Identifying and trading a bear market

S&P price action, the yield curve, interest rate expectations and trade tensions are all telling us the percentage decline during the next bear market could equal or exceed 1987, 2000 or 2007.

1983 through 2019 chart

Comparing S&P price action 1987, 2000, 2007 to 2019.

1987, Top heavy, hard corrections, struggles to make new high, fails then collapses.

2000, Top heavy, hard corrections, struggles to make a new highs, fails then collapses.

2007, Top heavy, hard corrections, struggles to make a new highs, then collapses.

2019, Top heavy, hard corrections, stalling at new highs without a significant new high in 18 months. During this 18 month period the US economy has slowed, rate expectations have gone from rate hikes to rate cuts.

2) The Yield Curve and real rate of returns, 1987, 2000, 2007 to 2019.

1987, the curve didn’t invert until 1988 but it was a different world in 1987, 10 year Treasuries were yielding over 9.00%, 3 month over 8.00%, reported inflation 3.58%, total Federal debt 2.34 trillion (5.20 trillion in 2019 USD). In 1987 Treasuries made sense, they had a real rate of return in excess of 4.42% with potential upside instrument appreciation if the U.S. cut rates. (real rate of return = The Treasury rate – reported inflation rate)

2000, The curve inverted in June 2000, the bear market fully engaged in October, average Treasury yield 6.43%, reported inflation 3.37%, total Federal debt 5.62 trillion (8.27 trillion in 2019 USD) a decade plus of  helter-skelter Federal spending had taken it’s tool on the U.S.’s balance sheet and fiscal credibility but Treasuries still made sense because they had a real rate of return of 3.06% with upside instrument appreciation is the U.S. cut rates.

2007, The curve inverted in January 2007, the bear market engaged in October, Average Treasury yield 4.80%, reported inflation 1.93%, total Federal debt 8.95 trillion (10.97 trillion in 2019 USD) despite the fact Washington was now a debt Junkie main-lining trillions in borrowed funds to satiate their spending habit U.S. Treasury purchases could still be justified because they had a real rate of return of 2.97% with potential instrument appreciation if the US cut rates.

2019, The curve inverted in January 2019, average Treasury yield 2.44%, average reported inflation 2.44%, total Federal debt 22.51 trillion, (9.59 trillion in 1987 USD, actual Fed debt in 1987 was 2.34 trillion).

Investing in 5 to 30 year US Treasuries in 2019 makes absolutely no sense, they have a real rate of return using reported inflation of 0.00%, a negative rate of return using actual inflation of greater the 1.00%, with annual currency & instrument risk 5 to 20 times greater than annual yield, (depends on duration) with no significant upside instrument appreciation potential even if the US cuts long-term rates to 0.00%. Don’t think there would be much of a market for US Long-Term debt at 0.00% the U.S.’s fiscal credibility and credit rating are at record lows they have near record amounts of debt to sell and their offering the lowest yields in history with highest instrument and currency in history. The fact that U.S. Treasuries are so blatantly unattractive to investors and no longer qualify as a “flight to quality” alternative to stocks this dismal debt reality has helped support the stocks at current historic highs.

3) Pre bear market interest rate expectations 1987, 2000, 2007 to 2019.

1987 17 August 1987, S&P price 335.40, 4+ trillion in interest rate derivatives were pricing in 1.60% in rate hikes, 13 October 1987 S&P price 314.52, down 20.88 points or -6.22%, during the same period (17 August – 13 October 1987) rate hike expectations had decreased by 0.53% pricing in just 1.07% in rate hikes, by the 20th of October 1987 (one week latter) the S&P had sold off a total of 35.90% to 216.50 and it didn’t didn’t see a new high until July 1989.

2000 25 January 2000, S&P price 1,410.03,  8+ trillion in rate derivatives were pricing in 0.45% in rate hikes. 15 December 2000, S&P 1,336.60, down 73.70 points or -5.21%, during this same period (Jan 2000 to Dec 2000) 8+ trillion in derivatives went from pricing in a 0.45% rate hikes to a 0.59% in rate cuts, by October 2002 the S&P had sold off  50.50% and didn’t see a significant new high until September 2013, 13.5 years latter.

2007 12 June 2007, S&P price 1,509.12, 10+ trillion in rate derivatives were pricing in a 0.1950% rate hike, by the 15th of November 2007 the S&P sold off 65.63 points to 1,443.49 -4.34%, during the same period (June 2007 through November 2007) 10+ trillion in rate derivatives went from pricing in a 0.1950% rate hike to 0.77% rate cut, by March 2009 the S&P had sold off  a total of  57.70% and didn’t see a significant new high until September 2013.

2019 17 October 2018, S&P price 2,809.21, 17+ trillion in rate derivatives were pricing in a 0.2400% rate hike, 17 June 2019 the S&P was trading at 2,889.67 up 80.46, +2.78% with  17+ trillion in rate derivatives now pricing in a 0.79% rate cut.   

30 July 2019, S&P price 3,012.80, the June 2019 rate derivative contact went off board pricing in the July 0.25% rate cut, (September 2019 is now the next delivery month with deep liquidity), total additional rate cuts priced in between September 2019 and December 2020 0.48%. 17 trillion in rate hikes is now pricing in a very hard sell off in stocks with the probability of it occurring prior to December 2020.

Today’s priced in rate expectations between September 2019 & December 2020

Technically the US equity market is still in a fragile long-term uptrend, history, current S&P price action, interest rate expectations, deteriorating US economic fundamentals and common sense are all telling us this fragile uptrend is unsustainable.

Preparing to capture the move lower

First let’s see if there’s an easy out potentially by allocating funds to long/short Hedge Funds and/or ETF after all this crowd managed trillions and if all the hype is true they should knock it out of the park once the bear market fully engages.

