Neither Candidate Gets This Right About The Markets (And It Scares Me)

Last week began with a historic presidential debate and ended under a cloud of worry regarding the potential failure of a truly too-big-to-save financial institution, Deutsche Bank (NYSE: DB). I have been warning for nearly a year that DB is the canary in the coal mine and poses genuine systemic risk.  This week fears about the future of the bank came to fruition after the US government asked for a $14 billion fine to atone for DB’s sins during the mortgage crisis a decade ago, an amount that would severely hurt the bank even if it were cut in half. By the week, there were unconfirmed reports that a settlement of $5.4 billion was reached, a number that would wipe out the bank’s legal reserves but let it live another day.

DB’s imminent and well-deserved failure makes me happy.

The debate just made me scared.

The prospect of future financial crises should give serious pause to anybody who watched Monday night’s debate.  Solving the world’s economic problems – too much debt and too little growth – is going to require the types of leadership qualities that were in short supply on the stage at Hofstra University.

The truth is, neither Mrs. Clinton nor Mr. Trump understands what we’re really facing here…

Trump and Clinton Ignore The Real Issues Facing The Markets Right Now

Leadership will require an acknowledgement that leverage is a bad thing, that governments can’t keep borrowing themselves into insolvency, and that regulation has to be a lot smarter.  The world also faces geopolitical fractures that can only be healed by courage, character and strength.  Watching the trivial discussion and name-calling on Monday night was not reassuring.

Right now, stocks remain close to record highs.  Last week the markets barely moved with the S&P 500 gained 0.17% to close at 2,168.27, only 22 points below its all-time high of 2,190 set on August 15.  The S&P 500 gained 3.3% in the third quarter, recovering from a short-lived plunge after Brexit to recertify its blind faith in central banks and willful suspension of disbelief in reality.

But no one (especially our candidates) is talking about this:

  • Valuations remain stretched with the Shiller Cyclically-Adjusted P/E trading at around 26, its highest level other than 1929 and 2000.
  • S&P 500 Non-GAAP earnings are expected to drop for the sixth consecutive quarter. GAAP earnings are much lower than non-GAAP earnings.
  • Corporate leverage is higher than it was on the cusp of the financial crisis due in part to many investment grade companies borrowing to raise dividends and buy back overvalued stock.

In addition, oil prices rose last week by 8% on stories that OPEC is going to cut production.  A harder look at the news, however, revealed that the cuts are rounding errors that will do little to change the supply and demand dynamics of the oil market.  Higher energy prices are going to require sustained higher economic growth, something that is going to be difficult to achieve.  Exxon-Mobil (XOM) and Chevron (CVX) were up 5% and 4% respectively last week, but I wouldn’t get too excited about the sector until we see more evidence of a global economic recovery.

A couple of “real world” points to observe here include:

  • The troubles in the global shipping sector, which is wrestling with huge losses and the bankruptcy of South Korean shipping giant Hanjin Shipping, are a sign that the global economy remains weak.
  • China is at best growing at half the rate of a few years ago (if you believe the numbers, which you shouldn’t) and energy markets are still oversupplied.

The truth is, the markets are vulnerable to any bad news that can’t be outweighed by the misplaced belief that central banks are all-powerful.  As we learned again last week, the Fed has no idea what it’s doing and is navigating uncharted waters.  The odds of a positive outcome from this maelstrom are low.

And we desperately need leaders who will talk about that.

Michael Lewitt

25 Responses to “Neither Candidate Gets This Right About The Markets (And It Scares Me)”

  1. Another problem is that the market quotes are being compared based on highly inflated dollars. Even thought number wise the market is up, in reality, the market has barely recovered because those dollars are worth substantially less. The markets continue to teeter showing weakness everytime anything changes.

  2. It’s easy Tom, just spread the word for folks to preserve their purchasing power long enough to take over best cashflow businesses after their speculations [backstopped with their own precious metal insurance] pay out. Rebuild a balanced growth phase after the transition swing back to gold…things are definitely screwed between now and the My sheer Millenial’s prime household formation window-years of mass consumption wave , admittedly muted yet buoyed by double spending of retiring boomers whose spending will come out because of rebound hyperinflation of stocks after the gold superboom re-peg. Maybe. No one said its supposed to be easy; i was just kidding. But dont worry, just do your own math & explain why to your loved 1s why they might see their friends suffer & cant help everyone as well as your ownselves, after the facts have added up + add mitted.

  3. You are not quite right that the candidates ignored the inflated stock market. Trump accused the Fed of playing politics and warned of a “big, fat ugly bubble” in stocks. No one paid much attention to this except for Wall Street, which of course said it was nonsense.

  4. Tom, you are concerned about destroying this current economy? Why, what is is currently? Thriving? Strong? It’s weak and ineffective. Many people are jobless contrary to the employment numbers and the growth is awful. Heavenly Vee, I have no idea if you want Clinton in office or not? Hopefully not, she has no clue how to govern.

  5. As a society, Isn’t it up to use to collaborate together in an effort to bring a solution to the for front. We need to start some form of grass roots movement to unite us together as our for fathers did. They met together in town halls and talked to a solution appeared. Isn’t this our responsibility also? If not us…Who?

  6. For those who believe Hillary will fix things, wake up! Remember if you keep doing the same thing over and over again expecting to see change, you are ignorant of the problem. Time to change the engine that drives our government and that is lobbyist and Washington insiders. We can only overcome the coming monetary crisis by recognizing its causes and stop them.. Government spending must be controlled by a balanced budget amendment, term limits for all elected officials and Supreme Court Judges, and electing business savvy leadership.

