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2021-05-18

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Are We Approaching Another 'Lost Decade'?

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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":194920188,"tweetId":"194920188","gmtCreate":1621335531644,"gmtModify":1634192364173,"author":{"id":3575250365561640,"idStr":"3575250365561640","authorId":3575250365561640,"authorIdStr":"3575250365561640","name":"Wisteun","avatar":"https://static.tigerbbs.com/c3de3a27114c3fcf9704ae4eb725b735","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":9,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body>What?</body></html>","htmlText":"<html><head></head><body>What?</body></html>","text":"What?","highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/194920188","repostId":1147381167,"repostType":4,"repost":{"id":"1147381167","kind":"news","pubTimestamp":1621329159,"share":"https://www.laohu8.com/m/news/1147381167?lang=&edition=full","pubTime":"2021-05-18 17:12","market":"us","language":"en","title":"Are We Approaching Another 'Lost Decade'?","url":"https://stock-news.laohu8.com/highlight/detail?id=1147381167","media":"seekingalpha","summary":"Summary\n\nThe stock market is overvalued by every historical valuation metric.\nMarket psychology refl","content":"Summary\n<ul>\n <li>The stock market is overvalued by every historical valuation metric.</li>\n <li>Market psychology reflects an optimism bordering on a casino mentality.</li>\n <li>Forget predicting the next recession or correction, we are poised for another “lost decade” in the market.</li>\n <li>Pattern recognition suggests gold assets should perform well during a “lost decade”.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/898b7fe59ef695fe0f32deb7d584e4e6\" tg-width=\"1536\" tg-height=\"1029\" referrerpolicy=\"no-referrer\">Photo by Craig Mitchelldyer/Getty Images News via Getty Images\nWarren Buffett&nbsp;gave a speech&nbsp;to corporate executives in Sun Valley, Idaho in July 1999 where he reflected on two consecutive and fascinating multi-year periods in the stock market. The first period was from the mid-'60s to the late '70s. It was a lean time of flat S&amp;P 500 returns, despite extremely healthy GDP growth. The second period was from late '70s to 1999. Occasionally referred to as the “Boomer Bull Market”, that 22-year period was a blockbuster for the S&amp;P 500 with 13.4% annual growth. GDP grew at a healthy rate, but one that was nearly 3% less annually than the earlier period of flat stock market growth. In that speech, Warren laid out his thoughts on why the bull market was about to end. Stock price movements, as reflected by growth in corporate profits, should track GDP growth plus inflation. However, markets routinely behave for long stretches in ways that aren’t linked to value. Sooner or later, value counts. One of his favorite economic indicators reflecting this principle, the S&amp;P 500 / GDP metric, was at a 60-year high. Within a year, the market began a significant correction that proved him correct.\nUnknown to anyone in 1999, history was also about to repeat itself. Using a logarithmic scale to see the earlier periods more clearly, Chart 1 shows that the S&amp;P 500 had a second extended period of flat growth followed by an ebullient bull market. I’ve loosely termed the two periods of flat S&amp;P 500 performance as ‘Lost Decade #1’ and ‘Lost Decade “#2’. They are obviously longer than a decade and both encapsulate two recessions. Interestingly, the “Boomer Bull Market’ of 1978 to 2000 includes three recessions and a memorable warning of the Fed Chairman against “irrational exuberance” towards escalating asset values. The second bull market from 2013 to present has weathered the COVID recession and a global shutdown with a similar annualized S&amp;P 500 growth rate of 13.5%.\n<img src=\"https://static.tigerbbs.com/9d11eb8bb7b5a56dbf6913a16318760f\" tg-width=\"1180\" tg-height=\"788\">Chart 1. S&amp;P 500 and GDP showing two ‘Lost Decades’ and two bull markets. Source: Author’s chart\nThe S&amp;P 500 / GDP metric stands significantly higher today than it did in 1965 or 2000, the transition years where the two “Lost Decades” began. Unlike those past scenarios, though, today’s interest rates and money supply have muddied the waters. Charlie Munger, Berkshire Hathaway Vice Chair and Warren’s lifelong business partner, recently mused that the current money supply and interest rates are “unbelievably extreme” and have left us in “uncharted waters”. Market psychology is typically rearward-looking and often follows a herd-mentality. It’s been optimistic over the last 8 years and is presently discounting these historical warning signs.