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1/ People that message me often ask if I am worried about the current fundamentals in the market?

I'm always worried. Sometimes less, sometimes more. However, that doesn't stop me from investing.

Today I want to go through some of the more important worries for me. Let's start.
2/ There are plenty of things that could worry investors, that is why they say the market climbs a wall of worry all the way up.

When those worries disappear for the most part and the majority is celebrating usually marks a sign a major top is near.
3/ Those are NOT the kind of worries I'm going to be discussing in this week's Marco Weekend Update.

These are going to be more contrarian in nature, where one is potentially anticipating — but not necessary bearish & betting on a turn of events.
4/ The list of worries, at least for me, are:

1. Sky high US consumer confidence
2. Beginnings of the inverted yield curve
3. Rock bottom claims & unemployment rate
4. Low future expected return probabilities
5. Prolonged period without a serious asset decline
5/ The United States consumer is upbeat, with sky-high confidence.

The chart below shows that present conditions haven't been this good since the year 1999/2000 period (major equity top) or the 1969/70 period before that (another major top).
6/ FinTwit is always in disagreement on whether to be a bull or a bear & who to be contrarian against. But truth be told, the simple answer is not against other investors (even though that works), but against the public itself.

After all, that is the definition of dumb money.
7/ The public is ALWAYS spectacularly wrong at major turning points, either when they fear everything as sentiment hits rock bottom (1982, 1991, 2008 were all major bottoms) or — like today — when optimism is overflowing & complacency rules.
8/ Consumer sentiment rises throughout the bull market because living standards improve during an economic expansion. Asset prices make people feel wealthier.

However, eventually sentiment reaches super high levels & that is when we need to watch a potential break of this trend.
9/ The blow off in sentiment saw the stock market have a sideways performance from 1966 until 1982 (some people would argue from 1970-82).

Sentiment also went sky high during the tech bubble of the late 90s, and stocks had an awful performance from 1998-2012 (or 2000-12).
10/ This is no guarantees that a recession "needs" to start, nor that the stock market "needs" to top out and have a lost decade.

However, whenever the public is this euphoric, from a contrary perspective —I'm extremely worried.

It's that simple for me.
11/ Moving along, the next worry I have is that we are now at the beginning stages of the yield curve inversion.

One of the two major yield curves I track has just inverted — the 10 year vs the 3-month yield spread. And this happens to be the most historically accurate one.
12/ The other curves are just as good though and they haven't inverted yet. In particular, the 10s & 2s yield curve sits at around +20 basis points (previous chart).

The yield curve is one indicator you should pay attention to as it has predicted 90% of the recessions since WW2.
13/ However, recessions usually occur some 9 to 12 months later, and in some cases can take up to 24 months to unfold. So an inverted yield curve is a signal of the very late stage of the cycle, but not the end of it.

The party tends to continue (for a while).
14/ Also worth mentioning is that we are in some strange economic experiment era — where central banks have been printing money like crazy, interest rates have broken textbook rules & gone negative... & unicorns are consistently profit-less, while China is building ghost cities.
15/ Just like any other indicator, the yield does NOT have a perfect track record. No indicator does, and most likely never will.

Who's to say that the yield curve signal won't end up being a false alarm, or that central banks pull a "helicopter money" bunny out of the hat!
16/ Talking about the late cycle of the expansion, as we approach the longest stretch of growth without a recession, and some employment indicators are at rock bottom readings.

What do I mean by that?
17/ It is almost impossible for things to get meaningfully better, but it is quite easy for things to get marginally worse.

Claims are at the lowest level in decades. Things weren't this good during Japan's 80s boom, the flying Tech 90s or the credit binge of the early 2000s.
18/ Mind you, those were some serious booming cycles, which created an incredible amount of prosperity for the baby boomers and the generations after it.
19/ Actually, the jobless claims are so low, we would have to go back to 1969 to see a similar level.

There is that year again, connecting to the previous research of the consumer confidence (which was also sky high in 1969) together with the flying stock market.
20/ Below 4%, the unemployment rate has managed to fall to even lower levels then Clinton's 90s boom, infused by the invention of the internet & WWW.

Once again, the data takes us back to 1969 and you'll notice from 1969 until 1982 employment conditions really deteriorated.
21/ Same can be said about the period from the year 2000 until 2012...

These two periods, where the consumer confidence was off the charts and employment conditions as good as they get, have at least some parallels to the present data.

And that worries me.
22/ Finally, I'll focus on the stock market which really is points 4 & 5 together, as they go hand in hand.

Low expected returns, high valuations, lack of major declines, prolonged bull market length, etc, etc, etc...
23/ There was no doubt in my mind that late 2017 was an important top. I didn't get outright bearish, nor short anything, but this is the reason I went looking for value elsewhere (private credit & real estate).

The global stock market has not made a dime since.
24/ You might have a different strategy and that's fine. Do what works for you. But for me, the truth is, it's quite simple and here it is:

"I believe the risk that has to be taken right now is far greater (and not justifiable) by the potential return one stands to receive."
25/ I have averaged almost 25% compounded since Brexit 2016 (last 3-year period).

I'm not here to blow wind up my a$$ (as we say in Australia) nor to show off but to say that apart from a few depressed pockets there are no major opportunities I see to make a SCORE!
26/ To me nothing looks attractive to bet a ranch on.

Remember, diversification is the protection of capital & usually for the older super-wealthy ones amongst us.

Concentration is the art of making big scores (or losing it all), and that is more suited for us younger ones.
27/ In 2016/17 I favored well balanced riskier portfolios with stocks tilted towards international & EM equities, mixed with some corporate credit & EM debt.

That worked well and 2016/17 for — the majority of us was a great year or two.
28/ In mid parts of 2017 I started taking money off the table & by years end sold all public assets turning to real estate in the UK, France, Czech, Norway, Belarus & Vietnam. I also invested in SME private credit in Singapore.

I've now almost exited everything successfully!
29/ A follow investor asked me today: where will you invest your money next?

As I said right here, apart from a few pockets of value (riskier EM jurisdictions like Russia, Greece, Turkey, Nigeria) there is just nothing of interest where I would bet a ranch on it.
30/ The followers of Jack Boggle & Warren Buffett, who will stay invested in stocks & bonds for the long run — it's a wise strategy. It has paid off over the last 10 years. I commend you on your discipline & patience.

But the future expected return is NOT attractive for me!
31/ Some of you say the bull started in 2009, while others say it started in 2009, 2011, 2015 & 2018 (cyclicality) — for me, it doesn't matter.

On a monthly closing, used for the very long term charts, US equities haven't dropped 20% in a decade.

And that's nor normal!
32/ Drop it will, and no, I don't know when & how much.

But when it does, it will "feel" a lot different than 2011, 2015 & 2018 — what you guys call a bear market.

When the big drawdown starts & things get bad FIRE people, retires, high flying millennials will all be hurting.
33/ Remember that there is always a low probability of that happening anyway.

But when the consumer confidence is sky high, when the yield curve begins inverting, employment conditions cannot get too much better, the expansion is long in the tooth & set to break all records...
34/ ...and when the market's last major fall was over 10 years ago — the probability isn't low anymore. The risks start increasing so you got to be careful. Unless of course you're just analysis or bank strategies and playing with monopoly money.
35/ So to answer everyone's direct message questions — yes, I'm worried.

Today, a little bit more than normal.

I think it's justified.
36/ And no, I’m not outright bearish. I’m not shorting stocks. And I’m not expecting a recession tomorrow.

You asked me what I’m worried about and I merely answered the worries that would keep me up at night if I was 100%, or even 60% long US equities.
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