Setting a benchmark for Assessing Advisor Performance

Looking at the gentle clean trend and price action we saw from July 2008 though January 2018 a blind squirrel could of found nuts in this market. Nearly any medium to long-term technical trading program would have kept you on the right side of this trend for the entire move, this period certainly wouldn’t qualify a traders ability to survive a volatile toppy market, a long-term trend reversal and to capture the move lower.

Price action

The S&P appreciated from 915.70 in July 2008, contract value $45,775.00 to 2,875.90, contract value $143,795.00 up 1,960.20 points for a gain +214.06% or of $98.010.00 using zero leverage. (leverage of up to 24 to 1 is currently available in Stock Indices)

Chart

The 12 months between June 2018 and June 2019 on the chart below is a much better qualifier, S&P price action is struggling to make new highs without putting in significant new high in over 18 months, let’s assess long/short manager performance during this 12 month period.

Performance Benchmark

From 29 June 2018 through 28 June 2019 the S&P appreciated from 2,720.90, value $136,045.00, to 2,944.20, value $147,165.00 up 223.30 points or +8.21%.

During this period the S&P had a 21.15% “correction” with a 21.19% recovery.

Volatile, but tradable, this 21.15% correction and 21.19% recovery created exceptional opportunities for long/short advisors who manage trillions and you’d expect their performance to equal or exceed the market’s overall gain of +8.21%.

Chart

Hedge Fund Performance during this 12 month period

Performance for the 3,869 reporting long/short Hedge Funds linked on this spreadsheet averaged 0.28%. Out of the the 3,869 only 15.98% did as well as the market’s +8.21% the best fund with verifiable performance was up +94.85%, but this manager’s 11 year average annual return is only +36.57%, maximum drawdown -35.81%, and he was profitable only 1 out of the last 3 years, total return during this 3 year period +30.69%, they trade futures long and short using leverage of up to 10 to 1. Out of the top 5.00% with verifiable performance who’s funds are open to new investment none excite enough to meet their minimums, endure the regulatory scrutiny of disclosing my assets and pay an annual 2.00% management fee. The worst long/short Hedge Funds, bottom 291 were casualties with drawdowns they stopped reporting and/or closed down.

Let’s check all 5,988 reporting Hedge Funds linked on this spreadsheet over the last 12 months the average comes in at 0.78%, only 11.95% did as well as the market’s +8.21%, the best +103.10% with a -36.74% life of program drawdown, this fund has a $5,000,000 minimum and is “selectively” closed to new investment, the worst 361 were casualties with drawdowns so deep they stopped reporting and/or closed down.

These Hedge Fund “Superstars” managing in excess of 3 trillion dollars certainly didn’t set the performance benchmark to high with average performance over the 12 months period of 0.28% to 0.78%. They wouldn’t qualify to manage my money especially given the fact that their annual managements fees on average have exceeded their annual net performance.

Publicly Traded Funds during this 12 month period

Out of the 11,080 funds I track only 227 or 2.05% did as well as the market’s 8.21%. Spreadsheet  containing the 227, the bottom 250 are dismal with losses between 18.57% to 61.91%. 

An alternative that may make more sense

Work with a trading program fully discloses trading methodology enabling you to agree with the trading logic and independently verify and track performance. Then find a team that can implement this program for you negating your need to sit in front of a quote screen 23 1/2 hours a day 5 1/2 days a week. Keep control of the account by defining what market(s) are traded, how and maximum leverage to be used. Finally, define your overall account risk in writing before the first trade goes on. This type of an account is called an Automated Trading Account or ATA.

ATA’s, What They Are and How They Work
The ATA Fee Structure
Defining Overall Risk For Your ATA Account

Exchanges Traded
Brokerage Firms
How Balances Are Guaranteed Plus or Minus Trading

In this report I’m going to introduce an ATA that uses a very simple, easy to understand trading procedure. This procedure has captured the majority of every bull and bear market since 1980, outperformed the market and the majority of 22,310 Hedge Funds, ETFs and Mutual Funds I track.

I’ve fully disclosed how it trades, provided you with all tools & data enabling you to verify 39 years of performance and to track trades forward as they occur.

What we’re trading in these examples

S&P E-Mini (ES) 1.00 change in price = $50.00
Contract value at 3,000.00 = $150,000.00
Total bid ask spreads and all fees per trade = $25.00 or less
Margin Requirement = $6,300 USD
Margin cost = pay 0.75% annually on longs, get paid 0.75% on shorts
Restrictions on shorting = None
Trading hours = 23.5 hours per day, Sunday afternoon – Friday afternoon
Daily USD volume = 168.5 billion

S&P Micro (MES) 1.00 change in price = $5.00
Contract value at 3,000.00 = $15,000.00
Total bid ask spreads and all fees per trade = $12.00 or less
Micro Margin Requirement = $630 USD
Margin cost = pay 0.75% annually on longs, get paid 0.75% on shorts
Restrictions on shorting = None
Trading hours = 23.5 hours per day, Sunday afternoon – Friday afternoon
Daily USD volume = 2.9 billion

Stock Index educational videos resources

Additional Stock Indices I trade using EMAs

What this program uses to generate trades

3 Exponential Moving Averages (EMAs). Every chart in this report is set up the same way, the EMA4.5 is the green line, EMA9, red and EMA18, blue. You can feed this combination of EMAs any data period from 15 minutes to monthly and it’ll work in nearly any market. When you’re done qualifying the S&P I’ve linked other ATA EMA markets I trade by sector here including the individual EMA analysis pages for over 100 individual markets enabling you to qualify EMA methodology and performance, using any market of your choice, trading any time period of you choice from 15 minutes to monthly.

Trading Procedure

Longs
If price action is above the EMA9 and the EMA9 is above the EMA18 = long
Risk on long positions, if the EMA9 moves below the EMA18 exit longs and reverse to short.

Shorts
If price action is below the EMA9 and the EMA9 is below the EMA19 = short.
Risk on short positions, if the EMA9 moves above the EMA18 exit shorts and reverse to long.

