Where Is the Market Headed and When?
On August 29, I asked Gaps Galore on the Stock Market, Where Is the Market Headed and When?
My Answer
- I think the S&P is headed to the 2400 level and the Nasdaq to the 6,000 level.
- That’s roughly a 50% decline from the top on the S&P 500 and a 64% decline from the to on the Nasdaq.
A reader commented “You’re on record stating a low 1%ish max rise in unemployment. That’s absolutely CRAZY! There’s absolutely no way either of these indices dive down to those levels without unemployment moving above 5% and staying there for the better part of 12 months.”
Recession Rise in Unemployment Rate Since 1948
During the 2001 recession, the unemployment rate only rose 1.1 percentage points.
The percentages are recession start and end. The unemployment tends to rise after the recession ends but that was not the case in the short pandemic recession.
S&P 500 Discussion for 2001 Recession (Lead Chart)
- From the stock market peak in 2000 to the 2002 bottom the S&P 500 fell from 1530 (1553 if you go back a few months) to 769.
- That’s a decline of 49.8% top to bottom.
- The peak was well before the recession, but many fervently believe we are not in recession yet.
Nasdaq 100, 2001 Recession
Nasdaq 100 Recession Notes
- Between March of 2000 and the October 2002 bottom the Nasdaq had rallies of 43.1%, 32.8%, 53.7%, 59.3%, and 22.9%.
- Despite those rallies, two of them well over 50%, the market declined 83.5%.
- The Nasdaq declined 56.9% before the recession even started.
- The rise in unemployment rate during the recession was only 1.1%.
JOLTs
The BLS report (Job Openings and Labor Turnover) JOLTs reports shows there are an unprecedented 10.7 million openings.
Employment Levels in Retirement Age Groups
In addition to 10.7 million openings, as of January 1, 2022 there were a whopping 22 million workers of retirement age who are still working.
10.3 million of them are over the age of 65. Potentially millions of them will retire reasonably soon.
Employment Levels
Employment Level Notes
- In the DotCom 911 bust, the employment level declined by 1.1 million.
- In the Great Recession housing bust, the employment level declined by 6.4 million
- In the Covid pandemic recession, the employment level declined by 22.3 million, and that number was dramatically understated according to the Fed.
Given 10.7 million openings and 22 million people of retirement age still working, how fast will the unemployment rate rise?
Current Numbers
- Employment: 158,290,000
- Unemployed: 5,670,000
- Unemployment Rate = (5,670,000 / (158,290,000 + 5,670,000)) * 100 = 3.458%
Playing With Numbers #1
- Assume a decline in employment by 5 million to 153,290,000.
- Assume a rise in unemployment by 2 million to 7,670,000.
- Unemployment Rate = (7,670,000 / (153,290,000 + 7,670,000)) * 100 = 4.766%
That’s a total rise in the unemployment rate of only 1.3 percentage points.
Playing With Numbers #2
- Assume a decline in employment by 3 million to 155,290,000.
- Assume a rise in unemployment by 1.5 million to 7,170,000.
- Unemployment Rate = (7,170,000 / (155,290,000 + 7,170,000)) * 100 = 4.441%
That’s a total rise in the unemployment rate of slightly less that 1 percentage point from here.
Pick your numbers and pick a start recession date, but that first set of numbers is fairly robust, estimating an employment decline of 5.0 million vs 6.4 million in the Great Recession.
I highly doubt employment declines by 5 million, but if it does, the bulk of it will be by retirement.
Five Key Ideas
- The demand for workers coupled with retirement replacements will prevent a massive rise in the unemployment rate.
- Unlike the the Pandemic, the Fed will not step on the gas out of fear of stirring up more inflation.
- Like the 2001 recession, expect many big stock market rallies that all die on the vine.
- Given the strength in employment, the Fed has ample room to hike. I expect the Fed to overshoot, then be reluctant to act aggressively out of fear of inflation.
- The longer the stock market and housing prices stay elevated, the more the Fed is likely to hike.
Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
On August 19, I commented Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
On August 26, at Jackson Hole, Fed Chair Jerome Powell Pledges to “Act With Resolve” to Beat Inflation
Key Powell comment: “Reducing inflation is likely to require a sustained period of below-trend growth.”
