Economic Outlook

“The policies of the government in power, and the proclivities of the current prime minister, are not particularly oriented towards the hard work of generating economic growth, and that can make things difficult for the Department of Finance,”

– David Dodge, Former head of the Bank of Canada

“The lack of transparency around the government’s intentions in its economic and fiscal forecast is not acceptable in a democracy. I think everyone should be concerned about this.”

– Don Drummond, Former Chief Economist, TD Bank Financial Group and several senior positions, Department of Finance

There is nothing government can give you that it hasn’t taken from you in the first place.
~ Sir Winston Churchill

Why The Second Stimulus Won’t Have Much Economic Impact

In October, I discuss how the “2nd Derivative Effect” would mute the impact of future stimulus programs. With the passage of the $900 billion stimulus package, we can update the estimates for the economic impact heading into 2021.

While most hope more stimulus will cure the economy’s ills, the “2nd derivative effect” will be problematic. Of course, since vast portions of the stimulus package went to everything but “helping out the average American,” such ensures the impact will be far less.

Let me recap.

NOTE: This article was written prior to Trump’s rejection of the stimulus bill. The analysis is based on the bill as is currently written. I will update the analysis if the bill changes. 

Making Some Assumptions

As the economy shut down due to the pandemic, the Federal Reserve flooded the system with liquidity in March. At the same time, Congress passed a massive fiscal stimulus bill that extended Unemployment Benefits by $600 per week and sent $1200 checks directly to households.

As shown in the chart below of GDP, it worked. In Q3, inflation-adjusted GDP surged 29.91% from the Q2 reading of 35.94%. If we assume that Q4 will increase according to the Atlanta Fed GDPNow estimate, GDP will slow to just a 2.76% advance…CLICK for complete article

  • They’ve missed the big take away from the US election…
  • They’ve missed the point on the economic and financial impact of the pandemic related lockdowns…
  • And they definitely don’t seem to know what’s coming next…

Wow – those are pretty bold statements. I’d better explain.

The big takeaway from the US election is that, as we predicted well over a year ago, whichever side lost was not going to accept the outcome. That’s been the case since Al Gore took the results of the 2000 presidential election to the Supreme Court. The 2016 presidential election wasn’t 10 minutes old before the Democratic Party stated that the results were tainted by Russian interference and this year the Republicans are disputing the results because of allegations of voter fraud and malfunctioning voting machines.

Please, I’m not talking about the validity of any of the claims. And I’m certainly not talking about your or my political preference. Forgive me but they’re irrelevant to the investment markets. I’m talking about the most important overriding financial and economic trend – and that’s the continued decline in confidence in government and its institutions. The 74 million plus people who voted for Donald Trump, or the 66 million who voted for Hillary Clinton in 2016 didn’t walk away with more confidence in the American political system.

As for uniting a divided US. It’s not going to happen. The divisions are only going to get worse and that has major implications for investments.

They’ve missed the point on the economic and financial impact of the pandemic related lockdowns…

Eighteen months ago we warned of a liquidity crisis in the credit markets that would begin in the fall of 2019. Sure enough, on September 16, 2019 the overnight lending markets froze. No one was lending. Borrowing rates went from 2% to 10% in a matter of hours. The Federal Reserve was forced to step in with hundreds of billions of dollars to get the market functioning again and it’s been forced to intervene every single day since. The Bank of Canada continues to buy $4 billion of Government of Canada bonds every week in order to keep rates down. Globally there’s now an estimated $277 trillion in debt.

My brief point – the economic and financial fall-out from the new pandemic related restrictions are accelerating the coming monetary and a sovereign debt crises. It’s already started in Argentina, Venezuela and Turkey. It’s historic and it’s going to have a profound impact on stocks, currencies, real estate and bonds.

The Coming Chaos

Let me cut right to the chase. I invite you to think about the last two years. The huge moves in currencies, stocks and precious metals. The unprecedented manipulation of interest rates by the central banks. The record increase of government debt. The rise of protests against the establishment – Black Lives Matter, the yellow vests in Paris, the pro democracy protests in Hong Kong and the massive protests against the pandemic restrictions in Berlin, London, Jerusalem and other major cities.

A pension crisis, which has already started in major US cities is going to intensify at the sub national level because unlike federal governments, they can’t create money. Pension problems are already evident in states like California and Illinois as well as many cities and states throughout Europe.

This is the backdrop for the next two years. The volatility and chaos are going to intensify. The triple threat of a sovereign debt, monetary and a pension crisis are all gaining momentum and are exacerbated by the pandemic restrictions.

Don’t get me wrong – there will be huge opportunities but also huge potential losses for those people who don’t see what’s coming. Which brings me to the 2021 World Outlook Financial Conference in February.

What You Can Do

Understanding what’s going on is absolutely essential. For example, massive amounts of money are being created in order to deal with the fall-out of the measures taken to stop the spread of sars-cov-2, ( the virus that causes Covid-19.) That’s made some people doubt the viability of paper currencies, which has been the catalyst for significant moves up in alternative like Bitcoin along with a resurgence in gold, silver and other commodities as big money is exchanging their paper currencies.

Recognizing the monetary and fiscal challenges is why we kicked off last year’s Outlook Conference with a series called The Coming Commodity Boom. That proved to be a very profitable choice with gold up 17%, silver up 36%, copper up 38% and nickel up 34%.

