Not So Stable Economy
The stop-and-start trade wars have effectively created a stop-and-go economy — one that is subject to the whims of the president and his daily pronouncements about US trade strategy. We are beginning to adapt to and cope with economic instability. For example, consumers purchased a large number of cars in March and April to avoid the tariffs, which drove sales to a four-year high. Then, vehicle sales dropped 10% in May as the tariffs took effect.
The number one priority of the government is not to do great things; it is to provide stability. So, wait, and everything will be great? I grew up in the Soviet Union. Please don’t give me this BS. I need stability. That is why I elect (hire) you.
S&P 500 earnings are at 217.05. Historically, the average P/E ratio on the S&P 500 is 17. If you multiply 217.05 by 17, you get $3,689.85. This represents the fair value of the S&P 500 index, based on its historical average dating back 140 years. Now, we are at 6,000. Is it different this time? The most dangerous phrase in the world is, “It is different this time.”
Being overvalued is not a timing tool, but once the investment community is presented with problems, corrections/bear markets tend to be more severe than if we were fairly valued. Therefore, the next time a bear market begins, it may be a particularly severe one. Nobody knows when, but the conditions are right for it. And what if we hit a recession and corporate earnings decline? The answer is that we will likely experience another 50+ percent decline, similar to the ones in 2000–2003 or 2007–2009.
There will be only one way to get us out of it: Print, baby, print. Both the US Treasury and the Federal Reserve will be printing more money, as this is the only medicine we know for managing the economy. Therefore, every effort to balance the budget will be thrown out like babies with bathwater. Rinse and repeat!
As far as the short term is concerned, here is what is going to happen: We have the FOMC, where Powell is likely to tell President Trump that rate cuts aren’t happening. Everyone who ever worked for or with Trump eventually became his enemy. He wants to model his presidency based on Putin. Putin is the exact opposite. Did I mention I grew up in the Soviet Union? This is half of the story. I grew up in St. Petersburg, five blocks away from Mr. Putin. I know how he thinks. Mr. Trump, you are no Mr. Putin. And I don’t like Putin. Enough of that!
Meanwhile, there will be several sectors which will benefit from this mess:
First: Gold and other metals. Here is the chart of GLD:
It appears to be a steady bull market with a bullish pennant. The reason is economic instability and capital outflows from the US Dollar.
Second: Airspace and Defense: Here is the chart of the ETF:
This one is going pretty much straight up. Aren’t we on a mission to cut spending? Something doesn’t add up.
Anything related to natural resources is going to be a winner. The rest is highly questionable.
Dennis Leontyev
Dennis@NaturalResourceStocks.net