The EMA4.5 crossing the EMA9 and EMA18 is a wake up call warning you to get prepared to modify your position should the EMA9 cross the EMA18.

There are no other filters, no stops, no holy grail algorithms and you don’t require a direct line to Federal Reserve chair Powell to trade it.

Performance over the same 12 month period

Let’s see if this simple trading procedure outperforms the market’s +8.21% and 94.76% of the 22,310 programs I track.

In this example I’m trading the EMA4.5, EMA9 and EMA18 using daily price bars. To ease the qualification process I’ve divided the 12 months into 3 periods and circled every trade and provided supporting links for trade verification. The forth period & corresponding chart link enables you to track this procedure forward using daily data and monitor trades as they occur.

Performance is based on trading one E-Mini S&P (ES) never adding positions, each 1.00 change in price = $50.00. I’m assuming worst case order execution and deducting a ridiculously high $100.00 a trade to cover any bid/ask spreads, order execution issues and all clearing and regulatory costs.

Using no leverage this procedure generated a net return $27,743.50, +20.50% on the initial contact value of $135,316.50 outperforming 97.88% of the 22,310 programs I track . Using 5.5 to 1 leverage the net profit is +112.76% outperforming all. Using 5.5 to 1 leverage you’d be allocating  $24,603.00 per contract to cover the CME’s margin requirement linked here of $6,300.00, excess margin per contract $18,303.00, enough to cover a 366 point move against you without being on call, largest 1 day point move in history for the the S&P, 116.60 points on 26 December 2018)

Charts & links to verify performance

Chart 1,  June 2018 through October 2018

Chart 2,  October 2018 though February 2018

Chart 3, February 2019 through July 2018

This procedure can be traded using the S&P E-Mini S&P (ES) each 1.00 change in price = $50.00 or the S&P Micro (MES) each 1.00 change in price = $5.00. Educational videos and resources on Stock Index futures are linked here.

Current chart to track this procedure forward.

Let’s qualify this trading procedure over a longer period of time from June 1980 to June 2019 (39 years).

1983 through 2019 chart

In this example I’m using weekly data, circling every trade and providing supporting links for performance verification.

I’m trading the same EMA4.5, EMA9 and EMA18 using weekly data. I’m following the same objective trading rules we use earlier trading the daily data taking every objectively generated trade with no subjective interpretation.

I’m assuming worst case order execution, deducting a ridiculously high $100.00 a round-turn trade to cover any bid/ask spreads, order execution issues and all clearing and regulatory costs.

This Spreadsheet contains the trade-by-trade, with links to all supporting charts & data enabling 1980 -2019 performance verification.

To make performance verification easy I’ve divided the last 39 years into 13, 3 year periods, circled all trades and linked all charts.

3 Year chart July 1980 – July 1983

3 Year chart July 1983 – July 1986

Chart July 1986 – July 1989  &  Daily chart linked here for the October 1987 crash

Chart July 1989 -July 1992

Chart July 1992 -July 1995

July 1995 – July 1998  The EMA9 never crossed below the EMA18, maintained the long for this 3 year year period.

July 1998 – July 2000

July 2000 – July 2003

July 2003 – July 2006

June 2006 – July 2009

July 2009 – July 2012

July 2012 – July 2015  The EMA9 never crossed below the EMA18, maintained the long for this 3 year year period.

July 2015 – Current

With an Automated Trading Account  you can trade any combination of objective trading programs automatically with with overall account risk defined before the first trade goes on.

Trading multiple time periods simultaneously

In this example I’m trading the EMA4.5, EMA9 and EMA18 on 4 time periods, 120 minute, daily, weekly and monthly over an 18 month period.

I’ve deducted $38.90 per round-turn trade to cover all bid/ask spreads, clearing, and regulatory fees including automated order entry and 24 hour a day position monitoring. If I spent 23 1/2 hours a day 5 1/2 days a week glued to my quote screen I could enhance performance by $2,400.00 per unit during this 18 month period to $172,229.10, fortunately my time is worth more than 23 cents an hour so I opt to pay the brokerage team in Chicago to place and monitor all trades for me, guarantee order accuracy and maximum account risk (called a maintenance balance) imagine a maintenance balance on an account as nothing more than a stop loss based on the liquidation value of the account for example, $100,000 initial balance with a  maintenance balance of $70,000, if the ATA account’s liquidation value drops to $70,000 calculated on the settlement on any day it would be liquidated automatically on or before the next settlement or the ATA team is liable for the difference.

Performance

Linked Here is a spreadsheet containing the trade-by-trade performance, all supporting and chart links for verification, download, open it and enable editing (with some operating systems you may have to save it as a new file)

On the spreadsheet you can change the number of contracts traded for each time period in cells B5, B7, B9 & B11. To change the staring balance see cell D3, contract size cell B3, use $50.00 a point for trading the S&P E-Mini (ES) or $5.00 a point for S&P Micro (MES) , to modify the Bid/Ask spread and all fees deducted per trade change cell B13 to $39.80 for the S&P E-Mini (ES) or $12.95 for the S&P Micro (MES),  margin requirement, cell B15, use $6,300 for S&P E-Mini (ES) or $630 for S&P Micro (MES).

Performance below is based on trading one E-Mini S&P (ES)  contract for each time period 120, Daily, Weekly and Monthly.

Net profit = $169,829.10
Maximum drawdown =$23,158.90
Drawdown period 26 March 2018 – 6 July 2018
Total number of trades = 180
Average winning trade = $2,565.57
Average losing trade = $819.64
Percent winning trades = 41.67%
Percent losing trades = 58.33%
Maximum margin requirement = $25,200 (shows in cell D17)
Closed out trades = $138,430.50 (shows in cell D13)
Open trade equity (28 June) = $31,398.60 (cell D15)
Starting balance 2 January 2018 = $100,000.00 (cell D3)
Ending balance 28 June 2019 = $269,829.10 (cell D17)
Trade-by-trade performance = vertical column M

To track this procedure forward

120 minute price bars this chart
Daily price bars this chart
Weekly this chart
Monthly this chart

When all 4 periods generate a short you’ve just confirmed the beginning of the next bear market.

