Mixed Warning Signals
This month a number of commentators grew quite alarmed by disturbing data coming from the National Association of Credit Management (NACM) showing that the US economy may be facing a credit crunch as businesses find it very hard to get loans. Here's a chart showing the level of credit applications rejected exceeding the depths of the last recession.
Source: Advisor Perspectives
Many are citing this as evidence that the US is slipping into recession and that a major bear market is around the corner. We at Financial Sense don't think a recession is likely this year (see here), but decided to speak with NACM's chief economist Chris Kuehl to get his inside thoughts on what's going on. In an in-depth interview with Financial Sense Newshour this Tuesday (see here), Chris explained a very important point that wasn't picked up by most commentators: credit applications are being denied at such an alarming rate not because of credit worthiness (this hasn't changed much he said), but almost entirely because credit managers are exercising an "abundance of caution" given the unknown impacts of a stronger dollar and the prospect of Fed rate hikes in a weak economic environment, as some reasons cited.
Since NACM data as a whole is not yet giving a recessionary warning signal, Chris says it'll be important to see whether indeed credit managers' fears come to fruition through increased bankruptcies, collections, and overall deterioration in the credit worthiness of the companies applying for loans across the US, which we have yet to see.
We will be updating our readers and listeners with this information as it is released. Our interview with Chris Kuehl, NACM's lead economist, can be found here.
The Economics of Grid Defection
On Wednesday we spoke with one of the analysts of a heavily cited study conducted by the Rocky Mountain Institute (RMI) on a very disruptive and fast-growing technology: solar-plus-battery storage (or what they refer to as "utility in a box"). Due to the massive decline in the price of solar panels, including installation costs, combined with the growing use of battery storage, RMI's James Mandel says that many regions throughout the US will either be pulling from the electricity grid entirely or only getting part of their power from electrical utilities.
So, how long before Americans should expect to see a SolarCity salesman arrive at their door selling a solar-plus-Tesla battery package? Here's what James had to say:
"Fairly soon. So, again, if they're in Hawaii they should be seeing that right now and we see solar installers already adding batteries to their line-up and selling and installing those systems today. For New York and California...you're looking at the mid-2020s to maybe the early 2030s. So for California we had 2031, New York 2025...and then for partial defection (from the grid) or some of these other scenarios you might see some of the markets arriving earlier...it's maybe 10-15 years for the coasts, 5 years for early adopters."
As we discuss in the interview, this technology will have enormous economic impacts not just for solar companies, which have been on a tear lately, but also for our aging power grid. You can download their full report for free by clicking here or listen to our recent fascinating conversation with James here.
Odds Increase for 10-20% Correction This Year
On Thursday we spoke with global investment strategist James Kostohryz on the top ten major risks facing investors right now and why he thinks an earnings recession—though not an economic recession—makes it much more likely that we’ll see a 10-20% correction develop between now and the third quarter. That said, Kostohryz doesn’t think a major bear market is likely this year as he explains:
“By far the number one and most important risk to financial markets and stocks in particular pertains to the business cycle—business cycle risk. Recessions are the number one cause of bear markets. Every single recession in US history since World War II has been associated with a bear market and almost all bear markets have been associated with recessions. There have been only a couple bear markets that have not been associated with an economic recession; and so when we're looking at risks to the market, one of the most important things to look at is whether there is a recession potentially on the horizon and...that risk is low for at least the remainder of 2015... There are a lot of early warning signs and right now virtually none of those early warning signs are actually in force and so it would be highly unusual for a recession to appear any time within the next 6 months or between now and the end of the year.”
The other 9 risks, which are all major topics in financial news these days, are a strengthening dollar, Fed rate hike, oil prices, earnings, market valuations, Greece & Europe, Ukraine, China, and global political instability.
Putting each of these into context, James says the heightened possibility of a correction developing this year means it might be wise to take profits where investors have seen decent gains and then use that cash to buy stocks at cheaper values. Two areas he likes are technology and solar. Subscribers can access this full one-hour interview by clicking here.
"Repricing of US Debt" Starting Around 2016
On Friday we spoke with Contrary Investor’s Brian Pretti, who says we’re likely to see interest rates climb between 2016 and 2019 as over a trillion dollars of debt matures off the Fed’s balance sheet. In that environment, Brian fears how the global financial system will respond as we see a “repricing of US credit”. Here's what he had to say on this point:
“Starting in 2016 a little more than 200 billion dollars on the Fed's balance sheet matures. In 2017 another 200 billion matures. In 2018 it's 400 billion. In 2019 it's 350 billion dollars. That's close to a trillion dollars of assets on the Fed's balance sheet maturing between 2016 and 2019. Now they can let it mature—no worries at all. But if we think about the bigger picture here, the US is not about to pay off its debt...it keeps growing. So somebody is going to need to pick up that additional debt in addition to the ongoing financing needs of the US itself. So, we are potentially looking at a higher rate environment or a repricing of US credit in the next few years while not only will government financing needs be going higher but the Fed balance sheet maturities are going to mean that in the open market we are going to need a buyer for another trillion dollars of debt. And the buyer of that trillion dollars of debt in the last x-years has been an artificial buyer, which has been the Fed, that bought it at artificial rates. So were looking at...some type of meaningful crossroad ahead...and it's not the end of the world but it's about how do we navigate as investors..."
Brian Pretti is one of our more popular guests on the show and has been a longstanding contributor to Financial Sense as well with some of the best analysis you’ll find on the web. This comprehensive discussion between him and host Jim Puplava is well worth your time. Click here to listen.
Weekend Show
For our market technician segment this Saturday, we’ll be speaking with Robin Griffiths, the former chairman of the International Federation of Technical Analysts, who is now the Chief Technical Strategist at ECU Group. Ryan Puplava will give this week's market wrap-up and Robert Rapier will cover energy. For the fixed income report, we'll be speaking with PFS Group's Rob Bernard.
For our most popular segment of the week, the Big Picture, Jim Puplava will finish his discussion of financial repression from last Saturday followed by an in-depth look at oil and energy. Lastly, he'll cover the breakout in the Nasdaq to new all-time highs and consider just how much higher it can go given current P/E levels of most tech stocks compared to the 2000 tech bubble.
Be sure to tune in by visiting our Newshour page or in iTunes by clicking here! Gain access to all our premium weekday content by clicking here.
