Friday, June 2, 2017

The silent economic boom

[Note: I was recently interviewed by Kenneth Ameduri who hosts the Crush The Street internet show.  In it I discuss my take on gold, stocks, Trump, the economy and Bitcoin.  The interview can be found here: https://crushthestreet.com/videos/live-interviews/economic-bubble-burst-trumps-watch-clif-droke-interview]

Though many Americans aren’t feeling it, the economy is quietly gathering forward momentum.  With consumers gaining in confidence and real estate heating up on both the commercial and residential levels, the U.S. economy is much stronger than it may seem at first glance.

One reflection of the strengthening economy is the equity market, which is in the eighth year of a bull market since the bottom of the credit crash.  The bromide, “As goes the stock market, so goes the economy,” is something that hardly needs explaining, yet so many investors lose sight of this cogent fact that it bears repeating.  Rising corporate profits and efficiencies in recent years have contributed in large part to the economic improvement. 

Another reflection of the recovery can be seen in our in-house New Economy Index (NEI), which combines the stock prices of the leading U.S. retail and business service stocks.  The graph below shows that NEI continues to hit all-time highs on almost a weekly basis and as such is reflecting a strong consumer retail economy.


With so many indicators pointing to a strong economy, why then are so many Americans acting as if recession is imminent?  That’s the question we’ll address here.

Ed Hyman is one of the most respected, and accurate, economists.  As Barron’s recent observed, he has been voted Wall Street’s top economist for 36 of the past 41 years in Institutional Investor’s annual poll.

In an interview conducted by Barron’s editor Randall Forsyth, Hyman said he sees cities around the U.S. “booming,” including smaller ones away from the megalopolises on the coasts. His conclusion is that this will benefit Main Street more than Wall Street.

Hyman has a rather old-fashioned, yet highly effective, method of gathering data from which to make his forecasts.  His team of researchers simply contact companies such as employment agencies, truckers, car dealerships and home builders and ask, “How’s business?”  A rating scale of zero to 100 is used by respondents to describe business conditions and from this tally Mr. Hyman is able to get a good read on what’s happening in the economy. 

According to Barron’s, Hyman’s surveys were trending higher well ahead of last year’s election.  “At that time,”  quoting the Barron’s article, “his model was forecasting real growth in gross domestic product of about 1.5%, although not as ‘uplifting’ as the recent ‘soft data,’ such as confidence surveys, indicate.  Now, the model points to 3% growth, bolstered by indicators such as tight credit spreads and high consumer net worth, which accords with what he calls a ‘scientific method.’”

Ad Ed travels around the country, he’s finding that “every place is booming,” he told Barron’s.  “Every major city, Chicago, Minneapolis, Kansas City, they’re doing great.”  Smaller cities are also outperforming, he says.

Hyman also reports that “millennials are coming on like locusts,” as they emerge from years of living in their parents’ basements.  “They’re getting jobs and apartments,” he told Barron’s.  “Millennials’ employment is growing at 3% while everything else is growing 1%.”

Hyman also pointed out that many observers have undervaued the extent to which central banks around the globe “are still flooding the system every week” with liquidity, with the Bank of England and the ECB having purchased more than two trillion euros’ ($2.14 trillion) worth of bonds in less than three years.  Meanwhile the BOJ and the Federal Reserve, along with the ECB, hold $13 trillion in assets, which has lowered interest rates around the globe.  This, he says, explains how the Fed funds rate at just 0.80% while U.S. companies are doing so well.

If Hyman’s macro optimism is to be believed – and our indicators strongly suggest he is right – then 2017 may prove to be the year that the U.S. economy finally takes off and leaves investors with no doubts as to its latent strength and momentum. 

