Dr Cheese, Dr Druck and Dr Copper say “Sell! (everything but gold)”
In the face of recessions and stock market declines, there are a number of indicators that are more or less reliable.
In the face of recessions and stock market declines, there are a number of indicators that are more or less reliable. For example, the yield curve is only inverted about 15% of the time, just as the stock market is in "bear territory" 15% of the time (with about a year's lag). Dr. copper, i.e. the copper price, often gives quite good signals in both upswings and downswings. The copper price rose in the fall and winter, but peaked at the end of January. You can also look at the copper/gold ratio to get some extra information about the market's focus on industrial demand relative to buying protection against market turbulence.
Dr Copper
Another market-based decline indicator is the cyclically sensitive Dow Jones Transportation sub-index, which suddenly fell sharply in the last two days. Above all, DJT fell much more than DJU (Utilities, i.e. cyclically stable infrastructure such as electricity and water). Furthermore, the breadth of strength for the Nasdaq is only 55% compared to 80% for the S&P 500, so the more volatile tech stocks on the Nasdaq also imply concern about the future, whether it's weak growth or continued high interest rates that scare. On the one hand, the Nasdaq may be a driver for a decline in the S&P500, and on the other hand the weak breadth in the Nasdaq itself is a signal that precisely fast-growing companies with high valuation multiples and weak cash flows can be hit hardest by a lower willingness to lend when the banks are pressed in the wake of the Silicon Valley Bank collapse.
Dow Jones Transportation
These various indicators are thus starting to warn of stock market falls (and possibly also of recession). Incidentally, it is very consistent with banks hoarding 4-week bills of exchange in the US to be sure of having the best kind of collateral in stock if and when tone-setting actors go from "mild recession" to "cross-stop" in their assessments. The LEI index (Leading Indicators) peaked a full year ago. The index is at its lowest level since November 2020 – that really says something about how weak it is getting, even though the labor market is still lagging behind. But the fact that unemployment is low is probably mostly due to the fact that many companies hoarded employees when the stimulus came down and the biggest problem was various bottlenecks in the economy rather than demand. It is costly to both hire and fire so companies keep their employees as long as they can, but at a certain point the limit is reached and there is a sudden ketchup effect with mass redundancies, reduced consumption and even more redundancies.
The LEI index has not fallen this quickly (7.8%) in the space of a year since the recessions of the 70s and 80s, so the ketchup bottle is probably about to be opened soon. In addition, tax revenues are lower than expected this spring, which has led to increased concern about an earlier-than-expected debt ceiling debate in the US, which this time for the first time in ten to twelve years looks like it could get really serious. This is due, among other things, to the severe polarization between Democrats (Biden) and Republicans (especially Trump) in American politics, as well as the fact that the central bank "Fed" is now running at a loss while the Treasury Department has to finance a huge budget deficit.
In this environment, a real hard landing for the US economy is increasingly likely, with a weaker USD due to the political situation (deficit & debt ceiling conflict) and a likely large and rapid reversal in monetary policy. The latter has long been strongly signaled in the Eurodollar market, a market with positions of several Trillion USD, which for a year has flagged a very high probability of large interest rate cuts. When American politicians are forced to show their colors in both the legislative and monetary policy camps, with lowered interest rates, renewed Quantitative Easing and yield curve control measures, then it may finally be time to prove the dollar skeptics right. One of the world's most legendary investors, Stanley Druckenmiller who has an extremely good track record, has recently said that he is really only really sure of one thing and that is that the dollar will fall sharply.
Dr Druck och USD
So Dr Druck says "Sell the USD" on a forced central bank pivot when the economy hits hard. He receives some support from his colleague Dr Copper. And last but not least, Dr Cheese (Swiss franc against the Australian dollar) has stuck out his chin and announced that he also sees economic problems and market turbulence ahead. CHF/AUD tends to strengthen considerably as underlying problems worsen and the major market players move away from the cyclical and China-sensitive AUD and into the safe haven that CHF represents.
Dr Cheese
If you don't want to short dollars or (technology) stocks, you can always park the money by buying precious metals (gold and silver) and cryptocurrencies (mainly BTC and ETH). The conditions may have rarely been better for it, with Druckenmiller on the right side of the USD, the cryptocurrencies in positive trend a year ahead of Bitcoin's reward halving, and gold a hair's breadth from breaking through to new record highs even measured in USD.
Dr Crypto
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