IN-DEPTH: TRANSCRIPTION - LONGWave - 06-07-23 – JUNE – Dotcom Bubble II?
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
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I have been focused lately in my weekly newsletter about:
- The dramatic impact AI is currently having on the equity markets,
- The continuously worsening global economic numbers signaling a US recession is near as the global economy slows,
- Whether China will again save the developed economies from a hard landing
What I want to do in this session is attempt to tie them together. They are inextricably connected.
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As such I want to cover the areas outlined here.
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Let’s start with the euphoria about developments in Artificial Intelligence which has captured the attention of corporate executives and investors.
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For corporations AI offers a solution to serious problem it has been facing as inflation crimps margins and pushes up labor costs while productivity measured by worker output steadily falls.
As I wrote in a recent newsletter it was startling to hear AI discussed during the Q1 earnings conference calls as a top priority to solving the productivity quagmire. IBM’s CEO and CFO even announced the avoidance of hiring 6000 people in anticipation of expected AI benefits.
ChatGPT saw 500M beta downloads almost immediately with now over 1.4B downloads being used in the assessment process. These are unheard of adoption rate numbers!
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To the investment community FOMO (Fear of Missing Out) has taken over as the Gamma & Momentum traders have enshrined AI as another Tech Bubble explosion to new heights.
I don’t want to rain on anyone’s parade but maybe we should examine some analytics underpinning all this before we start putting too much money on the table?
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As an old technology guy my experience forced me to always remind people in situations like this to remember: “Pioneers get arrows in the back!”
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Is the AI narrative just getting started?
If the current AI hype is real (and there is a strong chance it is!), then you have plenty of time to enter at a better Price-to-Risk Ratio! There is a strong chance the AI revolution will be fighting a Recessionary headwind on overall stock market performance. Take full advantage of this – you might want to keep your powder dry!
Most people underestimated the Dotcom momentum back in 1999. Most managed losing tons of money, first shorting the hype, later chasing it before it all reversed and crashed.
If AI is just hype or not, we leave you to decide, but one thing is sure, most people underestimate all big narratives and trends tend to go on for much more than most think possible.
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I am showing here the proprietary MATASII Cross for our index of the “Big 8”. You can see it gave us a SELL signal for this big tech group in early 2022 and only reversed to a BUY signal in January of this year.
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When we isolate NVDA from the group you can see that the BUY signal circle aligns with real breakout of NVDA.
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This aligns with the sudden explosion in public narrative on AI. These are “tells” of early narrative “push” that Wall Street is notorious for!
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The results have been nothing short of historic!
- The third largest single day market gap gain in stock market history, As well as
- The best 10 year gain of any stock in history.
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The real “Tell” in the market is the historic low level of market Breadth! The Big 8 Market Cap stocks are caring the market.
We presently have 325 of SPX are trending down while only 175 have an upward bias. Within that 175 we have the Big 8 carrying the market.
What is very unusual here is currently have market rallying with small Breadth. Typically a bottom like this is the time to Buy?
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We had to go all the way back to the Dotcom Bubble collapse shown by the red box to see a similar situation.
This doesn’t mean the current rally won’t last longer, but the coincidence is a significance worth noting.
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These are signs that historically have been very predictive because they are major reversals.
This issue with breadth is shown here with the Nifty 50 in 1972, the Dotcom Bubble in 2000 and where we are currently.
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I am sure you are all heard the often used rationale: “It’s different this time”! More money has been lost based on those words than can be imagined. Its always different in some ways but the same in major ways.
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Let me be specific and give you a couple of examples regarding the current AI euphoria.
This is a chart going back to the lead up to the Dotcom Bubble in 2000 through to the current market rally.
The red line is what has known as the PEG Ratio. This is how you should view the current market situation versus traditional PE Ratio analysis.
The PEG Ratio is the ratio of the PE to Growth Rate. It tells you how much you are paying for the expected future growth rate – assuming of course the euphoria is well founded!
It shows us that we are paying for expected growth at very near the level that “peaked” the prices that the Dotcom Euphoria was willing to pay.
The chart also tells us something else.
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Recessions truly matter! Prior Recessions are drawn in by the vertical Grey boxes.
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Simplifying the chart we see on the right and center that we are now at the Relative Forward PE Ratio for the S&P 500 Technology group in 2008 that was a precursor to the GFC Recession. If recent history is any indicator a looming recession should significantly “temper” this current Euphoria.
The only moment where Tech was more expensive relative to the market was the era 1999-2001.
You will also notice the initial collapse of the Dotcom Bubble actually lead to the Recession which followed in 2001-2002. Relative Technology PE Ratio’s fell to the current PE levels before falsely rising and then continuously crashing through 2013.