  7. When a person keeps doing the same thing over and over again and expects change that person is truly ignorant of the problem. The problem with America’s financial system is its leadership does not care about we the people thus reckless spending until America is bankrupt is inevitable unless we change Washington. Unchecked, wasteful spending is the hallmark of Washington until this is stopped things will never improve. What America must have is an intelligent business savvy leader, smaller government, term limits for all elected officials and Supreme Court Justices, and a balanced budget amendment. Liberals have never understood fiscal policy. Only a fiscal conservative will fix our problems before total collapse of the system and ensuing devastation for our children and grandchildren.

  8. I have just been reading a book called Rome. In it the author gives an example of what could well be the problem to-day. “All the parts of the human body were very upset that the stomach seemed to do nothing but eat,so they all decided to go on strike. The stomach grumbled as it felt hungry, but after a while bad effects were felt in all the other parts of the body and they realized that if they did not feed the stomach and work together none of them would survive”. The moral to the story is that we have to have wise and strong leaders and we have to have people who produce goods and services and we all have to work together. But the key is to have wise and capable leaders and not one who in spite of her touted experience continues to make bad decisions, errors of judgment and mistakes that put our country at risk nor a leader who embarrasses people with what comes out of his mouth although he may know how to use the bankruptcy laws when America goes bankrupt. Regrettably we do not have the leaders that we need to-day or for the foreseeable future. G-D protect, bless and save America.

  9. Until ALL the money thats been shifted to the top 10% is reinvested into our general society, I would prepare for a Global DEPRESSION never seen in the history of our country——EVERY U.S. citizen is now in $60,000.00 IN DEBT. The 16 year GORGE-FEST has destroyed our economy. Follow the money!!!!!

  10. As I always try to be neutral in these matters but it behooves me to say this. With the options we have current, liberal or otherwise we should only really be caring about two things. Tax rates and Justices. As Americans we should only care, at a high level, about these two things. Each candidate has different perspectives on them, and unless our decision is based on these two things our vote is disruptive.

    Our money can grow/decline depending on the outcome, of course. I think Michael has helped me understand this more and provided sound advice. It’s important to know how the results of the election can impact us, but at this time no one can determine that outcome.

    What we do know is that Monetary policy has been the victim of hugely failed governments Fiscal policy. Overspending is rampant in our government. What’s not being identified is our governments reckless spending to accommodate the few at a huge expense of the many. Herein the fundamental problem with our government. Our current government is not serving to protect our peace and our capitalistic value, it is, simply, serving itself.

  11. still there is food in the world to feed everyone if we wants too. With GMO and Monsanto about to take full ownership of mother earth, this food supply could soon be so capable of bringing us all the most terrible diseases that we were better of starving. I mean the money system we may change any time, as it suits us, Our real assets in this world is our food supply, which has a best before date unless it is tampered with And now our money may prove to be in the same category, with a best before date too, (if it is not tampered to much with). Our money is like blood flowing in our veins, they are better off being put to use and not fattening itself for too long, like stale meet in a bank account. A nation or a person may save themselves poor without ever using, doing, spending what is necessary because of waiting for the future that never comes, because always we are here and now. “And tomorrow takes care of tomorrow, if we take care of today”.(Vedic phrase).

  12. The Titanic, built from Mutually Assured Global Destructions, physical and economic, is as we speak colliding with the iceberg. Looks to me like we need serious life boat preparation. Thank you Michael for suggesting ways to profit as the system goes down.

  13. So many wonderful ideas and most have merit, BUT HOW do WE implement them? One thing that seems to be rearing it’s ugly head is our entire government leaders and all of our elected and appointed officials” would be leaders and not USERS”. So where do we start without a revolt.

  14. I read three papers a day and all u can glean from all the info is that everything is a mess.Well this we all knew for sometime The answer is easy look after yourself and yours .Doing this in earnest will put the ship back 9n course a little bit at a time.Get rid of your debt.Even though rates are at lows no one could forsee if they start to rise the world will be in trouble.Take the next three to five years and get rid of your debt.If you don’t have the financial room to pay them down Imagine when they start to rise.Now is the time to pay them .Make room g8ve up some pleasures ie:trips new car new app.etc In five years you will have room and be stress free .Then you can pick up the pieces left from the people we did not heed the warning NO debt NO stress and $ in your pocket.Now is not the time to buy.That time was 9 years ago.Pull in your horns I AM.

  15. Heavenly vee, glad you got back to us, glad answered as did… research older book “the fourth turning” Strauss/Howe, if right (I think so) we will be allowed to save selves an country happens bout every 80/90 yrs, 1776 1860 1940 . Trump should be the type to make change happen hes more free than others to make happen. Have our chance to rebuild as was, book says when happens all things are very pliable ready for change, goes easy, still war must be fought… not shure if dems try steal (like did Senate seat in east few yrs back ?) An war after in street ? Scary,,, we can, were willing now, seem to have #s finally, but ignore common news.

  16. First of all: We “don’t need to be governed”
    What we need is the replacement of the corrupt system, so eloquently detailed by Bill Bonner “the deep state”. I sense that whomever supports Clinton is either semi-comatose, or, is “on the take”, or, is receiving generous entitlements from the current regime. Truly, NO ONE ever knows what a psychopath is thinking but yet, they cling to this one. Trump has had great success and at least has a great business understanding. He’ll steer this Great Ship called America and turn it around, by calling out CORRUPT POLITICIANS whom can be replaced easily once everyone awakens. But.. the bigger the ship.. the longer it’ll take to slow it down & turn it around for Captain Trump.

Leave a Comment

View this page online: