Wednesday, August 27, 2014

Charting The Parabolic Blow Off Stage Of The U.S. Stock Market

Does it feel like the U.S. stock market no longer corrects downward? That's because it doesn't. Since we entered QE4 (dotted red line below), the size of stock market corrections have ranged from 4% to 5.4% and they are getting smaller as we go.

Prior to QE4, during the initial stages of the current bear market rally, corrections ranged from 8.5% to 19.7%. People were nervous back then. Now, any concerns about the market turning down have completely disappeared. Any down draft is looked at as an incredible buying opportunity. Any rally is looked at as an incredible buying opportunity. This process occurs during the final stage of a cyclical market rally.

Ambrose Evans-Pritchard On How The Next Crisis Will Unfold

Tuesday, August 19, 2014

The Remarkable Rise In College Tuition & Fees

Notice something about the chart below? The three major categories that have seen their prices surge (college tuition, medical care and shelter) are three sectors where the government provides financing and dominates the market.

If the ability (qualification) and cost (interest payments) to borrow money and enter a market becomes easier then there will be more demand for a product which creates a higher price. What you are left with years later are people having to take out massive loans in order to pay for those same goods. Those new entrants are now have a lifetime prison of debt payments.

Ah, but "how would people buy houses or go to school if the government didn't pay for it?" If the government stepped away from the market, prices for those goods would collapse back to a level the free market could afford. What you would be left with is people paying a lot less every month on student loans or housing payments. They would have more disposable income for saving, investing, starting a company or consumption.

Click for larger view:


Sunday, August 17, 2014

Weekend Summary

We covered a lot this weekend. Here is the summary:



















How Price, Pensions & Time May Be Unfavorable For Future U.S. Stock Prices

The Warren Buffett indicator, which he used in the late 1990's to gauge the market's overvaluation, has surged past the 2007 peak and is now rapidly approaching the 2000 mania high. It is the value of the U.S. stock market divided by U.S. GDP (or how big the market has become in relation to the real economy).




Crestmont provided an update of their P/E ratio this week showing that the U.S. market is now more overpriced than the 1929 and 2007 tops. Will the market mean revert back to its historical regression line as it always has in the past, or does gravity no longer apply?


One the main arguments for the bulls is that there will continue to be new money entering the market from the sideline. The chart below shows that this sideline money is unlikely to come from pension funds in the United States which already have 50% their portfolios in equities! (dark blue lines) If these funds begin to get nervous and believe stock prices could face another serious decline, it could be a tidal wave of selling as they scramble back into safer asset classes (remember that pension funds are already seriously underfunded which is why they are reaching for risk in the first place).


What about time? Surely we must still be early stages of a cyclical bull market, right?

Unfortunately, no. The chart below shows that the current bull market in stocks, which is 283 weeks old (5 years and 5 months) is the second longest in 85 years! The average bull market lasts 165 weeks (3 years and 2 months). The only stretch that lasted longer was the incredible run during the 1990's. During the 90's in the U.S. there was strong growth, commodity prices were falling, and interest rates were falling. We may be about to embark on a period when all three of those tailwinds become simultaneous headwinds.


One last bonus chart below, which shows the 10 most expensive stocks in the S&P 500 based on their CAPE P/E ratio. This may be a list to tuck away for the future if we are at or close to the cyclical peak in stocks because you may not see price to earning ratios approaching 300 for many years to come (a healthy P/E ratio is in the 8 to 12 range).



For more on why the U.S. market today is more overvalued as a whole than it was in 2000 see:

The U.S. Stock Market Is Now More Expensive Than The Bubble Peak In 2000.

Population & Economic Growth Migration Toward The Center States In America

A theme we have covered here numerous times over the past year is the migration of economic power away from the coasts toward the center of the country in the United States. The following info graphic provides a visual update on this transformation, specifically the "Domestic Migration" map at the bottom. For more on why this trend will continue throughout the decade ahead see:

The Fate Of The States: How Municipal Debt Will Reshape America



Japan GDP Collapses: Government Bond Yields Fall

Troublesome news from Japan this week where GDP contracted 6.8% in the second quarter. Consumption was down 19.2% and private investment was down 9.7%.


This was widely expected due to the implementation of the consumption tax hike to 8% in April. Consumption within Japan was pulled forward in the first quarter as consumers locked in purchases ahead of the tax increase. This boosted Q1 GDP and rocked Q2 GDP (see graph above).

As part of the global rush to government bond safety this week, the 10 year government bond in Japan fell back below 0.50%. Just incredible:


As with most developed countries around the world, the yields on government bonds in Japan currently have no basis in reality. Total Japanese debt just crossed 1.038 quadrillion yen (quadrillion is the number after trillion), while yields are moving back toward all time record lows (bond prices rise when yields fall). Hopefully the word quadrillion should be enough to explain that these bonds can never possibly be paid back at full value and anyone purchasing a 10 year bond at 0.50% makes U.S. subprime mortgage bond buyers in 2007 look like a genius.


