Thursday, March 26, 2015

Investing Based On Unemployment Data Is Like Driving With The Rear View Mirror

Following the Fed's announcement last week I discussed how the U.S. employment data is showing strength while most of the other economic data is showing weakness. Why is this important? Employment data is a lagging indicator. During most recessions employment peaks after a recession has already begun. 

MISH put together some excellent information this morning on this topic in Jobs and Employment: How Much Recession Warning Can One Expect?:

In the previous five recessions, jobs peaked two months after the start of the recession once, one month later once, one month prior twice, and once during the recession month.

In the previous five recessions, employment peaked one month after the start of the recession twice, one month prior twice, and once during the recession month.

The NBER says the last US recession started in December of 2007 and lasted until  June of 2009. Let's take a closer look at stats from that recession.

2007-2009 Recession Stats

  • Jobs were higher three months after the recession started than two months before the recession started.
  • Jobs were higher two months after the recession started than one month before.
  • Employment was higher three months after the recession started than two months before.
  • Employment was higher two months after the recession started than one month before.
This is the bind the Fed faces today. The economy is weakening rapidly but the broader public has not noticed due to the jubilation around the jobs number (which I have shown numerous times is actually weaker than the data suggests due to how they calculate unemployment).

Meanwhile U.S. stock market investors believe any weakness in economic data or weakness in stock market prices will mean the Fed announces a delay in raising interest rates or additional easing (QE4).

The belief in the Fed "put" underneath the market has never been stronger. Market participants (behind the strength of the media) believed the Fed would stop any decline in the market in 2000 and 2008 with rate cuts and additional easing. The Fed began cutting interest rates in the fall of 2007 and continued cutting through March of 2009. Stocks fell close to 60% during that easing period.  

The belief in a Fed put only pushes stocks artificially higher in the short term which creates more damage when reality ultimately returns to the markets. Or maybe this time around the laws of gravity no longer apply and QE can keep stocks elevated forever. My personal investment bet is the Fed will not be able to stop the next decline and when it's over there will be an entirely new paradigm shift toward how the world views the Fed and other major central banks.

Tuesday, March 24, 2015

The Perceived Safety Of The Market

From STA Wealth this week discussing the mindset behind individuals blindly purchasing stocks:

Unlike Warren Buffet who takes control of a company and can affect its financial direction - you are speculating that a purchase of a share of stock today can be sold at a higher price in the future. Furthermore, you are doing this with your hard earned savings. If you ask most people if they would bet their retirement savings on a hand of poker in Vegas they would tell you "no." When asked why, they will say they don't have the skill to be successful at winning at poker. However, on a daily basis these same individuals will buy shares of a company in which they have no knowledge of operations, revenue, profitability, or future viability simply because someone on television told them to do so.

Sunday, March 22, 2015

Bill Fleckenstein: The Fed's Game Of Chicken With The Stock Market

Excerpt from Financial Sense:
The Bulls' Self-Deluding Prophecy
I'd like to take a moment to reiterate where I think we are. Since the Fed began tapering I have been expecting the market to have a nasty spill at some point. As I have said many times, the market is where it is because of money printing by the Fed (and other central banks). That's what drove the stock market to the moon and put rose colored glasses on folks of a bullish persuasion regarding the U.S. economy, and the combination of the optimistic outlooks for stocks and the economy has led to strength in the dollar.
So three major macro conclusions have all been reached based on the premise that Fed money printing has worked. It would appear that folks also believe that not only can the Fed stop printing money, but it will be able to start raising rates and withdrawing liquidity. I and others who think likewise don't believe that is the case. Thus, my shorthand expression has been that there is a game of chicken going on between the S&P and the Fed, fueled by the aforementioned beliefs of the stock bulls, which they will continue to hold until the Fed's actions — or lack thereof — produce a huge break in the stock market.
Overdue Diligence
Just because a big break has not happened along the way doesn't mean that it won't. Timing the ending of markets that have been kited higher by easy money is impossible. It couldn't be done during the stock bubble that ended in early 2000, the bond bubble that ended in 2008, and it can't in this bubble either (especially given the epic size of QE). But it will occur. The question then becomes at what point will the stock market start to sink, and when will expectations for it, the economy, and the dollar all change? As noted, we can't know that in advance, we can only react to change once it occurs.