Wednesday, May 31, 2017

Crush The Street Interview

I was recently interviewed by Kenneth Ameduri who hosts the Crush The Street internet show.  In it I discuss my take on gold, stocks, Trump, the economy and Bitcoin.  The interview can be found here:

Saturday, May 20, 2017

The bull market and Donald Trump's death knell

In the minds of many investors, the election victory of Donald J. Trump to the United States Presidency was nothing short of a miracle.  Following his shocking victory, expectations were high that Trump would, with the help of Congress, fulfill his promises of tax reform and infrastructure spending.  The lifting of the heavy penalties associated with Obamacare was another hope that investors cherished.  Many hailed his victory by declaring that it was “morning in America” again.  But after only six months since the election, Trump's presidency has hit a potentially fatal obstacle and he now faces the growing possibility of impeachment. 

By now the particulars of the political onslaught against President Trump are well known and there is no need to recount it.  Impeachment in the wake of recent developments has become an increasing likelihood, and it is said that even the Trump White House is preparing for it.    It now appears that the president will be investigated by a Congressional inquiry with the possibility of eventually being replaced by his vice president.  The powers-that-be, it seems, have decided they've seen enough of Trump's muscular leadership and controversial America-first plans. 

How did America come full circle so quickly?  What started as a widespread hope that a president who fully understood the needs of commerce and would do everything in his power to further America's economic future now faces an ignominious ending.   Can this be chalked up to voter's remorse or the volatile temper of the American voter?  Or is it simply a case of Trump's ideological opponents taking an aggressive approach to derail his ambitious reform plans? 

A more likely answer is that Trump's election was a fluke and that it was never intended that a man of such convictions could ever be allowed to lead today's left-leaning society.  There are a few basic principles which can be addressed here.  One is that the leader of a free country is generally a reflection of the people he represents.  Is it credible to assume that today's average American favors the type of free-enterprise capitalism championed by Trump?  America's shift to the left of the political spectrum has become pronounced in the last two decades and the long-term trend is conducive to more socialist activism, not less, in government.  France has only recently been reminded of that and the U.S. is now being faced with that lesson. 

If anything, Trump's election victory was an aberration – a counter-trend rally in financial market terms.  It was born of deep frustration among middle class voters.  After the painful experiences of the Great Recession and years of stagnation, Main Street America was in a rebellious mood.  Donald Trump represented a radical departure from Washington-as-usual and, unlike the other candidates, he addressed middle class concerns in the most vigorous terms.  Voting for Trump was essentially an act of defiance, a way of rejecting the Establishment which professed concern for the plight of the middle class but did nothing to help it.

Indeed, Trump's election was tantamount to a full-scale middle class revolt.  As with all revolutions, however, this one appears destined to end at the point of origin with no net progress to show for it.  (A revolution, after all, consists in making a full circle according to a literal rendering of the word.)  Since his election victory was against the primary trend toward socialism, Trump's eventual replacement as president will almost certainly be in line with the status quo, and the middle class will once again be ignored.

Incidentally, the word revolution has more than one application here.  The long-term economic Kress cycle which bottomed around the year 2014 was described by the late cyclist Samuel J. Kress as the “Revolutionary Cycle.”  This observation was based on the cycle's tendency to usher in a new socioeconomic order when it bottoms (e.g. the transition of the U.S. from an agrarian to an industrial economy in the late 19th century).  Before his death, Kress forecast that the next bottom of the 120-year cycle around 2014 would witness the final transition from free-market capitalism in the U.S. to a much more aggressive socialist government.  His prediction proved prescient when one considers that the Affordable Care Act (a.k.a. Obamacare) was the first major legislative inroad to full-blown socialism since the New Deal of the 1930s. 


The revolutionary aspect of the long-term Kress cycle – which also answers to the Kondratieff wave, or K-wave – provides the context for the mass discontent we’ve seen develop in the U.S. and other countries in recent years.  From Occupy Wall Street to Arab Spring to Brexit, discontent has been widespread in the wake of the 2007-2012 economic malaise.  Students of behavioral finance are aware of the connection between financial market collapse and mass psychology.  After a major shock in the financial market/economy, it usually takes several years for the resulting psychological impact to fully disappear.  This is why revolutions are common occurrences in the years following such a shock, not during the actual shock itself.  Humans are reactive by nature and it takes them a while, in the aggregate, to psychologically process an economic shock, hence the delayed reaction to the economic event in question.