The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole
If you still think my downside targets on the S&P 500 and Nasdaq are crazy then please consider The Fed is Openly Cheering the Stock Market Plunge Following Jackson Hole
This is the biggest stock market bubble on record. It was fueled by the Fed’s massive QE coupled with unprecedented fiscal stimulus.
Despite the current declines, stocks are still priced for perfection, not a long period of weak growth with the Fed openly cheering their demise.
This post originated at MishTalk.Com.
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Mish
link to allrecipes.com
There’s a big dam at The Dalles, Oregon. It sells to Google at about 4 cents/kWh to run a big server farm, and there’s a high-voltage line from there to north of L.A. We’ve been at both ends. That power is being sold to California for 22 cents/kWh. Hey, California, you’re rich. Now pay. LOL
Meanwhile, I heard from Dutch friends who are paying 70 cents/kWh daytime and 53 cents at night + $26/mo to connect. I asked about how often it’s adjusted and what they were paying before the price explosion. I’ll be interested to see how that has gone, and how often the adjustments are made.
PapaDave Comment and my reply below
would provide more specific investment advice other than the usual:
After reading the blog for a couple of years now, I still keep
hoping for “buy this stock” because of this reason. I guess I can always hope.
================================================
Mish Reply
I am
someone restricted in what I say and one commentary nailed it. It is difficult to discuss stocks, especially the illiquid ones that I like best.
I am also in some private placements that I cannot yet discuss at all. One
will move to the Nasdaq in the 4th quarter. It is in the health space, a sector
I think you will like. Another issue I would like to discuss is also medical
related but it is a foreign issue, thinly traded. A third is environment
related, also foreign and thinly traded.
If my
medical play come in as expected it will dwarf all of my gold and miner plays.
I have been in it for 3 or 4 years waiting for a move to the Nasdaq. Entry was
only open to accredited investors rule I do not like.
I posted two
other comment that appear to have vanished
I am in
many very illiquid plays, some foreign. I also like lottery plays and have been
in some investments that have gone to zero.
But guess
what. If one play goes up 10 times, another two go up 5 times, and 70% go nearly
bust you are way ahead of the game. This style of play is not for everyone. And it opens
up discussion of look at all the loser picks this person made.
I have been
thinking of allowing more guest post, but I do not want to be involved with
companies I do not understand or promotion of pump and dump schemes.
Mish
Oh yeah, that’s new in world history. LOL
The gap between gdi and gdp has been 3.5%
larger than its gdp in 2022. N-gDp is still running too high. The
FED needs to drain the money stock and simultaneously increase the velocity of
circulation (the 1966 Interest Rate Adjustment Act).
derivatives still have ‘no skin in their game’ & excessive
concentrations”… “a culture, and Congress, that celebrates exploitation
of an unwitting public for the sake of a fast buck” where the bankruptcy code
gives derivative sellers preferential treatment allowing them to take ownership
of their higher-quality assets as collateral before proceedings.”
Savers never transfer
their savings outside the banks unless they hoard currency or convert to other national currencies. There is just an exchange in the ownership of pre-existing deposit
liabilities in the banking system, a velocity relationship. Where do you think
velocity has gone since 1981?
connection between monetary aggregates and either growth or inflation was very
strong for a long, long time, which ended about 40 years ago”. The FDICs drop in deposit insurance (which caused the “taper tantrum”), is prima facie evidence (a rapid rise in real interest rates).
of this theory, the release of savings, was as I commented on 12-16-12, 01:50
PM #1 when the FDIC’s unlimited transaction deposit insurance was reduced to
$250,000:
seeing the real power of OMOs. R-gDp is likely to accelerate earlier and faster
than anyone now expects. The roc in M*Vt before any new stimulus is already
above average.
With low inflation
(given some deficit resolution), Jan-Apr could be a zinger”
Zinger – a
surprise, shock, or piece of electrifying news.
So we had a “taper
tantrum” and a temporary rise in gDp:
2013’s ‘Taper Tantrum’ Actually So Tumultuous?”
I.e., we didn’t
get high inflation accompanying the “taper tantrum”.
You see, the
economists are running the economy in reverse
That’s
called a “predictive success”. “The only relevant test of the
validity of a hypothesis is comparison of prediction with experience.” –
Nobel Laureate Dr. Milton Friedman
unlimited transaction deposit insurance, the Japanese save more, and keep more
of their savings impounded in their banks.
households have 52% of their money in currency & deposits, vs 35% for
people in the Eurozone and 14% for the US.”