\nThis raises every investor’s obvious question: “Can these frothy market valuations continue to climb?” To add perspective on that question, this paper examines six ‘economic factors’ and ‘market indicators’ that historically affect or predict stock market returns. Using charting techniques to see trends and peaks, the data tells a fairly compelling story. The issue isn’t whether a market correction or recession is imminent, the larger question becomes “will we eventually face another ‘lost decade’. The answer is yes. Given that outcome, I’ve also included a chart on gold prices that shows a striking “pattern recognition”.\n1. Economic Factors\nSubjects like inflation and the Fed’s monetary policy are wonkish in nature and notoriously dry. They are uninteresting for many investors to follow. In today’s ‘unchartered waters’, however, these topics carry extra weight in understanding where the economy is and navigating where it may go.\nInflation\nThe Federal Reserve is the nation’s central bank and the ultimate guardian of the purchasing power of our money. Inflation is the Fed’s arch-enemy number one. Inflation de-values our money and, at very high levels, destroys jobs and can potentially destabilize an entire economy. The Fed uses interest rates, money supply, and bank reserve requirements to execute its mission of controlling inflation, maximizing employment, and driving sustainable growth.\nChart 2 shows inflation levels over the last 50-years. The chart also overlays the S&amp;P 500 index, shows recessionary periods, and annotates the causal elements for each recession. In short, inflation can have a very strong, though indirect, impact on recessions and stock market valuations.\nInflation has been a non-factor in recent years. Annual inflation (Dec to Dec) averaged 1.7% over the last decade. It simply hasn’t been on most investor’s radar screen - until recently. As the economy recovers from the COVID pandemic, news stories are breaking daily of shocking price increases. Over the last year, lumber prices are up nearly 300%, steel prices are up 60%, semiconductors are in chronic short supply, and average home prices are up 17%. The knock-on effect of these price increases is starting to ripple through the economy. The Labor Dept reported that the CPI for Apriljumped 4.2%from a year earlier. Similar increases are expected for many months to come. Analysts, academics, and other ‘experts’ are filling various media with opinions whether these increases will be transitory or permanent. Some even predict we are on the verge of a “tsunami of inflation” … reminiscent of the late 70’s. One salient point worth noting is that the CPI treats housing as an investment and not a relevant consumption item. The recent home price increases, which can represent 30% of a household budget, are therefore not included directly in the CPI numbers.\nThis paper doesn’t enter the debate of how high or how long inflation may last. The take-away, however, is: higher inflation is here, it’s becoming very tangible, and it’s realistically greater than figures reported by the Labor Dept.\n<img src=\"https://static.tigerbbs.com/735281458d72e27c243145f55c878072\" tg-width=\"1180\" tg-height=\"792\">Chart 2. Inflation. Source: Author’s chart\nFederal Reserve Monetary Policy: Interest Rates and Money Supply\nTwo of the Federal Reserve’s key levers in managing the US economy are the setting of interest rates and control of money supply.\nThe Fed uses the Federal Funds Rate(FFR)to control (short-term) interest rates, ex. 1-yr Treasury bills. The FFR is the rate banks charge each other for over-night borrowings to meet reserve requirements.\n<img src=\"https://static.tigerbbs.com/4f89daf9a7ad435a3d6316009cb1b8dc\" tg-width=\"1172\" tg-height=\"776\">Chart 3. Inflation, Federal Reserve Rate and 1-yr Treasury bill. Source: Author’s chart\nChart 3 graphs inflation, FFR and the 1-year Treasury bill. The FFR and 1-year Treasury bill are so close as to be indistinguishable from one another. Throughout the 70’s and 80’s, the Fed chairman, Paul Volcker, used interest rates to fight abrute-force campaignin subduing inflation. He drove the economy into a deep recession persuading Americans to abandon their entrenched expectation that prices would keep rising rapidly. The cost was steep. Consumers stopped buying homes and cars and millions of workers lost their jobs. Angry homebuilders mailed chunks of two-by-fours to the Fed’s marble headquarters in Washington. He was reviled and hated by most Americans. In the end, he was successful and proven correct. His reputation was restored and he became an international symbol of integrity and independence. His courageous leadership is the gold standard for Fed chairman.