One of the things that make financial markets so fun is their sheer unpredictability. From Charles Hugh Smith at oftwominds.com:
There would be some deliciously karmic justice in the “dumb money” driving a rally that forced the “smart money” to cover their shorts and chase the rally that shouldn’t even be happening.
Being cursed with contrarianism, as soon as a trade gets crowded and the consensus is one way, I start looking for whatever is considered so unlikely that it’s essentially “impossible.” Sorry, I can’t help myself.
The crowded trades are 1) long the Commodity Super-Cycle and 2) long hurricane-force recession for all the persuasive reasons we all know: global scarcities, geopolitical tensions, soaring US dollar and interest rates, de-risking, crazy-stupid levels of debt and speculation, etc.
The consensus holds that “Smart Money” rotated out of tech stocks and other over-valued equities into oil and commodities. That was a smart move, indeed, and the earlier one rotated out of equities and into commodities, the smarter the trade.
In this scenario, retail owners of equities are the “Bagholders,” those who continue owning the losers all the way to the bottom (Been there and done that). It’s a market truism that Bull cycles only end when retail drinks the speculative Kool-Aid of the moment and buys into the final gasp of the rally, allowing “Smart Money” to distribute their shares to the retail chumps, who go down with the ship when the market finally rolls over.
From The Babylon Bee:
CHERRY HILL, NJ—According to data analysts on Wall Street, as “timid beta-males” are selling off their stock portfolios in a panic over the tanking economy, women are coming out of the woodwork to snap up the cheap stocks now that everything is on sale.
“Hey Janie, did you see the price of Target stock?” asked Sissy Mixon excitedly to her friend over the phone. “It’s on sale for, like, 25% off! EEEEEE! I love Target!” Missy quickly hit buy on two shares of TGT at $304.92, so she could save even more money.
“Now that I own a piece of Target, every time I go shopping there I’m basically paying myself!” Missy explained to reporters.
According to sources on Wall Street, market recoveries are driven almost entirely by savvy housewives looking to snap up a bargain. “I don’t really know what ‘Riot Blockchain’ is, but it’s, like, 300% off! Whatever it is, I’m buying it!” Missy insisted.
Missy’s husband Sam tried to explain to her—as he always does—that buying things on sale doesn’t constitute saving money. “She doesn’t seem to get it,” he said.
At publishing time, Sam threw another $1000 into Dogecoin as he knows it will hit $1.00 eventually.
Posted in Humor, Investing
Economic options confronting the Biden administration and the Federal Reserve are all unpalatable, with unpopular consequences. From The Zman at thezman.com:
The government released the latest inflation data and the results were the worst we have seen in forty years. The retail number came in at 8.4% and the wholesale number clocked in at 11.2%. Of course, the retail number excludes the things that people buy, like food, fuel and housing. These numbers also rely upon the new math rather than old math used the last time inflation was an issue. By the old inflation standard, retail inflation is over 15%.
The political class is poleaxed by these numbers as they have been assured that inflation at these levels was impossible. Modern economic theory says that inflation is caused by too much money chasing too few goods. We now have top men in place to keep an eye out for this. They just need to manage the money supply to keep inflation under control. This assumption led the top men to assume inflation was transitory, the result of supply chain issues.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Financial markets, Government, Politics
Tagged interest rates, Monetary inflation, stocks
You own bonds to offset the risks of stocks and vice versa, but what happens when they both go down in extended bear markets? From Harris “Kuppy” Kupperman at wolfstreet.com:
When something that is this widely adopted blows up, it tends to blow up spectacularly.
For four decades, the US stock market has traded up and to the right. During those brief moments of setback, treasuries rallied strongly. The fact that these two asset classes seemed to offset each other, creating a smoothed-out return profile, was not lost on certain fund managers who created portfolios comprised of the two. Then, to better market this portfolio to the sorts of institutional investors who cannot bear drawdowns, the overriding strategy was given the pseudo-intellectual sounding Risk Parity moniker.
Over time, the reliability of Risk Parity funds has astonished most observers, especially after being tested by fire during the GFC. As a result, portfolio managers took the logical next step and added copious leverage—because in finance, when you do a back-test, every return stream works better with leverage.
Naturally, as Risk Parity continued to produce returns, inflows bloated these funds. Risk Parity strategies, in one form or another, now dominate many institutional asset allocations. While everyone makes their sausage a bit differently, trillions in notional value are now managed using this strategy—long equities, long treasuries. Are they highly-leveraged time-bombs??
Taking a step back, it’s important to ask, what created this smooth stream of Risk Parity returns? Was it investor brilliance or was it a four-decade period of declining interest rates that systematically increased equity market multiples while reducing bond yields? What if all the sausage-making was just noise?
Paul Rosenberg’s reasons for not investing do not include that stocks and bonds are at absurd valuation levels, particularly bonds. However, that’s not to say his reasons don’t make sense, they do. From Rosenberg at freemansperspective.com:
I’ve touched upon this subject in my subscription newsletter, but I had no plans to write anything more until I got a note from a friend, mentioning a particular investment analyst and his views on investing over the next few years. I had to agree that it was brilliant analysis, but at the same time I knew that I’d never do anything about it, because I simply can’t bring myself to put money into “the markets” anymore.
