Strategic Market Update




Forecast Revealing a Topping Stock Market

In my last 7-year forecast update I mentioned that I was expecting the S&P 500 to rise between 12% to 16% higher from where it began 2016. The S&P 500 closed out 2015 at 2,044 and began 2016 at 2,013 (the stock market was in free fall as the calendar turned) so depending upon which starting point is used, the target price range for a high varies somewhat. It turns out that the S&P 500 rallied about 12% higher in 2016 and is now about 16% higher than where it was on January 1, 2016. The following chart shows the performance of the S&P 500 (blue) and Russell 2000 (red) indices since January 1, 2016:

                                                                  click to enlarge

The S&P 500 is an index of 500 large capitalization (“cap”) stocks and the Russell 2000 is an index of 2,000 smaller cap stocks. We can see from this chart that small cap stocks have seemingly went nowhere so far in 2017, while their larger brethren have continued higher. My explanation for this is that the Trump rally is fading, but large cap stocks have continued to rally due to international capital flows. (The data on foreign purchases of U.S. stocks for 2017 is not yet available.) With so much political uncertainty in the European Union, I suspect that some investors are seeking perceived safety in liquid, U.S. blue chip stocks. 

Going back to my broader 7-year forecast, we are looking at the S&P 500 returning to the 2,000 level in the late September 2017 timeframe—a decline of about 15% from the current level—and then moving even lower into September / October 2018. It is my view that U.S. stocks are now putting in a top, the level of which will take years to return to. Given my forecast for the U.S. stock market, I expect the next 18 to 24 months to be a period of economic and market trouble.

A Typhoon Coming

My interpretation of the dream that lead to my current 7-year forecast was that the current environment of structural deflation / low-inflation would continue until around October 2018. Since the election of President Trump, interest rates have climbed considerably higher and a market narrative centered on the expectation for an increase in economic growth, higher inflation, and higher interest rates has generally emerged. 

Seasoned market observers know that the markets are consistently good at making the majority look bad. At present, I think we need to take this narrative and put it in our back pocket. Structurally higher inflation and higher interest rates are coming, but I expect that we will first see the market turn in a different direction which will again catch the majority off guard. 

God spoke to me in January 2009 that the Japanese Yen was going to crash. As usually happens, I had several years to prepare. I begin positioning my clients for this in late 2012 when $1.00 was worth about 80 yen. $1.00 is now worth about 115 yen so the yen has fallen by about 45% since that time. Yet, this longer term trend is just getting started. This unfolding scenario has impacted my thinking and other forecasts for years, because in the back of my mind I have expected one final, dramatic blow of U.S. dollar strength. I think this is going to unfold in the coming 18-month period and here is the main reason why.

There is a prominent cycle forecaster whom I read the blog of on a regular basis. I was attracted to his work several years ago after I saw that his model was predicting the crash of the yen and also a rise in the Russian economy (further out). These were both key events that God had led me to that I had not seen anyone else predict. One advantage of knowing future events is that you get to see who knows what they are talking about at present. 

This cycle forecaster, whom I shall leave unnamed, was calling for deflation and a higher U.S. dollar several years ago. On October 19, 2015, I had the following dream:

I dreamt that a typhoon was coming—a tropical cyclone in the Northwestern Pacific Ocean. I turned and saw a giant wave coming so I dove into it to avoid getting hurt. After I came through it, the price of silver was $18. 

In this dream, this particular cycle forecaster was standing there with me.  

My interpretation of this is that the crash of the Japanese Yen is going to lead to a wave of deflation, after which inflation will begin to accelerate. 

Japan is obviously in the Pacific Northwest and is commonly struck by typhoons. Whether or not this will be a real typhoon or some other event that leads to an economic typhoon, I do not know. Probably the latter. The fact that silver was $18 after this event tells me one of two things: either this will be the price level of silver at the time of this event or this event will lead to substantially lower silver prices (e.g., $7 to $9 per oz.) and then silver will rise to this level. Either way, I expect inflation to begin accelerating after this and a new bull market in silver. 

My 7-year forecast tells me that we have 18 months left in the current environment of structural deflation / low-inflation. I expect the typhoon to hit during the last 12 months of this 18 month period. The puzzle pieces would seem to fit together this way. This will be a time—September / October 2017 to September / October 2018—that will warrant extreme caution. We could suffer a final deflationary blow where the U.S. dollar skyrockets higher. 

Two Key Trends

Now I mentioned that the current market narrative of higher inflation and interest rates needs to go into our back pocket. I suspect we will be able to pull it back out again in about 18 to 24 months.

There are two key trends that I am focused on that I expect to accelerate during the later half of the current 7-year, sabbatical period. In 2013, on two separate occasions, the Holy Spirit showed me the following two separate newspaper headlines:

Global miners lead advance

Capital losses mount for bond investors

I think “Global miners lead advance” means that miners of industrial metals, which tend to be globally oriented, will be the leading industry group when we look back at the end of the next bull market cycle. I can easily see this happening with a U.S. push for infrastructure development (the only thing Congress agrees on), increased economic development in India, China building out the new Silk Road, and all sorts of emerging new technologies that will require industrial metals. President Trump showed up right on time for this one. Coinciding with this is the fact that key metals like copper and zinc are either already undersupplied or soon will be. This is why I have been focused on junior miners like Tinka Resources, whose quality development projects will soon demand a premium price. I also have a suspicion that some higher industrial metals prices will be driven by a decrease in Chinese production due to new environmental restrictions and depletion in general.

“Capital losses mount for bond investors” clearly means that interest rates are going to rise substantially. This one is easy to see coming, given debt burdens around the world.

These are two key trends that investors should pay attention to in the years ahead. 

After this soon coming crisis period, I suspect that investors who avoid long dated bonds and overweight industrial metals related stocks will outperform their peers. I continue to work on my buy list in the metals sector as I suspect this downturn will present some great buying opportunities.

Questions or comments? Leave them below and we can start a discussion.

Joshua Hall, ChFC



The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, a Registered Investment Adviser in the U.S.A. The information presented in The True Vine Letter is provided for educational purposes only and not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. The True Vine Letter is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may read this letter. You should independently evaluate specific investments and consult a professional before making any investment decisions.

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