\n<img src=\"https://static.tigerbbs.com/5c71bc98372f816d9615bae45743ff86\" tg-width=\"1180\" tg-height=\"792\">Chart 4. S&amp;P 500, US Treasury Yields. Source: Author’s chart\n“Interest rates basically are to the value of assets what gravity is to matter” Buffett said at the recent 2021 Berkshire annual meeting. Chart 4 makes that point. As interest rates dropped in the 80’s and 90’s, the stock market had one of its greatest bull runs. Short-term interest rates fluctuated during the early 2000’s as the stock market sputtered to flat returns for over a decade. The Fed dropped the FFR to nearly 0% in 2009 to stimulate recovery from the Great Recession. The stock market responded with astounding growth for nearly a decade. The Fed began raising short-term interest rates 2017, but cut them to zero again following the near-complete worldwide economic shutdown during the COVID pandemic.\n<img src=\"https://static.tigerbbs.com/8572c2aef13323084b2e799b7d61e979\" tg-width=\"1186\" tg-height=\"794\">Chart 5. Fed Assets and M2 Money Supply. Source: Author’s chart\nDuring and following the Great Recession, the Fed implemented three rounds of “quantitative easing” to stimulate the economy. Quantitative easing is a term describing the Fed’s purchase of assets such as Treasury notes to pump money into the economy. Chart 5 shows the growth of Fed Assets and the resulting growth in the ‘M2’ money supply. M2 is term economists use to measure the sum of all paper currency in circulation plus cash in checking, savings, money-market and other ‘near-cash’ accounts. Assets on the Fed’s balance sheet increased by $3.5 Trillion between the Great Recession and 2016 and an additional $3.5B since the onset of COVID pandemic. They continue to rise by $80B per month.\nNot to be outdone by the Fed, Congress also got into the economic stimulation effort in response to the global economic shutdown of 2020. They passed the two legislative acts that pumped an additional $4 Trillion into the economy. Between the Fed’s purchase of assets and Congressional stimulus packages, the M2 Money supply increased 250% from the start of the Great Recession. Unfortunately, these stimulus programs create profound distortions in the economy. Simply put, people can make more money not working than re-entering the workforce. Unemployment remains at 6.1% while 8 million jobs are open and can’t be filled.\nThe takeaways are: 1) The Fed FFR remains at 0 to ¼ percent, and 2) the M2 money supply has more than doubled over the last 10 years. A Fed statement on April 28, 2021,reaffirms its commitmentto this strategy. Charlie Munger’s fears of being in “unchartered waters” are well-founded. The Fed and Congress have simultaneously hyper-stimulated the economy and distorted the labor market. With global supply chains constricted and more cash awash in the economy than can be spent, inflation is sure to rise. This situation is both unprecedented and unstable. The Fed Chairman needs to summon the spirit of Paul Volcker and reassert its independence from politically-influenced legislative actions.\n2. Market IndicatorsYield Spreads\nYield spread is the difference between interest rates on short-term Treasury bills and long-term Treasury notes. The interest rate on short-term T-bills is set by the Fed. Interest rates on long-term notes are set by bond investors. Declining yield spreads drive heightened volatility in the stock market. Negative or near-negative yield spreads indicate broad-based pessimism in the economy and are a fairly reliable indicator of an onset of a recession within a year. Chart 6 shows yield spreads between 10-year and 1-year Treasury note over the last 35 years. (Some analysts look at yield spreads between 30-year and 2-year Treasury notes, but they are virtually identical to the 10-1 curve shown below.)