Thursday, September 5, 2013

The Rolling Bubbles Of America: Has The Roller Coaster Peaked Again?

The following chart of the S&P 500 provides a perfect summary of the United States economy over the last 15 years. The two previous highs were brought on due to asset market bubbles where the Federal Reserve dumped gasoline on the fire at every possible moment to keep the party going.

After each bubble collapsed, first in technology stocks and then in real estate, the markets and the economy collapsed as well.

Today we are at the peak of a 30 year bull market in bonds which have formed a rolling top around the world over the last 12 months. The ten year treasury bottomed at 1.38% in July 2012 and is close to touching 3% as of today's writing (bond prices fall as yields rise). Junk bonds did not see yields bottom (peak in price) until May of 2013.

If the most recent bubble has finally burst, what does it mean for both the stock market and the general economy? Since the most recent artificial rally was built almost exclusively off the benefits of easy money and low interest rates, it means something very troubling is approaching.

h/t Charles Smith

Rising Yields Impact On Auto Sales

Tuesday, September 3, 2013

S&P 500 Returns By Month

Would I ever consider buying, selling, or shorting a stock based on a chart like the one below?

Of course not. But they are still fun to look at.

America Leverages Up & Then Deleverages: August 1971 - June 2010

Beginning in the early 1970's the total credit market debt in America, which is composed of consumer, corporate, local government, federal government, and banking debt, began to explode higher on a new trajectory. This was due to the removal of the gold standard in August, 1971.

The credit expansion led to the greatest asset price boom in history, culminating in 2007 when stock prices, commodity prices, and real estate prices were many multiples higher than they were 20 to 30 years previously. The asset boom created millionaires and billionaires across the country and around the world.

The story ended, or so we thought, in the fall of 2008 when the American consumer hit the wall in their ability to take on additional debt. The following chart shows the peak in credit growth in the fall of 2008 and the reversal as gravity hit the debt markets. 

Gravity came in the form of consumers either not taking on additional debt, paying down existing debt, or defaulting on existing debt. The chart below shows consumers hitting the wall at 14 trillion in debt and their deleveraging process beginning.

As the global engine of growth began to to go into reverse it created chaos around the world. Stock markets crashed, real estate prices plunged, commodities went into free fall, global trade shut down, and the financial system almost disintegrated. The net worth of Americans declined significantly as a result of the credit machine breaking down.

In order to push back the much needed day of reckoning and cleansing of toxic debt in the system, three major programs were put into place in the United States. The first was the removal of mark to market accounting for the largest U.S. banks. This allowed them to carry toxic underwater loans on their balance sheet at full value which temporarily stemmed the hemorrhaging on their balance sheets.

The second step was the emergence of quantitative easing. The Fed flooded $1.2 trillion into the financial system in order to re-liquify the markets and lower the cost for all borrowers to take on more debt.

Flooding the financial system with printed money in and of itself does not create new loans because there has to be a willing borrower to take on additional debt. Because the U.S. consumer was still reeling, this new money was parked on the balance sheet of banks as excess reserves.

The borrower of last resort, and the final step in the re-leveraging process, was the United States federal government. The government's balance sheet went parabolic in 2008 as the future tax payers began to take on over $1 trillion annually.

This three step process worked, and the total credit market debt in the U.S. bottomed in June of 2010.

America Re-Leverages: July 2010 To Present Day

The enormous and unprecedented response from both the government and the Federal Reserve worked, and in July of 2010 the total credit market debt in the United States turned higher. Total debt continues to surge higher month after month and recently blasted through the previous peak seen in 2008.

To continue to push this debt higher, the Federal Reserve has kept the liquidity pumping from the fire hydrant, announcing QE 2, QE 3, then QE-ternity, running full throttle. The following shows the Fed's balance sheet now approaching $4 trillion.

Instead of lending money out into the real economy, the banks have continued to hoard the new money created by the Fed as excess reserves.

The Federal Government, working side by side with the Federal Reserve, has also kept the floodgates open and continues to pump trillions of new credit dollars into the system through the process of borrowing and spending.

The biggest impact to this re-leveraging process has come in the form of asset price appreciation, specifically in the U.S. stock and bond markets and more recently in the real estate market.

All three financial markets are now once again filled with euphoria and speculation as buyers only feel asset prices can move higher from here. The total net worth of households in America reached a new record high of $70.3 trillion in the first quarter of 2013.

