As the summer haze thickens and the chatter of Brexit and its various fallout risks blends into a dull headache, we can be somewhat assured that summer chop is set to continue this week, with jobs, early earnings, a run on bonds and more fear ramp into the picture.
As expected, safe havens are moving as one can almost feel the heartbeat of the investor crowd, assured more doom is headed our way. The audience cannot seem to get enough bonds with a US watermark, while sentiment across the board is getting negative. Fear trades are working – all else is as idle as hitting the doldrums in the middle of the ocean on a hot summer day. Let’s take a snapshot in time:
The first chart above provides us a sense of the raving fear of anything equity. Why else would you logically choose to provide money as a lender for a decade (or more in many cases) where one is nearly assured of a loss? You wouldn’t – unless you were also terrified.
Speaking of fear, we often note sentiment for you but at extremes, it is far more telling to check the same data on a long-term rolling average. The second chart does that by showing you an 8-week moving average of the bullish sentiment in the AAII data. The red dot shows we have not been this low in a over decade – inclusive of the 2009 epic lows at the depths of the Great Recession. I call that having almost all of the bathwater on one side of the tub. How often has that been correct in the long run?
Lest we assume it a fluke, here is the 8-week average all the way back to pre-1990:
Here we see there is ONE period where the depths of fear were worse than today. It was back in the commercial real estate collapse in the early 90’s. We lost 1500 banks and S&L’s, the Monday laundry list for a year+ included all the banks which vanished over the previous weekend with a Fed closure and of course, we had the RTC.
The DOW? It was under 3,000.
Has The Crowd Gone Mad?
The folks at Morgan released a chart which only goes to confirm the underlying theme from another perspective:
We talked about risk premiums spreads yesterday and stated the data was clearly on the side of equities versus bonds but the Morgan chart tells us something else. It tells us the bulls are afraid too! Look what’s making money:
The defensive stuff is the name of the game. Wait until we burn off the oil remix of the last 15 months. Wait until voters demand more fiscal changes – or vote the losers out. Wait until something unfolds which the crowd is not expecting. By the way, something almost always happens when sentiment is this dark – this deep-seeded.
As stated before–mark this on your calendar: There is going to be a day a few years from now when we are going to sit back, take a deep sigh of relief and recognize our luckiest days were when everyone was terrified of the next shoe, rates were at historical lows because of said fear and effective debt management locked in low costs for decades to come. In markets and investing, good things almost always come in ugly packages:
China Hiding in the Dust
Speaking of hiding…China seems to have left the front page of fear. Recall jst a few months ago, China was every other word in the headlines. Growth was terrible, the future was terrible, markets were terrible and debts were terrible. And then Zika and Brexit rescued them from the vat of fear.
The point? While we have long suspected the real growth in China is more like 3-4% (which is fine), data yesterday showed the service sector grew nicely. I am not sure I believe half of what they report to the public but this did jive with the ONE stock the Barbell Economy portfolio holds which finds itself based in China. That stock is up 20.57% this year alone, 51% in the last 12 months.
Boiling Over?
I think the Brexit issue is something which has a far more positive impact in the medium to long-term. It is people saying enough of government layers of regulations. I bring a comment to your attention which has been lost in the shuffle of time since he was quoted:
“Never let a good panic go to waste.”, Rahm Emanuel, The Obama Administration
It disgusted me when I read it – and we noted here then we would all regret it deeply one day. Panics like we saw in 2008-2009 take citizens into a weak mindset most of the time. Historically, government has masked its desire to “help” during times of crisis. It is only later that one realizes the help was more like hooks, dug deeply into their financial flesh, soaking away growth and hard work in return for the false feeling of being aided. In time it is more like being crippled.
It is my humble opinion that this is what is causing the voter to strike back today. Brexit was the sign of a potential turn in the tide. Maybe we can get back from this 8-year experiment we started in the US with the current administration.
I suspect we will be positively surprised by how quickly and efficiently businesses and people will adapt to whatever the new landscape is post Brexit and build anew with fresh eyes – so long as politicians’ input and regulations are reduced from the suffocating levels of today.
Sure there will be hiccups and after-shocks as already noted – each of which more likely than not set to provide a long-term opportunity instead.
I state up-front that this is surely not politically correct: If your business model is to take from the successful to distribute to the poor, you will end up with more who are poor and fewer willing to work hard to become rich. I do not care what country or period of history you want to go to in order to prove it wrong. You will not find that circumstance where long-term success arose from what DC has experimented with in the last 7.5 years.
In a smaller sense, Brexit was more likely a process of shoving off the suffocating regulations brought on by a failed EU process from the start.
But Let’s Move On
The good news? History says the frustrations we are witnessing today are the ending stages – not the beginning. I know – it feels the other way around. The data above make that crystal clear.
The key is this: Look at all the other times where sentiment was even close to this bad and ponder this instead:
What’s Next?
It’s been said before, “when the news trucks show up outside of the exchange, it’s almost over…” Likewise, when sentiment gets this gloomy, when only the fear trades are working, when only bad news is focused upon, the end is close…and the surprise is not what is assumed by all.
The Cleanup
Be patient. The rest of the summer doldrums remain ahead. Chop and angst should be expected. The Barbell Economy is running forward of the pack, through and under all this mess, just fine.
It is set to get stronger – for years and years – not weaker.
We are nearing the turn on the back-stretch of this “earnings recession” and EPS is set to turn with it.
Focus on what’s next – not what’s now.
Focus on demographics – not economics.
Count people – position properly and let them come through your door as they age.
The bottom line for investors:
If profits merely hold at present levels, one can see a scenario where the expected return on equities ahead can be significantly higher than the return on Treasuries in the midst of all this fear.
Make certain you remain focused on the Barbell Economy.
The data above continue to prove its value. Eventually, this will become obvious to the masses – also likely at much higher prices.
More later –
Until we see you again, may your journey be grand and your legacy significant.