Houses, Cars, College/Uh-Oh
Trader Scott’s Market Blog
February 19, 2017
The series of financial crises have been intensifying over the last twenty years. In July 1997, there was the beginning of the currency problems in Thailand and the Asian Financial Crisis. The crisis led to the downfall of longtime dictatorMuhammad Suhartoin August 1998. As of his death in 2008, he and his family were the most corruptof all time. But unfortunately he didn’t live long enough to see that mantle handed to the Clinton Foundation. Then there was theRussian Financial Crisis. In August 1998, the Russian currency, stock, and bond markets got plastered, just like Boris Yeltsin usually was. But the most ironic/funny? financial crisis was the blow up of Long Term Capital Management (LTCM), run by, yes, two Nobel Prize winners in Economic “Sciences”. So let’s consider the sciences…. physics, chemistry, computers, genetics, and….economics- seriously? But the most amazing factoid about LTCM wasneither of those clowns “managing” the fund wasLarry Summers. You’d figure that if someone were to blow up the financial world it’d be old Larry.
And the next crisis began in March 2000, when we had the top centered around the Nasdaq Dot-com Bubble, thus infecting equity markets world-wide. There were several prominent evangelists back then, who “abetted” the tidal wave of weak handed buyers.Jim Cramerwas one of those cheerleaders, and 10 days from the intraday top he was still euphorically shaking his pom-poms: “We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over — and it is very far from ending.”
The biggest financial crisis (so far) was centered around 2008, but the top in global equity markets was actually in October 2007. While the top in the main culprits -US real estate, mortgages, and derivatives – was generally in 2006. And Chairman Bernanke was on fire with his outlooks for the economy, rattling off one winner after another:
In March 2007 :”At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to becontained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.“
In October 2007:”Despite the ongoingadjustmentsin the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”
In January 2008:”The Federal Reserve is not currently forecasting a recession.“
So now as we enter the euphoric Trump era, there are a few minor multi-trillion dollar issues to deal with. To start with would be $1.4T in student loans, where less than half of the undergraduates are paying down their debt. While “only” 11% are delinquent loans, that number is artificially low, as the ones on deferred payment or payment plans mask the big troubles with those loans. Then there is the $1T car loan “industry”, where delinquency rates are at 7 year highs. And in the euphoria surrounding much of the housing market, more cracks, as “the Federal Housing Administration mortgage delinquencies jumped in the fourth quarter for the first time since 2006… The FHA(with $1T in loans oustanding) insures low down-payment loans and is a favorite among first-time homebuyers”. And: “thegovernment-backed debt is the only source of mortgage availability forlow-down-payment, subprime borrowers at a time when prices are rising relentlessly. A recent report from Black Knight Financial Services finds that a median-priced home now requires 22.2 percent of median income to make the necessary monthly principal and interest payments. Housing is about the least affordable it has been since 2010″.
Then in steps Donald (I Love Debt) Trump. While I voted for Mr. Trump, and it’s very early in his Presidency, it’s quite disconcerting the direction he’s going in. His misunderstanding of markets, like believing he can talk down the $ when the trend is up, and also taking credit for “his” stock bull market, are both examples. The Dow had already tripled from the March 2009 lows when he was elected. In fact, if we’re going to go there and do the moronic doling out of credit thing for the bull market, then Barack Obama gets 90% of it. There has not been one Trump supporter who has given Mr. Obama credit for the bull market, nor should they. So then who gets blamed for the next selling wave, as it’s actually normal for markets to go up and go down. As to the $, apparently everyone has already forgotten about the clowns touting the “new” US$ bull market, right into the massive 103 resistance in the $ index. I was warning two months agoto expect a correction in the $ uptrend. But the President himself wasperfectly happy to take credit for the strong $, right smack into the intermediate term highs – very incompetent. But now, weirdly, he “wants” a “not too strong Dollar“. He’s not going to get his wish (yet).