Obviously you can enhance performance using additional indicators for trend confirmation like the ones linked here, trading additional time periods simultaneously and/or implementing strategies like collars to define maximum risk on every trade and for the duration of every trading period. I did this spreadsheet a few years back and dropped in a instructional video on how to set up a collar, experiment with different collar strategies and time periods.

For the lineup of programs that use enhanced EMA strategy see this link

When I trade these programs I like to define the overall account risk before the first trade goes on, should the program fail I’m out, as it makes money I move the maintenance balance higher to lock in gains in the event the program fails in the future. I’ll stay with the program as long as it performs and my maintenance balance isn’t violated. I’ve come to the point where I look at these programs as if  they’re one trade with a stop loss based on account valuation to cauterize any potential financial hemorrhage enabling me to survive and trade another day, for more on initial and maintenance balances see this link.

If you’re going to trade this strategy on your own get organized.

Set up your platform by sector, in this example one glance at one profile page and I get the information I need for the 9 Stock Indexes ATA programs I’m trading using 5 time periods per Index.

List your markets by symbol alphabetically left to right, time periods traded vertically shortest duration to longest in descending order, this enables you to sort trades alphabetically, look at the charts and knock out ATA trade and position confirmations quickly.

You should be able to fit up to 9 markets across, 5 time periods deep, when your trading 5+ time periods in 45+ markets. Set up different profiles using the exact same format for each in this example FX majors, FX2, FX3, FX4, FX5.

Looking at the FX profiles, one glance tells me the direction for each market, each time period and which markets have the cleanest trends to trade allowing me to check my positions quickly and confirm the ATA team is doing their job correctly.

FX2

FX3

FX4

FX5

In  a few minutes you can review 45 different markets trading 5 time periods

When your trading, Indices, Currencies, Energies, Interest Rates, Individual Stocks, ETFs and CFD’s and multiple time periods its easy to have several hundred positions on in multiple accounts at once, it’s imperative to stay organized and always have a one click eject button in place enabling immediate liquidation of all positions and to cancel all open orders.  Have another for every sector, one for each program and one for all positions in a given market, you’ll probably never use them but it’s nice to know they’re there if things get nasty.

Be prepared for volatility

There is a very big difference in order execution capabilities in 2019 versus all other bear markets in history, internet speed and computer capability are literally 10 times faster in 2019 than 2007, order execution 100’s of times faster, we’ve gone from flip phones and open outcry on the floor of the exchange in 2007 to online order execution in nano seconds in 2019, be prepared for the type volatility on the chart below and appreciate the opportunities these types of moves presents.

5 February 2018 chart using 10 minute bars

 

Global GDP

Missing years

Fundamentals

Going into the next bear market and recession the U.S.’s recessionary war-chest is near empty, the only remaining tool left to cauterize the next hemorrhage is more “Quantitative Easing” (QE) or the Fed’s creation of trillions of dollars backed by nothing.

But “Quantitative Easing”  too is limited because the Federal Reserve has  already created over 4.639 trillion QE dollars to buy bad bank debt no one else would and Treasuries at non competitive rates to force rates to force and hold rates at historic lows, they still own 4.15 trillion of this debt. This creation of money backed by nothing caused a credit rating downgrade for US debt from AAA to AA+ on the 10th of June 2013. If the Fed fires up the QE printing press again during the next recession U.S. debt will be downgraded again making it even more difficult for the U.S. Treasury to sell record amounts of debt to satiate the Federal Government’s spending habits.

Sources

Lowering rates to “stimulate” the economy?

Lowering interest rates from record lows to 0.00% might work in the short-term but the U.S Treasury would be selling their new issues to the Federal Reserve  and not on the open market. U.S. Treasuries have their lowest yields in history, highest instrument and currency risk in history and they no longer have a real rate of return, who’s going to buy them, certainly not me.

From 1968 through 2007 the average Treasury yields was 8.29%, reported inflation 4.71%, from 1968 to 2007 Treasury investors enjoyed an average real rate of return of 3.58%.

In 2018 average reported inflation was 2.44%, average Treasury yields also 2.44% in 2018 U.S Treasuries had an average real rate of return of 0.00% and this is if you believe reported inflation numbers are accurate.

The decline in real rates of return from 2007 through 2019 has saved the U.S. Federal Government over 5 trillion in debt service cost at the expense of savers who would have spent this 5 trillion in the free market economy and created true economic stimulus. If rates remain were they are, or go lower trillions more will be removed from savers and the free market economy.  You have to ask yourself how stripping savers and the free market economy of 5+ trillion dollars stimulates it?

Sources Federal Reserve and Treasury Direct

Given the current return on risk for owning a U.S Treasury the only way the U.S. Treasury will attract buyers on the open market for the record amounts of new issues enabling them once again to borrow and spend their way out of a recession is by paying a more competitive unfortunately the U.S. can’t afford to.

If rates rose to the 40 year average (1968-2007) prior to the U.S.’s discovery of “Quantitative Easing” of 8.29% current annual Federal debt service cost would escalate from $480,755,520,000 (2018) to $1,779,224,670,000. I’d like to point out how Federal debt (red) escalates at an unconscionable level while debt service costs remain relatively constant, the US achieved this by lowering Treasury rates (black) which have stripped savers and the free market of trillions dollars, U.S. economic stimulus at it finest..

Source Federal Reserve & Treasury Direct

Federal Debt service cost as a percentage of total Federal Revenue would escalate from 15.71% in 2018 to 53.43% if rates went back to their 1968-2008 pre “Quantitative” Easing”, “Economic Stimulus” average of 8.29%.

sources

The impact on taxpayers from the U.S. borrowing and spending their way out of the 1987, 2000 and 2007 recessions.

