Blog | CB Investment Management

2 Timing Signals In The Anatomy Of A Pre-Crash Bubble

Status quo habits and inertia are formidable forces. So it can be remarkably hard to estimate when a change in direction is likely to happen. Charles Hugh Smith does a great job of describing this process:

Nevertheless, there is a point at which there is a growing realization that the current path can not be sustained for much longer. Denial works for a time, but after a while, dysfunction becomes unavoidably obvious and change becomes a necessity. This is where the trends in consumer confidence can be a key timing indicator as they have been before. There is also some remarkable geometry to the pattern of the US equity bull market which suggests that a peak in the 4 year rally may not be far away.

Confidence may well already have seen its highs on many measures as shown below, and many economic indicators are also diverging from the upward direction of US equity markets. Here are some examples:

1. John Williams of Shadowstats, a 40 year veteran of analyzing government data, on the recent employment data, which contributed to Friday’s market rally:

“The general economic outlook here has not changed a bit. The current labor reporting is just not to be believed.”

“There has been no improvement in the liquidity issues constraining consumer spending, while consumer sentiment still is in deterioration and at a level that historically only has been seen during recessions.”

“While BLS (Bureau of Labour Statistics) recognizes the error, it will not correct it.”

2. Lakshman Achuhan of Economic Cycle Research Institute has recently pointed out that one of the key monthly economic data points, the ISM which also was received positively last week, no longer correlates with its target which is production. He recently tweeted “12 mo correlation of U.S. ISM Mfg w/ yoy IP growth has collapsed to negative 0.43.”

3. Lance Roberts titles a recent article “The Fed may be skewing the data”. He shows how difficult it is to match leading indicators with other data:

4. There has clearly been a breakdown between credible economic data and market behavior which is simple to demonstrate from the following chart comparing the rolling 12 month correlation coefficient between the economic surprise index and returns on the S&P 500:

5. Then there is the growing evidence that we are already in a financial bubble of significant proportions as discussed last week:

While the hardest part of this is the timing for a peak in US equities, there are some key timing indicators that suggest we are close. This article shows a remarkable geometric fit which would indicate that the peak is close, as there is a point at which rallies can no longer match a near vertical pattern.

Then there is strong evidence based on analysis of consumer confidence that suggests that we could already be at the timing point for an equity market high . This compares the cycle of consumer confidence in the current cycle compared with the 2007 high and the 2000 high and reveals a very clear pattern. It also strongly suggests that now is a good time to favor bonds over equities and last week’s price behavior provides a good entry point for this switch.

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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