S&P 500 - A Bearish Outlook Heading Into 2020
Here is my thought process behind why I have a bearish outlook heading into 2020 - please note that this is the second time that I have ever published analysis and this is just me synthesizing a bunch of ideas. I'm going to start off with the lighter ideas before moving on to the heavier ideas...
1) We are in the late stage of the economic cycle... this is the longest expansion of the US economy since records began. Common sense dictates that we will enter a recession soon.
2) Keeping this in mind, let's look at the state of politics around the world. We have protests and riots in HK (recently a protestor was shot for the first time), we have Brexit which has both Germany and the UK on the brink of recession. The US and China trade war has not improved at all and is constantly seeing tit-for-tats. Finally, literally the other day the US was given the go-ahead by the WTO for $7.5 billion in tariffs on the EU in response to their 15-year long row over the subsidizing of the rival aircraft companies Boeing and Airbus.
3) In recent surveys, over half of economists in the US believe that a recession will hit the US in 2020. The market has also seen the yield curve invert, providing a stark warning (although this usually takes at least 12 months to materialize, this is a bad indicator).
4)There is a ridiculous bearish RSI divergence on the charts, with Fibonacci Time Zones pointing towards significant price action at the start or end of 2020. I believe this is because this cycle was pumped and overrated, running on the crack cocaine of financial markets: Quantitative Easing.
5) Recessions usually occur when there is a sharp fall in liquidity in the cash markets (referring to bank deposits and not trade execution liquidity). In recent times we have seen a bipartisan deal passed through in the US which mandated the US Treasury to "aggressively build up" cash reserves. After lowering the debt ceiling the Treasury plans on borrowing an additional $433 billion during this quarter (about $275 billion more than it had previously estimated) which is roughly ten times (1,000%) more than what the Treasury borrowed last quarter ($40 billion). This would cause global dollar liquidity to dry up fast (foreign nations and banks use excess deposits and reserves to purchase these meaning dollars flow out of the economy into the Treasury).
6) Continuing on from the last point, not only do we have dollar liquidity vanishing in the global economy but we have negative dollar swap spread (those lending USD via currency swaps want higher premiums). This is only getting deeper and deeper. Interestingly, the Bank of International Settlements found that cross-currency swap spreads act as a more accurate measure of struggle in the financial markets than the VIX. This shortage of dollars (highlighted by the premium being charged to lend dollars in swaps) comes at a time when the global economy is already weakening thus is making financial markets more fragile (turning to IMF reports on muted inflation and weaker final demand for goods and services) also referring to previous points
Seeing and analyzing all these factors, the future doesn't look too bright. Disappointing economic data continues to plague our minds. As the Fed continues to cut interest rates they are only giving debt-laden companies one more sigh of relief which will only knock the inevitable crash further down the road when neither corporations nor the government can cope with it (they're throwing away all their ammunition and shooting themselves before the battle has even started). The drop to come will be harder and more brutal than 2008 because asset prices are currently inflated at incomprehensible levels due to quantitative easing as well as the Fed having little headroom to cut rates further. You could only imagine what is to come in countries with much less head-room for monetary policy than the US... What's next? Helicopter money!?
Disclosure: I hold shares in: XSPS IGLT O IBTM
1) We are in the late stage of the economic cycle... this is the longest expansion of the US economy since records began. Common sense dictates that we will enter a recession soon.
2) Keeping this in mind, let's look at the state of politics around the world. We have protests and riots in HK (recently a protestor was shot for the first time), we have Brexit which has both Germany and the UK on the brink of recession. The US and China trade war has not improved at all and is constantly seeing tit-for-tats. Finally, literally the other day the US was given the go-ahead by the WTO for $7.5 billion in tariffs on the EU in response to their 15-year long row over the subsidizing of the rival aircraft companies Boeing and Airbus.
3) In recent surveys, over half of economists in the US believe that a recession will hit the US in 2020. The market has also seen the yield curve invert, providing a stark warning (although this usually takes at least 12 months to materialize, this is a bad indicator).
4)There is a ridiculous bearish RSI divergence on the charts, with Fibonacci Time Zones pointing towards significant price action at the start or end of 2020. I believe this is because this cycle was pumped and overrated, running on the crack cocaine of financial markets: Quantitative Easing.
5) Recessions usually occur when there is a sharp fall in liquidity in the cash markets (referring to bank deposits and not trade execution liquidity). In recent times we have seen a bipartisan deal passed through in the US which mandated the US Treasury to "aggressively build up" cash reserves. After lowering the debt ceiling the Treasury plans on borrowing an additional $433 billion during this quarter (about $275 billion more than it had previously estimated) which is roughly ten times (1,000%) more than what the Treasury borrowed last quarter ($40 billion). This would cause global dollar liquidity to dry up fast (foreign nations and banks use excess deposits and reserves to purchase these meaning dollars flow out of the economy into the Treasury).
6) Continuing on from the last point, not only do we have dollar liquidity vanishing in the global economy but we have negative dollar swap spread (those lending USD via currency swaps want higher premiums). This is only getting deeper and deeper. Interestingly, the Bank of International Settlements found that cross-currency swap spreads act as a more accurate measure of struggle in the financial markets than the VIX. This shortage of dollars (highlighted by the premium being charged to lend dollars in swaps) comes at a time when the global economy is already weakening thus is making financial markets more fragile (turning to IMF reports on muted inflation and weaker final demand for goods and services) also referring to previous points
Seeing and analyzing all these factors, the future doesn't look too bright. Disappointing economic data continues to plague our minds. As the Fed continues to cut interest rates they are only giving debt-laden companies one more sigh of relief which will only knock the inevitable crash further down the road when neither corporations nor the government can cope with it (they're throwing away all their ammunition and shooting themselves before the battle has even started). The drop to come will be harder and more brutal than 2008 because asset prices are currently inflated at incomprehensible levels due to quantitative easing as well as the Fed having little headroom to cut rates further. You could only imagine what is to come in countries with much less head-room for monetary policy than the US... What's next? Helicopter money!?
Disclosure: I hold shares in: XSPS IGLT O IBTM
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