The mentality behind the above mentioned revolutions also resulted in Donald Trump’s presidential victory.  But since this revolutionary episode was against the grain of the prevailing political wind, its lifespan will likely be brief.  Many European countries are already rethinking their political reactions against the European Union.  Now America will soon be forced to decide whether it truly wants to commit to the path it chose last November. 

Free market capitalism can survive only when a country’s citizens are fiercely committed to preserving personal liberty and self-initiative.  It requires a healthy, but respectful, disdain of government interference and a reliance on one’s own ingenuity to thrive.  If the Obamacare debate was any indication, America lacks the internal strength and will to survive as a free-market economy.  For this reason and others, socialism will eventually reassert its sway in the U.S. once the wave of revolutionary fervor subsides.

Returning to the subject at hand, how would a Trump impeachment affect the markets?  Will the secular bull market in stocks continue if Trump were removed from office?  What about the potential impact on the price of gold?  A successful Donald Trump presidency replete with tax and Obamacare reform would not have been good for the price of gold.  Gold is primarily a barometer of investor fear and uncertainty.  Tax reform would almost certainly have benefited both corporate profits and the economy, and a booming economy isn’t normally conducive for a vibrant gold market (the exception being a war-time economy).  However, the uncertainty generated by an investigation and subsequent impeachment hearings would likely serve to buoy the gold price to some degree.  The greater the uncertainty surrounding the outcome of Trump’s trial by fire, the more likely gold will benefit.

As for equities, the secular bull market which began in 2009 for the S&P 500 is still alive and will likely remain intact even if Trump is impeached.  The stock market hasn’t been as vibrant in the last couple of years due to a variety of technical and fundamental factors, including the uncertainties surrounding the U.S. political outlook.  Yet throughout the ups and downs of the last two years, there has been one constant: the lack of interest among retail investors.  Americans by and large lost their appetite for equities several years ago and it shows little sign of returning to normal in the immediate future.  This factor alone will ensure the bull’s longer-term survival throughout the short-term uncertainties, for no major bull market can end until the informed “smart money” investors unload their holding on uninformed participants (“dumb money”).  The big money investors have to have someone to sell to as they can’t very well unload their stocks amongst themselves.  So until we see the return of equity mania, we can be assured of the bull’s continuance notwithstanding its reduced vigor. 

Saturday, April 8, 2017

What will finally break the market's lethargy?

To most individual traders, there is no bigger buzz kill than a narrow trading range.  It takes the wind out of the sails of breakout and momentum traders, and even expert stock pickers have a tough time finding the stocks which are bucking the sideways trend.

Wall Street would much rather see a lively bull market when stocks are roaring and participation is widespread among all classes of investors.  But sometimes even a trading range-type market is good enough for the Street , provided stock prices are near all-time highs.  For even when prices are making no headway, the aggregate yield on stocks pays enough in dividends to make the lack of action worthwhile. 

There are indeed enough listed companies which pay a high enough dividend to make buying and holding in a lackadaisical stock market an attractive proposition.  This is one reason for the torpor which currently infuses not only the financial market, but the rest of the country as well.  Why worry when you can sit back and live off the interest?  Widespread lethargy breeds a range-bound stock market, but it also contributes to a sluggish economy.  As we'll discuss here, there is a reason for the public's lethargy and within that reason lies the solution to the problem. 

If you needed proof of the trading range-induced complacency out there right now, the public's response to the U.S. airstrike on Syria is a good example.  While there was a modicum of shock and anger, the response to the military action was mostly lethargic.  Even the stock market seemed unimpressed enough to rally, which underscores the extent of the public's complacency. 

Even Congress is infected with the conservation bug.  Even as President Trump touts his ambitious plan to cut taxes, the U.S. House majority leader is pouring water all over that plan by saying Congress will balance any proposed tax cuts by finding ways to increase revenues (read more taxes, but in different areas).  Thus the old "paying Peter by robbing Paul" syndrome has infused America's elected leaders, who seem to afraid to risk anything like general prosperity.

