Now is not the time to buy stocks, warns Wall Street veteran John Mauldin
- The New York Times best-selling author and researcher
John Mauldinhas published a warning by the name Recession Rumbles.
- While the likelihood of a full-blown recession is not clear, even the chances of high-growth and a stocks rally is negligible, according to Mauldin.
- The early warning signals I have used in the past are beginning to flash again, Mauldin wrote right at the start of the report.
Mauldin has cited three reasons for the warning.
Firstly, the stocks in the US are trending way above than the country's gross national income, an indicator most famously used by the iconic investor Warren Buffet.
"Think of Gross Domestic Income as what we collectively earn. When stock prices go up, the collective value of the market goes up and when you compare it to our collective income, you get a ratio to determine if prices got ahead of themselves (overvalued) or are cheap relative to our incomes (undervalued)," Mauldin explained. And on this measure, American stocks are overvalued.
Secondly, the Cass Freight Index that measures shipment volume (by quantity, not cost) transported by every possible medium -- truck, rail, air, ship etc -- is signalling that the economy is in far worse shape than it was between 2014 and 2016 period. This was when oil shipments fell due to a recession. This is partially due to Donald Trump's trade war with China and some part of it is due to a cut in consumption in the US.
Americans have a high level of household debt as the interest rates started to rise in the US, the people are finding it tougher to service their loans.
Thirdly, Mauldin contends that by the time the United States Federal Reserve acts to fix the problems it may be too late. "The Fed waits until it sees signs of weakness, so it’s always behind the curve. By the time there is objective evidence of weakness, it’s too late for the Fed to do a thing," he wrote.
All in all, as he summarised, "when you start matters, and now is not a good time. You want to buy on weakness, not strength. The weakness will come, but this isn’t it." In other words, now may not be the time to buy stocks.
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