In today’s issue:
- Oil prices have dropped to their lowest level for several years
- That could be a sign of global recession
- Recent stock market weakness may only be the beginning
You might have noticed that the price of petrol has declined slightly of late. What you may not have noticed is that the market price of crude oil is now about the lowest it has been for several years.
Source: Koyfin
As the world’s most widely traded industrial commodity, that is almost certainly telling us something important about the global economy.
But inflation over the past three years has been on the order of 20% cumulative. The price of crude oil should actually be higher, not lower.
So, why has it declined so much? Has there been a large increase in supply? No, there hasn’t.
The explanation, therefore, is on the demand side.
Demand is weak and getting weaker.
Iron ore prices have also declined of late and lie below their three-year average. But here too, had iron ore prices merely kept pace with inflation, they should have trended higher, not lower.
In these pages, we’ve been warning about a global recession for months. The recent dip in oil and iron ore prices may be indications that we’re now in one.
What about the stock market? Well, it had a good run last year, but following recent weakness, the US stock market is now down year-to-date. Here is a chart of the S&P 500 index:
Source: Koyfin
When asked about the state of the US economy recently, President Donald Trump said that it appeared to be in a “transition period”, one that is probably necessary and unavoidable in order for him to deliver on his MAGA plans.
Was that a hint that Trump thinks the economy might have entered a recession?
His comments do appear to have further spooked the stock market. But does Trump care? His Treasury Secretary, Scott Bessent, recently said that he and Trump weren’t concerned about the stock market but rather promoting long-term economic strength.
Mr Bessent has also said that the economy might be “starting to roll a little bit” and that it needed to go through a “detox period”.
Are Mr Trump and his economic team willing to steer the US into a recession if it helps them to achieve their MAGA objectives?
It would appear so. Is the stock market priced for that?
Almost certainly not. Despite the recent market dip the price-to-earnings (P/E) ratio on the S&P 500 remains way above the long-term average at just under 30. The market is arguably priced for perfection, not recession.
But what do we mean by “the market”? Yes, the S&P has had a good run to historically high valuations. But the “Magnificent Seven” Big Tech firms have been the primary drivers of that.
Will they also be the drivers of a correction or even a crash?
They are certainly at greater risk than other companies trading at far more modest valuations. But given their huge market capitalisation, it is difficult to imagine that the rest of the market won’t feel the gravity if they fall from grace.
What makes the current market environment so challenging is that inflation is once again ticking higher. Fleeing out of stocks and into cash might reduce risk but it also ensures losing out to inflation over time.
Ever since our initial recession warnings from last year, we’ve repeated the same mantra:
Rotate within the market, not out. Prioritise current income and dividends over growth. Avoid companies highly dependent on “intangibles” for their lofty valuation multiples.
Get into defensive, cash-generative companies with strong pricing power, trading at reasonable valuations. Consumer staples, energy, basic industrials, healthcare, insurance and utilities are all good places to look.
A portfolio of such companies provides the best way to preserve real purchasing power when markets stumble amidst rising inflation. Adding precious metals to such a portfolio makes it even more robust.
If you’d like to read more about my own personal strategy for building a portfolio through these times – and how you can discover the companies I’m recommending right now – just click here.
Until next time,
John Butler
Investment Director, Fortune & Freedom
Stocks Thumped
Bill Bonner, writing from Baltimore, Maryland
“I’ve never seen anything like it,” said a guest on a news show on Monday.
“Canadians feel betrayed by their closest friends and allies. They’re not buying American-made goods… and they’re taking them off the shelves. They’re canceling their vacation plans to go to the US. They’re just really, really angry. It’s the thing they talk about most…”
Today, we write about betrayal and befuddlement. They are all around us.
On Monday, the media tried to keep up with the stock market. The Dow was down 1%… then 650 points… then… 800… finally coming to rest down 890 points.
But any sell-off is treated as a calamity by the media. And any calamity is someone else’s fault. Betrayal… rug pulls… and treachery. Investors, who thought they would make a fortune by buying into the Trump Bump… are now getting Trump Thumped as the entire gain since November has been wiped out.
Who stabbed whom? Did Powell fail to cut rates? Did Trump fail to settle the Ukraine war, get peace in the Mideast, stop inflation, balance the budget or any of the other things he pledged to do? Or did the Democrats sabotage us all?
Crypto investors have felt the sharp blade in their backs too. Decrypt:
Not even the president’s meme coin is weathering the crypto market downturn, with TRUMP now down more than 85% from its all-time high.
Did Trump pull the rug on his coin buyers? Or was it just bad luck?
And Monday night night, Trump went on the attack against Thomas Massie:
“Congressman Thomas Massie… SHOULD BE PRIMARIED, and I will lead the charge against him.”
Massie’s sin?
A lack of loyalty. He plans to vote ‘no’ on Trump’s big, beautiful bill – which keeps funding in place for trillions’ worth of boondoggles… including those just discovered by Elon Musk.
Trump’s every move seems to bring a new opportunity for accusations of perfidy. Over the weekend, this remarkable headline appeared. Bloomberg:
Donald Trump claims his $5M ‘gold card’ visa will ‘sell like crazy’ — and could pay off America’s staggering $36.2T debt load.
US citizenship… for a price? Pay off the national debt? So, we can buy Treasuries again confident that they will hold their value, right?
Let’s see, how many of these rich foreigners would we have to take in? $36 trillion divided by $5 million = 7.2 million. Are there really that many people with a spare $5 million who want to become US citizens?
If so, native-born Americans might be able to get jobs as their chauffeurs or golf caddies. Some could clean their swimming pools. Others could park their cars.
What?
You say those jobs are already taken by the Mexicans and Guatemalans?
No matter. There’s plenty of room under the Big Tent. And with Social Security in deficit, we need all the contributors we can get – especially if they’re rich. Elon Musk says Social Security is a ‘ponzi scheme.’ He’s right. And it will go broke unless more people get enrolled.
There’s a back-stab waiting right there, too. Millions of people depend on Social Security payments. But the feds will soon begin trimming benefits.
But new citizens at $5 million a pop may not be the answer. Even if the feds could process 100 of those rich peoples’ applications every single day… it still wouldn’t come close to keeping up with the additional US deficit… to say nothing of the principle.
Meanwhile, there are a number of other promises that probably won’t be kept. Trump’s ‘trade war,’ for example, the one that got Canadians so upset. He said it is all about stopping drugs, not trade. And while the yes monkeys were still applauding, he called it off.
From an economic standpoint, this is the worst result possible – neither buyers nor sellers… importers or exporters… can make plans. And the blowback hits before the blow. AP:
Ontario’s premier, the leader of Canada’s most populous province, announced that effective Monday it is charging 25% more for electricity to 1.5 million Americans in response to U.S. President Donald Trump’s trade war. “I will not hesitate to increase this charge. If the United States escalates, I will not hesitate to shut the electricity off completely,” Ontario Premier Doug Ford said at a news conference in Toronto.
More betrayals… tomorrow…
Regards,
Bill Bonner
Contributing Editor, Fortune & Freedom
For more from Bill Bonner, visit www.bonnerprivateresearch.com