One certainly can't fault the President for trying to break the lethargy that has dominated the economy in the last two years.  His attempt at lifting the huge burdens imposed on the middle class by reforming Obamacare were spurned by Congress.  His latest move appears  aimed at stimulating the economy via military conflagration, a tried-and-true (short-term) economic palliative to be sure.

The subdued mood of the market can only be understood in terms of the long-term economic cycle, or K-wave.  This cycle is divided into four "seasons" of economic activity over a period encompassing roughly 60 years.  Each season approximates to 15 years.  The winter season of the cycle was between 2000-2014/15, with the last 60-year cycle bottoming at the end of 2014.  We're now in the early stages of K-wave spring, which should last until about 2029/30. 


So if economic spring has sprung, what is keeping the economy from flourishing?  The answer to that is best seen in a timely analogy.  Even as the Northern hemisphere experiences the early phase of spring in April, there are still lingering signs of the previous winter.  While most days are fairly warm, temperatures can still be sometimes chilly and even winter-like.  It takes a while for a new season to fully establish itself while the vestiges of the preceding season gradually fade away.  In like manner, it will probably take a few years for K-wave spring to become established -- especially given the severity of the K-wave winter season a few years ago. 

The question everyone is concerned with is what will it take to finally break the psychological shackles which have held back profligate spending and retail-level investing?  The answer to that question can be found in the previous paragraph: the immutable laws of the economic K-wave will eventually lay the foundation for a fundamental change in mass psychology. 

At some point in the current K-wave spring season the zeitgeist of contraction and fiscal restraint will give way to expansion and liberality.  Until then, expect to see occasional flare-ups of the winter mentality that predominated in the last decade.  These flare-ups should become more and more infrequent, however, as the K-wave spring season gradually warms the blood and increases the animal spirits. 

When K-wave spring finally hits full bloom, it will bring many economic benefits.  There will be a few signs to watch for to let us know that spring has fully arrived.  First and foremost, watch for higher yields on U.S. Treasury bonds.  There is no surer sign that the long-term economic cycle is accelerating than rising bond yields. 

As the new K-wave upward phase progresses we'll also see increasing real estate activity as prospective home buyers and commercial builders alike look to lock in still-attractive mortgage rates before they get too high.  As real estate timer Robert Campbell addressed in his latest newsletter (www.RealEstateTiming.com), U.S. home prices have broken out of a two-year doldrums phase and are rising at their fastest pace since 2014.  The momentum of real estate activity is on the upswing. 

Finally, look for speculative interest in both stocks and commodities to increase on a large scale.  Risk aversion is a lingering symptom of the contractionist psychology of the K-wave winter season.  When K-wave spring blooms in full, however, investment activity will pick up as participants shed their anxieties and trade them in for a more optimistic outlook.  

Tuesday, March 28, 2017

Book Review: Mind, Money & Markets

Most books in the financial genre tend to be, quite frankly, boring.  Books on the subject of stock market speculation are prime culprits of this tendency toward the tedious.  Every now and then, though, a book appears which breaks out of this mold and is truly as entertaining as it is educational.  Such is the case with Dave Harder and Dr. Janice Dorn’s recent book, Mind, Money & Markets.

The fruit of their collaboration is a useful guide for investors, traders, and business people and is rich in examples of how psychology influences markets.  Dr. Dorn is imminently qualified to address this subject as she is a Board certified psychiatrist as well as a long-time investor and investment writer.  Mr. Harder also brings long experience as an investment adviser and is currently vice president and portfolio manager with Canada’s largest financial firm.  The decades of experience between them provides the reader with a far deeper insight into investor psychology than is available in most works on the subject.


I personally found Mind, Money & Markets to be an engaging and insightful read.  At over 400 pages, there’s a lot of info to digest but the writing is smooth and the chapters seemed to fly by.  The book is richly illuminated with many colorful charts and illustrations and is lively with many accounts of how psychology influenced the financial market debacles from the distant pass to the present. 

