Today's Market
by Dr Invest


There is no question that the market has seen remarkable gains since 2008, this doesn't mean that we have a viable economy. No, I'm not a perma-bear! But the reality is that major corporations are releasing employees and cutting back like a recession will begin at any moment. Sears, J.C.Penny, Catepillar, Boeing, and the list goes on and on. These are strategies to insure stability for corporations.  What do they know that we don't?

When asked if stocks are overvalued, Nobel laureate Robert Shiller supplies a simple answer: "yes." But that doesn't mean equities are set to dive.

Evidence that stocks may be richly priced is easy to find. Shiller's cyclically adjusted price-to-earnings ratio, which compares the current value of equities to inflation-adjusted earnings over the past 10 years, is at levels not seen except for the years surrounding 1929 and 2000. And at 29, the ratio is higher than its highest level before the Great Recession.



Still, Shiller makes it clear this doesn't necessarily suggest that investors should sell stocks.
"I'm not saying pull out of the market — I'm saying that it looks dangerous now," the Yale economics professor said Wednesday on CNBC's "Trading Nation." "But it could keep going up."

Another fund manager and now consultant Raoul Pal suggest that a recession will be due in 2017.

Recession and Elections

I recently noted that since 1910, the US economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency… effecting a 100% chance of recession for the new President.

No recession without an election

I then spent some time looking at US recessions in general, and found that every single one occurred during, or just after, an election, without exception.

Not every single election sees a recession, only every two-term incumbent change. Some two-term Presidents saw recessions at their first-term re-elections too (Wilson and Eisenhower).
The following chart shows every NBER recession since 1910 (in yellow) with the new President after a two-term election marked in white and the new Presidents after a single-term presidency in red. Wilson and Eisenhower appear as both. Only Coolidge saw more than a year (sixteen months) from his second-term election and the onset of the subsequent recession at the end of WWI...




Trump will see a Recession in 2017

Finally, bearing in mind the above, we have to acknowledge that there is an extremely high chance of a recession within the coming year with the imminent change of government in the US after a two-term presidency. History would suggest that the odds are 100%.

Amid the furor of glowing economic reports, remember that our economy is still on "Life Support". The FED is only now attempting to normalize interest rates. This process will take years to complete especially at raising basis points only 1/4% three or four times a year. The other crisis is the purchase of bonds to the tune of 13 Trillion. Again, it will take years to wash out this liquidity from our economic system. The final obstacle is our national debt, at nearly 20 Trillion.

The problem is that as you raise interest rates, it will cost you more to pay back the money you have borrowed. Borrow $100 at 1% interest and you owe $1 per year, but if you raise interest rates to 5%, you will owe $5 per year. That is 4 times more you would owe.

Now if you talk about $100,000 of debt, at 1% interest you owe $1,000 and at 5% you owe 5,000 per year. Let's go to 1,000,000 of debt, at 1% interest you own 10,000 and at 5%, you owe $50,000 per year.

Assume you earn $100,000 per year. Paying back $5 per year is easily done, even paying back $5,000 is no sweat, but paying back $50,000 in interest alone would become somewhat challenging. The government also faces the same challenges. The U.S. government has limited income...from taxes...at some point the debt will become greater than the government's capacity to pay the interest.

CLOSING THOUGHTS

There is the promise of a return to 5% GDP, unemployment is low, the economy seems to be heating up, buying American seems the tone along with MAKING AMERICA GREAT AGAIN. The problem is that the demographics don't support these goals. The population of active workers is declining with the retirement of thousands of baby boomers, production will continue to decline and with it will come deflationary pressures. Meanwhile we are simply waiting for the next shoe to drop...that is a long overdue recession. While you are are counting all the money you are making from being positioned in stocks, you might consider the risks that grows higher each day.