\n<img src=\"https://static.tigerbbs.com/93ae3aae78a4778efe5f6068f6db07f1\" tg-width=\"1190\" tg-height=\"790\">Chart 6. Yield Spread vs S&amp;P 500. Source: Author’s chart\nThe recessions of 1991, 2001 and 2008 were predicted by negative yield spreads in the year preceding them. The dot com bubble burst and sub-prime mortgage collapse were the clear triggers for the subsequent 2001 and 2008 recessions. The negative or near-zero yield spreads in 2019 were short-lived. They were back in positive territory by the end of 2020 and are presently at a healthy level of 1.5%. The 2020 recession was created by the COVID virus ‘Black Swan’ event and is unrelated to negative yield spreads in 2019.\nMargin Debt\nChart 7 shows the relationship between margin debt and the S&amp;P 500 index. The solid lines are actual reported values and the dashed lines are adjusted to present day dollars using CPI. Inverting the margin debt axis shows the relationship between margin debt and the S&amp;P 500 as a divergence. Margin debt popularity accelerates prior to market peaks as investors increase their leverage in the market. A researcher at Advisor Perspectives,Jill Mislinski, published this analysis in April 2021. It was re-tweeted shortly thereafter by Dr. Michael Burry (ofThe Big Shortfame) shortly before he deleted hisTwitter accountfollowing a visit from the SEC regarding his frequent tweets about rampant stock speculation and excessive valuations in financial markets. His re-tweet also stated “the market is dancing on a knife’s edge”. It can still be found onReddit.\n<img src=\"https://static.tigerbbs.com/395bfdc1583d718ae6192a7798372416\" tg-width=\"1178\" tg-height=\"792\">Chart 7. Margin Debt vs S&amp;P 500. Source: Author’s chart\nMargin debt is both an excellent measure of market psychology and a leading indicator of market corrections. As of March 2021, the record level of margin debt reflects an extreme optimism in the market bordering on a “casino mentality”. Investors are playing for the excitement of a jackpot and fail to recognize the house’s growing advantage.\nThe S&amp;P 500 / GDP metric - Warren Buffett’s favorite indicator\n<img src=\"https://static.tigerbbs.com/0d3bc53f103f461de81be472e622b6d6\" tg-width=\"1107\" tg-height=\"807\">Chart 8. The Buffett Indicator. Source:Advisor Perspectives, May 2021\nChart 8 shows the valuation of corporate equities to GDP. As noted earlier, this is Warren Buffett’s favorite metric. The current market valuation of corporate equities based on GDP is at an all-time high. Additionally, though not shown, a graph of theShiller S&amp;P 500 CAPE ratio over timewould also show a composite S&amp;P 500 valuation (tied to a trailing 10-year average P/E) as being more than twice the historical norm. Investors with perspective will recall Buffett's frequent admonishment: “Be fearful when others are greedy”.\n3. What about gold?\nMany equity investors eschew investing in gold. Some see it as pure speculation or a reliance on “the greater fool than me” principle. Others dislike it because seeing past-their-prime actors pitch gold on TV seems as smarmy as similar TV advertisements for reverse mortgages. On the flip side,Renaissance Technologies, the most successful hedge fund in the world, has made billions investing in currencies and commodities, including gold. Their success stems from “pattern recognition” in seemingly random variables.\nChart 9 examined the old adage that “gold is a good hedge against inflation”. Well, the correlation between gold and inflation is equivocal at best. What is stunning, however, is how well gold performs during “Lost Decades” and how poorly it performs during a bull market. Gold rose over 400% in the last \"Lost Decade\". If we are soon to enter another “Lost Decade”, pattern recognition suggests that gold assets should perform well during most of that period.\n<img src=\"https://static.tigerbbs.com/db44301c39f5a1c4e6aa749cc0037057\" tg-width=\"1176\" tg-height=\"778\">Chart 9. Gold Prices. Source: Author’s chart\nConclusion\nI’m going to steal a line from Tom Hanks in the movie “Saving Private Ryan\" that summarizes where we are: “We have crossed some strange boundary here. The world has taken a turn for the surreal.” The market is overvalued by almost every historical measure. A casino mentality has set in and the bull market continues to stampede. Market psychology has disconnected stock prices from traditional measures of reasonable valuation. Insanely low interest rates,falling bond prices, excess money supply, and re-opening economies (driving hope of a rebound in corporate profits) are fueling the market optimism. The bull market will continue until optimism wanes. No one can say when that will be or what will trigger it. A potential looming ‘tsunami of inflation’ and the inevitability of interest rate increases is the nearest threat. That will take months to play out.