Contrary to modern
day economists, banks don’t lend deposits. Reg Q ceilings were removed because
the ABA convinced the world that banks were intermediaries. Not so. 15 trillion
dollars in U.S. banks are lost to both consumption and investment, indeed to
any type of payment or expenditure.
It’s stock vs.
flow. Velocity has fallen since 1981 because of the DIDMCA of March 31st 1980 (which turned 38,000 financial intermediaries into banks).
insurance coverage deposit account limits (commercial banks):
interest)
As Dr. Philip
George, in his E-Book “The Riddle of Money Finally Solved” diagnoses these
recessions as a cash-imbalance phenomenon (which corroborates Dr. Pritchard’s
thesis):
“When interest
rates go up, flows into savings and time deposits increase” ( the ratio of M1
to the sum of 12 months savings ).
Keynes’ “optical
illusion” is that all bank-held savings are frozen.
In contrast, the
U.S. Golden Era in Capitalism was where 2/3 of GDP was financed by velocity,
and 1/3 by money.
……and higher education is the worst
NOW: Do you always just make s*** up, and why?
The misallocation and
maldistribution of credit is due to bad policies. QE in conjunction with the
payment of interest on interbank demand deposits artificially depresses real
interest rates (artificially boosting asset prices). So, it takes increasing
infusions of Reserve Bank credit to generate the same inflation adjusted dollar
amounts of gDp.
LOL
Dr. Philip George rediscovered, in his E-Book “The Riddle of Money Finally Solved”, diagnoses
these recessions as a cash-imbalance phenomenon (which corroborates Dr.
Pritchard’s thesis):
“When
interest rates go up, flows into savings and time deposits increase” ( the
ratio of M1 to the sum of 12 months savings ).
As predicted in
1963 in my Money and Banking book, Dr. Pritchard’s (Ph.D. Economics, Chicago 1933, M.S. statistics, Syracuse) economic syllogism posits:
require prompt utilization if the circuit flow of funds is to be maintained and
deflationary effects avoided”…
aggregate demand and therefore produces adverse effects on gDp”
time-deposit banking, would tend to have a longer-term debilitating effect on
demands, particularly the demands for capital goods.”
nothing to GDP. And all savings originate within the payment’s system. The
source of time deposits is demand deposits, directly vis the currency route, or
indirectly via the bank’s undivided profit’s account.
Since time deposits originate within the banking system (and
there is a one-to-one relationship between time and demand deposits — an
increase in TDs depletes DDs by an equivalent amount), there cannot be an
“inflow” of time/savings deposits and the growth of time/savings deposits
cannot, per se, increase the size of the banking system.
From a system standpoint, TDs constitute an alteration of
bank liabilities, their growth does not per se add to the “footings” of the
consolidated balance sheet for the system. They obviously therefore are not a
source of loan-funds for the banking system as a whole, and indeed their growth
has no effect on the size or gross earnings of the banking system, except as
their growth affects are transmitted through monetary policy.
The objectivity is twisted: “Danielle Dimartino Booth’s
in her book gets it backwards too: “Fed Up”, pg. 218 “Before the financial
crisis, accounts were insured up to the first $100,000 by the FDIC. That limit
kept enormous sums *in the shadow banking system*.
The only way to activate savings, give savings a velocity of
one, an income velocity, is for the saver-holder to invest/spend
directly/indirectly outside of the payment’s system.
transaction type deposits:
its’ recession will be deeper than that of the US which is basically
saved because it produces all the energy it needs.”
If you don’t think my comments are worthwhile, then please IGNORE me. I have done that for many of the people that comment here, as I consider their constant whining, complaining and blaming to be a complete waste of my time. If they don’t offer up anything useful to me, there is no point in reading their comments.
Don’t like the boasting? Then IGNORE me. Because I’m not going to stop talking about investments.
Everyone has losers. I have had plenty of them over the years. But there is little point in discussing the past.
People don’t care about Warren Buffett lost money on in the past. They only care about what he thinks will do well in the future. And guess what, he is loading up on Occidental.
I am discussing the future and what I believe will be one of the best investment areas going forward. There are a few people here who have acknowledged that they want me to continue to offer my suggestions and thanked me for my suggestions so far. I do this for them, and for anyone else who cares to listen.
I don’t care about who doesn’t like my comments.
Oh for f*ck sakes. Forget it then.
Then do it.