Markets do not tend to stop at the median; they tend to go from bubbles to bust and from greed to fear. We are looking at something like a 50% to 70% correction, said Kevin C Smith, Founder & CEO, Crescat Capital, in an interview with ETNOW.
Edited excerpts:
Given that you have a history of outperforming the S&P, why do you feel we are entering a bear market in the US?
There are really two main reasons that we think we are entering a bear market. First is valuation reasons. There are at least eight different fundamental valuations. As a result, we have calculated that last year reached historic all-time highs.
Second, is economic timing indicators. Theres a whole host of them but in terms of the severity of the bear market, that we are looking for US stocks, given the valuations and just to get to the median and multiples, we are looking at 40% bear market. Markets do not tend to stop at the median; they tend to go from bubbles to bust and from greed to fear. We are looking at something like a 50% to 70% correction.
Global equities have rallied year to date on hopes that US-China trade deal will come through. The Fed move at this point is indicative of a bearish trend. That is the first sign that things are actually going to go south. Can you explain the thought process there?
A lot of people think that with the Fed pausing its interest rate hikes, we can have a soft landing or an extension of the business cycle. We actually really got that pause in the Fed hiking cycle back at the end of 2015. That led to an extension of the business cycle and the soft landing we think has already happened in 2016 along with reflation.
Since that time, the Fed has raised another 225 bps. In terms of rate of change, it is actually the largest interest rate hike in a Fed rate hike tightening cycle ever and the idea that when the Fed pauses its bullish is really not true when it is late in the economic cycle at record valuations.
We are in the longest US expansion cycle now. Normally, when the Fed pauses, it is because they are doing it for a reason and that something is wrong that the economy is slowing and they are afraid of bursting the asset bubble.
Are you also tracking the inverted yield which has really made everyone take notice as a signal of an oncoming recession in the US?
Your curve inversions really are a very good economic timing indicator both of impending bear markets and recessions. Historically, there have been times when you have got some false signals, like in 1966 and may be 1978. At this time, we have more than 50% of the US yield curve inverted. We have been at higher levels of inversions during the height of the tech bubble or the height of the housing bubble in the US.
When you look at twos versus tens inverted here in the US back in 2006, it took another really almost two years before that the market started to correct. But that doesnt mean we have another two years. Twos versus tens is not really the best segment of the yield curve to be looking at and the three month versus the 10-year is probably a better one to look at. That just inverted last week and we really need to be careful here, given the record valuations and all the host of other economic indicators.
You cannot just look at yield curve inversions alone to see that it really is a time to be concerned but the yield curve inverts for a reason. It means that the economy is signalling that expects the Fed to have to ease soon and that is because the economy is slowing and the credit markets were trying to tell us something.
You have said that this is part of a global debt problem and cited $90 trillion in the Chinese banking system highlighting global debt contagion. You are shorting China, Australia and Canadian banks. Do you expect this contagious credit bubble to actually burst?
It is true that we have record debt to GDP levels globally and some of the biggest credit bubbles in the world are in China, Australia and Canada and they tend to see housing bubbles as well. There are 60 million empty apartments in China. This is not just a US stock market valuation bubble. We have asset bubble globally and at Crescat, we are a global macro asset management firm. We use valuation models, equity models and macro models to try to time the business cycle and to look across the globe.
The timing indicators in terms of yield curve inversions are not just in the US. Hong Kong actually has the record number of inversions in the yield curve today at over 60%. Canada has a high number of yield curve inversions today. It is rising in Australia too.
So with the housing bubble countries, we will short banks in those countries and we will short US stocks as well. We do think there are a number of economic timing indicators globally. There is a global yield curve inversion when it comes to Fed funds versus 30 year rates and at least 15 different countries are inverted today.
It is a global yield curve in inversion. We think global equity markets topped out in January of last year. The US market topped in September of last year. What we have really seen year to date in 2019 is what we very strongly feel is a trap. It is a bear market rally that is taking place across a number of countries, leading to a bull trap. We think global markets are getting ready to turn over.
Let us talk about the big valuation question. Is the stock price decline now a natural outcome of this?
Other asset classes that are richly priced today include corporate credit and especially here in the US, high yield bonds, junk bonds and private equity, venture capital. We have already seen crypt currency go through what we think is a bust and in real estate, we are not quite as frothy as we were in 2006 at the height of the real estate bubble here in the US.
The household debt to GDP in the US is a little bit lower than we were back then but we have had another real estate inflation here in the US as well. In a number of ways, everything is bubble except commodities. Commodities have been the one asset class that has been left behind.
From here on where do you see money moving?
When you see people getting out of risky assets they tend to flock first and foremost they cash into the US dollar. But we are in what we call a multiple bubble, debt to GDP bubble and in another way, central banks are really coming to the rescue with more money printing and easing as the cycle turns down. The pressure is in that also in thiRead More – Source
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