One Trader's Antidote To 'Billionaire Bear' Dalio's Fearmongering

Authored by Kevin Muir via The Macro Tourist blog,

Yesterday, yet another Billionaire Bear issued a stark warning. This time it was Bridgewater Chief Investment Officer Ray Dalio who penned a piece comparing the current environment to 1937.

This was after an earlier in the month letter where Bridgewater warned that risks were rising, and that clients should have 5% to 10% of their portfolio in gold:

“Most immediately, during the calm of the August vacation season, we are seeing 1) two confrontational, nationalistic and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war, and 2) the odds of Congress failing to raise the debt ceiling (leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system) rising. It’s hard to bet on such things one way or another, so the best that one can do is be neutral to such possibilities.

“When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don’t have a unique insight that we’d choose to bet on … We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest you relook at this. Don’t let traditional biases, rather than an excellent analysis, stand in the way of you doing this (and if you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you sharing it with us.)”

Although I am sympathetic to Ray’s view that the dysfunction in Washington will cause American financial assets to underperform in the coming quarters, I wonder if we aren’t maybe overthinking the whole situation.

And in that vein, I represent one of my favourite indicators. I have written about Ed Yardeni’s ‘fundamental stock indicator’ many times in the past. It appears overly simple, and the fact that it doesn’t directly include interest rates or earnings, seems to make it destined to break. Yet, somehow it magically continues to work.

Is the Yardeni ‘fundamental stock indicator’ confirming the bears’ thesis that it is time to exit stocks?

Well, let’s have a look at the indicator over a long time frame to get a feel for how it has performed in the past.

As you will notice, the correlation is not perfect, and there are definitely times when the indicator ran ahead of the stock market, but its ability to match large moves in the stock market is remarkable.

Let’s quickly review Yardeni’s secret sauce. His indicator is a combination of;

  • consumer confidence
  • initial jobless claims
  • CRB raw industrials

That’s it. Nothing more. It’s surprising that it tracks the stock market as well as it does with nothing more than these three inputs.

Look closely at the chart. I am hard pressed to find an example where the stock market declined by a meaningful amount that the indicator hadn’t foreshadowed, or at the very least, mirrored.

So let’s zoom in on the recent action to get a feel for the potential of a stock market sell off.

Contrary to most pundits’ warnings, the Yardeni indicator is sitting at new highs.

Wow. How can that be? That doesn’t make any sense. Aren’t things rolling over?

Well, maybe we should have a look at the various components a little more closely.

First of all, jobless claims are sitting at cycle lows.

With all the help wanted signs littering store windows, I don’t see this changing anytime soon.

And given all the reporting about the recent rise in Chinese centric commodities, it is no wonder the CRB Raw Industrials index is pushing up against the previous highs.

Finally, even though the news seems awful, consumers are still an optimistic bunch.

When you add up these three inputs, you get a Yardeni ‘fundamental stock indicator’ that is pushing up to the highs.

Now maybe this is the period where this indicator finally stops working. Maybe all those billionaire bears will prove smarter than Yardeni’s simple system. Yeah sure. Maybe my homemade boat will also pass my upcoming coast guard safety inspection.


The Cooler King (not verified) shovelhead Tue, 08/22/2017 - 16:40 Permalink

BUY BITCOIN! CRASH DALIO! (after you #failed, previously, to CRASH JPM with your house full of silver that you then SOLD at a yard sale at less than the $5 that it takes to dig it out of the ground). In some universal planetary solar system where the sun hasn't yet turned into a RED GIANT, you'll have won a pyrrhic victory! so you'll have that going 4 u!

In reply to by shovelhead

Dammit Walter Tue, 08/22/2017 - 16:01 Permalink

Consumer confidence - similar to how sure Wile E. Coyote's is standing on firm ground when he is actually standing on a cloud of nothing and about to fall 5000 feet to the bottom of the canyon with a rocket strapped to his back! 

LawsofPhysics Tue, 08/22/2017 - 16:02 Permalink

ALL STIMULUS IS FUNGIBLE!Central banks and financiers around the globe have been printing their fucking brains out, and still are.Don't overthink this folks..."Full Faith and Credit"

taketheredpill Tue, 08/22/2017 - 16:06 Permalink

  The decline in Jobless Claims happened at the same time as a massive drop in Participation Rate.I think this cycle was unique in that the drop in Jobless Claims was not because of people getting jobs as much as people reaching the end of benefits period (recall the "99 weekers").So Jobless Claims doesn't mean what it used to.And Commodity Prices?  Are they rising because of an increase in Global activity or because (Chinese) speculators are borrowing at Zero and buying?I think pre-2008 models ashouldn't be applied to anything post-2008 

gm_general Tue, 08/22/2017 - 17:46 Permalink

This is stupid - studies have already shown consumer confidence rises and falls mostly based on the stock market, so all you have here is an echo chamber, it doesn't appear to lead or lag in any way.

0xAA4214C Tue, 08/22/2017 - 17:54 Permalink

I don't belive in a crash anymore. I think, it's more likely, that we see a scenario, where the headline one day will be: Wal Mart filed for bankuptsy, and the next day: Dow Jones hits 35'000. How many times did we see somewhere something crash, that just turned out to be a buying opportunity for a central bank, a connected agency or who ever...What's the alternative? What can we offer? In the dollar world, there is an abundance of entertainment, food, porn, cheap stuff, etc. and we can only offer chaos and doom :-(I am waiting for an alternative form asia. Let's say a crpto currency pegged to a commodity like gold or silver and they start buying oil from the saudis with that new currency. The saudis can either buy stuff from asia or they can convert this currency into gold or silver. Without such an alternative, there is nowhere else to go. Bitcoin? lol! Pysical PM for world trade? lol! Such a move from asia would not be a violent attack on the dollar, but would slowly undermine it's global reserve status and will definitely force the western mafia gang to make;dr: there will be a time, when it's raining men on wall street, but i don't expect them to jump all at once.

two hoots 0xAA4214C Tue, 08/22/2017 - 18:17 Permalink

Doesn't take much of a step back to see US hegemony waning in many areas, reserve currency is final straw then the "reserve currency" empire is done.  Just another brick in the wall at that point.   We are already being tested in all areas and it's not Trump just a point in the planet's social/economic/shared tech evolution.   Really need to get our trade balance, balanced and quickly.

In reply to by 0xAA4214C

vladiki Tue, 08/22/2017 - 19:26 Permalink

This is for speculators/gamblers/traders like Muir. It's not for investors. Stock punter = horse punter. Each with his secret sauce/rabbit's foot/Teddy to guide and comfort him as he blunders through the fog.

For them, there's no long term. They'll hang in for the last 10% ... 5% ... 2% i.e. trying to time the exit. But we know NO ONE can time markets and on average traders are big losers. Knowing that won't stop all of them trying, because each knows he's smarter than the average.

There's a lot of rubbish talked about 'psychological profile' for investors, but the crucial question is 'what age are you?'. At 70, I'm too old to gamble with my capital, and if I go to the casino or the track, I only take what I'll have fun losing I've no rational option but to be an investor = think long term, and we KNOW that long term results from stock-buying depend on ENTRY PRICE (PE or a variant), and we KNOW that they're close to or through historic highs, so I'm out. I'll be back later.