We Live in Interesting Times September – December 2018

At time of writing the US stock market is completing its final consolidation phase prior to its last advance from March 2009. We indeed live in interesting times as people, economics and politics are at variance with each other. Huge forces at play are shaping the direction for the next 10-15 years.

These all-time index highs will most likely be completed prior to the end of 2018. It also coincides with the weakest money supply growth of the last five years which is undercutting potential asset growth in stocks and property. A mid-term Congressional election that strongly reflects the polarized nature of US society.

Our projected top for the US stock market also coincides with US congressional mid-term elections. Stocks may peak either before or after the actual elections as markets will often foresee electoral results. The polarization of US politics suggests major ramifications of the results coming from the selection. This is often characterized by the saying “buy on rumour, sell on news”. Targets on the DJIA range from 26234 to 30676.46. SP500 is a little more difficult to determine as the index is showing more bullish potential. It may move into a spiking finale where the DJIA looks more tepid.

Should Republicans increase their number of seats in Congress the Democrats will implode as clearly the results demonstrate how completely out of touch with the electorate they have become. We could see strong political violence occurring as an embittered left goes on the rampage. Trump will be able shut down the investigations against him and indeed persecute the Democrats. Conversely, should Democrats reaffirm their congressional majority then this will introduce a lot of uncertainty into the business, economic and political environment. Stocks will naturally reflect this uncertainty as one of the Democrats stated aims is to shut President Trump down. In this environment we would anticipate the presidency be forced on the defensive as Congressional attacks on the president increase in light of the Democratic Party resurgence. At present social mood suggests Republicans will carry the day given the ebullient US economy. We assign a probability of only 65% on this outcome given the fragmented nature of the US political environment. The final result doesn’t really matter as the long term picture overrides the short term political machinations. This political divide is in itself a reflection of the major top occurring for the US economy and markets. Either outcome assures a loss of appetite for investing and expectation of the future – a strong reflection of the changing zeitgeist of our times. (As a mini reflection of these times people might hark back to the political and economic times of 1970-1973.

Everybody however is still addicted to the “cool-aid”. The liquidation of malinvestments that should have occurred in 2007-2009, but didn’t, now risks stopping the recovery in its tracks. As inflation advances in 2019, interest-rate markets will be forced to adjust savagely. We anticipate US Treasury bond markets to fall steeply, reflecting political uncertainty, gathering inflation, and the potential for an embattled presidency. As the US Federal Reserve moves to get back on top of the inflation outbreak we may see stagflation break out.

Weak money supply growth is a major concern moving forward given the over-valuation of asset classes. The implication is that major falls in asset values will take place in 2019 unless there is an immediate pick up in money supply growth. We also see inflation accelerating based on the money supply growth of the last 10 years. We see US inflation soaring quickly to the 4 to 6% rage. The US Federal Reserve does not appear to be very aware of the threat this imposes to an already strong economy as they still fear the fragility of the recovery and the impact of higher interest rates. A 30 year US treasury bond will travel very quickly to 4.5% to 5.5%.

Off the back of a strong inflation surge we anticipate gold to rally. Many will claim this is the start of a new bull market. We anticipate gold rallying to around US$1527, completing another leg of its consolidation phase. The low point prior to the rally is not in yet.

This peak in US stocks represents the peak of an economic cycle that started in 1760-1783. It is equivalent to the cycle that saw the peak of the Roman Empire. This current cycle has seen the rise and fall of empires. This peak concludes the rise of Pax Americana but it will be many decades before another Empire emerges with the anarchic nature of nation states competing for supremacy.

Near the index tops we will be releasing our forecasts for the phase 2019 – 2030. We live in interesting times. Be prepared for what is coming next!