Generally speaking, the economy’s been pretty good over the past 40 years — credit was cheap, and so were Chinese products and energy. Stocks were going up and interest rates were going down, observes Mary Anne and Pamela Aden, editors of The Aden Forecast.
But the truth is, the last 40 years were not normal. They were abnormal and this is something that few want to accept. In fact, many people have known nothing else but the good ol’ days. And that’s why they think it’s normal.
But this prosperity was fueled by ongoing massive debt and money creation that provided fertile ground to keep the illusion going, and so it did for 40 years. But now, it’s time to pay the piper.
Currently, for instance, the debt alone has exploded and it’s reached the point of no return. The bottom line is that the government takes in about $5 trillion per year via taxes. But it spends more than $6 trillion on Social Security, defense and so on. The difference is the budget deficit, which keeps growing and it’s now more than $1 trillion per year.
One item that’s increasingly becoming a problem is the interest that has to be paid on the debt. It’s been soaring and it’s already one of the governments biggest expenses. But it’s expected to keep growing and it’ll soon hit $1 trillion per year. That’s especially true now that interest rates are rising.
In other words, interest payments could become the largest government expense, in the not-to-distant future, taking up 25 cents out of every dollar spent on interest paid on the debt. This is simply not sustainable.
At the same time, inflation has been soaring too. So the Fed is actually raising interest rates at the fastest pace ever to reign in inflation. This has pushed the economy into a recession and it’s fueled big volatile drops in stocks and bonds.
It’s also hurting the real estate market. With interest rates surging, U.S. home prices recently posted their biggest monthly declines in 13 years. In addition, the number of homes sold in the U.S. dropped by 25% and listings fell 22%. These were the biggest declines on record.
As you know, the bear market has been in force all year. It’s primarily been driven by high interest rates, a strong dollar, the recession and weak earnings.
The recent upmove in stocks has basically been due to signs the Fed may soon slow down their interest rate hikes. This was reinforced by the latest economic upmove via GDP, as well as the lower CPI. So, they’re hoping the Fed will reverse course and again bring interest rates down, providing easy money.
Currently, however, it doesn’t seem like the Fed’s in a hurry to reverse their course any time soon. For now, it looks like the Fed’s going to keep raising interest rates for as long as it has to bring inflation down. The mega trend is now clearly up for interest rates and down for bond prices. Continue to stay on the sidelines and avoid bonds for the time being.
Once the rebound rise is clearly over, the bear market will likely resume, taking stocks down to new lows. Our leading indicator for the S&P 500 is reinforcing this view.
The S&P 500 could test the 2009 uptrend near 3300. It also means this will likely end up being a major bear market with stocks declining more than 40% overall. One important reason why is because stocks are still very expensive, in spite of the decline they’ve already experienced.
Everyone worldwide is struggling, some more than others. Stagflation is rampant, interest rates are rising in most countries, and stocks are falling). With all of the markets vulnerable to a further decline, it’s best to stay on the sidelines while the bear’s in full force.