And it’s very troubling to see the President encouraging more debt for government, business, and individuals. It was one thing when President Reagan was doing it35 years ago,but it’s a light year’s difference with our current debt situation on this Planet. We were then at a secular top in inflation, and interest rates, but now it’s absurd to be encouraging more debt to just be piled on top of the mountain of old debt. Part of Mr. Trump’s argument is thatDodd-Frank is a disaster (possible) and banks arenot lending. And putting aside whether Dodd-Frank is good policy or not (anything Barney Frank is involved in is suspect anyway), but here’s the actual lending situation –household debt rose by $226 billion in Q4, the most in a decade. So with inflation having bottomed, the new debt will now fuel the inflation, not the deflation anymore. There will be sort of a symbiotic relationship with debt, inflation, and rising rates. And the wage earners can not catch a break, as real earnings are going to continue to stagnate, yet we have leaders encouraging more debt. Wow.
So as we think about those other crises, with the total incompetence by the so-called leaders, the current dangerous push for more lending into a totally over-borrowed world, and the cluelessness by the Federal Reserve, is it worrisome that Janet Yellen at the Feb. 1st meeting said “she is now confident“– yes it is. And looking at those other crises, the one thing they had in common was a rush to buy US Treasuries. But what if the next crisis is actually caused by those US Treasuries themselves….uh-oh.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
February 19, 2017 @ 11:43 pm Randal Magnuson
Great post home fry-
“So with inflation having bottomed, the new debt will now fuel the inflation, not the deflation anymore. There will be sort of a symbiotic relationship with debt, inflation, and rising rates.”
Powerful point indeed…
Keep em comin’
February 20, 2017 @ 12:46 am traderscott
The real inflation comes with the $ downtrend/velocity increase. That will have to wait awhile, but the asset accumulation in anticipation should have been done over the last year into the opportunities, and there will be more.
February 20, 2017 @ 12:31 am Easy Al
There is another story about Larry Summer. After the end of Clinton administration, Robert Rubin, who sit on and dominated the board of the Harvard University at the time, gave Larry the presidency of the university. Whatever you say about Larry, he really believed in his own shit (i.e. derivative). He was extremely unpopular among Harvard faculties and were forced to resign in 2006. Any way, about 10-12 years ago, Harvard had about $35 (plus or minus) endowment fund. At Larry’s encouragement, the endowment fund went heavily into private equity and derivative, both of which blew up (or stuck) in 2008 and 2009. Harvard ran into serious cash flow problem in 2008/2009. It had to halt the construction of a building in the middle of the construction and reduced the library hours. The reward for his failure is that he was hired by Obama as the Director of the White House United States National Economic Council.
About the student loan, do you know that our Congressmen already booked the profit of the student loan ? Essentially, government borrows with a low interest , lends to students at higher rate and profits from the spread. I do not know what kind of the default ratio they used when the profit was booked. Presumable some time into the future, the US government will have to reverse some of the phony profit.
February 20, 2017 @ 12:42 am traderscott
EA, that exact story about the endowment is in the link for my Zero Hedge post “More Brilliance from Larry Summers”. Larry is an absolute idiot. And that student loan thing is one of the biggest scams of all time. There should be multiple prison sentences and civil lawsuits. It’s disgusting what they’ve done to the youngsters, and actually a lot of oldsters have gotten screwed also.
February 21, 2017 @ 1:12 am Dmitrii
Have you read the Bruce’s article about TLT? He think it is in redestribution mode. What do you think?
February 21, 2017 @ 2:16 am traderscott
Dmitrii, I still have a 1/2 position long at around 117, took profits at 122 1/2 (all in the blog), so my view is different than Bruce. He does good Wyckoff work, but it could also be a difference in time frame. I totally agree longer term that we are in a major downtrend, but as a trader that setup was beautiful in December to enter long. And I have to say, his chart is weird. The big support in TLT is around 115, so not sure what the deal is. And here is my own shorter term trading chart for TLT, and also a new low into 115ish is still a buy to me. But that’s trading stuff, longer term bonds are super bearish, and his distribution stuff has a lot of meaning.
February 21, 2017 @ 7:47 am traderscott
Without needing to make this real fancy, in the $ index, 101.75 is the resistance. Overall, this is an intermediate downtrend (re-accumulation), within a bigger uptrend. So those are 3 powerful tools – the trend, support/resistance, and accumulation/distribution – so there is one way to be prepared.
February 21, 2017 @ 8:53 am traderscott
Here’s the $ chart.
February 21, 2017 @ 9:21 am David V
Still at it.
February 21, 2017 @ 10:00 am traderscott
How can this guy get anyone to pay him for his “services”. He’s been saying that same thing for 5+ years. Gold will “reset” on its’ own – it’s called a bull market Andrew, look it up.
