This Bear Market Is Just Getting Started
This Bear Market Is Just Getting Started
The Ivory Hill RiskSIGNAL is still red (since January). The S&P 500 just finished its 3rd consecutive quarter of losses, something we haven't seen since the 2008-2009 Great Financial Crisis. The UK is showing early signs of a possible global credit and currency crisis.
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This Bear Market is Just Getting Started
The Ivory Hill RiskSIGNAL is still red (since January) and we are still sitting on roughly 85% cash. Since we moved to 60%-70% cash in January, roughly $12 TRILLION in U.S. stock market value has evaporated.
The S&P 500 just finished its third consecutive quarter of losses, a worrisome streak last witnessed during the 2008–2009 Great Financial Crisis. The S&P 500 ended its worst month since March 2020 with a loss of 1.51% on Friday. For the month, it dropped 9.3%, while the Nasdaq fell 10.5%.
I think this bear market is just getting started and yet the Fed and policymakers still don't comprehend the new threats that are hurtling toward us right now. Think about what current Treasury Secretary and former Fed Chair Janet Yellen said last week, “I don’t see any erratic financial market conditions.”
I don’t see any erratic financial market conditions.
That statement is just as scary as it is sad. When I look at markets today and what is embedded in the underlying market conditions, I see something completely different than what Janet Yellen is seeing. These market conditions are worse than in 2000 and 2008.
The Fed has gone too far, way too fast on rate hikes because they are almost two years behind the eight ball on raising rates. This aggressive Fed behavior is driving volatility clustering. Volatility clustering refers to the tendency of large changes in asset prices to follow large changes and small changes in asset prices to follow small changes. This is important to know because it supplements our investment strategy that is focused on identifying early indicators of volatility. An example of this is, low-volatility months in the S&P 500 are usually months with higher performance. As volatility tends to cluster, a low volatility month in the present can signal a low volatility month with better performance in the future.
To simplify this
If you have trending volatility to the downside, you have something you can invest in.
If you have clusters of volatility that explode significantly to the upside on a scale the world has never seen, you are going to have crashes.
The Fed has moved from being in control of volatility to creating volatility, and now we have cross-asset class volatility that is rising.
The MOVE index, which measures Treasury rate volatility, was over 160 last week. That is very close to competing with the pandemic high of 163. Today, the MOVE has moved back down to 141.
Whatever the Fed says now is irrelevant to the investment process. What matters is your account. What matters is protecting your hard-earned money. At this point in the cycle, no one should believe the Fed models.
The bond market has dropped significantly and still has more room to go, but bonds are beginning to look like they might be a good investment in the not-too-distant future. I realize that I have made this claim before, but the entire global financial system depends on US treasuries, so at some point they will bottom and stabilize. Keep calm; the bond market will return eventually, just not today.
I've been arguing for a long time that inflation isn't the true enemy of the economy right now. Credit and currency risk are. The $360 trillion in total global debt and the $31 trillion in U.S. federal debt are the root causes of the issue. When central banks lowered their benchmark rates to zero and even the longest-term debt only offered a yield of about 2%, no one had difficulty piling up debt when money was cheap.
That avalanche of debt is now proving difficult to service since inflation has predictably turned into a problem and central banks are aggressively hiking interest rates to confront it.
The majority of investors are ready to downplay the likelihood that something extremely catastrophic could occur since they feel comfortable believing that things aren't that bad. If you didn't think that the situation was not only growing worse but also dangerous, or if you thought that a true black swan event wouldn't occur, you need to be aware of what happened in the United Kingdom this past week.
All of it started with the ambitious new tax cuts proposed by the U.K.'s new prime minister, Liz Truss. This was a... Click HERE for the full analysis.
Click HERE for the full analysis.
Outperformance is achieved through the avoidance of major market crashes.
Best regards,
-Kurt
Schedule a call with me by clicking HERE
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Email: kurt@ivoryhill.com | ivoryhill.com
8400 Normandale Lake Blvd, Suite 920, Bloomington, MN 55437