Saturday, March 21, 2015

Peter Schiff: Why The Fed Will Not Raise Rates In 2015

Why Your Vote Does Not Matter In America

The Sunlight Foundation recently completed a study on corporate political spending and the reward companies received for their contributions. Their research found that for every $1 corporations spent on political donations they received $760 in return through direct business support. There is no better return for a company than buying and purchasing the next round of politicians.

This is why the political structure in the United States will never change. Corporations and the largest banks put their pre-chosen candidates out for Americans who then try and figure out who will protect their personal interests. The elections are over before they even begin.

While this used to anger me, over the years I have come to understand this system will never change until we reach the next major economic collapse (something far greater than 2008). All I (and you) can do as an individual is try to put yourself in a position to play by the rules of the rich.

For me personally that is through building businesses and preparing myself every day to be the best possible commercial real estate investor and manager (so I am ready to purchase as much quality real estate as possible and manage it well when the real collapse finally arrives).

For more see: Why Are Young Americans Not Starting Companies?

Why Cheap Oil Doesn't Stop The Drilling

For more on why this supply surge will be temporary see:

Friday, March 20, 2015

The Financial Markets Vs. The Real Economy: How Big Will The Gap Grow?

From Albert Edwards' most recent note:

Most economists see recessions causing increased saving by both households and companies, but I believe the causality has been reversed in the aftermath of Alan Greenspan’s bubble-blowing era - loose monetary policy drives asset prices, fostering increased private sector borrowing and spending. That was the disastrous policy that led to the unprecedented 2000 private (household + corporate) sector financial deficit of 4% of GDP (all corporate), and the same ruinous policy that drove the deficit up again to peak in 2007 (all households). The problem with using asset bubbles to drive an economy is that when the bubble bursts, private sector borrowers realise they have been taken for a mug and correct their savings behaviour aggressively, causing a recession. That same barbarically naive policy remains in place today.

His thoughts on corporations borrowing money to repurchase their own stocks:

Should we be less worried now that the US private sector surplus is 3% of GDP – ie an historically high level and less liable to spontaneous retrenchment? No. The decline from a 9% surplus at the end of 2009 to 3% of GDP now is precipitous and almost entirely driven by another corporate sector borrowing binge to finance activities in the financial markets. Another spontaneous recessionary retrenchment awaits.

My thoughts:

The current goal of the Federal Reserve is to drive the economy higher with asset bubbles in the financial markets (stocks, bonds and real estate). The Fed hopes euphoria in the markets will create a wealth effect, which will then stimulate the real economy, which will then provide a justification or real fundamentals behind the sky high asset values.

In the most recent cycle, from 2009 to present, only the first part of the plan has occurred; financial asset bubbles in U.S. stocks, bonds and real estate (particularly commercial real estate). The real economy has not yet gained traction. This has left the 1% who own the assets more wealthy than any time in history and the remaining 99% running in quicksand.

This perfectly sums up the Fed's dilemma, which was on full display this week. The Fed can see economic data is deteriorating across the board, other than the jobs number which the Fed has admitted is a rough determinant of what is really taking place with employment (i.e. jobs are being created but they are lower paying jobs while higher paying jobs continue to decline or stagnate).

In the meantime, the financial markets are booming and even the clueless Fed can feel the level of froth. Janet Yellen has comented on sky high valuations in biotech stocks, corporate bonds and commercial real estate. The Fed removed "patient" from their guidance this week, but they were clear in expressing their concern for the real economy.

I guess a positive you can take away; because the real economy has not recovered or been "pulled up" by the financial market bubbles, it will be impacted less when U.S. stocks, bonds and real estate finally enter back into reality (they collapse).

Thursday, March 19, 2015

Will Stocks Always Rise & Silver Always Fall?

I came across an interesting chart this week from Casey Research showing the massive volatility in silver market. We have just experienced the second largest decline of the last 50 years (close to 70%). While it certainly possible we could go much lower from here with a deflationary, scramble for cash like event, I am personally steadily accumulating physical silver at these mid-teens prices (silver is about $15 today).

After four relentless years of price declines people begin to forget there was ever a time when silver rose in price and begin to believe steady declines will last forever.

On the other end of the spectrum you have U.S. stocks which have been rising relentlessly for six straight years. People forget there was ever a time when U.S. stocks declined in price and believe the market will always rise, without interruption.

My belief is there will be a day, relatively soon, when the performance of these assets diverge considerably. Every day that passes until we reach that point will bring more people comfortably into the "safe" warm waters of U.S. stocks and away form the "danger" in precious metals or cash.

For more see: The 6 Year U.S. Stock Market Rally Relative To History & What Comes Next