The 4 Horsemen of the Financial Apocalypse

Four Warnings are Forming in the Stock Markets

Capitalism Protest at G20
Protesting Capitalism at G20 Summit. In Pictures

This article is opinion - a dark opinion, an educated opinion, and based on historical precedents... but is still just opinion.

The Four Horsemen of an economic apocalypse may be fast approaching. Based on my assessments, I believe that we are more likely to see a stock market correction (or collapse) than we are to see the broader markets break out much higher into this recent territory of new highs.

I'm not trying to be dramatic - I am backing up what I say, and I'm putting my money where my mouth is. Much of the investments and market positioning which I have done over the course of the last few months, and even the last few years, has taken all of this analysis and these expectations into account.

In fact, this philosophy has allowed me to establish positions in many assets, commodities, and penny stock companies (like ASM, PXG, and LODE, just to name a few...) which have absolutely soared in value so far this year. My exposure to things such as precious metals, healthcare, and disruptive technologies (which typically will help you insulate against any stock market shocks), have performed better than just about any other asset classes.

The Four Horsemen of the economic apocalypse are all strong enough on their own to derail the entire economy, and each one seems to be even more significant and potentially damaging than the last.

The four warning signs that I am looking into include some of the most serious and telling aspects which guide the global economy, either higher or lower; the velocity of money; the Q ratio; the much-anticipated increases in interest rates; and last but not least, the technical overreach of the markets driven by unprecedented money printing on a global scale.

The Velocity of Money

Velocity of money is an indicator of how many times a single dollar is spent through the economy. For example, if you pay someone for goods or services, and they take that money and give it to someone else, that's the same dollar getting spent twice.

If the painter gets paid, then spends that same dollar at the restaurant, and the restaurant owner uses that dollar to pay the dentist, that is a velocity of money of a factor of 3. Velocity of money hit an all-time peak in 2007 at a rate of 10.7.

That means that each dollar was spent 10.7 times, as it cycled down and through the economy, over the timeframe used (if you look at velocity of money over the course of a year, it only counts "times spent" for the 365 day period). 

At some point, a dollar's journey may come to an end - it may be saved or held onto by its owner. Lower velocity of money represents that people are spending less, or saving... thus are hanging onto their money for longer periods of time.

From that somewhat-recent peak of 10.7, velocity of money now has fallen all the way down to 5.8. This demonstrates that the average dollar cycled through was spent only 5.8 times now, as compared to a much higher numbers from 2007 and 2008.

As the velocity of money declines, it represents a couple of things:

  1. It reveals that the economy is slowing down.
  2. Low velocity shows that people are holding onto their money tighter.

This cause some additional problems - since every transaction typically incurs some tax, higher velocity of money is better for the government. However, as the velocity of money continues to decline (as it has since 2007), it illustrates that there will be less in terms of taxation and revenue for the government.

This is just another indicator which we are watching to keep an eye on, and why I personally am expecting an economic recession and a stock market correction coming up in the future. Based on the declining velocity of money, plus the other Horsemen of the Economic Apocalypse, we are positioning ourselves and subscribers of Peter Leeds Stock Picks into shares which we believe are going to do well during, because of, and in spite of any economic correction.

The Q Ratio

The Q Ratio is indicating that there is trouble ahead for the stock market. To give you the most simplified explanation, the Q Ratio takes the value of all stocks on the market and compares that amount to the cost to replace all the assets of those stocks.

The Q ratio is not sustainable at or above 1.0 because you should never fully value the assets on the books of any company (let alone the entire market). For stocks to be healthy, there should always be a drop off between the actual trading price (or total market capitalization) of any company, and the replacement value of their assets.

In cases when the Q Ratio rises towards 1.0, it implies that stocks are highly overvalued. When the Q Ratio comes in closer to 0.3, then most investments are probably undervalued.

The Q Ratio has reached or broken above 1.0 only 6 times going all the way back to the year 1900. In each case, the stock market dropped significantly very soon after, until the Q Ratio reached levels as low as 0.3.

The Q ratio right now is just under 1.0, and like all other historical times, it will probably have significant trouble maintaining current levels. In fact, the most likely scenario is for the stock market to have a significant correction, just like it has in every other event in the last 116 years.

In the Dot Com Bubble of the year 2000, the Q ratio reached its all-time high of 1.61. You probably know what happened immediately after that.

Currently, the Q ratio is screaming that there will be a stock market correction, and somewhat soon. I expect that this "economic adjustment" will probably add to (or lead to) an overall economic recession, if not depression.

As I always say, the absolute worst way to play this scenario is to panic, or get out of the stock market, or stuff all your money into a sock. There are tremendous opportunities setting up right now which will make the difference between moving into the future with a lot of wealth, and getting wiped out. You are in a compelling situation - you now know where things are likely headed, and can start choosing to set yourself up for profits, which will be even more significant considering that most investments could be falling.

Remember, more millionaires were created during the Great Depression than any other time in history. I believe that we're going to see a similar set of events play out in the coming few years, so to benefit from them you're going to want to set yourself up now. 

Interest Rate Increases

The Federal Reserve has been under pressure to raise interest rates for a long time, but they've been unable to do so. For various reasons, the long-awaited "normalization" keeps getting put off; stock market drops; the Brexit (Britain leaving the EuroZone); weak jobs data.

