The next economic crash will be life altering

When one side pops so does the other:

In my secret life as a financial analyst (meaning I read finance-related web sites) and in my personal conversations with other nearing retirement age, I have been struck that almost everyone understands that the US economy is in a bubble again, the so-called "Trump recovery" notwithstanding.

Actually, we are in two economic bubbles. One is a somewhat conventional stock-market bubble. The other is a far more serious and destructive-pop of the government debt bubble.

The market bubble first: "Beneath the glow of stock-market records, darkly bearish trends are lurking."

Major U.S. stock-market indexes are trading near record levels, but does that statistic simply mask an ominous picture that’s being painted behind the scenes?

Market breadth, a measure of how many stocks are rising versus the number that are dropping, has turned “exceedingly negative,” according to Brad Lamensdorf, a portfolio manager at Ranger Alternative Management. Lamensdorf writes the Lamensdorf Market Timing Report newsletter and runs the AdvisorShares Ranger Equity Bear ETF HDGE, +0.47% an exchange-traded fund that “shorts” stocks, or bets that they will fall.

“As the indexes continue to produce a series of higher highs, subsurface conditions are painting an entirely different picture,” Lamensdorf wrote in the latest edition of the newsletter. He noted that the year-to-date advance in equities — the S&P 500 SPX, +0.19%  is up 10.6% in 2017 — has been driven by outsize gains in some of the market’s biggest names.

Simply put, though the market indices are rising, most of the gains are from a decreasing number of stocks. More and more of the market is falling week after week, month after month. But the indices are rising, tending to mask that the overall markets are declining. Here is an example, the S&P Index in red, INX, compared to the IJR fund in blue. IJR is a mutual fund of the S&P index of 600 Small Cap companies.

This is today's track so the time frame is obviously very short. What about the last month?

These illustrate the market-breadth problem: indices being held up by the Godzilla companies of each index while the smaller companies decline. But wait! There's more!

There have been other signs of worsening technicals. Currently, 60.4% of S&P 500 components are above their 50-day moving average, considered a positive sign for short-term momentum. In mid-July, nearly 75% were, according to StockCharts. For the Nasdaq Composite Index COMP, +0.18% only 47.3% of components are above their 50-day, compared with 67% in late July, a dramatic swing lower.

Recently, nearly 6% of New York Stock Exchange- and Nasdaq-listed securities hit a 52-week low on a day when the S&P 500 ended at a record, according to data from Sentimentrader that was cited by Lamensdorf, who called this “an alarming percentage.”

He added that it was the second-highest level going back as far as 1965, and that “Similar spikes occurred in 1973 and 1999, both directly preceding significant corrections.”

So what is a defensive move to mitigate the effects of the crash when it comes? Well, let's look at funds that are defensive in nature, that is, funds that usually make money (though not a lot) in bear markets. Or at least they don't decline so much.

Utilities funds are usually considered a safe haven. Here is the Vanguard Utilities ETF, VPU (blue), compared to the S&P 500 and Dow-Jones indices.

An income fund, oriented toward preservation of capital, is another bear-market investment. Here is USAIX v. the S&P and DJI.

Remember that the S&P and the Dow lines are somewhat deceiving since they do not show the decliners versus gainers within each of them. These do, although they are for the overall markets.

NYSE:

NASDAQ:

And finally, "If You Are a Crazy Bullish Investor Right Now This Chart Should Be Terrifying."

The iShares Transportation Average ETF (IYT) provides a warning to reduce equity holdings on strength, as its weekly chart will be downgraded to negative at Friday's close. The investment strategy is "sell on strength," as stocks appear vulnerable for a correction.

There are warnings away from the negative weekly chart for the transportation exchange-traded fund.

The July reading for the American Association of Individual Investors (AAII) Asset Allocation Survey showed the lowest level of cash in more than 17 years, while the allocation to stocks was at a 12-year high in June. What happened to all the so-called cash on the sidelines?

The NYSE Margin Debt through June is near a record high of about $550 billion. Record high margin debt preceded the peaks of the tech bubble of 2000, and the bear market of 2008. ...

Tracking the transportation ETF is important, as recent weakness implies that the goods we produce are not being ordered by stores or businesses slowing shipments. The good news is that this ETF held its 200-day simple moving average of $164.23 on Aug. 2. 

 The problem with bubbles is that everyone knows they will pop, but no one knows when or what exactly will pop them.

Then we have the government debt bubble.

Yesterday, in my post about the latest jobs report, I said that “our massive looming government debt bubble” will “precipitate the biggest economic disaster of them all.” A commenter here at RedState asked what I meant by a “government debt bubble.” I have talked about this before, but it is an important enough topic that it is worth revisiting. 

In short, we’re in a bus speeding towards a cliff. We’re probably already past the point of no return. The bus is going over the side. It’s not a matter of if, but a matter of when. About the only thing we can do is bail out of the bus before it goes over. ...

But President Trump isn’t talking about what it would take to make a dent in the debt. That would take entitlement reform, frankly — and that’s the least popular topic on the planet. Indeed, preserving ObamaCare, our newest and shiniest entitlement, seems to be the top priority for our elected officials these days. Actually reforming entitlements is out. Get with the times, man!

Why talk about this today? After all, it’s not the fashionable topic of conversation. Palace intrigue at the White House, Russia investigations, transgender this that and the other, and whatever other stupid story of the day is occupying all the talking heads — that’s what brings in the clicks. I’m surprised you actually clicked on this post and read this far. It makes you among a distinct minority in this country.

And as long as only a distinct minority cares, we’re going to keep careening towards that cliff.

Once we leave solid ground, the flight through the air will be exciting and fun.

As long as you don’t think about what comes next.

It will not be cheap if we start now. But it will only be more expensive later, until finally it is completely unaffordable.

Which may not be long.

Update: Will the crash be triggered by collapse of the Godzilla tech companies? Probably:

We can never know when the end will come. Still, there are three critical signals to watch for.

The first is regulation. The tech giants are seen today as monopolizing internet search and commerce, and they are angling to take over industries such as publishing and automobiles, raising alarms at antitrust agencies in Europe and the United States. Fear that new internet technologies are doing more to waste time and brainpower than to increase productivity has already provoked a backlash in China, where officials recently criticized online gaming as “electronic heroin.” A regulatory crackdown on tech giants as either monopolies or productivity destroyers could pop the allure of tech stocks.

The other signals are more familiar. Going back to the “nifty 50” stocks of the 1960s, nearly every big market mania ended after central banks tightened monetary policy and many people who had borrowed to get in the game found themselves in trouble. The dot-com bubble peaked in 2000, after the Federal Reserve had increased interest rates multiple times. The current boom will likewise be at risk if an increase in inflation compels the Fed to raise interest rates beyond the modest rise the market currently expects.

Finally, watch for tech earnings to start falling short of analyst forecasts. The dot-com boom was driven in part by increasingly optimistic predictions for technology company earnings, and it imploded when earnings started to miss badly. Investors realized then that their expectations about profits from the internet revolution had become unreal.