February 21, 2017 @ 9:28 am David V
I put Cabelas on my watchlist.
February 21, 2017 @ 10:17 am traderscott
Certainly has been creamed – one part of the equation.
February 21, 2017 @ 10:25 am traderscott
The solar energy sector/clean tech had gotten creamed over the last 9 years. I’ve mentioned them a couple of times, like in the comments at this post:
From the January 4th post herediscussing agriculture there were some stocks mentioned – MOS, POT, CF, SOIL, and Dmitrii added IPI to the list. I keep bringing up stocks which have been out of favor for awhile and are showing signs of life. The biotechs in the December 7th blog for example. I did initial purchases of Ag/biotech stocks over the last several weeks, and another group which is very interesting is solar energy, which has been beaten down. Why in the world would anyone want to own solar stocks with a Trump Presidency? Here are some symbols which are interesting to me – TSL (chart), FSLR (chart), SPWR (chart), VSLR (chart) for your due diligence, and there are many more – this is just a start.
As you know, I only buy on weakness, and there have been opportunities to do that. It’s a very bullish group long term. I like the fundamentals, but the fundamentals are useless for timing. I was waiting for the reason, and we started seeing the SOSes, that’s why i mentioned the group initially. There is a lot of upside room, but only bought on weakness. SPWR had bad “news” last week – these are the opportunities if you’re bullish.
February 21, 2017 @ 10:49 am Easy Al
Are you the one moving IPI today again ?
February 21, 2017 @ 11:05 am traderscott
Good one EA, no it’s probably Cramer. Plus I’ve got a gold trade to keep me busy today.
February 21, 2017 @ 10:38 am David V
Talk about getting creamed.
CDE had a sign of strength off its December low.
February 21, 2017 @ 10:44 am traderscott
But that’s beautiful today, and a big change of character. I wasn’t watching it, but good one David. So for people who like the special situations.
February 21, 2017 @ 10:55 am traderscott
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We all know of child prodigies who graduate high school at 10 years old and finish their Ph.D. at 16, but those are outliers. Typically kids finish high school at 18 and college (if they go) at 22. These milestones are ingrained in our culture.
If we look further, we find other milestones, or stages, in life that are also very predictable by age, and have huge implications for what happens in our economy.
We enter the workforce on average between the ages of 20 and 22.
We get married around 26 or 27.
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February 21, 2017 @ 10:57 am traderscott
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Of course, I’d understand if you asked: “Can it really be that simple?”
The short answer is…
Yes! It can.
Baby boomers were born between 1934, and 1961 when they peaked (the generally accepted years are 1946 to 1964, but we count them differently, from the bottom of the wave of births, to get a more accurate numerical picture). This massive wave of people – some 109 million – have been moving through our economy ever since.
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Starter homes topped around 1992, when the peak number of baby boomers, those born in 1961, were 31 years old… as we said they would. Trade-up homes peaked in 2005, when the top number of boomers were 44… as we said they would.
Motorcycle sales enjoyed a good ride until 2007, when those born in 1961 were 46. Just look at Harley Davidson’s run up to that point if you’re looking for the proof. Around the time of the company’s precipitous fall, its CEO, Keith Wandell, warned shareholders that the iconic motorcycle maker faced tough economic headwinds. Remember, this was before the financial crisis! Our forecast was based on fewer potential Harley clients, aging professionals with money to burn.
These forecasts came from our study of demographics and consumer spending patterns alone. In total, Harry has a hierarchy of four cycles that have, to date, enabled him to call the 2008 crisis, the Japanese collapse, the gold meltdown, and oil’s slide in 2016, to name but a few.
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February 21, 2017 @ 11:18 am traderscott
Continuing to watch FCX, there’s a gap around 12, which could make this interesting as more than just a trade. Their problems are actually helping the rest of the group, and Hg itself.
February 21, 2017 @ 11:56 am David V
And James Flanagan is out extrapolating some ominous number sevens.
February 21, 2017 @ 2:47 pm Easy Al
Thanks. James Flanagan is a very good analyst. It’s always nice to get his view.
February 21, 2017 @ 1:54 pm traderscott
Have another live video, NUGT once again filling the downside gap, and then straight (sort of) to the upside gap – took partial profits at 12.08, buy and sell all in the real time videos – will post later.