IN-DEPTH: TRANSCRIPTION - LONGWave - 02-08-23 - FEBRUARY – Investment Themes for 2023
SLIDE DECK
TRANSCRIPTION
SLIDE 2
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 discussion purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
COVER
It is once again that time of the year when we outline our expectations for the most important investment themes for 2023.
In this first session of the year for the LONGWave video we will talk about the major INVESTMENT Themes for 2023.
AGENDA
We show here the Macro Themes for 2022 and 2023. In our recently released UnderTheLens video we discussed the 2023 Macro Themes
SLIDE 5
Here I am showing those Macro Themes and how they align with this year’s Investment Themes, shown to the right of the vertical red line.
SLIDE 6
We won’t discuss the individual sectors and instruments in detail in this session, but instead will try to:
- Position them,
- Highlight what is important, and
- Draw some conclusions for timing in 2023.
As an aside it is the purpose of our weekly newsletters to focus more closely on individual sectors and instruments as 2023 unfolds, as well as within the others areas of the MATASII web site.
The other areas are the Triggers and Strategic Investment Insights sections.
SLIDE 7
Besides the UnderTheLens video I mentioned we have also released two other videos as well as our Annual Thesis paper that all add significant additional detail to what we will be discussing in this session.
I highly recommend you review all three to gain a further view of our research efforts that allowed us to arrive at these 2023 Investment Themes.
SLIDE 8
Let’s begin with “Positioning” these sectors within the bigger context.
SLIDE 9
This long term chart features the three biggest market distortions the US equity markets have experienced going back to the early 1960’s.
In the late 60’s – early 70’s we experienced the “Nifty 50” market peak as large US domestic corporations entered the global arena in a major way. We saw the same thing with the Dotcom bubble driven by the arrival of internet technology companies and most recently by what we have come to refer to as the “Everything Bubble” driven by Zero-Bound interest rates.
The first two regressed back just as fast as they rose over the following 10 years. We are highly likely to experience the same thing as part of what we have been calling the coming Beta Drought Decade!
The chart also highlights something more ominous. The downward slope illustrates how each market peak has been increasingly broader based. More of the market on each occasion has reached these higher peaks.
This is in alignment with how each of the two prior popped bubbles had been increasingly more devastating and this one is highly likely to be even worst!
SLIDE 10
The bursting of the “Everything Bubble” aligns with the end of the Great Moderation highlighted here in green.
It began in the early 80’s as Fed Chairman Paul Volcker was forced to take interest rates north of 17% in his fight to combat the inflation battle of the 1970’s. During the great Moderation we experienced falling rates, low inflation, and solid economic growth.
This was fostered by the three pillars of Globalization, Financialization and Mercantilism.
Globalization through offshore labor arbitrage delivered disinflationary pressures as imported goods dominated the US economy.
Financialization through falling global interest rates from the Volcker highs to the Zero-Bound delivered rising asset prices and the wealth effect.
Mercantilism import strategies adopted first by Japan and then China where competitive currency devaluation and investing profits back into US Treasury debt fostered a strong dollar purchasing value and ready credit, resulting in an exploding, sustained level of US consumption.
All of these have slowed significantly with the Covid-19 shock to global markets. We feel this shock wave will result in a continued increase in bond duration risk premia and equity risk premiums.
SLIDE 11
This chart of the Dow Jones Industrial Average to Gold ratio makes it easier to see what is happening. The ratio rose dramatically as a cyclical period of Stagflation ended and we experienced a major positive economic period from 1980 to the Dotcom Bubble peak.
From 2000 onward, slower secular growth stagnation set in. We had an initial period of cyclical stagnation until 2011 when as a result of extreme monitor policies such as Quantitative Easing and historic levels of artificially low interest rates we experienced rising markets.
As strong as markets may have appeared they were actually weaker when measured in sound money and formed a clear downward trend channel.
In 2023 we are likely to reach a cusp. Since 2018 we have been trending downward in a consolidation pattern with even the post Covid-19 surge not achieving a new high in the DJI: Gold Ratio.
