Lance Roberts: The Markets Are Now Waving A Huge Red Flag

Lance Roberts sees trouble ahead.

As chief investment strategist of Clarity Financial and chief editor of Real Investment Advice, Lance issues commentary weekly on the financial markets. He sees a major market correction/crash dead ahead, likely in early 2019 as the US economy officially slides back into recession -- though he's open to it happening sooner than that.

Based on the huge debt / deficit excess that have built up in the economy, paired with the tremendous overvaluations in asset prices seen in today's markets, Lance expects economic growth to remain anemic (at best) for the coming decade:

It's a huge red flag. Look, at the end of the day, we can manipulate the bottom line of earnings statements all we want. But if I'm a business, look, I run three businesses, and if I don’t have revenue coming in at the top line, I can manipulate my bottom line through accounting gimmicks. I can do some weight suppression. I can layoff all my employees. I can maintain an illusion of profitability for some period of time. But at some point I've got to have the revenue, which is what happens at the top line of the income statement.

Just to put this into some context: since 2009, total growth of revenues for the S&P 500 is running about 30%. Bottom line profitability has grown by almost 300% during that same timeframe. Earnings per share have grown tenfold over revenue growth because of things like corporate stocks buybacks, weight suppression, employment suppression and accounting gimmicks.

We're at record levels on debt across the board. In fact, I run a chart every now and then that shows what I call total system leverage. And what total system leverage looks at is all the debt: government, margin, corporate, personal debt, all put into one indicator. And we're talking in excess of $120-$130 trillion of total debt outstanding right now, relative to an economy that's growing at $20 trillion.

This is, of course, the highest level ever on record. Corporations have, of course, they’ve used ultra-low interest rates to lever up balance sheets to pay out dividends, to do stock buybacks, etcetera, and a lot of these stock buybacks that have been done using corportate leverage because it was a 'better use of capital': I get to write off the interest on my balance sheet in terms of what I'm borrowing on the debt plus the buyback shares and improve my bottom-line earnings. That's been a win-win for corporations.

The problem, though, eventually, is that a lot of this debt that's been issued is sub-quality credit in terms of investment. When you talk about investment grade investments, BBB or better, a lot of this debt that's outstanding is BB or less. And that's going to be an issue when two things occur: one, when interest rates rise enough that the cost of borrowing is no longer acceptable and two, when you have the next major market crash that causes a massive deleveraging cycle in the markets -- and that will be triggered by an increase in interest rates from the Federal Reserve.

So America can slash taxes; do the things it wants to do -- like trade wars and tariffs -- but all it's going to do is negatively impact the economy because of the fact we're running $21 trillion in debt. And we're going to run a trillion-dollar deficit by the end of this year, one that's going to become $2 trillion over the next five years. With this growth trajectory of debt and decificts, economic growth can only go substantially lower over the next decade.

Click the play button below to listen to Chris' interview with Lance Roberts (53m:51s).

This is a companion discussion topic for the original entry at

Best explanation for the underlying basis for interest rates that I have heard. Great discussion about the lack of acceptance of the new normal and the financial state of the majority of Americans. I know there is a lot of pent up anger about the level of corruption and injustice, and in a way that fuels a lot of the apopolectic predictions about future events. Despite our fears about a dystopian future, it is in an odd way, a wish for justice served. But I am afraid that brutal reccessions, and a continuing slow downward grind are the more likely outcomes. I think our fears of a meaningless grind, unfulfilled oportunities, and an ordinary life not fully lived are a far greater. As good as this discussion was, in a way it was far more chilling that the more apocalyptic ones. It comes on like a cold grey morning, when reality comes at you all at once. The dream from the night before of dramatic events waking a sleeping humanity disapates, and we are left beneath the yoke of a vapid dysfunctional culture marching aimlessly into the future.

Seems like if you believe as Lance says, that things aren’t going to start affecting the equities market until 2019, then you’re trying to time the popping of the bubble. Waiting for an inverted yield curve is a bit risky, given the way things like that can easily be manipulated behind the scenes.
No question that rising interest rates are going to negatively affect corporate buybacks. Conversely tax credits are enhancing buybacks. The only question is timing. If you’re a nimble investor and want to take a chance on waking up some morning to a waterfall stock market as your signal to decide whether it’s a real crash or a “pre-crash” that will recover first - then sounds like a fun timing game. The upside is the few percentage points you might make before the market does crash. The downside, is you blow it and things just keep waterfalling, some recovery, then more waterfall. Like in 1929.
not a game that seems like it’s conserving one’s wealth. Maybe ok for fund managers, who have to maximize their profits, and think they can time the fall. But not for an individual…

The 80’s were also the era of the microprocessor and personal computers. The efficiency improvements were dramatic, allowing significant improvements in profitability across a wide range of industries.