Friday, October 3, 2014

The Rise & Fall Of Modern Empires

As of this morning there are no broad stock markets around the world that are appealing to me to add positions. The world feels as if it's due for a correction, and I'm fortunate as an individual investor to be able to sit back and wait for a fat pitch. I do not manage money for a fund that demands action every day or every millisecond like a high frequency trading firm.

What if we were to have a global "risk-off" sell-off?

I think of shares as a small piece of ownership in companies that I will hopefully be giving to my children many decades from now. As Warren Buffet likes to say; the best time period to hold a company is forever.

If you are thinking in terms of decades, then you should be thinking about which countries, and the economies within them, will do the best over the next century. I believe the emerging markets will continue to grow at a faster pace over this century than the developed world, thus increasing their total market share of the global stock market.

Right now U.S. stocks are worth roughly 50% of the market capitalization of the entire global stock market, while the U.S. is less than 25% of global GDP. Those numbers will eventually find a way to balance, which I believe will occur first with valuation declines in U.S. stocks. While it is tough to explain why in a single sentence, the U.S. has had a 43 year debt fueled binge and one day soon the bill the will coming due for the party.

For a more visual way to look at this topic, the chart below shows the rise and fall of modern empires. This is the natural macro economic cycle of the global economy. While the current dominant economic power slowly loses its share of global GDP, new powers emerge to take their place. The U.S. experienced the greatest century of growth in history, with its might peaking in the 1950's. Since then it has been masking the real decline occurring with debt and printed money. Under the surface the rot is real.

What does this mean for investing? In overly simple terms, I would like to be a seller of U.S. stocks if they reach high valuations and continue to move higher (occurring right now), and I would like be a buyer of China and developing markets if their stocks have inexpensive valuations and experience short term major declines (hopefully coming soon). For more on this topic see:

How Expensive Are U.S. Stocks Relative To Markets Around The World?

Tuesday, September 30, 2014

Traders: Millions By The Minute - Part 1

To continue see Traders: Millions By The Minute - Part 2

Traders: Millions By The Minute - Part 2

Two Charts Explain Why I Continue To Accumulate Precious Metals

The chart below shows that by the year 2024 only two categories within federal spending, entitlement spending and interest payments, will consume 100% of annual revenue.

This chart makes two pretty important assumptions:

1. We will not enter a recession in the next 10 years. 

We are already over five years into the current expansion. The U.S. historically has entered into recession every 4 years on average. That means there will be no recession during the previous 15 years leading into 2024.

2. Interest rates will remain low. 

We are currently 32 years into the current bull market in bonds. Do you believe interest rates will continue to fall or remain at all time historical low levels throughout the next 10 years as record supply of new debt continues to enter the market?

The truth is no one likes to think about charts like the one above. We will never get anywhere near those lines crossing because the bond market would implode well before they have a chance. One of two things will have to happen to stop this from occurring:

1. Entitlement spending must be cut drastically and immediately.

2. The Federal Reserve will be forced to monetize (print money to buy) an enormous amount of debt during the next decade.

I will let you decide if you think a politician will run and win an election over the next two years on the promise of reducing medical and social security payments (scenario 1).

The situation above is the same one facing the entire developed world, not just the United States. Japan is even closer to their crisis moment, while the U.K. and most of Europe are ticking debt time bombs as well. The chart below shows the money printed by the Federal Reserve, European Central Bank, Bank of Japan and Bank of England since 2008 has now crossed $10 trillion. This is only the warm up.

When Will Gravity Return To U.S. Stock Prices?

We discussed this topic a few weeks ago, but the following chart helps illustrate this concept perfectly. The entire U.S. market was more expensive back at the peak of the mania in 2000 because a small group of outrageously priced technology stocks moved the average weighting of the market higher. An analogy would be the average net worth of a bar filled with 10 patrons increasing substantially if Warren Buffet were to walk in. 

Today's market has a few sectors that are priced higher than others, but the market as a whole is more expensive (and dangerous) than it was in 2000. You can see this by looking at the median (middle number) price to sales ratios instead of using the mean (average). The market is now well above any point in history including 1929, 2007 and even 2000. 

Beginning in the late 1980's, due to the insane monetary policies of then Federal Reserve chairman Alan Greenspan (which have not stopped since), the U.S. economy has experienced overheated asset bubbles which have temporarily boosted corporate profits and the S&P 500. What followed the first two artificial booms were collapsing S&P 500 prices and collapsing corporate profits. Stocks and profits have continued to find a way to mean revert back to the actual growth of the real economy. It is only a matter of time until the current asset price inflation will subside, taking corporate profits and the S&P 500 back down to reality once again. 

While technology stocks and real estate fueled the first two asset bubbles, this time it has been turbocharged by the entire bond market. Record low junk bond yields (anyone can borrow as much as they'd like at lowest cost in history), have fueled short term gains. A large portion of this junk bond issuance has been used by companies to purchase their own stock and turbocharge prices in the short term. It should not take a high level of finance education to understand this type of artificial ponzi growth will not end well. 

h/t StreetTalkLive

Monday, September 29, 2014

Mebane Faber On Shareholder Yield & Investing Globally

U.S. Housing Market Vulnerable For Further Price Declines

Institutional money continues to retreat from the U.S. residential real estate market. The share of sales to investors has fallen to 12%, down from a recent high of 23% in the 2012 - 2013 investor accumulation period. The chart on the right illustrates this decline, while the chart on the left shows the 12 month moving average in home sales peaked in late 2013.

The most bullish argument for the housing market is the "pent up demand" that has accumulated with 18 to 34 year olds still living in their parent's basement will soon become home buyers.

The good news is the number of 18 to 34 year olds living at home looks it may have finally peaked.

The bad news is they are not purchasing homes due to lower paying jobs, not enough savings, crushing student loans and an overall distaste for home ownership.

Perhaps this will change if the economy continues to improve combined with a reduction in mortgage rates, a loosening of lending qualification standards and a more positive sentiment toward home ownership.

My personal opinion is that all four of those criteria will move in a negative direction for housing in the years ahead (setting up an excellent buying opportunity during the next period of price declines).

In the meantime there is only one remaining sector of the market that continues to see price appreciation; the $1 million plus price point. The rich have seen their net worth explode higher due to the most recent paper asset mania, and they spend weekends out bidding each other for the largest possible mansion at the highest possible price.

If it makes you feel any better, this portion of the market will experience the greatest losses when the current asset bubble deflates.