Year Personal Income Federal Debt Per Taxpayer Federal Debt as a Percentage of Income
1970 $4,218 $5,365 127.18%
1987 $16,313 $22,974 140.83%
2000 $30,640 $42,632 139.14%
2018 $53,658 $143,980 268.33%

Source Federal Reserve

Start here 20190804

 

If the U.S. Treasury can’t sell record amounts of new issues that have the worst credit rating in history, offering the lowest yields in history, with the highest currency and instrument in history on the open market they’ll need to the Fed to fire up the QE printing press and create more money to buy all the Treasuries the open market won’t.

 

Sources Federal Reserve and Treasury Direct

Each taxpayers portion of the national debt before the 1987 crash was $22,974 an amount equivalent to 140.83% of reported annual personal income of  $16,313. In 2000

 

income has not kept pace with the the growth in Federal Debt. In 1987 Federal Debt per Taxpayer was $22,974, Personal Income $16,313 or Federal debt per taxpayer was 140.83% of Personal Income. At the end of 2018 Per Taxpayer Federal Debt was $143,980, Personal Income $53,650 or Federal Debt was 268.33% of Personal Income.

By any definition the Federal Debt to income growth ratio is  unsustainable if the U.S. does not want it’s credit rating downgraded again (last downgrade was 10 June 2013) another credit downgrade would escalate the already difficult time they face selling near record amounts of debt on the open market to satiate their spending habits.

 

equivalent to the 2.44% the U.S. paid out in debt service cost  telling us the average rate paid was 2.44%.

During this period inflation was reported far more accuratley than

the 2018 average yield was 2.44%

If rates rose to realistic levels prior to the U.S. ‘s discovery of

 

to buy the Trillions of dollars of their debt at non competitive yields it would

 

 

 

s, Corporations and Consumers to borrow more and spend money they ultimately  can’t pay back if rates rose to realistic levels exasperating the existing long-term debt crisis.

 

 

this inability to pay would create a fester of financial crisis from municipal to corporate to consumer that could dwarf the ramifications seen during the subprime mortgage collapse. Lowering saving rates would remove income and money from the  from the free market economy forcing those dependent interest income to borrow more to survive, should rates rise from economic recovery and or the deteriorating credibility of the borrower  it would create yet another crisis.

All Major Debt

 

 

0.00% and saving rates to -1.00% would encourage Federal, State

subprime mortgage crisis

private companies with unlimited access a near interest-free debt rate, and are actually being encouraged to buy all sorts of securities and make transactions they otherwise wouldn’t be (buying),

 

 

 

 

 

Chart

The Federal Reserve also used  “Quantitative Easing”  get out of jail free card to create another 2.88 trillion to buy US Treasuries with objective of forcing and holding US Treasury yields at historic lows. The Fed told debt all debt holders by stripping them of trillions of dollars in interest income and removing these trillions from the free economy it would stimulate it and called this procedure “Economic Stimulus”.

“Quantitative Easing” and “Economic Stimulus” did provide stimulus to the Fed in light of the fact they now owned 2.88 trillion in US Treasuries. The Fed bought these Treasuries with yields of  3.00% to over 5.00% with money they created from nothing,  backed by nothing in a market they control interest rates.

Fed’s unparalleled Opportunity

As rates decline the liquidation value of a US Treasury increases as it prices in the change in rate for Treasury’s duration, let’s do the math using the Treasury calculator linked here

I’ve entered

1)_A Coupon (yield) for a 10 year Treasury note at 5.10% the June 2007 rate.
2) A 10 year settlement
3) A price of 100
4) Generating a yield of 5.10%
5) A price of 100 with no change in yield = a liquidation value of $100,000

If 10 Treasury rates fell to 1.88%  levels we saw in August 2019 the liquidation value of this 10 year Treasury note would increase in price to reflect the change in  rate from 5.10% to 1.88% over it’s 10 year duration.

Using the Treasury calculator linked here 

1)_Ive deleted the price
2) Entered a yield of 1.88% and clicked on “calculate price”
3) The price moves from 100.00 to 129.11 to price in the decrease in 10 year rates from 5.10% to 1.88% for the 10 year duration increasing the price from $100,000 to $129,110 or +29.11%.

Impact on the Fed’s income

Prior to the start of  “Quantitative Easing” in November 2008 the Fed’s average net annual income was 29.22 billion. Since the beginning of  “Quantitative Easing”  in November 2008 through December 2018 the Fed’s average annual income during this 10 year period has been 80.2 billion. In short the Fed is making an average of 175% more a year since they discovered  “Quantitative Easing”

Unfortunately for the Federal Reserve they have to forfeit all net profits after they pay their expenses and bonuses to the US Treasury, since 2015 the Fed has remitted 922.10 billion to the US Treasury.

The Fed’s justification for forcing yields to and holding them at historic lows was to “stimulate the economy”.

Well we know it “stimulated” the Fed’s economy to the tune of a 175% average annual increase in their net income, let’s see how it did for other everyone else.

Start here Friday Morning

Investors  who depend on interest income  & Safety

Currently there 58.64 trillion it US debt that generates income  

 The 2008 through 2108 average is 18.61 trillion, up until the Fed discovered “Quantitative Easing”  investors who placed money in these debt instruments had a 40 year average rate of return above reported inflation of 3.58%, individual investors pension funds, family offices and even foreign counties could justify buying U.S. debt. Additional money rolled into the US debt market when stocks markets started collapsing (as they’ve done 3 times since 1980) offering stock traders a safe haven where they would at least break even (after taxes) and potentially pick up a few bucks on instrument appreciation if the Fed lowered rates. 

 

 

 

For the 40 years prior to “Economic Stimulus”  Treasury yields averaged 3.58% more than reported inflation rate.