When interest rates increase that is better for banks and lending institutions, because they can garner larger profits. It also inflates the value of the US dollar in contrast to other currencies, since it implies that investors in the Greenback can capture better returns.

However, higher rates also make debt repayment significantly more difficult. This is especially true for developing nations which borrowed money from America because it will cost them comparatively more of their own domestic currency to service their debt obligations.  

Unfortunately, these considerations also apply to the American government. They will be absolutely unable to pay off their massive debt load if interest rates increase a very small amount.

In fact, even without any rise in rates, the amount of debt which is been racked up by the American government is absolutely mathematically unpayable. This part of the article is not opinion, it is fact - a very unfortunate and mathematically provable fact.  

In other words, it is not a question of if the government will default, it's more a question of when. And that "when" gets bigger and more-unsustainable by the minute.

You see, every American citizen owes just under $60,000 in debt, even as they are born into this world. They may still be in diapers and coloring with crayons, but they already owe their part of the national debt.

As of 2016, the US National Debt is just under $20 trillion and it is increasing at an alarming rate. In terms of taxpayers, each is on the hook for $161,000. There are $15 trillion in Social Security liabilities, $27 trillion Medicare, and $102 trillion in unfunded liabilities which no one understands how we will be able to pay.

In other words, the actual total liability per taxpayer equals about $858,000. (It will actually be a lot higher by the time you reached this sentence).

This is part of the reason why you are seeing territories like Puerto Rico run out of money, or some massive municipalities going bankrupt or being unable to pay their bills. We've seen this play out already in Detroit, Stockton California, Jefferson County Alabama, and many others.

Things like budgetary shortfalls do not typically get better, and certainly not before they get a lot worse. The impact of massive debt loads, upcoming debt servicing payments, and budgetary shortfalls, has yet to hit our economy in full… but that process has just begun.

You will hear a lot more about prominent bankruptcies among municipalities, and even States, in the coming few years. Everyone will be able to bail out everyone else at first... but not once they reach the point where everyone needs money.

Then it becomes most States, Counties, and Municipalities for themselves. That's when the real troubles in the underlying economy will become common knowledge.

Technical Stock Market Overreach

Money printing all across the world is running rampant. We are doing it, Japan is doing it, as are Europe, various South American nations, and many others.

Here at home, there is a direct correlation between the recent stock market run-up and the degree of fresh money being dumped into the system. (Technically, it is not actually "printing of new dollar bills," as much as selling bonds - however, it is a lot easier for most people to understand when it is described as "running the printing presses").

As well, throughout history, we have seen a recession or economic stock market correction at least once every nine years or less, and typically more like every 4 to 7 years. This is the second longest time we have ever experienced without a significant stock market correction - we are approaching nine years.

We almost certainly would have already seen that correction take place, but the financial engineering and influence of the Federal Reserve has brought us into unchartered waters. By generating trillions of new dollars, it has benefited stockholders and kept the stock market inflated.

Of course, without the trickle-down effect to people on Main Street, the overall economy is not at all stronger than it was before the money printing. When you look at the unemployment rate, the government uses the U3 percentage (which is just under 5%).  

However, a more realistic measure is the U6, which includes people who want a job but have given up looking, as well as those who want full-time jobs, but only have part-time employment. The U6 rate is closer to 10%, according to Portal Seven and many other leading sources.

Since 1900, the American dollar has lost 95% of its purchasing power. What you used to be able to buy for $500 would now cost you several thousand dollars - not because the cost of the products increased, but rather because it takes more watered down dollars to purchase the exact same item.

People might brag that their grandfather bought his house for $40,000, and now many years later it is worth $900,000. Sometimes that is not all based on the price of the house increasing, but rather that weaker American dollars are now needed to buy the same asset.

Items which are bought in American dollars are especially susceptible to price changes as the value of the currency fluctuates. If you picture commodities such as oil (which we are running out of), or gold, often the strength you see in the prices stems more from decreases in the value of the American dollar than it does from an increased demand or a minimized supply of the actual commodity itself.

In any case, as the Federal Reserve continues to weaken the American dollar, it acts to support the value of stock market investments. Regardless of and in spite of the four Horsemen of the economic apocalypse, if the Federal Reserve continues to pump more money into the system, then stocks could continually conceivably increase in value from current overvalued levels .

Which Horseman Takes Down the Economy?

Unfortunately, it will probably be a combination of all four. In fact, they all tell the same story, just in different ways - the markets are overvalued, recent gains in stock prices are artificial and forced, and the value of assets has ballooned well beyond any realistic levels.

When you add to that the continual war against the value of the American dollar, and the economic uncertainties reaching out to every nation across the globe, any one of a number of factors may be the pin which pricks the balloon.

Just like when you are sick with the flu, you may have a half dozen different symptoms. Maybe you don't know which one is the worst, nor can you point to anyone issue which is the cause of the illness, but they are all parts of the same situation.

As dark and alarming as this article may feel, it is actually a positive message. You've seen it before when chaos and turmoil have led to massive gains for people positioned it to the right types of assets.

Now you will see it again - a massive shift of wealth towards people who prepared appropriately, away from the people who did not see any of this coming. If you want to see some of the types of investments which will soar, while most others become cheaper, you can get in touch with us - we are planning to come out on top in a big way.