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Market Lab Report - Premarket Pulse 4/16/19 - The Economy That Won't Quit

by Dr. Chris Kacher



U.S. Continues To Outpace Global Economies


Mario Draghi’s recent press conference showed the European Central Bank (ECB) will have to loosen monetary policy again before too long. Economic data since the bank’s last policy meeting have confirmed that the slowdown at the end of 2018 is “extending into the current year” and that the risks to the economy remain tilted to the downside thanks to geopolitics, trade conflicts and “vulnerabilities in emerging markets.”


That said, the International Monetary Fund and World Bank both voiced concern over the slowdown in the global economy but expressed confidence that a rebound is around the corner. They cited a generalized step back from tightening monetary policy by global central banks, along with increased stimulus from China and easing trade tensions between Washington and Beijing.

Meanwhile, the U.S. economy is maintaining traction. The pre-election year is traditionally bullish for stocks as the sitting President and his team which includes the Fed will do what it takes to create a bull market. QE has been, is, and will remain the clear direction. Voters vote with their pocketbooks so a bull market by the time votes are cast greatly increases the odds of the incumbent being re-elected. 


U.S. GDP has been rising at an annual clip of 3.1%. It has been creeping higher since Trump was elected. GDP hit a low in 2Q 2016 of about 1.3% then has slowly risen since then to where it stands today at 3.1%. While this is not a boom, it is a sign that the U.S. economy has been able to muster sufficient strength. 


Displaying


Unemployment has continued its downtrend, bottoming out at 3.8%. Unemployment currently sits at 4%.



Inflation has dropped back below the Fed’s target of 2%. It currently sits at 1.5% thus gives the Fed breathing room to be more dovish. 



As for valuations, the Dow Industrials are actually cheaper than they were a year ago with its average P/E having dropped to 18, down from 26. 


Price is the Main Factor

Of course, one can argue that since the CPI is distorted, the GDP is artificially boosted, while corporate stock buybacks are near all-time highs which artificially amplify earnings and suppress P/E’s. But the market has factored all of these issues into price. As a trader or investor, one must always realize that the only thing that is real is price. Thus seasoned traders know never to argue with the market even if they are so sure they are right. Intellect and being right mean nothing if the price is working against your positions. 


Bursting Bubbles

As one of many examples, in the late 1990s, most dot.com companies had faulty business models but that did not stop Wall Street investment houses from writing favorable reports which helped many of these deficient companies move sharply higher. And when the bubble did burst in March 2000, it was no accident that every single one of William O’Neil’s hand-picked all-star portfolio managers were back in cash within 5 days from the market top, with Gil and myself out in 3 days. We had no idea that was the top. We just knew to protect our profits. Since I had been heavily invested in biotechs at the time, I managed a triple digit percentage return that first quarter. Nevertheless, most of the dot.coms died out by 2003, just as we will see most of the ICOs in the cryptospace also go bankrupt. Of course, that does not mean an end to crypto just as it did not mean an end to the internet after the dot.com bubble burst in the year 2000. 


Exponential Technologies

Given Trump’s pro-business policies as well as the exponential technologies such as blockchain, AI, nano, IoT, and VR that will increase efficiencies while lowering costs, this can only help boost growth and profits over the long run. It will therefore be interesting to see if the U.S. can grow itself out of the currently onerous levels of debt. It did this post World War II when it found itself in even greater levels of debt making it the highest debt-to-GDP in its history. Today’s levels are the second worst in U.S. history. 


That said, central banks continue to print at near record levels while signaling that they would be willing to reduce interest rates even further if necessary, thus if they were to stretch the rubber band beyond its limits, this could have dire implications for fiat in general. Assets such as gold and bitcoin would likely benefit. 


But it is more likely the rubber band will continue stretched for some time to come as the headroom major fiat currencies have to continue quantitative easing is ample. Nevertheless, the metrics driving bitcoin are near or at all-time highs so it is only a matter of time, even if it takes a couple of years after bitcoin bottomed in Jan-2015, before bitcoin finds itself back at old highs around $20,000 which of course will have vast implications for the cryptospace as well as those cryptocurrencies with top line fundamentals. 


At present, there are only a handful of cryptos, perhaps less than a hundred such crypto companies out of the 2100+ ICOs currently trading that could be said to have proper business models based in a reality that can be realized. But the pace of development continues to accelerate thus more such companies with top management, vision, blockchain tech development, and disruptive potential in their respective space are launching in the coming weeks and months. As I’ve said before, we’re going into a new era so buckle up!



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