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The Trump rally into January 2018 looked like the classic final blow-off top.
It had been advancing in a clear channel, then it broke above that in a classic ‘overthrow’ pattern, followed by a
sharp correction.
My first problem with that scenario early on was that the major bubble peaks in stocks have averaged a 42%
crash in the first 2.6 months. That comes from seven global stock bubbles since 1929. The range is 30–50%.
Instead, the S&P 500 only crashed 12%, and has moved mostly sideways this year with an upward bias.
My second problem was that such extended sideways patterns, following a strong advance, tend to break up in
the same direction to new highs — not down.
And now, in late August, the S&P 500 has followed the NASDAQ’s break to new highs months ago.
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20% correction. and net worth while real wages continue to stagnate
or fall, all the while economic growth has been subpar.
As at 21 August, this rally from early November
2009 has lasted the same 3,453 days that the But as we’ve seen thus far and throughout history,
longest one from late October 1990 into early March such bubbles are fleeting and always burst.
2000. So, we’re now in new territory for bull markets
Trump has been proposing a second tax cut through
on that measure.
adjusting capital gains for inflation that he may
Many classic indicators are not pointing to a major be able to force through without going through
high and crash ahead. Congress. That will again favour the top 1–10%, but
not the broader economy or his supporters.
The advance/decline line measures how broad the
rally is and that tends to narrow in the late stages of Suffice it to say, the broader consensus is that this
a major bull market. That line has continued to make market is not ready to top yet. But I’ve a sneaking
new highs with this rally and is saying it’s still healthy. suspicion that we may see a surprise crash just
ahead; one that almost no one expects.
However, the FAANG stocks (high-tech large-cap
leaders) are showing such narrow buying, while the The actions of stocks and some key indicators over
tariff and trade war threats favour small-caps over the next few months should tell us which scenario is
large, as they are less exposed. That could throw this more likely to come…
indicator off.
The danger is that if the near-term top (the
The yield curve — 10-year Treasury yields minus six second scenario) is unfolding, the market could
months — tends to invert before a major top and get hit quick and hard by that likely first 40%
recession. This appears to be approaching, but has or so crash in the first two to three months.
not occurred yet. We’ll have to watch carefully for signs of that —
like significant new lows from 2018. And even
And even if it does, it can be many months before the
if some investors get caught in it, the time to
downturn starts.
sell is in the likely strong bounce that typically
Gross domestic product growth is accelerating out of follows such a crash.
the 2% doldrums of past years.
Since the first scenario is the most favoured — a top
Normally it would decelerate a bit before a major top. by late 2019 rather than anytime soon — I’ll cover the
second scenario here in case it sneaks in.
The Fed is raising rates which will eventually trigger a
top. So far inflation and long bond rates haven’t risen
enough to signal danger, as investors expect rates to The Unexpected Second Scenario: How to
rise when economic growth accelerates.
Spot a Recession When No One Sees It!
Household net worth just passed $100 trillion after
How many experts saw the 2008 crash and
peaking at $69 trillion in late 2007 and $45 trillion at
financial crisis — the largest since the Great
the 2000 top. Compared to GDP it has risen from just
Depression — coming?
over 4.4-times in 2000 to 4.8 in 2007. Now it’s just
over five times that amount. We noticed the slowing of Baby Boomer spending,
not just years or months, but decades in advance.
This is another good sign touted by the bulls, but
I think this is one of the biggest reasons that the The key trigger was the subprime crisis. Even Ben
economy has been holding up amidst declining Bernanke didn’t see that as a problem — and
demographic trends and record levels of debt. commented publicly that it was easily containable.
Central banks — and now Trump through tax cuts — Housing prices actually peaked in early 2006, and we
have been able to dramatically goose financial assets called that one in late 2005. It wasn’t because of a
slowing economy at that point. It was high prices and
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bad loans due to the ‘good times’.
Even the smart money index below didn’t see that one
coming as the overvaluation factors were not there.
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Our investment services continue to play the uptrend, towards $1,375-plus back in July of this year.
and will be quicker than most to change gears.
The other exception goes back to the aftershock
But keep in mind that in the first scenario with a bubble into early 1937 that saw a peak (from a
continued bull market into 2019 that this indicator second demographic wave of immigrants) and then
could just continue to crash. That would simply an attempt at a new high that failed — and then the
suggest an even bigger crash in late 2019. sharp crash you would normally expect, just a little
later than normal.
So this indicator, even if it turns out to be accurate,
doesn’t have to signal a top just around the corner.
It is, however, signaling a major crash in the coming
future, and that could very well be just around the
corner. That’s the risk here…
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was way higher.
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shoulders pattern, and it has.
This would only occur near-term if the Chinese stay Now this one is pumped up with $16 trillion in global
defiant on tariffs and don’t negotiate in earnest. But at QE. The major tax cuts in the US aren’t doing Main
least this represents a clear warning sign if it breaks Street any favours either.
below 2,600. I believe we’re due for the worst of that cycle between
The next target would be 2,000, and the ultimate target now and 2022 for stocks, and into 2023 or so for real
would be its pre-bubble low of 1,000 in late 2005 — an estate and the rest of the economy.
84% crash from the all-time high of late 2007. But we could see Dow 30,000 first…
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On that Watergate cycle, Trump could be forced to
leave office by late 2019…and it was he who just
said, ‘If I’m impeached the stock market will crash.’
That wouldn’t be the biggest reason.
We don’t get over this Winter Season until 2023 or Harry Dent,
so. That’s still five years from now, leaving plenty Editor, Boom & Bust Letter
of time for a scenario similar to what happened in
1929–33 to play out.
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