Even a possible recessionary scare is not likely going to be handled well by today’s overly leveraged and speculative investment climate.
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Looking at the 2000 Dotcom Bubble burst more closely we show here on the left the NDX 100 when it hit its’ high in March of 2000. On the right we overlay the reported Initial Jobless Claims at the time on orange.
Their high and low coincide almost perfectly before both abruptly reversed and moved strongly in the opposite directions. This is because the rise in Initial Jobless Claims was seen as a confirming “trigger” that recessionary impacts were actually now being felt.
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Today the Initial Jobless Claims chart is again at historic lows and therefore even as Treasury Secretary Janet Yellen touts – you can’t have a recession with Jobless Claims being at historic lows.
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As we saw in 2000 we need to watch for a sudden change in trend!
We may actually have it?
We need further confirmation but we might just be getting the confirmation we want now!
These numbers come out every Thursday so we won’t have to wait too long.
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Let’s look at another view of the Dotcom Bubble peak. Here we overlay the very reliable Inverted Yield Curve predictor in turquoise where once again the highs and lows align. The key here is that the Yield Curve must be inverted.
It is long after that once again both violently change as the economy goes into a recession.
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Today on the right you can see once again we have the same set-up!
You look across the vertical grey recession bars you can see how accurate an Inverted Yield Curve in predicting US recessions.
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It becomes pretty clear that the identification and timing of a recession is of primary importance!
With the market as represented by the major indices like the S&P 500 and Nasdaq rising, many are increasingly discounting this possibility.
We believe that is a poor decision!
One reason is in the understanding of the “two quarters of negative GDP” often cited versus the GDI and Productivity measures seldom cited.
SLIDE 27– MAY BLS JOBS REPORT
You would think from May’s blowout jobs report the economy was booming.
Here’s the puzzle: Other data suggest it is in recession.
The dichotomy emerges from the divergent behavior of two key indicators of economic activity:
- Employment and
- Output
In May, employers apparently added 339,000 jobs, bringing the total number of jobs added this year to nearly 1.6 million, a gain of 2.5% annualized. This is of course if you believe the BLS numbers which include the notoriously fictional “plug number” called the Birth-Death Model which was a net add of 231K from new businesses being created.
Contradictory, the real Gross Domestic Income (GDI), a measure of total economic activity, shrank in both the fourth quarter and the first quarter.
Two negative quarters of output growth are one indicator of a recession.
The economy has gone through periods where output has expanded faster than employment, but seldom the other way around. We will get back to the GDI in a moment.
SLIDE 28- PRODUCTIVITY
What explains these dissonant signals is productivity, or output per hour worked: It is cratering.
That raises questions about whether the much-hyped technology adoption during the pandemic and, more recently, artificial intelligence are making a difference. It also raises the risk that the Federal Reserve will have to raise interest rates more to tame inflation.
Labor productivity fell 2.1% in the first quarter from the fourth at an annual rate, and was down 0.8% in the first quarter from a year earlier, the Labor Department said Thursday. That is the fifth-straight quarter of negative year-over-year productivity growth—the longest such run since records began in 1948.
SLIDE 29 – GDI
Those calculations are derived from gross domestic product, which shows output rising at a 1.3% annualized rate in the first quarter. But another key measure—gross domestic income—declined, implying an even bigger productivity collapse.
GDI is the yin to GDP’s yang, measuring incomes earned in wages and profits, while GDP tallies up purchases of goods and services produced. In theory, the two should be equal, since someone’s spending is another’s income.
They never exactly match because of statistical challenges. Lately, though, the divergence is dramatic.
Over the past two quarters, real GDP shows the economy expanding by 1.0%, not far off potential growth, whereas GDI shows it contracting by 1.4%, which amounts to a decent-sized recession.
The divergence is ominous: GDI previously undershot GDP dramatically during the 2007-09 financial crisis and in the early 1990s recession.
SLIDE 30 - GDPNow
The second quarter is also shaping up to be weak.
- S&P Global Market Intelligence sees second-quarter real GDP expanding at a 0.8% annual rate;
- Morgan Stanley projects 0.3%.
- The Atlanta Fed’s GDPNow model estimates 2%.
Most economists don’t forecast GDI.
SLIDE 31 – JOBLESS CLAIMS
Usually, employment plummets during recessions because as factories, offices and restaurants produce less, they need fewer workers. That clearly isn’t happening. “If you look at the early 2000s, that was what was called a ‘jobless recovery,’ because employment took a long time to come back even though the economy was growing,” said Sweet. “This time around it could be the opposite—the economy could be contracting, but you’re not seeing job losses.”
