January 20, 2018 12:10 am CST
How the Bull Market Ends
By Briton Ryle, Wealth Daily


I don't mind if someone wants to be bearish. Really. If you wanna jump at everything that goes bump in the stock market or the economy, that's fine by me.

There's just one thing I ask of the sky-is-falling crowd: Get your facts straight.

The U.S. economy is having its best employment growth in decades. As of February, the U.S. economy added 200,000 jobs in 12 consecutive months. That hasn't happened in 30 years. You have to go back to 1985 to find a similar streak.

2014 was a record-setter for jobs. In November 2014, the economy added 423,000 jobs, the most since 2012. Back in 2010, monthly job gains hit above 500,000. But that was followed by four straight quarters of net losses.  

For the entire year of 2014, the economy added 2.65 million jobs. That was the best performance since 1999, when we got 3.2 million jobs. 

Now, 1999 was very close to the end of that amazing Internet-driven business cycle and a 14-year stock market top. The U.S. economy posted 6.4% GDP growth that year. It was the fourth straight year of +6% growth. 

If you were a bear in 1999, you had a compelling argument that GDP growth was overheated and that many new jobs were "bubble" jobs, fueled by ridiculously allocated tech bubble money. 

Now, in 2015, we're in the seventh year after the financial crisis. And we've seen two — count 'em: two — years where GDP broke above 4%. We haven't seen even one year of 5% growth, let alone four straight years of growth over 6%. 

If you think zero interest rates are a problem, I get it, and you're right. Low interest rates are a problem. And we've already seen one bubble that's directly related to low rates burst in spectacular fashion. That's the shale oil bubble.

There should be no doubt that America's shale boom was driven by low interest rates. Treasuries yield squat, and investors seeking out nice yields gladly poured billions into high-yield oil company bonds. All that cash ($500 billion over the last five years) bought land leases in North Dakota and Texas and rented drilling rigs that pushed U.S. oil production to 20-year highs. 

Today, the oil market is oversupplied by at least 1 million barrels a day. And estimates are that 100,000 oil jobs are on the chopping block. Some have already been cut, others are twisting in the wind. I would wager that job cuts are likely to be over 100K by the end of this year. Maybe oil job cuts hit 200,000...

I don't make light of anyone losing their job. I've been fired before, and it's not fun. But at the end of the day, even if the oil patch loses 200K, that's less than the one-month job gains the overall economy has been adding.

If we can see the total implosion of an interest rate-fueled bubble like shale oil and all that happens is we lose a month's worth of job gains, we should probably conclude that the U.S. economy is doing okay.

Barking Up the Wrong Tree

Yeah, the March employment report blew the trend. With just 85,000 jobs created, it stunk. And if that was the bearish indicator — if that was the data you used to conclude the bull market was over — well, I don't know what to tell you. 

The bears got a little frisky in March. We saw declines of 77 and 69 points on the S&P 500 that month. The S&P 500 even finished lower for the month of March, a darn rare occurrence. 

GDP growth was painful as well — 0.2%. That's darn close to an actual contraction.

But then the April jobs report hit last week. And it was a blowout. 223,000 new jobs were added. 

So much for the end of the bull market and economic expansion...

Ah, but those bears are tenacious. They don't give up easy, as headlines like this one show: "In April There Were 26 Waiters And Bartenders For Every Manufacturing Job Added."

"Sure, we're getting jobs, just not very good ones," says the doom-and-gloom crowd. This angle of attack has been pretty popular. After all, if a former manufacturing giant like the U.S. can't put more people to work in factories than bars, clearly something must be terribly wrong. 

It sounds good. It's compelling. It's also wrong. 

Do you know the last time the U.S. had a net gain for manufacturing jobs? It was 1990 — 35 years ago. Well, except for last year.

The U.S. had a net gain of 10,000 manufacturing jobs in 2014. Again, that was the first net gain since 1990. 

Oh, and about the quality of jobs... The breakdown of April jobs gains actually looks pretty good:

 

jobs report april

Click Chart to Enlarge

You can clearly see that any comparison between manufacturing and bartending jobs is a red herring. The biggest contributors were Professional and Business Services and Education and Health Services. And don't miss the addition of 45,000 construction jobs...

So if you want to build a bearish case for the stock market that's not based on exaggeration and obfuscation, you simply have to look elsewhere. Job growth is a positive story. 

Now, I'm not here to tell you everything's great and there's nothing to worry about when it comes to the stock market. If you're invested and you're not worried, that would be a problem. My whole point is that you should be worried about the right things, the things that could actually cause a bear market. There are plenty of them, too — no need to invent them. 

Like China. 

Here's Your Problem...

China is walking a tightrope trying to raise its standard of living to the point where it can actually support its economy. And it's doing it with what may well be a debt and credit bubble.

The thing is, there's no way to really know because you can't trust the Chinese communist party to tell the truth about what's going on there. 

China's currency is not freely traded. It's not an open market, and China doesn't have an open economy. You might think the Fed's money creation is bad, and it is. But China has the potential to be way worse.

What's the money supply growth like there? Why can't the government keep printing yuan to cover bad debt and investment? It's not like they'd tell us...

No, we won't have much indication that China's financial system is going Bear Stearns and Lehman Brothers until it really does blow up. And that would send shockwaves around the world.

Another one that bugs me is interest rates. It's not so much that rates will rise — it's what that means for corporate earnings.

I've written on this before. Corporations have been using cheap money to buy back their stock. And so they are showing earnings growth (~70% of S&P 500 companies beat EPS estimates in Q1) but not revenue growth (only 50% beat revenue estimates).

When rates rise and companies can no longer fund share buybacks, stocks may look more expensive than they already are. Plus, investors will come face to face with lack of growth. And that's never a good thing.

I can't tell you exactly when these things happen, but this is what you should be watching...

Until next time,

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Briton Ryle

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