2,5,10, 30 Year Treasury & 3 Month Rates Versus the CPI (the red line)

Total Federal Debt

Debt service cost

 

 

 

All Major Interest Rates

 

The harsh reality is since the Fed forced rates to and has held them at historic lows it’s stripped Treasury investors of more than 6 trillion dollars in interest income

savers in very kind of deposit

The harsh reality is deposit rates went to near zero literally stripping savers of trillions in interest income, true consumer credit on the other hand had only a moderate decline while at the same time  bank borrowing cost (Fed Funds bank borrowing rate) dropped from 5.25% to 0.05% increasing the profit margins for banks on their consumer loans exponentially, note the spread between consumer credit (dotted lines) and the Fed Funds bank borrowing rate (red line) on the chart below.

Chart

The other beneficiary of  the Fed’s “emergency and temporary rate cuts” that are now in their 11 year was the US Federal Government. Historically low rates enabled the US Government to save literally trillions of dollars in Federal debt service cost. These trillions were stripped from savers who wold have spent this interest income in the free market economy stimulating the free market economy.

 

 

it debt service cost at the containexpense of savers.

 

 

US and the Fed chose the path of least resistance with reckless disregard  for the long term implications

The failure of the Bank of Japan to make any significant dent in its economic situation was widely cited by many critics to deter the Fed from pursuing this policy.

However, the Fed remained undeterred. This is to say that it did implement Quantitative Easing (QE) and did so on a large scale. In the first round of Quantitative Easing (QE), the Fed purchased the troubled assets i.e. bonds of government agencies like Freddie Mac, Ginnie Mae and Sallie Mae as well as private mortgage backed securities that were available in the market.

The logic behind the bailout was simple. All types of mortgage backed securities simply had no market! Once the high risk associated with these securities came to light, no one was willing to invest in these securities. Hence, the Fed took the entire market on its own balance sheet! The financial implications of this action are yet to be known. However, one thing is for sure. The Quantitative Easing (QE) policy round one used by United States central bank allowed it to avoid a catastrophe of historical proportions as well as the economic and geopolitical implications that it would have resulted in.

Quantitative Easing (QE) 2 and Quantitative Easing (QE) 3

The United States central bank i.e. the Federal Reserve continued to use the Quantitative Easing (QE) policy unabated in the years following the crisis. In 2010, the Fed launched Quantitative Easing (QE) 2. This time the Fed was using the money plowed back from investments in 2008 as well as some more of its own money. The target was to buy as many Treasury securities as the Fed could lay its hands on. This was being done with a view to stabilize the government’s finances which had been stretched given the recent crisis. A similar program was undertaken in 2012 and was expected to continue till the end of 2015. This is known as Quantitative Easing (QE) 3 and it has been nicknamed as Quantitative Easing (QE) infinity because of the long lasting nature of this program.

The Federal Reserve continued to use the Quantitative Easing (QE) policy unabated in the years following the crisis. In 2010, the Fed launched Quantitative Easing (QE) 2. This time the Fed was using the money plowed back from investments in 2008 as well as some more of its own money. The target was to buy as many Treasury securities as the Fed could lay its hands on. This was being done with a view to stabilize the government’s finances which had been stretched given the recent crisis. A similar program was undertaken in 2012 and was expected to continue till the end of 2015. This is known as Quantitative Easing (QE) 3 and it has been nicknamed as Quantitative Easing (QE) infinity because of the long lasting nature of this program.

since the birth of “Quantitative Easing” (QE) in 2008 the Federal Reserve created over 1.77 trillion to buy bad bank debt the free market would touch at any price.

 

 

In total the Fed created over 4.65 trillion USD, as of July 2019 theystill has over 4.07 trillion of this putrid paper on their books.

History has shown us without exception the creation of money backed by nothing is a last resort of a terminal economy, any country that has gone down the path the US and Fed are currently on has experienced hyper-inflation, the eventual collapse of their currency and their economy.

On the 10th of June 2013 the US’s credit dropped to the lowest level in history.

As of  2019 the US is no longer in the too big to fail club, it no longer represents 39.07% of Global GDP, it’s now 24.18% at best with other sources putting it as low as 16.94%.

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Start here

 

 

 

In 2019 US Treasuries no long qualify as a “flight to quality” alternative to stocks.

1980 to 2019 chart

Comparing Treasury risk 1987, 2000, 2007 to 2019

1987 The risk reward of owning US Treasuries pre bear market 1987.

Using the highs and lows from the last 30 years for every +$1.00 in maximum potential instrument and currency gain you were risking between -$0.18 to -$0.79, maximum historical risk was 7.52 to 8.03 times greater than your real rate of return. (Real rate of return = Yield – reported inflation)

2000 The risk reward of owning US Treasuries pre bear market 2000.

Using the highs and lows from the last 30 years for every +$1.00 in maximum potential instrument and currency gain you were risking between -$0.68 to -$1.58, maximum historical risk was 14.56 to 33.89 times greater than your real rate of return.

2007 The risk reward of owning US Treasuries pre bear market 2007.

For every +$1.00 in maximum potential instrument and currency gain you were risking between -$0.77 to -$1.13, maximum historical risk was 22.61 to 48.67 times greater than your real rate of return.

 

US fundamentals and Fiscal credibility are crap in 2019, let’s do the math

Let’s start with the US Federal Deficit and the way it is reported.

The reported budget deficit in 2018 was $779,140,000,000 yet the national debt increased by $1,256,620,000,000, the difference of $477,480,000,000 is what the US Government calls “Off budget expenditures” in short these are “must pay expenses that politicians don’t get to a chance to vote the majority of the expenses are represented to be Social Security payments and to cover operating losses of the US postal Service, so they don’t count and haven’t for 50 years,

Total of “off budget expenditures” from 1968 through 2018 have been $7,365,328,000,000 representing 34.85% of the U.S. Federal debt.

Try to obtain an accounting of these “off budget expenditures”, the ones provided don’t remotely reconcile with the 7.35 trillion discrepancy between the reported budget budget deficits and the increase in the national debt.  The standard answer is Social Social Security payments and the US postal Service.