\nIt is reasonable to say, however, that future returns in the stock market after a correction begins will be muted for an extended period. Yes, it’s my assessment that another “lost decade” is looming in our near future. It’s probably not more than two years off. My advice to investors is to always remember that the stock market is a market of stocks. Value investors don’t exit the market in a correction. They continually look for exceptional companies that are trading at a fair price. It may also be time to consider putting a portion of your assets into gold.","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Are We Approaching Another 'Lost Decade'?</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAre We Approaching Another 'Lost Decade'?\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-05-18 17:12 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4429554-are-we-approaching-another-lost-decade>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nThe stock market is overvalued by every historical valuation metric.\nMarket psychology reflects an optimism bordering on a casino mentality.\nForget predicting the next recession or correction...\n\n<a href=\"https://seekingalpha.com/article/4429554-are-we-approaching-another-lost-decade\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{".IXIC":"NASDAQ Composite",".DJI":"道琼斯",".SPX":"S&P 500 Index"},"source_url":"https://seekingalpha.com/article/4429554-are-we-approaching-another-lost-decade","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1147381167","content_text":"Summary\n\nThe stock market is overvalued by every historical valuation metric.\nMarket psychology reflects an optimism bordering on a casino mentality.\nForget predicting the next recession or correction, we are poised for another “lost decade” in the market.\nPattern recognition suggests gold assets should perform well during a “lost decade”.\n\nPhoto by Craig Mitchelldyer/Getty Images News via Getty Images\nWarren Buffett gave a speech to corporate executives in Sun Valley, Idaho in July 1999 where he reflected on two consecutive and fascinating multi-year periods in the stock market. The first period was from the mid-'60s to the late '70s. It was a lean time of flat S&P 500 returns, despite extremely healthy GDP growth. The second period was from late '70s to 1999. Occasionally referred to as the “Boomer Bull Market”, that 22-year period was a blockbuster for the S&P 500 with 13.4% annual growth. GDP grew at a healthy rate, but one that was nearly 3% less annually than the earlier period of flat stock market growth. In that speech, Warren laid out his thoughts on why the bull market was about to end. Stock price movements, as reflected by growth in corporate profits, should track GDP growth plus inflation. However, markets routinely behave for long stretches in ways that aren’t linked to value. Sooner or later, value counts. One of his favorite economic indicators reflecting this principle, the S&P 500 / GDP metric, was at a 60-year high. Within a year, the market began a significant correction that proved him correct.\nUnknown to anyone in 1999, history was also about to repeat itself. Using a logarithmic scale to see the earlier periods more clearly, Chart 1 shows that the S&P 500 had a second extended period of flat growth followed by an ebullient bull market. I’ve loosely termed the two periods of flat S&P 500 performance as ‘Lost Decade #1’ and ‘Lost Decade “#2’. They are obviously longer than a decade and both encapsulate two recessions. Interestingly, the “Boomer Bull Market’ of 1978 to 2000 includes three recessions and a memorable warning of the Fed Chairman against “irrational exuberance” towards escalating asset values. The second bull market from 2013 to present has weathered the COVID recession and a global shutdown with a similar annualized S&P 500 growth rate of 13.5%.\nChart 1. S&P 500 and GDP showing two ‘Lost Decades’ and two bull markets. Source: Author’s chart\nThe S&P 500 / GDP metric stands significantly higher today than it did in 1965 or 2000, the transition years where the two “Lost Decades” began. Unlike those past scenarios, though, today’s interest rates and money supply have muddied the waters. Charlie Munger, Berkshire Hathaway Vice Chair and Warren’s lifelong business partner, recently mused that the current money supply and interest rates are “unbelievably extreme” and have left us in “uncharted waters”. Market psychology is typically rearward-looking and often follows a herd-mentality. It’s been optimistic over the last 8 years and is presently discounting these historical warning signs.