PARIS – Wall Street continued its recovery yesterday, the Dow rising 116 points.
Investors believe – as we do – that the trade war will blow over… or at least calm down into tweety skirmishes. The Donald himself is already backing off, calling it only a “squabble.”
The Trump administration also signaled that it would not step up its trade war with Europe (over autos)… and that it was ready to back away from steel and aluminum tariffs, too.
And faced with a collapsing stock market, there is little doubt – Trump will retreat… and turn his guns on the Fed.
But only the old-timers bother to worry about a stock collapse.
Three times, the Dow has tried to beat its October 2018 high of 26,800. And three times, it has failed. This “triple top” formation is a bad sign. It foretells a bear market, they say.
The latest news from Reuters shows Main Street weakening too:
U.S. retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, pointing to a slowdown in economic growth after a temporary boost from exports and inventories in the first quarter.
The moderation in economic activity was underscored by other data on Wednesday showing a drop in industrial production last month as manufacturers, especially in the automotive sector, worked off stockpiles of unsold merchandise. Growth is slowing as the stimulus from the White House’s $1.5 trillion tax cut package fades.
And the Atlanta Fed is now predicting a big drop in GDP growth. From CNBC:
The Atlanta Fed’s closely watched GDPNow tracker is pointing to a 1.1% gain for the economy in the second quarter, according to a revision posted Wednesday. That comes on the back of a strong first three months that saw a 3.2% gain and is substantially lower than CNBC’s Rapid Update survey, which puts the GDP tracking estimate at 2%.
But nobody pays any attention to old-timers… or to warning signs… anymore. That’s what financialization is all about – separating the real world from the financial world… and allowing fantasy and fake money to replace facts and real earnings.
This week, we’ve been exploring the real causes of America’s trade wars… and its turn toward uncivilized win-lose deals. American democracy was once a “light unto the world” – with its emphasis on personal freedom, free markets, and live-and-let-live foreign policy.
It’s hard to say when, exactly, the lights went out. But now, the U.S. has the highest tariffs in the developed world, the tightest border controls (along with Israel), and the biggest military budget. Now, nobody – not Iran, not Russia, not China – throws its weight around like the U.S.
Why? Why now? Those are our questions. And we will answer, tomorrow, by taking you first to an ancient graveyard in Poland – dating back more than 4,000 years.
But today, we’re going back only 30 years. That was when financialization really got going.
When Alan Greenspan announced his famous Greenspan Put in 1987 – in essence, promising investors that the Fed would step in if stocks fell too far – U.S. GDP was $4.8 trillion. Now, it’s $21 trillion – up four times. The Dow was only around 2,000 in 1987. Now, it’s 25,000 – up 12 times.
In other words, the financial world – measured by stock prices – has grown about 3 times faster than the real Main Street economy.
We know why that happened; the feds rigged the game, providing Wall Street with trillions in fake money lent at fake, artificially low rates.
The fix has been in for years. And investors believe it will stay that way. Stocks may go down. But in a selloff, Trump will cave in to the Chinese… the Fed will cave in to Trump… and stock prices will recover.
Meanwhile, the “unicorns” show how far Main Street and Wall Street have grown apart. Last week, Uber went public and immediately saw itself shorn of 20% of its market value.
But even after the decline, it is still supposed to be worth $69 billion. The CEO explained to employees and stockholders that while there were a lot of “possibilities” in the marketplace, investors value stocks according to “the profits they are expected to generate in the future.”
Typically, investors, being a hard-headed and canny lot, simply multiply current profits, expecting the future to continue more or less on the same road.
But if Uber stays on the road it is on now, it will end up in the ditch, along with all the other failed businesses.
It generates no profits at all – only losses. It does not create wealth; it destroys it, at a rate of about $4 billion per year, which at a reasonable price-to-earnings ratio of 10, makes the company worth NEGATIVE $40 billion.
That gap – between the Wall Street valuation of $69 billion and our MINUS $40 billion valuation based on Main Street earnings – will close some day.
No one knows when the correction will come; but it should be fun to watch… from a safe distance.
MARKET INSIGHT: AN OMINOUS PATTERN
Editor’s Note: As Bill wrote above, a “triple top pattern” is forming in the Dow. Today, master trader Jeff Clark shows how a similar bearish pattern is taking shape in the S&P 500… and why it could spell trouble for investors later this year.
By Jeff Clark, Editor, Delta Report
There’s an ominous pattern taking shape in the stock market. And it could spell big trouble for investors later this year.
Take a look at this one-year chart of the S&P 500…
In technical terms, this is called a “double top” pattern, with the first top forming last September/October, and the second top forming this month. Typically, the two “tops” are separated by a decline of anywhere between 10% and 20%.
This is a bearish pattern that can indicate the reversal from a bull trend to a bear trend. So it’s worth paying attention to.
Keep in mind, though, that until key support levels are broken to the downside, this pattern isn’t confirmed.
For example, if you look at the action since the market bottomed in December, you can see that every pullback in the S&P has formed a higher low on the chart.
So, the first step to confirming this double-top pattern would be for the index to decline and make a lower low. That means we’ll need to see the S&P drop below the 2800 level or so.
