Bear Market Signal #10

Bear Market Signal #10:

Ten Reasons Why the Government Will Not Save You

Click Here to Watch the Event

We hope you've been following our Bear Market Signals over the past several days. We've touched on nine indicators to watch closely ahead of the next big downturn in the market.

And tonight at the Bear Market Survival Event at 8 p.m. Eastern time, you'll hear about the critical steps you can take right now to ensure you're ready for the coming crisis.

You'll hear from...

Porter Stansberry, founder of Stansberry Research. His firm not only predicted the mortgage meltdown of 2008 and helped thousands of Americans avert catastrophe... it also predicted the stock market Melt Up that followed — which sent stocks soaring to new, dizzying heights.

You'll also hear from multimillionaire former hedge-fund manager Jim Rogers, who delivered 4,200% returns through one of the most volatile 10-year periods in recent history...

These two investors will show you exactly how to safely profit from the final phase of this epic bull market and protect yourself from its inevitable collapse... along with six powerful strategies that can help you grow your retirement war chest before, during, and after the crash.

So to get you ready for tonight's Bear Market Survival Event, we bring you one additional article from famed economist Nouriel Roubini. He has worked at the International Monetary Fund, the U.S. Federal Reserve and the World Bank, and was a senior economist for the White House.

It's one of the best reports we've read recently... detailing step-by-step why the impending recession and financial crisis are likely coming sooner rather than later...

The Makings of a 2020 Recession and Financial Crisis By Nouriel Roubini and Brunello Rosa

Today, there are still ongoing debates about the causes and consequences of the financial crisis, and whether the lessons needed to prepare for the next one have been absorbed. But looking ahead, the more relevant question is...

What actually will trigger the next global recession and crisis, and when?

The current global expansion will likely continue into 2019, given that the U.S. is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession. There are 10 reasons for this:

The fiscal-stimulus policies that are currently pushing the annual U.S. growth rate above its 2% potential are unsustainable. By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%.

Because the stimulus was poorly timed, the U.S. economy is now overheating, and inflation is rising above target. The U.S. Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates, as well as the U.S. dollar.

Meanwhile, inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.

The Trump administration's trade disputes with China, Europe, Mexico, Canada, and others will almost certainly escalate, leading to slower growth and higher inflation.

Other U.S. policies will continue to add stagflationary pressure, prompting the Fed to raise interest rates higher still. The administration is restricting inward/outward investment and technology transfers, which will disrupt supply chains. It is restricting the immigrants who are needed to maintain growth as the U.S. population ages. It is discouraging investments in the green economy. And it has no infrastructure policy to address supply-side bottlenecks.

The policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis.

Growth in the rest of the world will likely slow down — more so as other countries will see fit to retaliate against U.S. protectionism. China must slow its growth to deal with overcapacity and excessive leverage. Otherwise, a hard landing will be triggered. And already fragile emerging markets will continue to feel the pinch from protectionism and tightening monetary conditions in the U.S.

Europe, too, will experience slower growth, owing to monetary-policy tightening and trade frictions. Moreover, populist policies in countries such as Italy may lead to an unsustainable debt dynamic within the eurozone. The still-unresolved "doom loop" between governments and banks holding public debt will amplify the existential problems of an incomplete monetary union with inadequate risk-sharing. Under these conditions, another global downturn could prompt Italy and other countries to exit the eurozone altogether.

U.S. and global equity markets are frothy. Price-to-earnings ratios in the U.S. are 50% above the historic average, private-equity valuations have become excessive, and government bonds are too expensive, given their low yields and negative term premia. And high-yield credit is also becoming increasingly expensive now that the U.S. corporate-leverage rate has reached historic highs.

Moreover, the leverage in many emerging markets and some advanced economies is clearly excessive. Commercial and residential real estate is far too expensive in many parts of the world. The emerging-market correction in equities, commodities, and fixed-income holdings will continue as global storm clouds gather. And as forward-looking investors start anticipating a growth slowdown in 2020, markets will reprice risky assets by 2019.

Once a correction occurs, the risk of illiquidity and fire sales/undershooting will become more severe. There are reduced market-making and warehousing activities by broker-dealers. Excessive high-frequency/algorithmic trading will raise the likelihood of "flash crashes." And fixed-income instruments have become more concentrated in open-ended exchange-traded and dedicated credit funds.

In the case of a risk-off, emerging markets and advanced-economy financial sectors with massive dollar-denominated liabilities will no longer have access to the Fed as a lender of last resort. With inflation rising and policy normalization underway, the backstop that central banks provided during the post-crisis years can no longer be counted on.

Trump was already attacking the Fed when the growth rate was recently at 4%. Just think about how he will behave in the 2020 election year, when growth likely will have fallen below 1% and job losses will have emerged. The temptation for Trump to "wag the dog" by manufacturing a foreign-policy crisis will be high.

Once the perfect storm outlined above occurs, the policy tools for addressing it will be sorely lacking. The space for fiscal stimulus is already limited by massive public debt. The possibility for more unconventional monetary policies will be limited by bloated balance sheets and the lack of headroom to cut policy rates. And financial-sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments.

In the U.S. specifically, lawmakers have constrained the ability of the Fed to provide liquidity to non-bank and foreign financial institutions with dollar-denominated liabilities. And in Europe, the rise of populist parties is making it harder to pursue EU-level reforms and create the institutions necessary to combat the next financial crisis and downturn.

Unlike in 2008, when governments had the policy tools needed to prevent a free fall, the policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis. When it comes, the next crisis and recession could be even more severe and prolonged than the last.

About the Authors

Nouriel Roubini, a professor at NYU's Stern School of Business and CEO of Roubini Macro Associates, was senior economist for international affairs in the White House's Council of Economic Advisers during the Clinton administration. He has worked for the International Monetary Fund, the U.S. Federal Reserve, and the World Bank.

Brunello Rosa is co-founder and CEO at Rosa & Roubini Associates and is a research associate at the Systemic Risk Centre at the London School of Economics.

 
 
 

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Special Guests

Jim Rogers

Jim Rogers

Jim Rogers is an American businessman, investor, traveler, financial commentator and author based in Singapore. Rogers is the Chairman of Rogers Holdings and Beeland Interests, Inc. He was the co-founder of the Quantum Fund and creator of the Rogers International Commodities Index.

Porter Stansberry

Porter Stansberry

Porter Stansberry founded Stansberry Research in 1999 with the firm's flagship publication, Stansberry's Investment Advisory. He is also the host of Stansberry Investor Hour, a weekly broadcast that has quickly become one of the most popular online financial radio shows. At Stansberry Research, Porter oversees more than twenty of the best editors and analysts in the business, who do an exhaustive amount of real-world, independent research.

Austin Root

Austin Root

Austin Root is editor and portfolio manager for the Stansberry Portfolio Solutions products and American Moonshots. He is also director of corporate development at Stansberry Research and a senior analyst for Stansberry's Investment Advisory.