October is over, much to the delight of investors, mainly because it historically experienced 37% gr...
The Aden Forecast on the "Big Picture"
05/17/2019 5:00 am EST
The big picture is the dominant trend and it’s the most important. It dictates which way the economy and the markets are headed in terms of years, not months, explains Mary Anne and Pamela Aden, leading marketing timing expert and editors of The Aden Forecast.
The economy has been in an upswing for the past 10 years, ever since the financial crisis literally pushed the economy and the whole financial system to the brink. The economy was saved by quantitative easing (QE).
This included super low interest rates and bond buying by the Fed and other central bankers. It was done to stimulate the economy and turn it around. They succeeded by adding trillions to the financial system, which was basically thanks to this manipulation.
Nevertheless, the big picture of the economic trend has been up since then and it’s still intact, even though it has lasted longer than the average upmove.
Meanwhile, interest rates have been in a big picture downtrend since the early 1980s, and this too remains intact. Interest rates hit 5000-year lows three years ago, which is as far back as the records go, and it looks like they’re going to stay near these low levels in the period ahead.
Basically, everyone wants low interest rates and that’s what we’re going to get. This in turn will continue to be good for stocks. The stock market’s big picture trend has also been up since the early 1980s. Stocks had a big setback during the 2007-08 financial crisis, but then stocks started up again in 2009, thanks to the Fed’s QE actions.
Even though this stock market rise is now getting long and it should be maturing, the rise could keep going as long as interest rates stay low. And as you’ll see next, there are some factors that’re indirectly changing the big picture, extending the “normal” time frames.
As for the dollar and gold, the big pictures are down for the dollar and up for gold, and that’s been the case since the early 1970s when the dollar went off the gold standard. Obviously, there are ups and downs within these mega trends but it’s important to keep the big trends in focus. Why? Because they’re the most powerful and the most profitable over the long-term.
But it’s also very important to note that this time around, there’s a new twist in the big picture. And it could alter its outcome for a few years, or more. Here’s why — very simply, monetary policy has become political. President Trump, for instance, has demanded that interest rates must stay low.
He’s also been criticizing the Fed on a fairly consistent basis. In a recent comment, Trump said, “If the Fed had done its job properly, which it has not, the stock market would have been up 5,000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%, with almost no inflation. Quantitative tightening was a killer, should have done the exact opposite.”
Whether you agree with this statement or not isn’t the point. The point is, the President is telling the Fed what to do and the Fed is following instructions. This is totally unprecedented because the Fed has always been independent.
But now it’s a different story. The President wants the era of low interest rates and super loose monetary policies to continue, and he’s not alone. Bernie Sanders wants the same. So does the U.K., India and many other countries as well.
Overall, it’s becoming more obvious each month that more stimulus is going to be the end result. Basically, the world is following Japan, and it has been for years.
Japan has been the trendsetter. Over 20 years ago, the Japanese lowered their interest rates to zero to help boost their economy. Even though this didn’t help much and their debt continued to surge, the rest of the world has been following in Japan’s footsteps, especially after the 2007-08 financial crisis, dropping their interest rates to near zero, and in many cases below zero.
Meanwhile, Japan was buying its own bonds and the rest of the world did the same. For years, Japan has also been buying its own stocks. And now some countries, like Switzerland, are following suit, all in an effort to help their economies.
Currently, however, the main countries simply do not have room to cut interest rates much further. So, they’ll again have to turn to unconventional stimulus measures.
As respected commentator Mohamed El-Erian, formerly PIMCO’s CEO and now with Allianz, recently noted… “With Europe’s economy in the doldrums and signs of a coming economic slowdown in the U.S., the advanced economies could be at risk of falling into the same kind of long-term rut that has captured Japan.”
In other words, what will the government do when bond servicing takes up most of the expenses? They’ll revert to more quantitative easing, buying bonds, negative interest rates, buying stocks and corporate bonds. But like Japan, it won’t work for the U.S. and other countries either.
Postpone the recession? Yes. Kick the can down the road? Yes, but solve the underlying debt-ridden problem? No… And that’s the bottom line. This is the new twist in the big picture. It’s basically manipulation of the normal business cycle.
Rather than let the cycle unfold on its own, everyone is jumping in to turn the tide. That is, this will delay the inevitable recession/ crash/crisis or whatever is eventually coming, but it will not eliminate it.
For now though, enjoy the ride. Go with the flow. Recognize where we are in the big picture and pay attention. These are interesting and historical times and it’s actually an incredible experience to be a part of this era and see what’s happening.
And using Japan as our guide, also recognize that this manipulated postponement period could last for a long time. If so, those big picture mega trends could also continue far longer than they normally would.
First, the mega trends will likely remain intact. But increasingly, it looks like we’ll see superior strength in the bond market. Looking at the ratio of U.S. bonds compared to the Dow Industrials on the right, you can see the ratio has been declining since 2009, and especially since 2016. This means bonds have been weaker than stocks.
For now, the ratio is bottoming and it’s set to rise further. If it does, then bonds will be stronger than stocks going forward. This doesn’t mean stocks will necessarily decline, it just means that bonds will outperform.
When bonds rise the Dow Utilities is usually strong too. And when we compare the Utilities to the Dow Industrials, note on the left that this ratio is bottoming too.
That is, Utilities are poised to outperform the Industrials. So this also coincides with a strong outlook for bonds. And it reinforces that the low interest rate era is going to be with us for quite a while.
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