How Investors Win As Policy Defies The Economic Cycle

Continuing economic down cycle.

Offset by yet more debt.

But take a look!

Extreme long term return-to-risk condition.

Conviction the key to a winning strategy.

Bubbles can be beaten and with very low volatility.

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As investors face at least the third major bubble of the last two decades are they going to be able to come through this bubble any better than the last two? While much can learned from past experience, successful execution through a bubble cycle requires much more than education. There are several other conditions that have come together for an investor to survive, let alone thrive.

Continuing economic down cycle

Last week’s note showed 8 major indications1115copper that the economic downcycle had become very clear. This week we show some more. This week copper made a new 5 year low.

The level of the Weekly Leading Index (monthly) decreased to a 31-month low, and the growth rate fell to an eight-month low.

https://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-ecri-u-s-monthly-leading-index-ticks-down

“Surprisingly the consensus has only recently become aware of the slowdown in US economic growth. Yet the related decline in profit margin growth already has some worried because similar declines have been associated with past recessions. This weighs heavily on investment.

https://www.businesscycle.com/ecri-reports-indexes/report-summary-details/economic-cycle-research-ecri-defying-fed-business-investment-growth-slows

Just today we saw that retail sales1115retailXautos showed considerable weakness. “The picture is clearest when excluding the debt bubble-funded auto-spending spree. When one excludes autos, what we find is that the last two times retail sales were this weak, the US was already in recession.”

http://www.zerohedge.com/news/2015-11-13/retail-sales-miss-across-board-year-over-year-gain-2nd-weakest-financial-crisis

 

This should be no surprise as 1115EL_CoD1_Income_Growth_normalincome is under pressure.

 

 

 

 

 

Offset by yet more debt

What is holding the economy up1115EL_COD2_Credit_Growth_normal at all? You guessed it. More and more debt.

 

 

 

 

 

But take a look!

1115government loans_2_0Could the government really be sponsoring  yet another sub-prime boom?

http://www.zerohedge.com/news/2015-11-06/here-credit-bubble

What is clear is that a huge component of the credit strength is in auto loans. A massive boom. However, what is a the quality and durability of this growth? Gordon Long provides an excellent analysis.

 

 

Extreme long term return-to-risk condition

A long term investment perspective is so key to get through a bubble successfully. John Hussman’s analysis is probably the best in putting this in a long term context. Be aware that overvalued markets tend to not just revert to the mean but go far beyond that.

Sometimes investors need to realize that the long term risk is so great that the best thing to do is just get out of the way, whatever short term returns are going to be.

http://www.hussmanfunds.com/wmc/wmc150928.htm

Conviction to stay the course with a strategy

It is so rarely the case when cycles have1115Risk_cartoon_02.19.2015_normal become so clearly trending down, are propped up on a very fragile credit boom, while the long term return-to-risk outlook has become so clearly unattractive. There is little excuse for failing to recognize dangerous bubble conditions at the current time.

Nevertheless, it does take significant conviction to overcome crowd sentiment and concerns over short term performance. Sticking with a winning long term strategy, especially before the bubble breaks is not easy. Nevertheless, at an extreme phase of a bubble short term returns become increasingly just a dangerous distraction.

Bubbles can be beaten and with very low volatility

When you follow all the signs and stick with conviction to overwhelming evidence, good things can happen, for example over the 2005 to 2010 period.

http://chrisbelchamber.com/track-record/

 

 

 

 

 

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