Friday, March 16, 2012

Global Market Forecast: Introduction

Global Market Forecast: Introduction
Global Market Forecast: Sovereign Debt Review
Global Market Forecast: United States Economy & Stock Market
Global Market Forecast: Conclusion

Earlier in the year, I wrote a detailed outlook on the global financial markets and the United States residential and commercial real estate market.  The purpose of this forecast is to update the 2012 outlook with real time data on where the markets stand today.

The reason for this broad discussion on where find ourselves almost three months into the year is due to the explosive rise in the stock markets and all asset classes around the world.  The markets are telling us that not only is the worst is over for the global economy, but they have now priced in a tremendous global boom years ahead into the future. 

When this site was created, I recommended an array of investments and pushed hard for investors to fill their portfolio with these assets.  The general palette included precious metals, precious metals mining shares, energy stocks, agriculture stocks, and investments in foreign currencies and stocks inside Australia, Canada, Hong Kong, Singapore, and China.

For almost two full years, those investments performed incredibly well. In April of 2010, I felt that the market had risen too far based on the fundamentals in the global economy. I recommended that investors hold their current positions and start to build a cash position for future buying opportunities.

Since that point, the United States stock market, bond market, and commodity markets have been on a tear upward.  The S&P has risen from close to 1100 to 1400, where it stands today.  Treasury bonds rose by 30% last year, the best performing asset class.  The original assets the I recommended purchasing and holding through this most recent period have performed excellent.  However, those that have been accumulating cash, instead of following the herd rushing back into stocks and high yielding bonds, have missed this most recent rise in the market.

What I'm saying is so far over this two year period of recommending cash accumulation, I have been wrong.  Your portfolio would have performed better had you run with the herd.

The reason why I'm writing this now is because many people that have been patient during this run up are now ready to throw in the towel.  Some of these people have an excellent understanding of the global economy, but understandably cannot bear watching the markets rise day in and day out.

A rising stock market has an eerie effect on one's psyche.  Investors, companies, and every day people see a rising stock market and they look for reasons why it is rising to justify the move. When stocks go up 200 points in an afternoon, CNBC provides five headlines that created the move. When stocks fall by 100 points the next day, they provide another five headlines that created the move downward.  Of course, common sense will tell you the market does not work this way, but it makes for excellent television.

In the investment world, unlike anything else you purchase during everyday life, when an investment rises in price it makes people want to buy it more.  No one wants to buy gasoline for their car more because the price has risen.  No one wants to buy diapers for their kids, dinner at a restaurant, or a plane ticket home for Christmas because the price has gone up.  They like to buy these items when they go on sale.  The stock market is the exact opposite. This one of the most fascinating parts of the financial markets for me and something I love to watch and study taking place.  Three months ago Apple stock was close to 400 and today it is touching 600.  This 50% move higher, making the stock 50% more expensive, makes investors want it far more today than they did back in December.

A friend of mine emailed me this week and said he can't believe he missed out on this most recent Apple move.  I sent him the following graph of the price of Apple against the NASDAQ back in 2000.  This is a graph that they don't show on CNBC during their three hour conversation on the new iPad 3.


My friend is extremely intelligent and understands that Apple is way overpriced, but the lure of the price move has an intoxicating effect on the mind.

The same goes for the stock market in general.  Back in October when the market was touching 1075 and the European crisis was at its most recent point of intensity, people were running full speed away from stocks.  Today at 1400, with the European crisis far, far, worse than it was back in October, they are salivating to get back in and become a part of this new bull market.

Sentiment in the market today is at multi-year highs. The VIX, the fear index for the stock market, has just touched multi-year lows (meaning investors see absolutely no danger ahead).  The short position in stocks (meaning those that are betting against prices going lower), is now at a four year low.  Insiders, those that actually work for the companies, are currently selling at an 8 to 1 rate.  They are seeing something that the rest of the world is not.


Investors see the higher stock prices and look around to find reasons to justify its price being there. This is like driving a car looking through your rear view mirror.

I want to take a moment and have a broad discussion on what the world may not be seeing while they watch Apple shares soar higher every hour.  I want to start first with what is taking place outside the United States by providing an update on the sovereign debt crisis, and then take a long look at the United States itself.

I believe that the stock market is more dangerous today than it was back in December of 2007 when it was touching the all-time record high.  Let's talk about why.

Next: Global Market Forecast: Sovereign Debt Review

h/t Zero Hedge, Charles Smith

8 comments:

  1. We aren't almost four months into the year. We are two and a half months into it.

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    1. I appreciate the look out, changed it. Was typing fast there. :)

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  2. I was lucky enough to stumble onto your blog. Thank you for sharing your knowledge and experience.

    "I believe that the stock market is more dangerous today than it was back in December of 2007 when it was touching the all-time record high."

    But, difference now is MASSIVE CB intervention? Since so far CB's have successfully (?) backstopped risk events and governments will continue to socialize TBTF's losses, how can markets lose?

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  3. They can only loose if they loose control over the "political will" of the bailout process. Back in 2008, everyone collectively said Lehman will not be bailed out because there was outrage over the bailouts. So far we have not have that Lehman moment. And maybe we won't. But the price of gas at the pump is 7% away from the all time record high and more and more people are starting to understand that it is correlated with the trillions of free money given to the banks.

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  4. Tuna,

    1. It's "lose" as in "loser". "Loose", on the other hand, means not a tight fit. Spell Chequer does not pick this up.... However, the message is still intact!

    2. I am astounded that there are still people around who do not believe the wisdom of Ludwig Von Mises, re the "crack-up" boom prior to hyper-(in-de)flation:

    "This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy."

    "But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them."

    "It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."


    What you are describing is a classic "crack-up" boom in AAPL. I fully expect to see Von Mises receive a sainthood in due course....

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    1. Great quote from Mises. One of the things I like to do is go to the bookstore and just take a look at the dominant themes in the business and finance sections. The economics section has been flooded over the past year with titles on the "revival of Keynes" and how "Keynesian" economics has saved the world. During the next downturn these books will be no where to be found. Hopefully more and more people will continue to find their way toward Austrian economics.

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  5. Dear Tuna,

    The AAPLY chart you have posted makes it seem like a parabolic blow-off. Would it be a good time to short it now? Or is it now up and up as part of a "crack up" boom and no gravity to pull it down?

    Thanks for the significant effort you put in to write your articles and great analysis.

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  6. I have no idea if AAPL is a good short right now. There are rumors they are announcing a dividend as early as tomorrow which would most likely send the stock market soaring higher. I loved Netflix as a short when it was at 200 last year, then it went to 300 (before crashing below 100). Markets can stay irrational longer than you can stay solvent (or hold out on a put option). Trade with caution.

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