Meltdown 2000 is here again

When you were a kid, it was the 3 Rs that everyone knew.

Now, it’s just the 2 Rs — recession and recovery.

Plenty of op-ed columnists, politicians and financial types love to talk about how well the U.S. economy is doing, how well on the path to recovery the U.S. economy is. But there are a number of disturbing facts that make the praises they sing like more simply whistling past the graveyard.

Recently, a friend of mine who is a boutique money manager told me he heard President Obama say — on television — that this is a great time to buy into the stock market.

I told my friend that when the president is pimping Wall Street you have a serious problem.

Many of Obama’s key financial and economic people came from none other than Goldman Sachs. Goldman was a big financial supporter of his presidency. It’s the kind of revolving door — send up-and-comers to Washington where they get access and then return to Wall Street and pull down big money and deliver power to their firms. That is more a simple fact in Washington than it is a scandal.

If Goldman is telling the president that he needs to pump up the stock market by telling Americans to invest, there’s something very wrong with the market. The insiders want investors to dive in so they can offload some of their bad decisions on individuals’ retirement portfolios.

It’s one thing when politicians are talking about how great the U.S. economy is. It’s entirely different when the president tells the American people to invest in stocks and tells you the good times are on the way.

Let me point out a few things that I hope will clarify why I believe this is the polar opposite of what investors should be doing.

First, let’s look at China. It’s the growth engine of the global economy. It recently released the three numbers that give us a clear idea of what’s actually happening with China’s “rebound” — retail sales, industrial production and fixed asset investment (FAI).

• The latest retail sales number hasn’t been this low since 2006. Retail sales peaked in 2011, and have been in a solid downtrend ever since.

• Industrial production has been in a bear market ever since 2010 and is now trading around a 6 percent growth rate. The high was triple that 6 years ago.

• Fixed asset investment came in at its lowest level since 2000. And the only reason FAI hasn’t fallen off a cliff is because of the government’s attempts to prop it up.

Also, the Chinese corporate bond market contracted in May for the first time in six years.

China is not doing well.

How about the U.S.? The Federal Reserve hiked rates 0.25 percent in December because it said the U.S. economy was starting to grow and they wanted to be proactive. We’re now half way through 2016 and the market has priced in another rate hike between now and 2017.

The Fed lowered its own growth projections for the U.S. economy for this year and next.

The latest U.S. industrial production report showed a decline in the annual growth rate for the ninth consecutive month. This is the longest such streak without a U.S. recession. So manufacturing is in an undisputed recession no matter what you hear.

The Labor Market Conditions Index is an index that Fed Chairman Janet Yellen helped build and monitors a variety of key data points in the U.S. economy. The latest reading was -4.8.

That’s exactly the same reading as when the meltdown hit in 2000.

So if you’re a market player, it’s time to short the S&P 500 by using the exchange traded fund (ETF) proxy SPY.

If you don’t want to bet short, buy U.S. Treasuries using its ETF proxy TLT. With all the negative rates in most industrialized nations, a low-yielding, long dated U.S. Treasury looks like manna from heaven.

And regardless of whether you do either option above, buy gold. Now that it looks like there won’t be any rate rises for quite a while, gold will be in demand. And if the global economy can’t find its footing, it’s even better for gold. Use the ETF GLD.

The other thing you can do is pare down your portfolio to bare bones and build up your cash. Avoiding a major market crash will save a lot of money. It’s too late to sell when the market rolls over.

— GS Early

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