Over the last 50 years Social Security has collected $2,86 trillion USD more than they paid out, over the last 10 years $656 billion more then they paid out, Social Security has not had a deficit in any year since 1982, see their site liked here for verification.

Must be one expensive postal service, to generate a loss in excess of 7.35 trillion, to put this into perspective total defense spending from 1968 through 2018 was 20.365 trillion let’ check this out. According the the Government Accountability Office  the United States Postal Service is in the red a total of 121 billion, annual loses are running at 3.9 billion per year. That’s a relief there’s only 7.244 trillion dollars that can’t be accounted for in “Off Budget Expenditures”.

Year Total Reported Revenue (Millions USD) Total Reported Spending (Millions USD) Reported deficit (Millions USD) Actual Deficit (Millions USD) “Off Budget”  Spending (Millions USD)
1968 $152,973 $178,134 $25,161 $35,085 $9,924
1969 $186,882 $183,640 -$3,242 -$2,916 $326
1970 $192,807 $195,649 $2,842 $15,152 $12,310
1971 $187,139 $210,172 $23,033 $27,256 $4,223
1972 $207,309 $230,681 $23,372 $27,759 $4,387
1973 $230,799 $245,707 $14,908 $30,355 $15,447
1974 $263,224 $269,359 $6,135 $17,602 $11,467
1975 $279,090 $332,332 $53,242 $58,032 $4,790
1976 $298,060 $371,792 $73,732 $87,045 $13,313
1977 $355,559 $409,218 $53,659 $77,428 $23,769
1978 $399,561 $458,746 $59,185 $70,204 $11,019
1979 $463,302 $504,028 $40,726 $52,865 $12,139
1980 $517,112 $590,941 $73,829 $79,574 $5,745
1981 $599,272 $678,241 $78,969 $85,787 $6,818
1982 $617,766 $745,743 $127,977 $142,487 $14,510
1983 $600,562 $808,364 $207,802 $234,345 $26,543
1984 $666,438 $851,805 $185,367 $192,923 $7,556
1985 $734,037 $946,344 $212,307 $252,836 $40,529
1986 $769,155 $990,382 $221,227 $303,084 $81,857
1987 $854,287 $1,004,020 $149,733 $225,450 $75,717
1988 $909,238 $1,064,420 $155,182 $255,152 $99,970
1989 $991,104 $1,143,740 $152,636 $266,697 $114,061
1990 $1,031,960 $1,252,990 $221,030 $338,491 $117,461
1991 $1,054,990 $1,324,230 $269,240 $391,887 $122,647
1992 $1,091,210 $1,381,530 $290,320 $403,607 $113,287
1993 $1,154,330 $1,409,390 $255,060 $349,256 $94,196
1994 $1,258,570 $1,461,750 $203,180 $292,267 $89,087
1995 $1,351,790 $1,515,740 $163,950 $277,274 $113,324
1996 $1,453,050 $1,560,480 $107,430 $260,880 $153,450
1997 $1,579,230 $1,601,120 $21,890 $187,744 $165,854
1998 $1,721,730 $1,652,460 -$69,270 $108,984 $178,254
1999 $1,827,450 $1,701,840 -$125,610 $127,332 $252,942
2000 $2,025,190 $1,788,950 -$236,240 $23,179 $259,419
2001 $1,991,080 $1,862,850 -$128,230 $141,182 $269,412
2002 $1,853,140 $2,010,890 $157,750 $428,516 $270,766
2003 $1,782,310 $2,159,900 $377,590 $561,615 $184,025
2004 $1,880,110 $2,292,840 $412,730 $594,635 $181,905
2005 $2,153,610 $2,471,960 $318,350 $550,649 $232,299
2006 $2,406,870 $2,655,050 $248,180 $546,054 $297,874
2007 $2,567,980 $2,728,690 $160,710 $499,398 $338,688
2008 $2,523,990 $2,982,540 $458,550 $1,035,325 $576,775
2009 $2,104,990 $3,517,680 $1,412,690 $1,889,773 $477,083
2010 $2,162,710 $3,457,080 $1,294,370 $1,652,959 $358,589
2011 $2,303,470 $3,603,060 $1,299,590 $1,235,421 -$64,169
2012 $2,449,990 $3,526,560 $1,076,570 $1,286,690 $210,120
2013 $2,775,110 $3,454,880 $679,770 $668,510 -$11,260
2014 $3,021,490 $3,506,280 $484,790 $1,075,090 $590,300
2015 $3,249,890 $3,691,850 $441,960 $325,540 -$116,420
2016 $3,267,960 $3,852,610 $584,650 $1,419,430 $834,780
2017 $3,316,180 $3,981,630 $665,450 $666,190 $740
2018 $3,329,900 $4,109,040 $779,140 $1,256,620 $477,480
Totals $71,165,956 $84,929,328 $13,763,372 $21,128,700 $7,365,328

Conclusion the reported deficits  figures are absolutely useless and misleading.

US reported Budget surplus or deficit

To even get even a remote idea of what true US budget deficits are you need to monitor the annual increase in total Federal debt

US Federal debt

Unemployment and income (versus Gold)

Inflation

Trade deficits

Whats going to happen during the next bear market and recession

 

 

 

 

 

Potentially push the U.S.’s credit rating from it’s current historic low since June 2013 of AA+, stable to potentially as low as AA negative making it even more difficult for the US to sell near record amounts of new Treasuries on the open market (not to the Fed) that offer Treasury investors nearly lowest yields in history, with nearly the highest instrument and currency risk in histor

 

 

Another scenario would be the Bureau of Labor and statistics BLS.GOV telling the world that US unemployment was at a new historic low when 0.78% fewer Americans have had jobs than in 2018 than in 2001 when reported unemployment rate was 4.74%, with stocks selling off and the bear market that began in 2000 was fully engaging. This this kind of statistical subjective interpretation of a leading US economic release could also have a negative impact on the U.S.s credit rating and their ability to sell near record amounts of new Treasury issues on the open market and not to the Fed.