We believe the consolidation will end to the downside.
SLIDE 12
Over the remaining part of this decade we are likely to experience poor overall market returns. A lost decade not to is-similar to what Japan experienced as it attempted to manage its similar post bubble environment.
SLIDE 13
This period highlighted by the red box….
SLIDE 14
…. is likely to look eerily similar to this chart which shows a falling overall standard of living as measured by falling Household Net Worth as a Percentage of Personal Income.
SLIDE 15
The initial stages of the stagnation decline will be marked by economic developments of sustained higher inflation, asset deflation, surging unemployment and stagflation.
This will be followed by a crisis of debt as we witness US dollar weakness, collateral and leverage failures leading eventually to extreme levels of inflation and possible hyperinflation if correct global monetary and fiscal policies are not adopted.
If history is any indication – they won’t!
Though the developments are highly likely to happen, the timing and volatility of each cannot be determined yet. It will depend on the decisions yet to be taken. You can be assured that this chart will not look as symmetrical and orderly as shown here. However the trend is a high probability.
SLIDE 16
This schematic maps the sequential economic developments that are likely to occur, in what sequence and where we are currently positioned.
Keep all these charts handy, so as developments occur you have some semblance of a roadmap to guide your expectations. It will change and your investment these must change with it.
SLIDE 17
Let’s now shift gears a little to the investment period we are now in.
SLIDE 18
The MATASII.com site is broken into three focus areas as shown here.
My focus is about the Macro positioning through market research and analytics.
SLIDE 19
The Triggers and Strategic Investment Insights (SII) are where my partner focuses on the various market indexes and approximately ~150 Investment Instruments. All are charted on multiple time frames and employ various analytics. Those analytics are based on his book “Identification of High Probability Target Zones or HPTZ’s.
This are is much too extensive to attempt to address here, so I will leave you to explore.
I continue on a weekly basis in my newsletters to try to point you in the right direction with market analytics and highlighted / annotated investment instrument charts.
SLIDE 20
In that regard I show here the current weekly S&P 500 chart going back to 2018 which aligns with the 2018 peak in the DJI: Gold ratio chart shown earlier.
The rising black trend line shows three circles where this trend line was tested. The third also correlates with a falling trend channel and a falling low in the regular cycle of the S&P 500. These are strong indications that the S&P 500 is near a pull back.
The bottom pane shows our proprietary MATASII Momentum Indicator. It also shows that momentum is testing its longer term trend channel.
A pull back is in order but the question is how deep?
SLIDE 21
We have shown this S&P 500 Daily chart many times before. It shows the Elliot Wave Double Combo pattern we feel we are likely in.
We were looking for a completion at “E” of an “ABCDE” consolidation pattern before resuming with leg “Y” downward. The market pushed above that final “E” leg.
SLIDE 22
It appears the count is slightly different. However, caution is advised until we get a solid confirmation that we are headed lower.
SLIDE 23
A different Elliott Wave count is shown here which also suggests a reversal point is at hand. If this count is correct then the market will fall even further than our current target of 2900 – 3200.
SLIDE 24
The primary reason to be highly cautious near term is that the Financial Conditions Index has loosened so excessively.
This Bloomberg chart highlights the surge since last September.
SLIDE 25
This much longer term chart from the Federal Reserve puts this loosening in perspective. The recent loosening shown on the right within the red circle says it is relatively small but that reversal changes need to paid particular attention to! That is why we are cautious.
Yellen and Powell may have hidden games at work. I laid out one such game that would explain this change which is presently going on under cover of the lifting of the Treasury Debt Ceiling and Treasury Secretary Janet Yellen’s use of the Treasury General Account (TGA).
SLIDE 26
Another reason to be cautious is that official unemployment levels are historically extremely low as shown by the red circle in the bottom right.
Layoffs are worse than currently worse than reported and are steadily occurring but they are neither showing yet in government reporting nor in the media.
