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Beginning of the End

Posted December 4, 2018

In the book Hells Angels: A Strange and Terrible Saga by Hunter S. Thompson, he writes about finding the edge on a motorcycle. The edge is that ultimate point where you are pushing yourself and the bike to its limits, on the verge of crashing, but not.

The Edge... There is no honest way to explain it because the only people who really know where it is are the ones who have gone over. The others—the living—are those who pushed their control as far as they felt they could handle it, and then pulled back, or slowed down, or did whatever they had to when it came time to choose between Now and Later. But the edge is still Out there.

In many ways this is how the Federal Reserve runs the economy.

The Fed is blazing recklessly through the canyons with few signposts and the throttle wide open. But it is too much... It can’t go on. It hits the brakes and hopes the momentum won't send it over the side, down the cliff, and into the weeds.

Mistakes Were Made

Many people blame the Fed for hiking rates and slowing the economy. But the blame lies not on the current chief, Powell, but rather on Bernanke and his dripping madness into the dark world of money printing.

Ten years ago, the Federal Reserve made the mistake of pushing interest rates to zero. It kicked money out the door by hammering the "0" on the Federal Reserve laptop and Ctrl+Print on the Treasury's Xerox machine.

Now, in an attempt to end the party right when the mescaline kicks in, the Fed is pulling back the money supply and hiking rates in an effort to slow down the bad bets, malinvestment, and misdirection funds. As if you can stop the beast even if it knew what it was doing.

But as we've seen twice over the last 18 years, and 16 of the last 19 times, the Fed gets it wrong. The stock buybacks on borrowed money, the exploding debt, and fancy new cars have already been bought with tomorrow's money.

The cracks are growing more apparent:

Manufacturing was extremely weak in October, with every indicator heading lower. Industrial and capacity utilization fell year over year since May. That said, there is still growth, just slower and slowing growth.

Employment data went negative. Initial claims showed its first month of negative momentum since June, and job cut announcements surged.

Housing was soft. Prices are falling, and days on market have increased to above seven months. New home sales are near their lowest levels since 2010, while pending home sales have dropped to 2014 numbers.

On the upside, wages grew 3%, and consumer confidence was high. Personal income, personal spending, and retail sales were up year over year. But those are usually signs of a top, not a bottom.

Divestiture is back. GE sold its aircraft parts business to a Singapore company for $630 million. Lowe’s is closing stores. GM is closing plants.

This is at a time when housing is just off its all-time high book value on the S&P 500 — it is at 3.30, which is above the 2008 high. Price to sales on the same index is at 2.13, which is above the 2008 and 2000 highs.

Other ominous signs are that the leaders of the current bull market — the longest in history, mind you — the FANG stocks, are all down about 20%.

Leaders lead down as well as up.

As I’ve been saying for months, it’s a good time to take some money off the table and build your grubstake. Also, you should buy undervalued, uncorrelated stocks with strong uptrends and get paid for doing it.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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