I can’t recall having more indications of a top going off at once than we are seeing right now.
Before we get into that, however, I do want to point out one thing. We are seeing tremendous cross-currents in the economic data. For one, as mentioned in the previous letter, despite the headline print on employment, the measures of employment we keep are all dire.
Yet, the events of 2020-21 have so bonked the economic data - seasonals and cycles, that things are not in the alignment we have historically known them to be, and, much like supply chains, may take years to re-align.
Among these is the notion of the hot GDP growth we have been seeing of lately. As nearly all news - economic and otherwise, is suspiciously propagandist, we need to look beneath the surface.
There is a common theory that says this growth has been caused by massive federal government spending.
One of the major inputs to calculating GDP is precisely that - the input of government spending. But if we back out government expenditures (which are financed by either tax receipts, which have been abysmal for 3 quarters now) or borrowing, we find that the economy has actually been growing faster than the headline GDP prints.
Fourth quarter GDP, including government expenditures (on the plus side, of course), grew at an annualized 3.28% whereas if we look at this series, sans government expenditures, it
Among the plethora of other reasons to be looking for a top, it grew in the fourth quarter at an annualized rate of 3.81%.
Nevertheless, the market tends to look ahead by a couple of quarters, and we are clearly seeing a society in the throes of absolute, speculative fever, particularly when juxtaposed with competing rates. This has been the driving factor here. And these types of tops, historically, have been biblical-type tops. All of this comports to our projections based on the long-term cycles in real total returns from stocks as well as the percentage of household wealth invested in stocks - all of which is calling for a major, protracted bear market of at least 50% drop from these levels.
And now, the technicals are a very much aligned for a top, and I don’t hear market participants even alluding to these historically stalwart technical indicators.