SLIDE 27
We expect that to soon change quite dramatically and head higher towards the red trend line shown here.
SLIDE 28
We are already beginning to see signs of this anticipated shift. This along with emerging bankruptcies will be triggering reversal confirmation events.
SLIDE 29
The games may go on further but seldom has the economic and macro data been worse
Real Personal Disposable Income has simply collapsed on a Y-o-Y – according to the Federal Reserve’s own charts, shown here.
SLIDE 30
Manufacturing Purchasing Manager numbers for New Orders, Business Prices and Employment are all below fifty. Fifty being the level that marks contraction – not merely a slowing!
SLIDE 31
The yield curve has been inverted for some time but is now at levels not seen since the Volcker Crisis in the late 70’s – early 80’s.
Something is seriously amiss and is not likely to end well!
SLIDE 32
An analytic seldom seen, is the one shown here. It is put out by Sentiment Trader and measures downward market pressure.
It is particularly useful at points in market behavior like this. It warns of rare peaks when market typically falls further from levels that were already considered as low. That is the case when you have a potential for a market capitulation which we have been writing about in our weekly newsletters.
SLIDE 33
What are the conclusions?
SLIDE 34
We think we are near a potential market capitulation. The markets may lift a little longer but they are running out of the proverbial runway!
SLIDE 35
The chart on the right is from my colleague Thorsten Poillet that measures real money supply in the OECD developed economies. It is in contraction. The rate of decline is alarming.
Also shown here on the left is the Money Supply for the US on a Y-o-Y basis. It is now also contracting.
Markets don’t sustain themselves well when money supply actually contracts!
SLIDE 36
With credit payment delinquencies rising banks loan officers are now tightening consumer credit quickly.
Residential investment fell off a cliff, dropping 26.7 percent as consumers were unable to afford the combination of high home prices, high interest rates and falling real incomes. No wonder homeownership affordability has fallen to the lowest level in that metric’s history.
But the growth in inventories, which accounted for half the GDP growth in the fourth quarter, is not a good sign, either. It is the result of businesses being unable to sell off existing inventories at current prices. Liquidating that inventory at discounts will mean lower profits, a further drag on future growth.
SLIDE 37
Going back to Real Personal Disposable Income.
Perhaps most troubling to me is the precipitous drop in real disposable income, which fell over $1 trillion in 2022.
For context, this is the second-largest percentage drop in real disposable income ever, behind only 1932, the worst year of the Great Depression. To keep up with inflation, consumers are depleting their savings and burning through the "stimulus" checks they received during 2020 and 2021. Credit card debt continues growing, while savings plummeted $1.6 trillion last year, falling below 2009 levels.
As consumers continue depleting cash reserves and borrowing costs are rising, the growth in consumer spending will keep slowing. Since that accounts for roughly two-thirds of GDP, this doesn’t bode well for the economy.
Just how much pain is the consumer feeling? The average family has lost about $6,000 in annual purchasing power under Biden because prices have risen so much faster than wages. Higher interest rates have increased annual borrowing costs by $1,400, so that the average family effectively has $7,400 less in their annual budget.
But that’s just the average. Someone trying to buy a median priced home today will have a monthly mortgage payment that is 80 percent higher than when Biden took office. That means spending an extra $9,500 a year for the same house. It’s no wonder people are financially strapped and taking on second or third jobs in this economy.
Meanwhile, federal nondefense spending grew 11.2 percent in the fourth quarter, another example of politicians feeding the federal budget while starving the family budget.
If you’ve ever driven a car that ran out of gas, you may have noticed the engine rev up right before stalling out. That seems to be what we are witnessing with the economy—an engine running on fumes, about to stop.
The last thing America needs is more taxing, spending and regulation by the federal government. Instead, we need to follow the winning formula laid out by President Ronald Reagan and Fed Chair Paul Volcker, which brought the economy back from stagflation.
Reagan scaled back government while Volcker stopped the monetary manipulation and allowed interest rates to seek their natural level.
SLIDE 38
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.
SLIDE 39
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!
