Look out below! America is in trouble

Human nature being what it is, some investors are more aware than other investors of what is going on in the economy and financial markets. But almost every investor knows that the U.S. stock market fell big time in recent days. Specifically, (through Tuesday August 25th), the Dow Jones Industrial Average declined 10.5 percent in just five trading days! Actually, that’s mild in comparison to the recent stock market declines in China, Greece and about a dozen emerging-market countries. For example, China’s Shanghai Index declined 4 percent in the two-and-a-half months ending August 26th.

So, what factors are driving the sharp and swift, worldwide sell-off? For starters, the bull market that began March 9, 2009, is the third longest and fourth most profitable in U.S. history; it was overdue for a correction. In retrospect, that bull market was the result of the Federal Reserve’s financial engineering, spurred by the unprecedented action of reducing interest rates to near zero and holding them there for almost seven years. Moreover, several rounds of quantitative easing (the Fed buying Treasury securities) put money in the economy that  inflated stock prices. One of our favorite and respected financial writers, James Grant, has coined the term “Ph.D. Standard” to describe the actions of the Federal Reserve as “the conduct of policy by neo-Keynesian, neo-monetarist academics with Ph.D’s granted by a small number of elite schools.”

In historical terms, how expensive did U.S. stock prices become this summer? The answer according to research by Nobel laureate Robert Shiller: The third highest valuation since World War I, trailing only the late 1990s and 1929; 2007 ranks fourth. The 1990s, 1929 and 2007 had stock declines of 49 percent in 30 months, 86 percent in 33 months and 57 percent in 17 months, respectively. Such times are not for the faint of heart!

In recent weeks, it has become apparent that China – the world’s second-largest economy – is experiencing a dramatic showdown and its intermediate-term prospects have dimmed. In response, China unexpectedly devalued its currency, the yuan, on August 11, 2015.  All other things being equal, that devaluation makes China’s exports cheaper. Another recent currency devaluation was done by Kazakhstan on August 20th.

In the last year, there have been huge collapses in commodities including oil, copper, agricultural products and gold. Since June 2014, oil has declined 65 percent (as of August 25th)! This development, along with the Fed’s policy moves, have resulted in the biggest threat of all for the world economy: Deflation. The world experienced some deflation in the 1930s, but none of significance since then. For the last few years, the inflation rate has been nearly 0 percent, far below the Fed’s target of 2 percent.

Americans should be concerned about today’s level of national debt. Since January 2009, federal debt has grown from $10.6 trillion to more than $17 trillion. Despite some rather glowing reports about the U.S. economy in recent months, federal student loans are out of control. These loans have exploded to $1.2 trillion over the last decade. In addition to that large figure, nearly seven million student borrowers have gone at least a year without making a payment – either because they are unable or unwilling to do so.

Considering this list of negative factors, it’s easy to understand the recent weakness in stock prices. But wait, another important factor comes from the Bible: God’s judgment has a tendency to occur in Shemitah years. The most recent Shemitah year is September 25, 2014 to September 13, 2015.

Shemitah years date back to ancient Israel and its exile to Babylon. (See Jonathan Cahn’s book The Mystery of the Shemitah, 2014.) Key Scriptures relating to the Shemitah years are Exodus 23:10-11a and Leviticus 25:1-4. Suffice it to say here that many major declines in the U.S. stock market have been in Shemitah years or in the three months thereafter (that is, in their wake). But note that not all Shemitah years saw major declines in the stock market.

Regarding God’s judgment in Shemitah years, in is instructive to be aware that two U.S. Supreme Court decisions would anger God. First, Roe v. Wade (legalizing abortions) on January 22, 1973, was during a Shemitah year and Obergefell v. Hodges (legalizing same-sex marriages) on June 26, 2015, also was during a Shemitah year. The stock market peaked on January 11, 1973, leading to a 21-month bear market with a decline of 48.2 percent. As of now, the stock market peaked on May 21, 2015, with a decline of 12.4 percent trough August 25th.

The Bible is clear: People are to worship God, not their wealth. They are to recognize that their wealth is one of God’s blessings: “You may say to yourself, ‘My power and the strength of my hands have produced this wealth for me.’ But remember the Lord your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant, which he swore to your forefathers, as it is today.” (Deuteronomy 8:17-18) Watch a few minutes of financial television someday, and you’ll see the reporters and guests are not aligned with these verses.

The Dow rallied 6.3 percent on August 26th and 27th. But in light of the economic and biblical factors weighing on the stock market now, look out below!

One of the authors of this article, John Harris, has developed a brand-new proprietary investment tool called the Good and Bad Times (GBT) model. The intention of the GBT model is to enable individuals and institutions to be invested in the S&P 500 Index – a broad measure of the U.S. stock market – (1) during much of its good times and (2) avoiding much of its bad times.

In the last 88 years, there have been only 22 sell signals. Number 23 occurred August 24, 2015. It is noteworthy that six of the 23 sell signals occurred during the periods of highest stock valuations of all time (mentioned above). Moreover, nine of the 23 Sell signals occurred during Shemitah years including 1931, 1937, 1973, 2000 and 2008.

To receive a short writeup describing the GBT model, request it by emailing harrisjohnk@hotmail.com.