With the re-leveraging of America now complete we look at both who benefits from this process and how the story will ultimately end.

Up Next: America Re-Leverages: The Benefactors & How This Story Will End

America Re-Leverages: The Benefactors & How This Story Ends

The re-leveraging of America has not helped all sectors of the economy equally. A large amount of the new money created since 2008 has made its way into financial assets. This has brought the stock market to new all time record highs, brought the bond market (until recently) to new record highs and halted the decline in real estate prices as speculative capital is now flooding the sector. Higher asset prices help the ultra rich who control the vast majority of stocks, bonds, and real estate in America.

The hope is that they will go out and spend with confidence, now backed by their juiced up portfolios, and create a what is known as the trickle down effect for the rest of the economy. They have certainly been spending as there are once again bidding wars for super high end mansions, expensive art, rare cars, and other valuables.  A 1967 Ferrari convertible just recently sold for $27.5 million. The grey line on the chart below shows that classic car prices have pulled away from the others on the valuables index as the new "must have" toy for the ultra rich.

The problem is that this wealth has not yet "trickled down." Those making $50k or more per year are experiencing a surge in consumer confidence while those making less are experiencing a decline. The gap is now the greatest in history.

Most of the jobs in the re-leveraging recovery have come in the form of waitress, bartender, low pay, or part time positions.
Income levels for those that have been fortunate enough to find work are not keeping pace with the cost of living. Utility bills, medical costs, gasoline, and food costs are rising, which is taking away disposable income for the middle class. The following chart shows the decline in median household income since the current depression began in December of 2007.

46% of Americans own no stock investments and 40% of Americans do not own a home. They feel no benefit from Bernanke's asset price stimulation, only a rising cost of living. Students graduating from college are smothered with the burden of student loan repayments, which reduces their ability to save or invest, as well as their entrepreneurial spirit.

Savings are not only a problem for the young, as a recent poll showed that the median savings for a household between the ages of 55 and 64 is $12,000. See $12,000 For Retirement - How Many Months Can You Live?

While the middle class worker is running in quicksand, corporations are seeing their profits surge to new all time record highs. During the re-leveraging of America, corporations slashed their biggest cost (employees) and they have done everything possible to keep that cost off their balance sheet.

Productivity, which measures the goods and services generated per hour, continues to improve while compensation has flat lined over the past 3 decades. This is due to the continued improvements in technology and the ability to save costs by outsourcing jobs overseas.

Can the economy continue to grow based on financial asset price appreciation benefiting exclusively the ultra wealthy while the middle class of the country continues to be hollowed out and withers away?

Of course not. This process will continue until the artificial mirage created by central banks around the world dissipates. It will end when central banks lose control of interest rates, currency values, or both; something that markets incorrectly believe they have control over. This is the next black swan event waiting for the markets, and the world experienced the first preview of this event in June of this year as both stocks and bonds sold off together around the world.

Ultimately, a debt crisis cannot be solved by more debt and printed money; it can only be postponed. The delay will ultimately create a much bigger crisis than what we would have experienced in 2008 if we allowed the system to cleanse. John Mauldin had an excellent quote a few weeks ago when he said that "the central banks desire to keep instability out of the markets is creating instability." The reckoning day will be devastating for those that are unprepared, while it will be a wonderful period of investment opportunity for those that understand it is coming.

Monday, September 2, 2013

Jim Rogers On The Coming Global Market Panic

Market Optimism Surges: Flashback To 2000 & 2007?

What were the top financial market participants saying at the stock market peak in 2000?

March 1999: Harry S. Dent, author of The Roaring 2000s

"There has been a paradigm shift." (Translation: "This time it's different, a New Economy!")

October 1999: James Glassman, author Dow 36,000

"What is dangerous is for Americans not to be in the market. We're going to reach a point where stocks are correctly priced, and we think that's 36,000 ... It's not a bubble. Far from it. The stock market is undervalued." (Warning, don't choke on your popcorn!)

December 1999: Joseph Battipaglia, market analyst

"Some fear a burst Internet bubble, but our analysis shows that Internet companies account for only 7% of the overall Nasdaq market cap but carry expected long-term growth rates twice those of other rapidly growing segments within tech." (The Internet Index lost two-thirds in the next six months.)

December 1999: Larry Wachtel, Prudential

"Most of these stocks are reasonably priced. There's not reason for them to correct violently in the year 2000." (Fact: The Nasdaq lost 50% in 2000.)

