Lady at the Tea Shop: ‘Have we not learned anything?!’

She has kind of a soft but heavy Eastern European accent …

Her name is Maria.

Months ago, her husband, Randy, gave me his recommendation for pu-erh tea. As she measured out a couple ounces of Fukamushi for me during this visit, she told me it was her husband’s favorite green tea.

They’ve not steered me wrong yet. So maybe I should heed their warnings on financial markets as well, eh?

OK, maybe they’re my warnings. But Maria set off some alarm bells …

She asked what I do. I told her I write about financial markets. Her reply: "What finances are doing these days?"

I told her, "Going up! Even though, while better than prior years, the underlying economy didn’t exactly warrant such lofty valuations."

She nodded in agreement. And she told me something along the lines of …

People are buying stuff like crazy — like they were before the recession. Stuff they don’t need. They get their tea then they say, "I’ll take one of those … and one of these … and one of those for my friend … and one of those too, please."

I can’t say I am surprised.

It does feel like the economy is in a much-better place than it’s been for the last nine years or so. The lingering problem still, for me, is what’s underpinning this activity.

It’s why Maria asked in humble amazement, "Have we not learned anything?"

I laughed.

But it’s not really funny.

Later, after lunch, I sat down at my computer and came upon this chart …

That data is based on a survey of independent businesses in America. The surge is surely due in large part to the prospects of tax cuts and infrastructure spending in the wake of November’s U.S. presidential election.

Those prospects have darkened a bit. But NFIB optimism is holding on at levels well above peak optimism in 2007.

So is this a sign that good(er) times are ahead?

Or is this a sign that things are getting ahead of themselves?

Financial markets tend to lead economic expectations. Will financial markets become concerned with what’s driving small business and consumer spending power?

These graphs show the nominal growth in loans and leases from commercial banks. Naturally, peaks have corresponded with recessions.

What needs to be determined is whether peak loan growth leads or follows recession … and whether we’re facing a potential peak in loan growth today.

As I made you aware in these pages less than a month ago, from Hoisington Investment Management, the economy is saturated with debt:

"Total domestic nonfinancial debt, excluding off balance sheet liabilities such as leases and unfunded pension liabilities, surged to a record 254.8% of GDP in 2016, 5.6% greater than in 2009 when Lehman Brothers failed.

"Total debt, which includes domestic nonfinancial, foreign and bank debt, amounted to 372.5% of GDP in 2016, compared with 251.9% of GDP in 2006, the final year of previous tightening cycle, which, in turn, was greater than in any earlier time from 1870 through 2006.

"The situation in the business sector deserves particular scrutiny. Business debt surged to a record 72.6% of GDP in 2016, for the first time eclipsing the prior peak of 70.2% reached in 2009.

"With the business sector so levered, not much room for miscalculation exists. As such, the risk is clearly present that the Fed’s restraint will chase out one or more heavily leveraged players, just as was the case in all the previous tightening cycles since the 1960s."

Will June’s almost-guaranteed Federal Reserve rate hike "help" financial markets lead economic expectations lower?

Will tax cuts and spending initiatives help compensate for the pressure that tighter financial conditions might pose?

Lots of questions.

The only answer is that the direction for stock markets is UP … until it’s not.

When it’s not, that’s when you want to be protected by having money in gold, Japanese yen and U.S. Treasuries …

You can do that by buying the iShares Gold Trust (IAU) or the Direxion Daily Gold Miners Index Bull 3x (NUGT) for a leveraged bet on faster-moving mining shares …

As well as the CurrencyShares Japanese Yen ETF (FXY) or the ProShares Ultra Yen ETF (YCL) if you want twice the leverage …

And then there is the SPDR Bloomberg Barclays Long-Term Treasury ETF (TLO) or the Direxion Daily 20+ Year Treasury Bull 3x Shares (TMF) if you’re looking to make a higher return on your exposure to U.S. Treasuries.

Yep, same as it ever was.

Here is a chart of FXY that seems particularly ripe for the picking …

And when you buy your Japanese yen ETF, I recommend getting some of that Japanese Fukamushi green tea as well.

Do right,
JR Crooks

Your thoughts on “Lady at the Tea Shop: ‘Have we not learned anything?!’”

  1. So, I guess you don’t believe there is a very large bubble in the bond market? Have you done any research on the Japanese economy and their GDP to debt ratio?

    Gold, silver and mining stocks, still cheap, your right about that.

  2. North Korea
    Anemic 1st qtr GDP
    Falling new car sales
    Tax plan & repatriation of offshore money “in the works”?
    Democrats will block all the good stuff in the Senate
    Campaign links to Russia
    Vix doesn’t matter anymore – Debt to GDP doesn’t matter anymore

    Just what you would expect for a market wanting to make new all time highs. Investors are numb to the cry of “Wolf”. Pardon me, but I’ll sit this one out.

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…