Central Banks Are Not Equipped For Today’s Crisis

Summary

The drop in global trade, stemming from the Covid-19 virus is a tinderbox that will likely cripple the liquidity of the small, medium and large business globally – ultimately testing their solvency. TRI believes this risk is being majorly underestimated – including the risk that the market decline hasn’t completed, but rather is just starting. A major credit crisis has likely begun. TRI is not all doom and gloom, as a great buying opportunity will likely emerge later in 2020.
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Rabbie Gill

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Main Article

The drop in global trade, stemming from the Covid-19 virus is a tinderbox that will likely cripple the liquidity of the small, medium and large business globally – ultimately testing their solvency.  TRI believes this risk is being majorly underestimated – including the risk that the market decline hasn’t completed, but rather is just starting. A major credit crisis has likely begun.  TRI is not all doom and gloom, as a great buying opportunity will likely emerge later in 2020.

This weekend I heard from countless retail investors that its time to buy! Great opportunity to buy cheaper. Buy the dip investor psychology complacency is still rampant.  TRI doesn’t disagree that over time markets tend to rise.  However, the global economic backdrop warrants caution, patience and playing defense as the best strategy.  This market decline and market reset is in the early stages.

This week the SP500 declined at a historic rate from its late Feb 2020 all-time high level. The drop of over 10% in a matter of seven days has marked the daily and weekly cycle highs, and likely the monthly cycle high (need more price action to confirm).  TRI is expecting a daily and weekly cycle bottom between Mar 11 and Mar 27.  This bounce should be followed by lower prices as the markets finish re-pricing the new economic reality.

Source: Tradingview.com

The SP500 dipped to the 2,880 level on Friday. This is the same level TRI believed the SP500 could bounce to after the Fall 2018 market decline.  We know, in Fall of 2019 the Fed began a stealth “non-QE” balance sheet expansion that pushed markets up another 10%.  In hindsight that 10% boost was the ultimate air pocket that has deflated. TRI maintains it’s the 2,200 to 2,400 range as better risk reward area for longer term investors. In the meantime, TRI follow its proprietary Cycles & Trends Investment process to navigate these volatile markets.

Central Banks Focused on The Last Crisis

Common perception is that central bankers will come to the market’s rescue with the Fed’s put.  TRI agrees the central banks will step in, but their “help” will be too little too late as the global supply chain has already come to a halt.  It will take months, if not years to get back up and running.

Ironically, the increased regulation and central bank support since the Great Financial Crisis of 2008/9 is focused on injecting capital into the banks – the source of the last crisis.  Today, the challenges and problems are much different. Small and medium size business across the globe are at risk.  TRI believes support and assistance for these business at risk is not in place.

A Step Closer to Negative Rates

Real interest rates in the US are now negative and high probability that nominal rates will follow.

The US 10Y and 30Y interest rates hit all time lows this week. The entire US interest rate curve is below the Fed Funds Rate. Markets now are pricing in 4 rates cuts into 2021, as the US2Y has dipped below 1%.  This is not normal. There is extreme economic pressure.

Source: Tradingview.com

The Emerging Markets Leading the Way Lower

The Emerging Market ETF cycle set-up foreshadowed this week’s market decline.  Bounces are to be expected, but trend and cycle is for lower prices.

Source: Tradingview.com

Dr. Copper is Now breaking down…

As we wrote in Dec 2019 “Copper showed the first sign of breakdown in Sep 2019 along with Emerging Markets. But as markets do, the sprung higher along with other risk assets.  The move higher appears to better fill out the symmetry of the double head & head and shoulders pattern.  The move higher is very similar to the EEM ETF…”

This week, Copper is back on the cusp of a breakdown… watch to see if we get a small bounce before the breakdown or if it will be a direct drop?

Source: Tradingview.com

Global Supply Chains Will be Restructured

TRI’s business cycle and economic analysis process has been showing signs of stress and an imminent change on the horizon for global trade. That is the beauty of cycles. They consistently repeat, although many times stretching or contracting with slight nuances.  TRI did by no means think a biological virus would be the catalyst that would spark this mass restructuring, but cycles analysis was pointing to a major shift. 

Looking forward 12 to 24 months, TRI believes there will be a renewed focused on capital investment in North America leading to a substantial (40+%) move higher for equities.  Before we get to the that buying opportunity, please preserve capital and position appropriately for challenges directly ahead of us into the fall of 2020. 

TRI Global Macro Fund

TRI Global Marco Fund has had positive performance since launching Jan 2020.  The TRI Global Macro Fund is focused on total return regardless of market conditions and is an excellent diversifier and value generating strategy to complement investment portfolios. To express interest or obtain more information, please reach out directly to at rabbie.gill@fieldhousecap.com.

Stay liquid, stay defensive and follow your investment plan.

TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on Feb 27, 2020.  Please see the TRI Overview document for further information. 

 Source: Fieldhouse Capital Management

* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.

Disclaimer: This material has been provided solely for information purposes for the use of the recipient and Fieldhouse Capital Management Inc. (FCMI). This material does not constitute an offer or an invitation by or on behalf of FCMI to any person to buy or sell any security. It should not be assumed that the methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses.  Any reference to past performance is not necessarily a guide to the future and the value of investments may fall as well as rise.  FCMI accepts no liability for any direct or consequential loss arising from investments made in accordance with the attached material. The research and analysis contained in the attached material has been procured from sources which are believed to be reliable and accurate.

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