The three largest banks in Japan are now offering adjustable rate mortgages starting at 0.77% (compared with a 1.3% 10 year fixed bonds). 42.8% of new mortgage lending in Japan during February (the most recent month of data) came in the form of adjustable rate loans. Beyond the bankruptcy of the government itself, the coming rise in interest rates in Japan will be a major headwind for real estate prices which have been in a steady downtrend for almost 24 years.

I believe the free fall coming in the Japanese yen or Japanese government bonds (or both simultaneously) is the most likely "black swan" event on the horizon for the global economy.

For a quick review see: Japan Is A Powder Keg Searching For A Match

How Rich Are The Top One Percent, Really?


Why We Should Be Optimistic On The Future

I often discuss how I believe the financial landscape of the world will change over the next few years. It is always important to remember that even if the worst case scenario occurs, a global derivatives meltdown (the equivalent of nuclear war in the real world), at the end of the day we are only talking oceans of digital currency that has been (electronically) printed into thin air.

The world is not going to end. Almost everyone is not going to die, and if it were to occur the world as a whole would be far better off just a few years later (We would transition into the next global monetary system most likely backed by the IMF with a portion of the system involving a gold standard. Any system that limits endless money printing funneled into large banks and government spending which only benefits a small portion of the economy will raise the living standards for everyone).

The world is going to be different over the next decade. Some people will profit immensely from the changes. Most will be caught off guard and see their living standards or total wealth diminish in the short term.

However, under the current global monetary system dominated by government spending and money printing which continues to be an anchor on the global economy's long term potential, there is a real economy composed of capitalists working hard every day to make the world a better place in the future. After the next collapse, when (hopefully) governments and central banks get further out of the way and remove some of the anchors currently in place, the progress of these capitalists will only move forward at a more rapid rate.

Let's look at 11 great reasons to be cheerful on the future from Matt Ridley, courtesy of AEIdeas:

1. Income. The average person on the planet earns roughly three times as much as he or she did 50 years ago, corrected for inflation. If anything, this understates the improvement in living standards because it fails to take into account many of the incredible improvements in the things you can buy with that money. However rich you were in 1964 you had no computer, no mobile phone, no budget airline, no Prozac, no search engine, no gluten-free food. The world economy is still growing every year at a furious lick — faster than Britain grew during the industrial revolution.

2. Life Expectancy. The average person lives about a third longer than 50 years ago and buries two thirds fewer of his or her children (and child mortality is the greatest measure of misery I can think of).

3. Food. The amount of food available per head has gone up steadily on every continent, despite a doubling of the population. Famine is now very rare.

4. Disease. The death rate from malaria is down by nearly 30 per cent since the start of the century. HIV-related deaths are falling. Polio, measles, yellow fever, diphtheria, cholera, typhoid, typhus — they killed our ancestors in droves, but they are now rare diseases.

5. Education and IQ: Education is in a mess but consider: far more people go to school and stay there longer than they did 50 years ago. Besides, through a mysterious phenomenon called the Flynn effect, IQ scores keep going up everywhere, especially in those topics that have least to do with education, probably thanks to better food, richer upbringing and so forth.

6. Environment. The air is much cleaner than when I was young, with smog largely banished from our cities. Rivers are cleaner and teem with otters and kingfishers. The sea is still polluted and messed with in every part of the world, but there are far more whales than there were 50 years ago. Forest cover is increasing in many countries and the pressure on land to grow food has begun to ease.

7. Charitable Giving. We think we are getting ever more selfish, but it is not true. We give more of our earnings to charity than our grandparents did.

8. Crime. Violent crimes of almost all kinds are on the decline — murder, rape, theft, domestic violence. So are capital and corporal punishment and animal cruelty.

9. Tolerance. We are less prejudiced about gender, homosexuality and race. Pedophilia is no more prevalent, just hushed up less.

10. Political Freedom and Democracy. Despite all the illiberal things our governments still try to do to us, freedom is on the march. When I was young only a few countries were democracies; the rest were run by communist or fascist despots. Today there’s only a handful of the creeps left — they could all meet in a pub: fat Kim, Castro the brother, Mugabe, a couple of central Asians, the blokes from Venezuela and Bolivia, the Belorussian geezer. Putin’s applying for membership. The Chinese one no longer shows up.

extreme_wx_deaths_498x425
11. Weather. The weather is not getting worse. Despite what you may have read, there is no global increase in floods, cyclones, tornadoes, blizzards and wild fires — and there has been a decline in the severity of droughts. If you got the opposite impression, it’s purely because of the reporting of natural disasters, which has become a lot more hysterical. Besides, thanks to better infrastructure, communications and technology, there has been a steep decline in deaths due to extreme weather. Globally, your probability of dying as a result of a drought, flood or storm is 98% lower than it was in the 1920s (see chart above).