Things are Not Well Everywhere

For the average U.S. based investor, or even one sitting right next door in Canada, things are generally looking pretty good.

Unemployment is low, stocks are near all-time highs, Trump is stoking inflation, interest rates are still too low, wages are climbing, and portfolios are swelling.

Even around the world we've got decent trading figures, manufacturers indices are good, shipping capacity is relatively low, northern Europe is in a hiring boom, and China is still cranking out goods as the world's factory.

The pros are saying that a recession is at least a year away, likely longer. Things are awesome!

Besides the blather about the yield curve being close to inverting (really just a manipulation of Federal Reserve and other central banks) and triggering a correction, the pundits are coming on TV and saying there is not a single indicator that a recession is coming.

The Truth

Although we are in year nine of a central bank induced asset and debt expansion and the conventional indicators are telling you to buy, I would be very careful about what exactly you are buying.

I refuse to buy in a downtrend, even if the fundamentals and valuations are great. Of course, I'm not talking the U.S. here where valuations are insane by historical standards, I'm talking about most of the rest of the world.

The equities markets and debt markets in many countries outside of the U.S. are not all that rosy. What's more, there is growing evidence that money is being pulled out of these markets.

Over the past months, literally billions have been pulled out of the riskier markets in a growing trend. I think it is important to pay attention to this movement.

Why are these investors fleeing risk when the pros are telling us we should be "risk-on"?

Many investors believe that current equity valuations are reflective of current conditions. That's not true. Stocks are priced based on the investor's current anticipation of future returns. That's why stock markets fall before economic recessions.

In fact, sometimes stocks markets fall and there is no recession. By most measures, 1987 was a great example of this.

In a lot of markets around the world, investors are getting increasingly nervous about future returns. Despite the growing economies, investors are signalling that they don't think corporate profits will continue to grow.

Bonds are even more strange and, in some ways, more telling. Not only do bond valuations fluctuate based on interest rates, they also reflect confidence in the issuer's ability to pay interest. That is despite bond holders first dibs on the assets of the issuer.

Investors right now are exiting higher risk bonds, especially high yield corporate bonds and emerging market debt. They're even leaving long-term U.S. Treasury bond funds in favour of short-term Treasury funds.

These money flow trends have occurred before without any major market crashes. Sometimes investors, as a whole, get things wrong.

Markets in "Bear Territory"

It is interesting to look at the MSCI indices to get an idea of just how many markets right now are experiencing market crash conditions. I define that as a 20 percent price decline from the peak valuation in the past 5 years priced in U.S. dollars.

Developed Markets

Of the 23 developed markets in the MSCI World Index, a full half are in a bear market. A number of others—not listed—are getting very close to being in one.

The list of bear territory markets includes the United Kingdom, Germany, Australia, Italy, Spain, Austria, Denmark, Belgium, Norway, Ireland, Portugal, and Israel.

Of course there are a few real economic dogs in this group. Italy and Portugal are special cases of mismanagement at the national level and their stock markets reflect that.

It is most concerning to me that the United Kingdom and Germany are in an equity bear market. If you take a look at their charts, they are both truly ugly. A stream of new 52-week lows, below all major moving averages, and solid down trends since January.

Source: Yahoo Finance

The U.K. is dealing with their own political challenges exiting the trade pact with their biggest trading partners. It is hardly a surprise that equity investors are cautious. But that doesn't negate the influence the U.K. has on global markets. After all, London is a major trading centre.

Source: Yahoo Finance

Germany is notoriously prudent and stable economically with an enormous manufacturing base. Their unemployment is very low and wages are growing. Why are investors there nervous?

Emerging Markets

Of the 24 countries in MSCI's Emerging Markets Index, 19 of the country stock indices are in bear markets. That's more the three-quarters of the countries and an even higher percentage of the Emerging market cap.

The correction in equity pricing is not confined to any one region and it is often compounded by currency drops. Many emerging market currencies are getting hammered right now.

In the Americas, Brazil, Mexico, Chile, and Colombia are slumping. Brazil and Mexico are the big ones here.

Source: Yahoo Finance

Although Brazil is still massively down from their 2008 highs, there are a few bright spots here. The more recent trend is moving up and I took a position a few weeks ago.

Source: Yahoo Finance

Mexico, on the other hand, is not showing any recent up-trends. It failed to make new highs in the run-up at the end of summer and has turned down again. There have been massive losses for investors if you held Mexico since 2013.

In Europe, Hungary, the Czech Republic, Greece, Poland, Russia, and Turkey are in bear markets. Aside from Russia, these are all pretty minor markets so they don't deserve a lot of attention.

Source: Yahoo Finance

Russia should technically be in a recovery as they are major oil and gas exporters, but the markets are not really buying it. The ruble is collapsing and has fallen by half since 2014!

Again, the charts are not very great. Failing to make new highs in the September run, now back below the 200-day moving average, and lower lows in June and early September.

In Asia, China, India, Pakistan, South Korea, Indonesia, Malaysia, and the Philippines are suffering.

Source: Yahoo Finance

Many people don't know, but China's domestic share market has gotten absolutely crushed! The A-shares have dropped over 50 percent since their high in 2015.

More recently, China's market has dropped big time since January. Repeated lower lows, well under the moving averages, and very weak upside moves. You should have dumped this market by June at the latest!

In Africa, the only two countries to make the index: South Africa and Egypt, are both in large drawdowns. South Africa has dropped nearly 40 percent since January of this year. Egypt has fallen nearly 50 percent since 2014.

Opportunities

The good thing about falling markets is that they create future opportunities. In a good capitalist system where government interference is minimal, corrections occur. Bad behaviour must get punished.

Eventually the markets get re-priced to a level where investors once again feel comfortable injecting money and taking risks. Prices begin to climb on a fresh slate of new ideas, better governance, and more prudent risk-taking.

These economic shakeouts should be embraced! I am looking for bottoms to form in many of these markets. Once the trend turns around, I will hopefully be there to get a piece of the action and reward better behaviour. Of course I hope there will be a nice profit in that risk-taking as well!

I am going to start a regular market opinion piece on the markets I track in the trend investing side of my portfolio. It will be a personal trading journal of sorts with charts and signals, trend following based of course. No Fibonacci or Elliott waves here!

It will probably be a bi-weekly piece, focused on one or two markets, to help me sort out my thoughts and investment process while giving my readers a better idea of how I make my investing decisions.

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