Friday, June 13, 2014

The Canadian Housing Bubble & The Dollar Standard

Michael Maloney, during a recent presentation in Canada, walked through the current real estate bubble there and the trigger that could cause it to burst; China's economic slow down.

During the remainder of the presentation, Maloney provides an update on where we are in the current monetary cycle:

Tuesday, June 10, 2014

European Government Bonds Reach Multi-Century Lows In Yields

An incredible set of graphs below showing 10 year bond yields for France, Spain and Italy which have simultaneously fallen to the lowest yields in history. As a brief reminder; all three of these countries are on the verge of a massive government debt disaster. These bonds are being purchased by (insolvent) banks within their own borders using massive leverage. They are being purchased by investors who believe that the ECB will soon monetize (print money to purchase) all government bonds. If you want to take it one step beyond the ridiculous, please remember that a central bank printing money to purchase a government bond provides no fundamental strength to that bond because they are diluting the future return investors are paying for today. 

The world has become so twisted and distorted beyond reality due to the central bank interference around the world it makes it impossible to even try to quantify how enormous the catastrophe will be when these risk assets begin to unwind. Perhaps it will be large enough during the next collapse that someone will take notice and at least try to stop it from occurring again, but based on how quickly we have returned to the insanity of 2007 in financial markets around the world there is little hope that any lessons will be learned during the next disaster.

Silver Bearish Sentiment Levels Reach Further Extremes

I discussed the bearish sentiment toward precious metals over the weekend, noting that the daily sentiment index toward silver reached 9% bulls last week. That means 91% of traders believed the price would fall from this level ($19). The following charts from The Short Side Of Long help provide an extended visual of the incredible hatred toward the metal.

The first chart shows that hedge funds are net short silver for the first time since 2006. It is the largest short position since, well, ever.

The next chart shows that the silver short position (red line) currently held by speculators is also at a record high, by a wide margin.

Does all this bearishness mean the market must turn higher tomorrow? Of course not. Even if everyone is completely on one side of a boat, they can hang out there for a long time before someone decides to move back to the other side. The market moves when it wants to move.

That being said, for long term patient investors, it is almost impossible for silver to paint a more attractive entry point than it is today. See:

The Appeal Of Holding Precious Metals When Cash Yields Are Negative

Sunday, June 8, 2014

The Most (& Least) Expensive Stock Markets In The World

The chart below from The Telegraph is a great visual showing the most to least expensive stock markets around the world. Last week we reviewed global stock markets using exclusively the CAPE price to earnings ratio in How The Home Bias Phenomenon Impacts Investors.

The value indicator below uses the CAPE price to earnings ratio along with two other metrics; standard price to earnings ratios and price to book ratios (the price of a company in relation to its underlying assets).

The study found that the four most expensive markets in the world are Indonesia, Pakistan, Sri Lanka and the United States (the most overpriced market in the world). 

The four least expensive markets are Greece, China, Hong Kong and India. While both countries face different short term challenges, I believe any short term pull backs in the Chinese and Indian stock markets represent tremendous long term buying opportunities. Click for larger image below. Full article here.

Shanghai Time Machine

Shanghai, China 1987:

Shanghai, China 2013:

h/t Worth Wray, Mauldin Economics

The Appeal Of Holding Precious Metals When Cash Yields Are Negative

The announcement this week from the ECB (see Explaining What The ECB Did Yesterday) was centered around the news that they are bringing their deposit rates into negative territory. These negative rates apply to the bank deposits held at the ECB, not citizen's deposits held at the banks. However, citizens will end up paying this cost through higher fees charged for the "privilege" of keeping their savings in a bank account.

Their savings will be charged a negative interest rate indirectly. 

With 0.0% returns (or below) for holding your assets in safety (cash) in the United States, U.K., Japan and now Europe, citizens have been forced out into risk assets in order to obtain some form of yield through dividends (stocks) or interest (bonds). This has pushed the price of risk assets in the United States back into the over-valued/extreme positive sentiment territory last seen during 2007. See:

U.S. Stock Prices: How The Home Bias Phenomenon Impacts Investors

U.S. Stock Sentiment: Volatility Disappears Setting The Stage For A Cyclical Top

U.S. Bonds: The Danger Behind Purchasing Bonds At Peak Complacency

While the U.S. asset prices are perhaps the most extreme in terms of overvaluation (other than the ridiculous yields currently seen on Japanese government bonds), asset prices in Europe, the U.K. and Japan have seen an experienced a price levitation over the past 3 years.

The option for investors today is to either hold cash with no return or invest in risk assets and reach for yield. This is currently a no-brainer because investors have the psychological backdrop of three steady years of risk asset price appreciation. Holding money in cash seems ridiculous when you can receive a steady yield (2% to 4%) and a 30% plus increase in the asset price itself (seen in U.S. stocks in 2013).

However, what if the thought entered back into investors minds that there was even a possibility that risk assets would not move higher in a straight line upward forever and potentially had the chance to.......fall?

When assets fall in price the "no return" cash category begins to look extremely attractive. Found within this most hated cash group is precious metals, which are a cash alternative. It is possible investors will look to diversify into this group, even at a very small percentage, if they find out that they are being charged to hold their money in the bank. 

Precious metals have been falling in price for 3 years and sentiment is back at record lows. Last week the daily sentiment index reached 9% bullish on silver, meaning that 91% of traders believed the metal would fall lower from these prices. The index is now a mirror image of the sentiment readings when silver was surging upward in the $40 plus range in 2011 (silver is at $19 today).

An ounce of silver is currently at a price below the total cost to mine it out of the ground. New and planned production for mining of the metal has either been shut down or postponed. I believe that during the next paper asset price decline central banks will respond just as they have during the past six years; additional monetary easing and larger asset purchase programs. There will be a rush back to precious metals at a time when very little supply is entering the market (it takes years to bring a mine to production). 

Some see the recent price decline as the end of the secular bull market in precious metals. I see it as the perfect set up for the grand finale of the secular bull. Positive sentiment has been completely washed away and investors have liquidated out of their position. Supply has been cut back or shut off.

While the final bull market run in gold should be exciting, it will be the silver price rise that brings shock and awe to the masses.

Putting The U.S. Employment Recovery In Perspective

The jobs report headline on Friday was that the United States has now recovered all the jobs lost during the "Great Recession." You've probably seen the chart below many times over the past few years, which shows the percentage of jobs lost compared to previous recessions in the United States going back to 1948. It was known around the online financial world as "the scariest chart."

The Oregon Office of Economic Analysis released an excellent chart this week which takes the current employment recession line above and layers it against the 5 largest financial crises in history plus the Great Depression (U.S. '29). When shown in the this context the most recent employment decline in the U.S. looks mild.

That's where the happy part of the story ends because as we have discussed numerous times during the last five years, the recovery in U.S. unemployment has been due in large part to Americans leaving the labor force. The chart below from Zero Hedge shows that the total number of Americans leaving the labor force has tracked higher in parallel fashion with the "economic recovery."

The group "not in the labor force" is composed of those that have retired or have given up looking for a job. If you use the same methodology to calculate unemployment that was used during 1929, the current unemployment rate is at 23% (close to the absolute peak of unemployment during the Great Depression at 25%).

The difference this time around is the trillions of dollars in government debt used to support Americans through welfare programs.