Thursday, October 23, 2014

Barron's Big Money Poll: Breathtaking Confidence In U.S. Stocks

Barron's conducts their "Big Money Poll" twice a year with 145 portfolio managers representing some of the largest investment companies in America. The most recent results have come in (click for larger image):

70% believe stocks will be the best performing asset over the next 12 months
72% believe the U.S. stock market will provide the best returns 
84% are bullish on large cap U.S. stocks

Are you ready for the most dire prediction of the 145 managers polled?

The DOW will end the year about where it is today at 16,500 and by mid 2015 fall by........23 percent. Really? That is the most dire prediction that one "crazy" manager could come up with?

In other words, those managing the money of U.S. stocks have clients all-in with 100% confidence in U.S. stocks in 2015 and beyond. What could possibly go wrong?

For a review of what the "Big Money" was saying during the last market top see:

Flashback To December, 2007: What Was The Outlook For U.S. Stock Prices?

Emerging Markets Provide A Stronger Expected Return Than The United States

A topic discussed relentlessly here over the past year has been how overvalued the U.S. stock and bond markets are relative to the rest of the world (specifically emerging markets).

The chart below from Research Affiliates shows the expected returns for specific asset classes in the years ahead. While emerging market stocks are shown to have the highest positive expected return, they also come with greater expected volatility (meaning prices could drop sharply in the short term).

You can see the dismal expected returns for U.S. stocks and bonds in the years ahead (far right). To play with their interactive graphs and review how their expected returns were generated click here.

The following chart helps illustrate why emerging market stocks represent a better current value. While U.S. stocks have risen parabolically for 3 years running, emerging market stocks have stagnated and essentially tracked downward during that period.

Am I buying emerging market stocks today? Not yet. My hope is that when the bubblicious U.S. stocks begin to sell off, they drag the price down further on some of the more quality and less expensive markets around the world (creating a better entry point for purchases). For more see:

A Visual Walk Through Of U.S. Stocks Relative To Markets Around The World

h/t Short Side Of Long

The Best Time To Buy Plane Tickets

It's fascinating how much the price of an international flight fluctuates day to day when purchased in the United States. The Wall Street Journal reports the best day of the week to purchase tickets is now Sunday, with Saturday coming in second.

Wednesday, October 22, 2014

Kyle Bass On Japan & The Changes In Global QE

On Japan:

How global QE policy changes will impact currency markets and U.S. stocks:

Saturday, October 18, 2014

The Federal Reserve Swiftly Enters To Stop The U.S. Stock Market Decline

On Tuesday morning, the Federal Reserve woke up and saw the stock market was going in a strange direction it was not supposed to be going; down.

Action was taken immediately, beginning with San Francisco Fed President John Williams who said, "if we get a sustained, disinflationary forecast.....then I think moving back to additional asset purchases in a situation like that should be something we seriously consider."

The stock market regained its footing on Tuesday and by Thursday afternoon it was time for another Fed member to turbocharge the rally. St. Louis Fed President James Bullard stepped up and said, "we have to make sure that inflation expectations remain near our target. And for that reason, I think a reasonable response by the Fed in this situation would be to.....pause on the taper at this juncture, and wait until we see how the data shakes out in December."


Only two weeks ago there was an across the board consensus coming from the Federal Reserve that not only should QE be stopped, but the Fed should immediately begin raising rates in 2015. The Fed's dual mandate is to promote low unemployment combined with stable inflation (discussing the absurdity of this dual mandate is beyond the scope of this discussion). The number of people applying for unemployment in the U.S. this week fell to a 14 year low. Combine that with a falling cost of living due to the energy decline and the Fed's dual mandate looks right on track.

However, there was one sector of the U.S. economy that experienced severe deflation this week: the U.S. stock market. The Fed's immediate reaction to talk up the market with unemployment improving and inflation falling reveals the Fed's true mandate: promoting a higher S&P 500 close at the end of every trading week. 

The most interesting part of this sham is when the real sell-off arrives market participants will see that the Fed is actually powerless to stop it.

There is one last option, the "nuclear" option, that can be employed during a stock market collapse; large scale purchases of U.S. stocks through QE (printing money to buy stocks).

This is the weapon of last resort, and I expect it to be used in the latter stages of the coming crisis in the massively overpriced U.S. markets. Japan is already employing this strategy with their central bank currently in the market every month making stock purchases (alongside their enormous bond buying program).

So how will this all play out and under what timeline?

I have absolutely no idea. If anyone tells you they do, politely excuse yourself from the conversation and walk away.

We are so far away from charted territory and so far away from anything that remotely resembles a real market it is beyond impossible to try and figure out how the market will react in the short term to every central bank intervention.

