Saturday, March 8, 2014

Mark Spitznagel Discusses High Frequency Trading & Corporate Cash

The founder of Universa Investments discusses what happens when liquidity disappears in a high frequency trading environment and lets investors know that "the liquidity will not be there when it is needed."

He also reviews capex spending, the impact of artificial interest rates and the truth behind the record corporate cash. For more on that subject see: The Corporate Cash Myth.

Gold Mining Shares Rise: Conditions Still Extremely Oversold

Some excellent charts this week from The Short Side Of Long on gold mining shares. The first shows the historical relationship between mining shares and the S&P 500. They tracked upward and downward together until mid 2011 when the mining shares began their epic decline and the S&P 500 began its euphoric blast higher.

The next chart shows the four points of extreme undervaluation that have occurred in the gold mining shares over the last 18 years. We are just exiting one of those points today as the mining shares have experienced a massive upward move (in percentage terms) to start the year.

You can see in the chart above that the gold mining index is sitting at the same levels it was in the summer of 2003, when gold was priced at $350 an ounce. Gold is currently hovering at about $1340 an ounce today, close to 4 times higher.

While the volatility is enough to make your stomach churn, those that have the courage to add to positions during steep declines will reap fortunes in the years ahead. As a personal rule, I prefer to only add to positions after a price decline which usually coincides with rock bottom sentiment (which is where we were in December) so I will be waiting and watching closely for the next down draft.

Wednesday, March 5, 2014

Thinking About What Kills Us

The human brain is an irrational machine. The following walks through how we think about what kills us vs. what actually does.

Sunday, March 2, 2014

Why Germany Will Push To Enter The Currency Wars

Concerned about the BRIC nation's export driven economies during the coming currency war? It would surprise many to learn that the percentage of their economy dependent on exports looks tiny compared to the developed country Germany. This should probably help many understand why Germany has tolerated the European Union disaster over the last few years. During many of the panics, which simultaneously drove the euro lower, it only boosted Germany's competitiveness in the trade market.

However, last year due in large part to the resurgence of the euro in the foreign exchange markets, the German economy slumped to its lowest growth level since 2009 at 0.4%. As France is looking increasingly shaky and Germany is slowing, it will put more pressure on the European Central Bank to enter the currency wars with far more force.

85 People In The World Are Worth More Than The Bottom 3.5 Billion

Looking at the global wealth pyramid below we see that 70% of the 7 billion people in the world have total assets below $10,000. Assuming close to 100% of the readers of this site have assets above that level, it should either make you feel good about yourself or very nervous at how quickly social unrest can occur around you.

Institutional Investors Pulling Out Of Real Estate Market As Boomers Look To Sell

Some interesting charts from RealtyTrac this week showing that not only are institutional investors reducing their total purchases in the residential home market.....

.......they are shifting their remaining investment capital to new markets.

The chart below shows the steady decline in mortgage related bond issuance since mid 2013 when rates began to rise. This reflects the importance of institutional and cash buyers in the market and illustrates the trend toward renting homes.

If the trend from home ownership toward rentals is a secular trend, then the decline of the institutional share in the market could be devastating.

Not helping this secular trend is the percentage of the population rising above the age of 65. This group wants nothing to do with their now empty five bedroom suburb mansion, and a large portion of them will favor the benefits of renting during retirement (smaller homes/condos/apartments which are maintenance free).

Putting this demographic shift into context with the remainder of the world, the chart below shows the percentage of the population over 65 vs. GDP growth of various countries. While the U.S. will swim against the demographic tide over the next 20 years, it is nothing compared to the tidal wave that is about to wash over Japan.

The Re-Leveraging Of America: A Different Cast With The Same Ending

A portion of the economic data is showing that consumers, the life blood of the U.S. economy, are coming back. We'll take a brief look at the how and where that consumption is occurring.

Will the economy grow at a robust 4% this year as the mainstream headline forecasts? First quarter GDP growth rate estimates have now moved below 2%, due to the steady stream of disappointing economic data over the past few weeks. It would take a monumental effort from the American consumer nationwide to print a 4% growth rate. They must go out and spend, but in order to do so they need confidence.

The following chart shows the consumer confidence index separated by income. You can see that consumers making above $50,000 per year (very light line on top) have diverged from the rest of the pack. This is due in large part to every day expenses (medical, utility, gas, food) rising. All the income entering every month for those making under $50,000 is earmarked for bills before it can even hit the checking account.

With every drop of income used for paying bills, what is the only American thing to do? Borrow money! U.S. household debt showed the first annual increase this past year in over four years. While the debt markets for mortgages and credit cards were essentially flat, auto and student loans rose by $114 billion on the year.

This re-leveraging in America has taken on a completely different look than the borrowing that took place pre-2008. In those days money was borrowed to max out credit cards and take out home equity lines of credit. This borrowed money then found its way into shopping malls or Home Depot.

Today the money is being pumped into enriching those in the higher education business (student loans) and auto industry (the subprime auto loan is back with a vengeance). The problem is this borrowed money has not made its way into regular retail stores, causing them to suffer.

The second major difference in this new re-leveraging is that it has been completely backed with federal (taxpayer) money. The commercial banks have stayed on the sidelines, happy to receive free QE cash that can be gambled with in the financial markets. Are the banks lending to small businesses, which would create jobs and grow the economy? Of course not. They trust the money far more with a young trader and 3 computer screens.

Although the story is different, the ending will be the same. You will see the weight of student loans continue to crush the graduating classes in future years. Consequences will range from the collapse of the current higher education system to the economic impact of this younger generation being unable to purchase homes or start new businesses. Auto loans, just as they did during the last economic downturn, will experience enormously high default rates.

This will have only a minor impact compared to the $14 trillion housing market meltdown in 2008, however, when you combine these issues with the $17 trillion U.S. government debt bubble (which does not include local and state debt), the next crisis should make the last one look like a warm up.

We can only hope, like everyone did with home prices, that interest rates never rise again in our lifetime.