\nThis raises every investor’s obvious question: “Can these frothy market valuations continue to climb?” To add perspective on that question, this paper examines six ‘economic factors’ and ‘market indicators’ that historically affect or predict stock market returns. Using charting techniques to see trends and peaks, the data tells a fairly compelling story. The issue isn’t whether a market correction or recession is imminent, the larger question becomes “will we eventually face another ‘lost decade’. The answer is yes. Given that outcome, I’ve also included a chart on gold prices that shows a striking “pattern recognition”.\n1. Economic Factors\nSubjects like inflation and the Fed’s monetary policy are wonkish in nature and notoriously dry. They are uninteresting for many investors to follow. In today’s ‘unchartered waters’, however, these topics carry extra weight in understanding where the economy is and navigating where it may go.\nInflation\nThe Federal Reserve is the nation’s central bank and the ultimate guardian of the purchasing power of our money. Inflation is the Fed’s arch-enemy number one. Inflation de-values our money and, at very high levels, destroys jobs and can potentially destabilize an entire economy. The Fed uses interest rates, money supply, and bank reserve requirements to execute its mission of controlling inflation, maximizing employment, and driving sustainable growth.\nChart 2 shows inflation levels over the last 50-years. The chart also overlays the S&P 500 index, shows recessionary periods, and annotates the causal elements for each recession. In short, inflation can have a very strong, though indirect, impact on recessions and stock market valuations.\nInflation has been a non-factor in recent years. Annual inflation (Dec to Dec) averaged 1.7% over the last decade. It simply hasn’t been on most investor’s radar screen - until recently. As the economy recovers from the COVID pandemic, news stories are breaking daily of shocking price increases. Over the last year, lumber prices are up nearly 300%, steel prices are up 60%, semiconductors are in chronic short supply, and average home prices are up 17%. The knock-on effect of these price increases is starting to ripple through the economy. The Labor Dept reported that the CPI for Apriljumped 4.2%from a year earlier. Similar increases are expected for many months to come. Analysts, academics, and other ‘experts’ are filling various media with opinions whether these increases will be transitory or permanent. Some even predict we are on the verge of a “tsunami of inflation” … reminiscent of the late 70’s. One salient point worth noting is that the CPI treats housing as an investment and not a relevant consumption item. The recent home price increases, which can represent 30% of a household budget, are therefore not included directly in the CPI numbers.\nThis paper doesn’t enter the debate of how high or how long inflation may last. The take-away, however, is: higher inflation is here, it’s becoming very tangible, and it’s realistically greater than figures reported by the Labor Dept.\nChart 2. Inflation. Source: Author’s chart\nFederal Reserve Monetary Policy: Interest Rates and Money Supply\nTwo of the Federal Reserve’s key levers in managing the US economy are the setting of interest rates and control of money supply.\nThe Fed uses the Federal Funds Rate(FFR)to control (short-term) interest rates, ex. 1-yr Treasury bills. The FFR is the rate banks charge each other for over-night borrowings to meet reserve requirements.\nChart 3. Inflation, Federal Reserve Rate and 1-yr Treasury bill. Source: Author’s chart\nChart 3 graphs inflation, FFR and the 1-year Treasury bill. The FFR and 1-year Treasury bill are so close as to be indistinguishable from one another. Throughout the 70’s and 80’s, the Fed chairman, Paul Volcker, used interest rates to fight abrute-force campaignin subduing inflation. He drove the economy into a deep recession persuading Americans to abandon their entrenched expectation that prices would keep rising rapidly. The cost was steep. Consumers stopped buying homes and cars and millions of workers lost their jobs. Angry homebuilders mailed chunks of two-by-fours to the Fed’s marble headquarters in Washington. He was reviled and hated by most Americans. In the end, he was successful and proven correct. His reputation was restored and he became an international symbol of integrity and independence. His courageous leadership is the gold standard for Fed chairman.