In the long term, what we do know with assurance is that every central bank intervention fundamentally weakens the general economy and financials markets. It is a poisonous intravenous fluid continuously injected into the arm of the financial system.

It is fairly simple to understand that a debt problem cannot be solved with more debt and printed money; it will only create a larger and delayed crisis in the future. Yet, after years and years of a market rally combined with central bank board members holding fancy economics degrees telling the world they have everything 100% under control, people believe the wizard is real and there is no reality waiting behind the curtain. In the end there will be chaos.

For more on the coming change to voting Fed members (who will be promoting additional QE) see:

Jim Rickards On The Structural Depression, U.S. Dollar & Gold

Friday, October 17, 2014

Jim Rogers: Most Assets Should Be Avoided Today

He is currently interested in agriculture (mentions rice and sugar specifically), and stocks in Russia, China and Japan.

Thursday, October 16, 2014

The U.S. Government Borrowed Over $1 Trillion In 2014

You'll hear from the mainstream media over the next few weeks how the deficit in the United States has fallen to "only" $483 billion in the 2014 fiscal year. While a deficit of that size seemed unimaginable back in 2007, it appears on the surface to be a massive improvement from the trillion dollar plus deficits than have been running since 2008.

But is it?

David Stockman, the former Director of the Office of Management and Budget under Ronald Reagan from 1981 to 1985, penned an excellent article this morning on the magic of government accounting.

As seen in the chart below, the amount borrowed (the real debt that must be payed back by American taxpayers in the future) was actually $1.086 trillion in 2014.

The deficit reported was largely wiped away due to accounting sleight of hand during the debt ceiling debate and movement of the debt into "other" off-budget categories.

For the complete breakdown see Washington Accounting Magic: US Deficit $483 Billion, New Borrowing $1.1 Trillion.

Better Buy: German Government Bonds This Morning Or Cisco In 2000?

While I have documented the madness surrounding the pricing of Japanese bonds relentlessly over the past few years, it appears that instead of Japanese bonds returning to more rational price levels, other countries are joining Japan in the realm of insanity.

The yields of German government bonds now mirror what is occurring in Japan only on the shorter duration they have moved negative.

If you want to lend your hard earned money to the German government for 4 years (or less), you must pay them to hold your money.

If you would like to lend to them for 10 years they will provide you with a 0.71% interest rate annually.

Germany has a strong export oriented economy with low unemployment, and its government debt to GDP ratio is less than 80%. In comparison to Japan's ridiculous 250% government debt to GDP their government balance sheet looks immaculate. However, when you add in public and financial debts to the mix, Germany's debt to GDP ratio rises to a less manageable 270% of GDP. As seen in the graph below, this number looks great when compared to the industrial-country average, but does that mean you should invest in German government bonds?

The best way to think of this is to use an analogy from a previous mania because we are currently at the final stages of a government debt super bubble. If you were an investor back in early 2000 someone might approach you to discuss the opportunity in purchasing Cisco stock. They explain to you how it is far safer stock to own than a company like because Cisco is a real business that is making real profits (just as someone might argue the safety of German debt vs. Japanese debt today).

The problem is not the business, but the price. Entering the year 2000, Cisco had a price to earnings ratio of 109 using extremely optimistic earnings projections (the historical average for P/E ratios is around 15 using Wall Street's optimist forward earnings). Although Cisco was a strong business, you were paying beyond bubble prices for the stock.

This same scenario is occurring in government bonds today. Germany's government is going to pay it's bills over the next ten years, but at a return of 0.71% the price of Germany's bonds can still collapse in the years ahead. If yields were to move up to a more rational 3.0% level, investors would lose a tremendous amount of principle (bond prices fall as bond rates rise).

Germany looks better than Japan on a relative basis (just as Cisco looked better than back in 2000), but does that mean you should currently own the debt of either country?

Of course not.

What happened to the investors making the buying decision back in 2000? Those that went with lost everything (the stock went to zero), while those that stayed with Cisco only lost 86%.

h/t Sober Look

Wednesday, October 15, 2014

They Don't Ring A Bell At The Top

Well, sometimes they do. The Alibaba IPO, which was the largest in history, top ticked the U.S. stock markets to the day. We'll see if it holds.

h/t Jesse's Cafe Americain

Stocks Now Below The S&P 500 200 Day Moving Average

The S&P 500 has broken below its 200 day moving average for the first time in 98 weeks.

This incredible run puts it at the top of the historical list.

After an almost two year never ending party in the U.S. stock market, participants calmly believe no hang over is necessary. I am in the camp that believes something far more wicked is waiting.

h/t Short Side Of Long, Pension Partners