Chapter 6 affords the reader with an in-depth discussion of market trends and momentum and is alone worth the price of the book.  There are also chapters dealing with the cycle of investor emotions, emotional management, identifying market tops and bottoms, and portfolio management.  Chapter 28 entitled, “It Is Time for a Revolutionary Change in Portfolio Management”, is also worth the price of admission.  


I heartily commend Mind, Money & Markets as a worthy addition to every trader/investor’s library.  The book is available from Amazon.com or click here.

Saturday, March 25, 2017

What Obamacare’s failure means for America

The first legislative setback of the Trump Administration is being celebrated by many, but not by middle class taxpayers and business owners.  A Republican-led Congress last week failed to generate the consensus required to overturn key provisions of the Affordable Care Act (ACA).  In a frank admission of defeat, House Speaker Paul Ryan declared that Obamacare would remain "the law of the land." 

The stock market wasn't too thrilled about it, either, although there wasn't a concerted selling effort on the part of the bears.  The major indices were down for the week, but the tech sector continued to show resilience with semiconductors in the leadership position.  There was a suggestion in the press last week that the stock market "couldn't care less" about Obamacare, and perhaps that's true.  But there's one thing that will be seriously impacted by the lack of Obamacare reform and that's the middle class economy.

Performing a postmortem of a failed political reform effort is seldom a gratifying task, but in this case there are a couple of things that need to be addressed.  From the start, the mainstream press tried to control the debate by constantly reminding everyone of the 24 million Americans who stood to lose coverage should Obamacare be repealed.  Never mind that is only about eight percent of the entire U.S. population, hence an extreme minority.  In a representative-style democracy such as ours, public policy is supposed to benefit the majority -- not the minority at the expense of the majority. 

What too many pundits have failed to consider in their treatment of the Obamacare debate is that the legislation which mandates health insurance for Americans is at root a personal liberty issue.  It's not about providing free (or cheap) coverage for the needy or the underinsured.  The main issue, which seemed to escape most commentators, is that Obamacare is a form of redistributive economics: socialism in its essence.  Obamacare represents the government putting the proverbial gun to the individual's head and saying, "You will buy health care whether you need it or not...or else!" 

I found it shocking that Obamacare was passed in the first place with little of the impassioned protest among individuals which characterized the first attempt at establishing socialized medicine in America (in 1993).  Even more surprising was the limp-wristed effort with which the current Congress failed to address the underlying problem with Obamacare, viz. the individual mandate.  An easy solution to the Obamacare reform debate would have been to simply eliminate the individual mandate and leave everything else intact.  This would have highlighted the single biggest problem with the legislation while avoiding direct confrontation from those who insisted that Obamacare not be entirely repealed.

Aside from personal liberty considerations, the other main consequence of leaving Obamacare intact is that it does nothing to alleviate the problems faced by individuals and small business owners who are forced to shoulder the burden of expensive healthcare coverage or else pay a hefty penalty.  One of the big reasons why the current economic recovery since 2009 has been the slowest on record is because of the exorbitant tax and regulatory burden imposed by Washington in the wake of the credit collapse.  Rather than remit taxes, the tried-and-true palliative for getting out of recession, the Washington establishment did the exact opposite.  No wonder then that Middle America has struggled to restore its financial condition ever since the housing bust laid waste to it some 10 years ago.  

If you want to see just how the middle class business economy is doing right now, take a look at the following graph.  It combines the stock prices of some of the leading U.S. publicly traded companies which cater primarily to the average American.  As you can see, it's hardly a picture of health and prosperity. 


Had Congress signaled its sympathy with middle class struggles by remitting the Obamacare taxes, there would almost certainly have been a strong consumer spending boom in its wake.  Lowering taxes always has a stimulative effect, and there's no better way to facilitate economic health than to make it easier for individuals and businesses to spend more of their hard-earned dollars into the economy than by letting them keep more of it.  Failure to lift the burden imposed by Obamacare means that the millstone remains tied firmly around the necks of millions of Americans.  It also means the economy won't be returning to a vigorous state anytime soon.

