where unemployment hit bottom in each cycle. There are nine times this has happened over the last 67 years and the 10th time appears to be close
- The grey shaded areas are times of recession and stock market crashes or corrections as both recessions and stock market troubles occur at the same time
The key thing to note is that each time the unemployment rate hit bottom, a recession followed not long after. It was either right at the beginning of the recession or 1 – 1.5 years prior. Remember that stock markets lead the economy so we should see stocks rollover before a recession begins.
Let’s have a quick look at current employment trends. We will focus on the hottest sector, technology:
Silicon Valley is not a perfectly defined area, but the heart of it is Santa Clara County, which was once known as “The Valley of Heart’s Delight.“ Silicon Valley also overlaps a little into the adjoining counties of the southern part of the San Francisco Bay Area. So given the boom in technology with firms like Facebook, Microsoft, Amazon, Apple, Netflix, etc., one would expect employment to be quite healthy. Well, look at the trend. It has moved negative in June 2017. The last time it was negative was during the Great Recession. Yes, it has just entered negative territory but most disturbing is the trend. It has been down since 2014 steadily.
Lending that is falling off a cliff and near perfect employment figures, tell us that the end of this cycle is near. Given the leverage up in this cycle since 2009, expect the downside to be just as powerful. These are two of ten key reasons that both the economy, stocks, low quality bonds and real esate are looking extremely risky. It is all about probabilities as if anyone tells you they know what is coming, run the other way. But, there are clear probabilities based on history and how markets act during certain periods. This is a time to be cautious.
So how do you do that….sign up for Fortrus Coaching. We provide a number of coaching options for you to consider. We live in times that are more dangerous than any point in history. I know it is not reflected by the media or financial system, but they will react to what happens, they are never proactive. Just look at debt levels of households, governments and businesses that have all grown at exponential levels. What about interest rates that cannot stay near zero forever. Markets are the second most expensive they have ever been. They are more expensive that they were at the peak of 1929, just prior to the greatest crash in history. We could go on and on, but just know that if you are not managing risks; have a system to get you out of stocks when necessary; and minimizing fees – your wealth long term will be dramatically impacted.
Founder & Chief Investment Strategist