Chart   

Or it could even be as drastic as the BLS.GOV under reporting inflation to control Federal debt service cost and contain nearly every US government expense that’s increase is tied to the “official BLS.GOV inflation rate like Social Security benefits, military and civilian employee pay, nearly all long-term US government contracts. This blantent misrepresentation

 

In 2019 we’re having high magnitude price moves without putting in a  significant new high in over a year, we have an inverted Yield Curve and the market’s priced in rate expectations have gone from a 0.45% hike to a 0.77% cut.

T

Ranking Country GDP
(millions USD)
% of Global GDP
1 United States $20,494,050 24.18%
2 European Union $18,750,052 22.13%
3 China $13,407,398 15.82%
4 Japan $4,971,929 5.87%
5 Germany $4,000,386 4.72%
6 United Kingdom $2,828,644 3.34%
7 France $2,775,252 3.28%
8 India $2,716,746 3.21%
9 Italy $2,072,201 2.45%
10 Brazil $1,868,184 2.20%
11 Canada $1,711,387 2.02%
12 Russia[ $1,630,659 1.92%
13 Korea, South $1,619,424 1.91%
14 Spain $1,425,865 1.68%
15 Australia $1,418,275 1.67%
16 Mexico $1,223,359 1.44%
17 Indonesia $1,022,454 1.21%
18 Netherlands $912,899 1.08%
19 Saudi Arabia $782,483 0.92%
20 Turkey $766,428 0.90%

Adding fuel to the fire is the deteriorating fiscal credibility of the US as a borrower as they try and sell near record amounts of their debt offering the worst yields in history. Their desperate attempts to massage their economic releases such as budget deficits, unemployment, inflation and trade deficits in attempt to make their economy look healthier and more solvent are far  pathetic.

Purpose of reporting misleading de

Lets do the math 

to buyers of  s debt justify low rates has gotten out of control.

to control rates thus controlling their debt service cost on their horrific debt load and to contain all other Governmental expenditures that are tied to the official inflation rate like Social Security.

While the masses are being divided and distracted by the latest pissing match between Republicans and Democrats they are overlooking the greatest threats to their country and their way of life, US debt, The US’s credibility as a borrower on the free market.

Example, in 2018 the reported US budget deficit was 779.14 billion yet the US Federal debt increased by 1.256 trillion making the actual budget deficit in 2018  447.48 billion (61.28%) higher than reported. Over the last 10 years US Federal debt has increased by 12.51 trillion USD while reported budget deficits totaled  9.17 trillion. In short if politicians don’t get to vote on it (like Social Security payments) it doesn’t count and labeled an “off budget expenditure”.  The US has done this for more than 50 years, reported deficits over this 50 year period totaled 13.76 trillion yet Federal debt increased by 21.12 trillion.

In 2019 the official unemployment rate was reported as an historic low at 3.60% with 45.56% of the US population working. In 2001 the reported unemployment rate was 4.74% or 1.23% higher than 2019 yet 46.79% of the US population had full time jobs or 1.14% more of the US population had jobs in 2001 with an unemployment rate of 4.74% than in 2019 with an unemployment rate of 3.60%.

Per Capita 1968 2007 Annual
Personal Income $3,641.00 $39,801.00 6.68%
Total US Federal Revenue $771.57 $8,515.09 6.70%
Total US Federal Spending $898.00 $9,047.98 6.44%
Total US Federal Debt (FD) $1,859.58 $29,679.53 7.77%
FD Using Reported Deficits  $1,859.58 $16,345.14 6.05%
BLS.GOV Inflation Index $100.00 $615.94 5.04%
Average Treasury Yield 6.66% 4.80% -0.0465%
Real Rate of Return 2.42% 1.93% -0.0123%
US Federal Debt Service Cost $123.84 $1,425.75 6.83%
Debt Service cost at inflation $123.84 $763.81 5.04%
Social Security $120.35 $1,943.56 7.81%
Defense $475.43 $2,167.22 4.18%
Outright 1968 2007 Annual
Median Home $24,800 $244,950 6.38%
HomePrice/Years of Income 6.81 6.15 -0.24%
S&P 500 103.56 1,477.25 7.45%
Income/S&P 35.06 27.11 0.57%
Gold $35.16 $836.50 8.94%
Income in Ounces of Gold 103.56 47.58 -1.18%

This continued misrepresentation of actual budget deficits (and other economic releases) coupled with their hyper-escalating debt will eventually impede their ability to sell near record amounts of their debt that have nearly the lowest yields in history with annual instrument and currency risk 5 to 20 greater than current yields.

The ability of the US to to balance the Federal budget,

When the open market fails to buy this debt the Federal Reserve with fire up the “Quantitative Easing” printing press creating trillion more US dollars backed by nothing to buy this debt at non competitive rates, in 2019 the US an’t service it’s existing debt at competitive rates. If you do the math US debt service cost if rates  returned to their pre “Quantitative Easing” 1968-2007 average of 8.29% annual debt service cost would consume 1.87 trillion of the US’s total annual revenue of  3.30 trillion leaving just 1.43 trillion annually to pay all public obligations like Social Security, defend and run the country.

The US’s ability to manufacture and sell goods and services on the Global market to cauterize the their trade 50 year deficit hemorrhage. Over the last 50 years the US has had a trade surplus in only 5 with the last trade surplus generated in 1975. Over the last 50 years 12.21 trillion in US wealth has left for foreign shores, with 5.79 trillion of the 12.21 trillion occurring since 2008. In 2018 the US trade deficit was 627.68 billion 291.09% higher than the 1968-2007 pre- “Quantitative Average” of 160.49 billion. Social issues aside what better judge of a countries global competitiveness than it’s balance of trade?

 

 

If you have questions send a message or contact me

Regards,
Peter Knight Advisor

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