At the 2021 Conference I’ll ask Martin Armstrong, whose model forecast the commodity move, how much longer it has to run. And he’s already told me he’s going to discuss one area that is set up for a major move that most people overlook.

Mark Leibovit, who’s been Timers Digest’s Gold Market Times of the year on several occasions – will tell us specifically where his model say gold and silver are going. Plus I can’t wait to hear one of the English-speaking world’s preeminent gold analysts, Greg Weldon, on what he sees next for precious metals given that last year he absolutely nailed the up move.

Winner, Winner Chicken Dinner

I’ve always wanted to write that but it’s also accurate. I don’t expect even the best analysts to be right every time but I have to admit I’ve been blown away by the performance of last year’s recommendations. Consider that while the TSX flatlined in 2020, the World Outlook Small Cap Portfolio is up 30%. What’s impressive is that the WOFC Small Cap portfolio has achieved double digit returns every year since its introduction in 2008. The good news is that we’re already working with Keystone Financial’s Ryan Irvine and Aaron Dunn on the 2021 version.

Of course, past performance is not a guarantee of future results but featuring analysts with exceptional track records like BT Global’s Paul Beatty, Investment Strategist extraordinaire, Dr James Thorne, Josef Schachter and RAI Advisor’s Chief Strategist, Lance Roberts puts the odds in our favour.

2021 World Outlook Financial Conference – Feb 5th & 6th

This year’s conference is going to be online, which is obviously different from other years but offers some real advantages. Sure it’s nice to be able to sit at home in your pajamas or whatever – and there is something to be said for casual attire. But I’m talking about the fact that you won’t just be able to watch the conference on February 5 and 6th as it broadcasts – you’ll also be able to review every part of the conference for months in the on demand archive. Any time, on any device, from anywhere in the world with no limits. We also get to feature more analysts and workshops in 2021 given there’s no room size restrictions or travel considerations.

The bottom line is that we are entering a pivotal time in history. The word “unprecedented” is in the running for the most overused description during the pandemic. So forgive me for saying that what we are about to witness financially is indeed, unprecedented.

I also understand that not everyone is interested in their personal finances and I respect that, but I’ll warn you that whether you’re interested or not – what’s coming during the next two years will have a dramatic impact on your financial well being.

All my best,

Mike

PS – The 2021 World Outlook Financial Conference starts broadcasting Friday afternoon Feb 5th and all day Saturday, Feb. 6th. For access passes and other details CLICK HERE.

Will “Santa Claus” Visit “Broad & Wall”

As we start moving into the last two weeks of the trading year, investors everywhere are hopeful that “Santa Claus” will visit “Broad & Wall.” 

The actual Wall Street saying is that “If Santa Claus should fail to call, bears may come to Broad & Wall.” The Santa Claus Rally, also known as the December effect, is a term for more frequent than average stock market gains as the year winds down. However, as is always the case with data, average returns are sometimes different than reality.

Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven day trading period – the last five trading days of the current trading year and the first two trading days of the New Year. The stats are compelling.

As I said, while it is a very high probability that stock prices will climb, there is a not-so-insignificant 24% chance they won’t. Such is why we want to analyze the technical backdrop to minimize the risk of “getting a lump of coal.”

However, let’s first analyze the “Santa Claus Rally.” CLICK for complete article

Half-Truths Are Half Lies By Definition

“When one side of a story is heard and often repeated, the human mind becomes impressed with it insensibly” – George Washington

Daughter- Can I go out with friends?

Father- Have you asked your mother?

Daughter- Of course I have.

Father- Okay, have fun.

In the plot above, the daughter only tells her father half of the truth. She fails to disclose that her mother said “no.”

Like the daughter’s craftiness, many markets are surging on narratives built on just one side of a story. For speculators and gamblers, that seems to suffice. For investors aiming to build and preserve long term wealth, we suggest understanding every side of a story.

Of the many tales we hear to justify record equity valuations, low-interest rates are among the more popular. Make no mistake, low interest rates provide benefits to stock prices. However, that is only half of the truth. We now present the other half of the story that few tell.

Opportunity Cost

There is a popular narrative that says stocks should do well simply because bond yields are pitifully low. The basis behind the argument is simple math comparing historical stock returns versus current bond yields. The fact of the matter is that historical average returns and expected stock returns are often quite different.

The calculation of expected returns is primarily a function of the price of an asset. The higher the price paid, the lower your expected returns and vice versa.

As we wrote in “You’ve Got To Ask Yourself One Question. Do You Feel Lucky?” current expected equity returns are near 0, as valuations are extreme. Statistically based expected returns are vastly different than the “we hope for” expected returns spewed by cheerleaders in the financial and social media outlets.

The article presents four popular valuations methods and the expected returns based on the historical relationship between valuations and 10-year forward returns. In each case, the current valuation has a strong statistical correlation with the coming 10 years of returns.

We extend that analysis by comparing those return expectations to yields on Treasury and corporate bonds.

The intersection between the same color vertical and trend line denotes the expected return for the respective valuation method. We show Ten-year U.S. Treasury yields and BBB-rated corporate bond yields with the dotted horizontal lines.

The table below the graph summarizes our findings…CLICK for complete article