I’ve been in the trend-forecasting business nearly 40 years. When you review who accurately forecast market crashes, beginning with the 1987 stock market crash to the Panic of ’08, I, and a handful of others, called them first. Now, a loud chorus of financial experts and economic headlines warn of grave stock-market dangers ahead: • “ ‘Potential bubbles’ in financial markets already exist, warns Deutsche Bank CEO,” CNBC, 6 September 2017 • “Brace yourself for a market correction in two months, analysts warn,” CNBC, 5 September 2017 • “Wall Street’s top bankers sell their own groups’ shares as Trump rally reverses,” Financial Times, 28 August 2017 • “US banking data suggest economy may be losing steam,” The Wall Street Journal, 28 August 2017 • “China markets tell disparate tales,” The Wall Street Journal, 28 August 2018 • “Investors pull billions from US stocks in longest outflow streak since 2004,” CNBC, 25 August 2017 • “Wall Street banks are sending warning signals,” Bloomberg, 25 August 2017 • “Biggest hedge fund manager turns defensive on US political concerns,” Financial Times, 22 August 2017 • “Reversal hits small caps,” The Wall Street Journal, 21 August 2017 • “Warning signs mount as stocks stumble,” The Wall Street Journal, 21 August 2017 • “Investors withdraw $1.6bn from Ems amid geopolitical tensions,” Financial Times, 18 August 2017 • “Investor view of earnings sours as White House fails to deliver stimulus,” Financial Times, 16 August 2017 • “Funds don’t buy Europe recovery story,” The Wall Street Journal, 3 July 2017. Despite the clarion calls to take cover, markets kept hitting new highs amid temporary pullbacks. This is important to note. It is not a fluke. When there is general mainstream consensus that a major market disruption is imminent, those forecasts mostly miss the mark.
TRUMP BUMP ENDING?
Tracking trends is an understanding of where we are, and how we got here, to understand where we are going. Entering the eleventh month of the Trump Rally, US equity markets have soared more than $2 trillion since he was elected. Let’s go back to Election Day, 8 November 2016. Mega-billionaire George Soros, who bet big against a Trump victory, also bet big against a Trump market rally. Back in January 2017, the Royal Bank of Scotland advised clients to “sell everything” because “in a crowded hall, the exit doors are small.” And all those other economic prophets of doom, who have predicted a biblical economic collapse since Election Day, continue to do so. As for the Trends Research Institute, just days after Donald Trump’s White House win, we did a 180-degree shift. We revised our forecast away from negative markets, strong gold prices and a weak economy. With expectations of a Trump White House promoting a more favorable business and investment climate, we predicted rising markets, falling gold prices and a continuation of moderate economic growth.
GAUGING EQUITY MARKETS
Indeed, the stock markets hit a streak of new highs, and the economy mirrors the moderate 2 percent Gross Domestic Product growth of the Obama presidency. Now, however, gold prices have hit a one-year high. The major reason why prices spiked is the basis for our forecast: There will be a US stock market correction of about 10 percent, but (absent a wild card) not a market crash. Why is gold’s price one harbinger of equity-market strength? Again, tracking trends is an understanding of where we are, and how we got here, to forecast where we’re going. There was high expectation at the annual central-bank meeting in Jackson Hole, Wyoming, in August that the six central banks — particularly the European Central Bank and US Federal Reserve — would announce how and when they would unwind the $15 trillion in bonds and other securities they’ve purchased since the Panic of ’08. And, The Street was listening closely for signals from Federal Reserve Chairwoman Janet Yellen if, when and how much the Fed would raise interest rates. Instead, European Central Bank President Mario Draghi blabbed on about the glories of globalism, and dangers of protectionism and populist movements. He said nothing about winding down the central-bank bond-buying scheme. Yellen, avoiding discussion about the US economy and whether it was appropriate to raise interest rates, yapped about pitfalls of the Trump administration weakening mostly meaningless bank regulations enacted following the Panic of ’08.
THE INTEREST-RATE-HIKE GAME
The Fed has raised interest rates only three times since 2006. Thus, another modest 25-basis-point rise, when accounted for cumulative inflation that has increased 21.4 percent since 2006, would, in effect, place rates deep in negative territory. Indeed, the zero-interest-rate and quantitative-easing policies that have driven the market rally “injected cocaine and heroin into the system to create a wealth effect,” as former Dallas Fed President Richard Fisher noted. Consequently, both gold’s spike and upward market momentum after the Jackson Hole meeting were based on expectations of central-bank monetary cocaine and heroin injections sustaining the market rally. They also rose a week later following a European Central Bank meeting during which its president, Mario Draghi, announced that interest rates would remain at zero and its deposit rate of negative .04 percent would remain for “an extended period of time.” As for the 60 billion euros per month asset-purchasing program, Draghi said the “bulk of decisions” will be made sometime in October. Thus, absent a wild-card event — and there is no greater wild card than the Trump card — we forecast a market correction, not a market crash, because stocks are greatly overvalued. As the Financial Times noted: “The cyclically adjusted price-to-earnings ratio of the US stock market has been higher only during the peak of the dot-com boom. And with bond yields still near record lows, there is mounting evidence of investors turning to convoluted, potentially risky bets in search of precious returns.”
GOLD ON A ROLL
Gold recently hit one-year highs. Will there be a correction? Will gold prices rise? The formula is quite simple. • The higher US interest rates, the lower the price of gold. • The lower the value of the dollar, the higher the price of gold. As noted, at the annual central-bank meeting, there were high expectations that Yellen would signal if interest rates would rise by year’s end. Receiving no hint, futures-market bets fell from 60 percent odds for a rate hike this year to near 35 percent. As for the dollar, it initially spiked to a 14-year high following Trump’s election. There were high investor hopes for tax reform, deregulation and spending via a massive infrastructure-rebuilding effort that would speed economic growth and, in turn, prompt the Fed to raise interest rates. However, the dollar now is down some 10 percent since Trump’s victory. It has tumbled to its lowest level since January 2015. Washington has made little progress in furthering those initiatives, which were expected to generate stronger economic growth. More downward dollar pressure pushed gold in early September to one-year highs. That followed weak jobs numbers and tepid wage growth, again lowering expectations for a rate hike by year’s end. And while heating-up war talk with North Korea also drove up gold prices, we do not anticipate a military confrontation between the United States and its Asian allies against Pyongyang. We concur with naysayers including former White House official Steve Bannon: Considering North Korea’s military potential, the US will not launch a pre-emptive strike. “Until somebody solves the part of the equation that shows me that 10 million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you’re talking about. There’s no military solution here. They got us.” Therefore, military confrontations, unless waged between major powers and inflicting massive casualties at enormous costs, do not sustain higher gold prices. China’s yuan-denominated oil contracts are among gold’s greatest potential for strong and sustained growth. They allow exporters to circumvent the Yankee dollar. Also, to reduce the dollar’s dominance in global trade, China will permit countries under sanctions by the US (including Russia, Venezuela and Iran) to trade in yuan that’s convertible into gold on the Shanghai and Hong Kong exchanges. “It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” noted Alasdair Macleod, head of research at Goldmoney. Once fully implemented beyond just oil trade, and exporters have the option of being paid in yuan exchangeable for physical gold, those factors may well prove to be catalysts that pushes gold to $4,000-plus Bitcoin levels. That would signal the beginning of the end of the US dollar as the world’s dominant reserve currency. The death of the petrodollar will be the rebirth of gold. TJ