December 1999: Ralph Acampora, Prudential Securities

"I'm not saying this is a straight line up. I'm not saying you can't have pauses. I'm saying any kind of declines, buy them!" (He also predicted a 14,000 Dow by the end of 2000 and an 11-year bull.)

February 2000: Larry Kudlow, CNBC commentator

"This correction will run its course until the middle of the year. Then things will pick up again, because not even Greenspan can stop the Internet economy." (He's still an economist, hosting his own show.)

April 2000: Myron Kandel, CNN

"The bottom line is, before the end of the year, the Nasdaq and Dow will be at new record highs." (Later in September he predicted a rally to 12,000 by election day.)
Source: Paul Farrell

What happened next?

What were the top financial market participants saying at the stock market peak in 2008?

"A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" —Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008
AIG (AIG) "could have huge gains in the second quarter." —Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008
"I think this is a case where Freddie Mac (FRE) and Fannie Mae (FNM) are fundamentally sound. They're not in danger of going under…I think they are in good shape going forward." —Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008
"I think Bob Steel's the one guy I trust to turn this bank around, which is why I've told you on weakness to buy Wachovia." —Jim Cramer, CNBC commentator, Mar. 11, 2008
"Existing-Home Sales to Trend Up in 2008" —Headline of a National Association of Realtors press release, Dec. 9, 2007
"I expect there will be some failures. … I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." —Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008
"There's growing evidence that parts of the debt markets…are coming back to life." —Peter Coy and Mara Der Hovanesian, BusinessWeek, Oct. 1, 2007. 
Source: Bloomberg
What happened next?

What are the top financial market participants saying today?

From USA Today August 2013: More Strategists Join The Growing "1700 Club"

At the start of the year, Wall Street's so-called "1700 Club," didn't have a single member. But that was before the Standard & Poor's 500 stock index zoomed past 1500 and 1600 on its way to its record-breaking run past 1700 last week.
Today, seven top stock strategists have joined the club, whose membership requirements include being bullish on stocks and owning a 2013 year-end price target of 1700-plus for the benchmark index. All the founding members have boosted prior lower targets to keep pace with the sizzling stock market of 2013.
The club's first member was Tony Dwyer, strategist at Canaccord Genuity. Back in March, he raised his target to 1760 from 1650. (In late July, he expressed confidence in his 2014 target of 1955, a 16% leap from Wednesday's close of 1691, after "busting" some market "myths," including one that says the market is "already up too much," and "it is too late to buy.") Dwyer remains bullish, as he thinks economic growth and inflation numbers are too low for the Fed to start pulling back on its market-friendly bond-buying program this year.
The club's most-bullish member, however, is Tom Lee. On July 26, JPMorgan's chief U.S. equity strategist raised his market outlook for the second time this year, bumping up his target to 1775 from 1715. That equates to further gains of 5%.
Other Wall Street firms that have joined the 1700 Club include Bank of America Merrill Lynch, Goldman Sachs, Stifel Nicolaus, Credit Suisse and Oppenheimer. Of the 17 firms whose S&P 500 price targets are tracked by Bloomberg, 15 have boosted their market outlooks this year, but a dozen still have current targets below 1700.
Lee told USA TODAY that his bullish call is "less about the market's momentum" and "more about the economy's momentum."
Says Lee: "We are seeing signs of a U.S. acceleration." He cites as evidence a better-than-expected July reading on U.S. manufacturing, a drop in the number of Americans filing for weekly unemployment benefits and a decline in the unemployment rate to 7.4%, its lowest level since December 2008.
1700 Club member Savita Subramanian of BofA Merrill Lynch, who has a 1750 target, says the market will be driven higher by a rotation to more economically sensitive stocks, a shift back into stocks by folks who are under-invested and continued economic healing in the U.S.
"Why wouldn't you buy stocks now?" she says. "What is the alternative?"
What happens next?

Sunday, September 1, 2013

Why Your Money Is Not Safe In Banks

The following walks through the events in Cyprus and helps explain why the model of looting bank accounts will continue to be used as the sovereign debt crisis continues around the world. Some of the topics discussed are surprising to many people:

- When you put your money into a bank, the money is no longer yours.

- The FDIC in America can only cover 0.25% of deposits if there was a bank run.

I reviewed this topic in: Cyprus Citizens Bank Accounts Looted By Government: Is Your Money Safe?