The failure of the Obamacare reform attempt also paves the way for the continued dominance of financial engineering in steering the economy.  Congress let slip an opportunity to regain the control over the economy that it surrendered to Wall Street and the Federal Reserve in the wake of the credit crash.  Instead of economic healing via fiscal stimulus and tax remittance, the economy will for now continue to be dominated by financial sector and central bank policy.  Any economic improvement from here will likely be due to the trickle-down effect of a rising stock market.  The direct stimulating effect of Congressional tax policy would have been far preferable.  

While the tone of this article might be construed as fatalistic, by no means should it be assumed that the die is cast.  There's still a chance, however remote, that the Congress will come to its senses in time to at least address some aspects of tax reform before the 2018 mid-term election.  By failing to seriously address one of the leading issues facing the middle class economy, however, Congress has telegraphed the message that it lacks sympathy with the majority of U.S. taxpayers.    An overnight change in this attitude would seem unlikely.

Tuesday, March 14, 2017

What’s preventing the Dow from exploding?

The stock market has once again entered a period of consolidation as investors wait for the results of the most important legislative decision of the year.  The fight to repeal and replace Obamacare has taken the spotlight as Congress debates the passage of legislation that would eliminate its most burdensome aspects for businesses and individual taxpayers alike.

Internally, the NYSE broad market has been unsettled for the last several days after a period of relative calm in the months following the U.S. presidential election.  There have been more than 40 stocks making new 52-week lows on a daily basis since last week.  This makes almost two weeks that the number of daily new lows has exceeded 40, which reflects an increase in internal selling pressure.  Most of that selling pressure is coming from consumer/retail stocks, bond funds and, increasingly, energy stocks. 

The extremity of internal selling pressure isn’t yet great enough to cause any major concerns about the strength of the stock market’s intermediate-term uptrend.  If the new lows don’t soon diminish, however, it could eventually cause problems for the interim trend as internal weakness spreads from the above mentioned sectors to the broader market.

Following is a graph of the daily cumulative NYSE new highs-new lows.  It’s telling that for the first time since the Nov. 9 election, the highs-lows have stalled out.  And while the trend is still technically up for the highs-lows, that trend could be broken if the new lows continue to expand in the next couple of weeks.


It’s clear that the honeymoon phase of President Trump’s election is over as investors aren’t giving a free ride to the stock market until he delivers on some of his campaign promises.  The most critical of these promises concerns the proposed overhaul of the Patient Protection and Affordable Care Act (a.k.a. Obamacare).  The mainstream news media are in full swing right now with negative stories which undermine the Congress’ effort at eliminating the onerous taxes surrounding Obamacare.  The tantalizing prospect of having the bill’s individual and employer mandates (which forces individuals to purchase health care or else pay a steep penalty) repealed is one big reason why the middle class turned out in droves to elect Trump. 

Now it’s time for the Republican-controlled Congress to “spit or get off the pot” as the saying goes.  Congress has an excellent chance to relieve a massive tax burden on individuals and small business owners by approving the proposed repeal of the Obamacare mandates.  Unfortunately, there is now a concerted effort underway within Congress designed at undermining the proposed overhaul.  It can’t be emphasized enough that the repeal of the Obamacare taxes would be of tremendous benefit for the economy by relieving the stress created by years of burdensome taxation.  That pent-up energy would likely express itself through a massive rally in the Dow and major averages, which have been tethered by the uncertainty surrounding the Obamacare reform debate in Congress. 

A repeal of the individual and employer mandates would also likely result in a hiring spree by small business and would give the stock market the euphoric burst of investor confidence needed to achieve heights undreamed of by even the most optimistic bulls.  This in turn would stimulate even more business activity due to the stimulative effect of America’s financially-driven economy.  

It’s sobering to think that how the rest of 2017 turns out for investors and wage earners alike might very well rest in the hands of Congress even as we speak.  All we can do now is pray for the best outcome and hope the Congress is able to deliver what would be the most extraordinary gift that Washington could possibly give the American taxpayers.