One reason could be labor hoarding. After struggling to hire and train workers during the pandemic-induced labor crunch, employers are now balking at letting them go, even as sales slip, given the labor market’s unusual tightness. There were 10.1 million vacant jobs in April, well above the 5.7 million people looking for work that month. Some firms—particularly services such as restaurants and travel-related businesses—ran short-staffed for the past couple of years and are still catching up.
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A possible sign of this is hours worked per week, which in May fell slightly below the 2019 average, after having surged during the pandemic. This drop has been particularly sharp in retail and leisure-and-hospitality—industries that have been especially strapped for workers. The unemployment rate also rose in May, one sign of a potential cooling in the labor market.
It’s “not that technology got worse in the last year, but that businesses were selling less stuff and they’re nervous about their ability to attract employees, so they’re holding on to their employees,” said Jason Furman, an economist at Harvard University who served in the Obama administration. It is also plausible, he said, that the shift to working from home generated a hit to productivity, whose impact grows with the cumulative loss of creative exchange and mentoring.
SLIDE – 33 - PRODUCTIVITY
Productivity growth is important in the long run because it is one of two engines of economic growth, the other being an expanding workforce. Sweet, the Oxford Economics economist, notes businesses have been spending on equipment, software and intellectual property, investments that should eventually raise productivity. Though it may take many years, so should recent advances in artificial intelligence.
A more imminent concern is that when workers produce more, companies can raise wages without increasing prices. When productivity falls, it is harder to keep inflation in check.
This could make things even more challenging for the Fed. Companies probably have the ability to pass on higher prices to consumers if they want to. That would be problematic for the Fed.
Moreover, if GDI is a better indicator of output than GDP, it would mean that the economy has slowed more than we had thought, without bringing down inflation that much. That might mean it will ultimately take an even bigger economic pullback to bring inflation down.
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Our June 5th weekly Newsletter laid out three drivers that have now in our opinion basically cemented a US recession. We labeled them as the Trifecta.
- A Liquidity Shock by increasing the funding of the US Treasury's TGA. This is as a result of the massive increase in the US Debt ceiling and government spending to a rate greater than required to maintain stability through the Covid-19 pandemic.
- Slow overall global growth, falling productivity and inflation though falling, still at persistently elevated levels.
- The unexpected slow reopening of the Chinese Economy from its Covid lockdowns and a Chinese Credit Impulse insufficient to once again save the global economy.
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The importance of the Chinese reopening from its Covid-Lockdowns in our opinion is being under-estimated and under reported.
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We recently released a full video on this subject.
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… and how important China has been over the last decade in stabilizing global economic growth and avoiding a recession.
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Since the release of that video the news out of China has only been increasingly more disappointing. The video highlighted the importance of the economic policy shift in focus to Consumer Consumption.
Chinese Consumer Confidence is only marginally improving and insufficient to deliver the economic surge needed.
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According to Morgan Stanley, Chinese Macro surprises have only further worsened.
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The all important Chinese Real Estate market is still in a quagmire and if anything is again showing signs of further weakness.
Our opinion is that China is not going to save the US economy from a recession.
Matter of fact we are concerned about China’s ability to save itself!
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What are our conclusions?
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We believe the recent passage of the “Fiscal Responsibility Act” to increase the US National Debt Ceiling has not only locked in a US Recession but a protracted Era of Stagflation for the US Economy.
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THE APPROVED INCREASE IN THE DEBT CEILING "SCREENS" FROM THE PUBLIC THE FOLLOWING URGENT NEEDS:
- The VISIBILITY to understand that promised Social Security and Medicare benefits are unsustainable — particularly for the youngest Americans, who are currently compelled to fund benefits for older Americans in a coercive Ponzi scheme.
- The RESOLUTION to be less likely to support costly foreign interventionism, to include the more than $113 billion already spent on the proxy war against Russia in Ukraine — more Americans would question the premise that their security is impacted by who controls Ukraine’s heavily ethnic-Russian Donbas region.
- The MOTIVATION to toss aside the rose-colored glasses through which they view big-spending proposals, like last summer’s $375 billion package to fund a crony-enriching and quixotic battle against climate change.
- The MOTIVATION to apply greater scrutiny to military spending, with more people questioning why the Pentagon should spend more than $7.3 trillion over the next 10 years — more than it spent in the decade that encompassed the peak of US warfare in Iraq and Afghanistan.
- The MOTIVATION to cast a harsher eye on thinly-disguised vote-buying schemes — from student debt cancellation to reparations for black people — and increasingly disfavor all varieties of wealth redistribution, from subsidies for Iowa farmers to (illegal) aid for Israel.
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2023 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