\nChart 4. S&P 500, US Treasury Yields. Source: Author’s chart\n“Interest rates basically are to the value of assets what gravity is to matter” Buffett said at the recent 2021 Berkshire annual meeting. Chart 4 makes that point. As interest rates dropped in the 80’s and 90’s, the stock market had one of its greatest bull runs. Short-term interest rates fluctuated during the early 2000’s as the stock market sputtered to flat returns for over a decade. The Fed dropped the FFR to nearly 0% in 2009 to stimulate recovery from the Great Recession. The stock market responded with astounding growth for nearly a decade. The Fed began raising short-term interest rates 2017, but cut them to zero again following the near-complete worldwide economic shutdown during the COVID pandemic.\nChart 5. Fed Assets and M2 Money Supply. Source: Author’s chart\nDuring and following the Great Recession, the Fed implemented three rounds of “quantitative easing” to stimulate the economy. Quantitative easing is a term describing the Fed’s purchase of assets such as Treasury notes to pump money into the economy. Chart 5 shows the growth of Fed Assets and the resulting growth in the ‘M2’ money supply. M2 is term economists use to measure the sum of all paper currency in circulation plus cash in checking, savings, money-market and other ‘near-cash’ accounts. Assets on the Fed’s balance sheet increased by $3.5 Trillion between the Great Recession and 2016 and an additional $3.5B since the onset of COVID pandemic. They continue to rise by $80B per month.\nNot to be outdone by the Fed, Congress also got into the economic stimulation effort in response to the global economic shutdown of 2020. They passed the two legislative acts that pumped an additional $4 Trillion into the economy. Between the Fed’s purchase of assets and Congressional stimulus packages, the M2 Money supply increased 250% from the start of the Great Recession. Unfortunately, these stimulus programs create profound distortions in the economy. Simply put, people can make more money not working than re-entering the workforce. Unemployment remains at 6.1% while 8 million jobs are open and can’t be filled.\nThe takeaways are: 1) The Fed FFR remains at 0 to ¼ percent, and 2) the M2 money supply has more than doubled over the last 10 years. A Fed statement on April 28, 2021,reaffirms its commitmentto this strategy. Charlie Munger’s fears of being in “unchartered waters” are well-founded. The Fed and Congress have simultaneously hyper-stimulated the economy and distorted the labor market. With global supply chains constricted and more cash awash in the economy than can be spent, inflation is sure to rise. This situation is both unprecedented and unstable. The Fed Chairman needs to summon the spirit of Paul Volcker and reassert its independence from politically-influenced legislative actions.\n2. Market IndicatorsYield Spreads\nYield spread is the difference between interest rates on short-term Treasury bills and long-term Treasury notes. The interest rate on short-term T-bills is set by the Fed. Interest rates on long-term notes are set by bond investors. Declining yield spreads drive heightened volatility in the stock market. Negative or near-negative yield spreads indicate broad-based pessimism in the economy and are a fairly reliable indicator of an onset of a recession within a year. Chart 6 shows yield spreads between 10-year and 1-year Treasury note over the last 35 years. (Some analysts look at yield spreads between 30-year and 2-year Treasury notes, but they are virtually identical to the 10-1 curve shown below.)\nChart 6. Yield Spread vs S&P 500. Source: Author’s chart\nThe recessions of 1991, 2001 and 2008 were predicted by negative yield spreads in the year preceding them. The dot com bubble burst and sub-prime mortgage collapse were the clear triggers for the subsequent 2001 and 2008 recessions. The negative or near-zero yield spreads in 2019 were short-lived. They were back in positive territory by the end of 2020 and are presently at a healthy level of 1.5%. The 2020 recession was created by the COVID virus ‘Black Swan’ event and is unrelated to negative yield spreads in 2019.