The next step to confirm this pattern is for the index to make a lower high on the next rally attempt. If the S&P rallies above the recent high at about 2950, then that invalidates the pattern.
For the moment, it sure looks like a double-top pattern is forming. But we need to see a lower low and a lower high on the index in order to be sure.
To understand why this is important, just take a look at this chart of the S&P 500 from 2007…
And here’s the S&P 500 chart from 2000…
It’s too early to say for sure if the pattern developing today will play out the same way it did in 2000 and 2007. But, if it does, investors are going to be in for some pain later this year.
– Jeff Clark
P.S. It’s looking like 2019 may just be the year this tired old bull ends. For investors, it could be catastrophic. But for traders? Well, that’s a whole different story…
You see, traders don’t fear market crashes. In fact, we get excited about them.
As scary as they seem, market crashes are a goldmine for trading profits… especially if you use my strategy.
On Wednesday, May 22 at 8 p.m. ET, I’ll reveal all the details… including the specific day I’m convinced the market will crash. Don’t wait – reserve your spot now.
“At Some Point, People Are Going to Get Burned”
The two most hyped IPOs so far this year – Lyft and Uber – were both flops. But the issue is bigger than two companies. Banks turned to unusual tactics to keep the deal spigot flowing during the recent government shutdown. One was allowing IPOs to bypass the ordinary filing process… leaving the door wide open for market trouble ahead.
The White House Releases New Censorship “Tool”
Online censorship has become a hot-button issue in the U.S. And the White House seems to have a response. If you feel you’ve been wrongly censored, banned, or suspended on a social media platform, you can now “share your story with President Trump”…
A Biblical Trading Lesson
Don’t look back. That’s the lesson from master trader Jeff Clark. Read on to see why Jeff believes modern trading lessons can be found in the most ancient of sources…
In today’s mailbag, readers are torn on Bill’s take on the U.S.-China trade war…
We can be a strong nation as long as our dollar and army are superior. China is the only nation we can be afraid of in the future. The political system in China is very ambitious. We need to fight as hard as we can against any support from China.
Trade with China makes our prices lower, but we need a little more inflation. We can print more money as long as our productivity per person grows and as long as other nations and the stock market will take this money. As long as we can buy everything cheaper in China, we do not have an interest in increasing our production.
– Jan F.
The low cost of labor in China allows the government to invest more in defense. The acceleration of their military build-up should be considered dangerous. Maybe it’s a good idea to give them a smaller cut of the trade profits between our countries.
– Richard K.
I nominate Bill for President; it’s so refreshing that there are people with common sense. I’m from Canada and our “Crime Minister” is working very hard at destroying our once prosperous, wonderful, peaceful country. No place to run, though Vancouver Island, my home, is still paradise. I wish there was a reset switch, but I’m afraid it’s a little late. My focus has been on building wealth (not too successful yet), but now, I direct my attention to making the world a better place, one person at a time. Keep up the great articles.
– Brian C.
The ultimate market manipulator is China, governed by communists. By imposing tariffs, Trump is using his hand to gently push the producers – yes, the ones that built all those factories in China; large American companies, who were incentivized to do so due to exorbitant corporate tax rates right here in the U.S. – to rebuild factories. This time, hopefully in the U.S., or at least in capitalist countries like India or maybe even Central America, and get a double win-win on trade and a win on the border security.
As for stagnant wages, you and I both know this has to do with diminishing returns in productivity. The big gains have been made – think railroads across the country, electrification, think pumps for water to the home, phone service, etc. Now, the gains are having significantly smaller impacts on our economy, thus proportionally smaller productivity gains, thus smaller wage growth. The huge debt we, as a society, have taken on doesn’t help either.
– Pascal H.
The problem is, we all have some sort of opinion on any matter, and subsequently, we split ourselves in half. One half is leaning to the right while the other is leaning to the left. I was born in a village in Europe, when the villages were small hubs of nearly self-sufficiency. Every month was a day of markets. People would take some of their produce to sell or exchange for something they did not produce. Looking back, I think that that was a true free trade. There were always those who liked to “fish” in the murky waters. In a way, they fulfilled a part that helped the efficiency of the market.
The way countries are today, the basics of old clearly do not work fairly, otherwise America would not seek a “fairer” playing field. Losing to your trading partner cannot go on into perpetuity, nor would that partner sell you any more if you could not pay, even if you were hungry. Years ago, when Western jobs started en masse migration, a thought came to me: To whom will they sell their cheap products when we run out of our jobs and money? Same thought still hangs around.
– Joso L.
Another reader isn’t concerned about “Washington’s War on Tomatoes”…
First of all, I don’t care if I ever eat a Mexican tomato. As far as I am concerned, the only tomatoes worth eating are from my own garden and from growers I can trust. Otherwise, they are virtually tasteless. And who knows what kind of pesticides and fertilizers they use.
My wife and I don’t eat anything from them except avocados. I could live without them, if I had to. We also don’t eat anything from China and most third-world countries. Their quality control is deplorable, unless there is a U.S. or European company keeping an eye on things.
– Cyril P.
IN CASE YOU MISSED IT…
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