Canaries in the Coal Mine Updates
Published September 22nd, 2021
It's time for us to take some action, to move a little bit to a more conservative position given market dynamics.
You've heard me talk repeatedly about "canaries in coal mines" - things that happen before market sell-offs. We've watched them in the market very closely in the first, second and third quarters of last year as we were going through COVID.
So today we're answering the question, "What's ahead for Vizionary Wealth?" Here's what we're looking at on our horizon. As always, we're here with perspective for the decisions ahead. Feel free to reach out to us any time if you have questions.
Watching the Evergrande Situation in China
We think we are on the cusp of a broader market sell-off. This is not Chicken Little – we're not running for the hills – this is a time to be wary. Let's start with Evergrande in China.
Evergrande is a huge construction company that it looks like it's going to default on something close to $300 billion in debt. The problem is that the market and the banks will have to digest that bad debt. When it gets magnified through the banking system, it impacts $15 to $20 of other transactions for every dollar of bad debt.
That means if Evergrande defaults on $300 billion in debt, there's going to be somewhere between four and six trillion dollars of other transactions that are negatively impacted.
That means the deals either don't get funded at all, they get delayed or the terms get changed. In any of those circumstances, six trillions dollars worth of transactions globally is too much for the system to swallow at one time. That's going to cause some disruption.
The US Fight Over the Debt Ceiling
We also have things going on in the US that we think are going to create additional headwinds for the market in the near term, things like federal debt ceilings.
There's going to be a fight in Congress about raising the federal debt ceiling again. No, they haven't fixed this fight. No, they haven't fixed the problem of constantly having to raise and increase how much we're borrowing. So we're leaving it to politicians who are effectively children to make these kinds of decisions.
It's very frustrating, but we have a debt ceiling fight coming once again this fall right before this election season. Awesome.
Shaky Confidence in the Federal Reserve
Another intersectional factor we're watching is that confidence in the Federal Reserve is really being challenged right now.
It's come out in the last week or two that Fed governors across the country were actually buying and selling individual stocks in their own accounts... at the same time that they were voting on the Federal Reserve to buy stocks for the Federal Reserves on balance sheet.
Conflict of interest anyone? Illegal, immoral, unethical, take them out and flog them, tar and feather them. I mean, use your euphemism, fill in the blank here, right? That trip in confidence for the Federal Reserve is going to cause some ripples throughout the economy.
Navigating a Forecast with Less Stimulus
The last thing we are watching is going to be some of the ending of some of the stimulus. For instance, we've got the ending of the moratorium on evictions that's happening at the federal level. We have it being continued at some of the state levels, but at the federal level it's going away.
We also have the ending of the unemployment insurance stimulus from the federal government that's ended here at the beginning of September.
So What's the Bottom Line?
We think all of these things kind of come together, not to create a crash, but we certainly think there's more than what we've seen in the present three or four percent pullback off the market. We think there's probably a broader pullback coming.
So what do we do? Here at Vizionary, what we're doing is we are proactively shifting a portion of your assets to the sideline in your TD Ameritrade accounts. If you have a TD Ameritrade account, you're probably going to see some trades this week that those trades are intended to raise a little bit of cash.
Again, this is not Chicken Little, we're not selling everything in the account. What you will probably see is somewhere between a 10% and a 20% shift to cash, depending on the risk tolerance of the account and how much actual equity exposure you have in the portfolio.
We're taking these moves preemptively against a potential broader market decline. We think it's in your best interest that we do this at this time in response to these canaries in the coal mines.
If you have questions on this or any other matter, as always, please don't hesitate to reach out. We're always here with perspective for the decisions ahead and you are never in inconvenience to our day. You are the reason we get up and get to go to work in the morning. I hope you're having a great day. Give me a call anytime. Not all the time, but anytime. Have a great day.