\nMargin Debt\nChart 7 shows the relationship between margin debt and the S&P 500 index. The solid lines are actual reported values and the dashed lines are adjusted to present day dollars using CPI. Inverting the margin debt axis shows the relationship between margin debt and the S&P 500 as a divergence. Margin debt popularity accelerates prior to market peaks as investors increase their leverage in the market. A researcher at Advisor Perspectives,Jill Mislinski, published this analysis in April 2021. It was re-tweeted shortly thereafter by Dr. Michael Burry (ofThe Big Shortfame) shortly before he deleted hisTwitter accountfollowing a visit from the SEC regarding his frequent tweets about rampant stock speculation and excessive valuations in financial markets. His re-tweet also stated “the market is dancing on a knife’s edge”. It can still be found onReddit.\nChart 7. Margin Debt vs S&P 500. Source: Author’s chart\nMargin debt is both an excellent measure of market psychology and a leading indicator of market corrections. As of March 2021, the record level of margin debt reflects an extreme optimism in the market bordering on a “casino mentality”. Investors are playing for the excitement of a jackpot and fail to recognize the house’s growing advantage.\nThe S&P 500 / GDP metric - Warren Buffett’s favorite indicator\nChart 8. The Buffett Indicator. Source:Advisor Perspectives, May 2021\nChart 8 shows the valuation of corporate equities to GDP. As noted earlier, this is Warren Buffett’s favorite metric. The current market valuation of corporate equities based on GDP is at an all-time high. Additionally, though not shown, a graph of theShiller S&P 500 CAPE ratio over timewould also show a composite S&P 500 valuation (tied to a trailing 10-year average P/E) as being more than twice the historical norm. Investors with perspective will recall Buffett's frequent admonishment: “Be fearful when others are greedy”.\n3. What about gold?\nMany equity investors eschew investing in gold. Some see it as pure speculation or a reliance on “the greater fool than me” principle. Others dislike it because seeing past-their-prime actors pitch gold on TV seems as smarmy as similar TV advertisements for reverse mortgages. On the flip side,Renaissance Technologies, the most successful hedge fund in the world, has made billions investing in currencies and commodities, including gold. Their success stems from “pattern recognition” in seemingly random variables.\nChart 9 examined the old adage that “gold is a good hedge against inflation”. Well, the correlation between gold and inflation is equivocal at best. What is stunning, however, is how well gold performs during “Lost Decades” and how poorly it performs during a bull market. Gold rose over 400% in the last \"Lost Decade\". If we are soon to enter another “Lost Decade”, pattern recognition suggests that gold assets should perform well during most of that period.\nChart 9. Gold Prices. Source: Author’s chart\nConclusion\nI’m going to steal a line from Tom Hanks in the movie “Saving Private Ryan\" that summarizes where we are: “We have crossed some strange boundary here. The world has taken a turn for the surreal.” The market is overvalued by almost every historical measure. A casino mentality has set in and the bull market continues to stampede. Market psychology has disconnected stock prices from traditional measures of reasonable valuation. Insanely low interest rates,falling bond prices, excess money supply, and re-opening economies (driving hope of a rebound in corporate profits) are fueling the market optimism. The bull market will continue until optimism wanes. No one can say when that will be or what will trigger it. A potential looming ‘tsunami of inflation’ and the inevitability of interest rate increases is the nearest threat. That will take months to play out.\nIt is reasonable to say, however, that future returns in the stock market after a correction begins will be muted for an extended period. Yes, it’s my assessment that another “lost decade” is looming in our near future. It’s probably not more than two years off. My advice to investors is to always remember that the stock market is a market of stocks. Value investors don’t exit the market in a correction. They continually look for exceptional companies that are trading at a fair price. It may also be time to consider putting a portion of your assets into gold.","news_type":1},"isVote":1,"tweetType":1,"viewCount":86,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":5,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/194920188"}