As a young man I spent time learning the nuts and bolts of investing: Price to earning ratios, book values, charting, puts, calls, covered positions, and so on. And when I had extra money, I tended to put it into the markets and use my tools. But I can no longer do that, and I think explaining why may be useful.
There are three reasons for this conviction of mine, and so I’ll list them below. But I’m listing them in reverse order, because reason number one stands above the others: By itself it would prevent me from investing in the usual way. I think all three reasons are strong, but reason number one is pivotal.
Reason number three is simply that the markets no longer make sense. In fact, I’ve now taken to calling them “exchanges,” not wishing to denigrate the concept of markets.
So far it’s just a few isolated fires here and there, but a massive global financial and economic conflagration is inevitable. From Egon von Greyerz at goldswitzerland.com:
“Everything is on fire” – Heraclitus (535-475 BC)
What Heraclitus meant was that the world is in a constant state of flux. But the big problem in the next few years is that the world will experience a fire of a magnitude never seen before in history.
I have in many articles and interviews pointed out how predictable events are (and people). This is particularly true in the world economy. Empires come and go, economies boom and bust and new currencies come and without fail always go. All this happens with regularity.
A GLOBAL FIRE IS COMING
But at certain times in history, the fire will be cataclysmic. And that is where the world is now.
Explosive fires have started everywhere already. Stock markets are on fire and so are property markets, as well as bond and debt markets. The problem is that fires are initially explosive but always end up implosive.
So right now we are in the explosive phase of the fires with markets all going parabolically exponential or should it be exponentially parabolic!
We are now at the end of a secular bull market in the world economy which on a global level has reached extremes never seen before in history.
Never before has the world seen an explosive fire of this magnitude, fuelled by uber-profligate money printing and credit expansion by central and commercial banks.
We have talked about inflation running wild and it is not just happening in stocks. Property markets are literarily exploding, especially the high end. We see this all over the world and not just in the US. In the UK for example, HSBC stated that March saw the highest number of mortgages EVER issued. In Sweden properties sell for up to 40% above asking price in a frenzied bidding war and second hand leisure boats are in such demand that they cost virtually the same as a new boat. And if you want a new boat, there is none available until 2022. It also seems that people are desperate for company after the lockdowns as prices for puppies in the UK are up to 100% higher than last year.
Yes, everything is really on fire as people are desperate to just spend, spend, spend after a year of lockdowns and restrictions.
Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Financial markets, Governments, History
Tagged financial collapse, Monetary inflation, Real Estate, stocks
The percentage drops for stock prices cited in this article may be over the top, but it’s a pretty good bet that gold’s price will rise relative to stock prices. From Egon von Greyerz at goldswitzerland.com:
Most investors are more interested in getting richer than preserving wealth. This is why they will never exit the stock market. As the Dow up 39x in the last 50 years this has been the right strategy. Only since 2009, the Dow is up 5x! So clearly a Win-Win position!
But as Jeremy Grantham recently said, stocks are in an “epic bubble”. Still most investors ignore this since greed dominates their emotions. If stocks are up 3,800% since 1971, there is no reason why it shouldn’t continue.
STOCKS or GOLD
During the last 50 years we have seen 5 vicious corrections in the Dow of between 41% and 55%.
But even with these corrections, the Dow is today 39x higher than in 1971.
There is another relatively small but important investment asset which represents only 0.5% of global financial assets. That asset is up 53x since 1971.
But it hasn’t been an easy journey for this asset either. There were 3 major corrections in half a century between 33% and 70%.
I am of course talking about gold.
If dividends are excluded gold has outperformed the Dow. With dividends reinvested, the Dow has outperformed gold by 3x. Leasing or lending the gold would have reduced the difference somewhat.
But the principal reason to hold gold is that it is nobody else’s liability and therefore physical gold should never be leased as it defeats the purpose of holding it for wealth preservation.
We must also remember that a stock index doesn’t tell the truth. Unsuccessful or failed companies are continuously taken out of the index and the most successful companies added. Therefore an index gives a much rosier picture than what really happened.
A market pro thinks we’re in for a huge market downturn sometime this year. From Jeremy Grantham at gmo.com:
The Hazards of Asset Allocation in a Late-stage Major Bubble
The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.
These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.
But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.
“The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both – and the price we pay for having this market go higher and higher is a lower 10-year return from the peak.”1
Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. With reasonable skill at evaluating assets the valuation-based allocator can expect to survive these phases intact with some small outperformance. “Small” because the opportunities themselves are small. If you wanted to be unfriendly you could say that asset allocation in this phase is unlikely to be very important. It would certainly help in these periods if the manager could also add value in the implementation, from the effective selection of countries, sectors, industries, and individual securities as well as major asset classes.
It all seems so easy, just buy low and sell high (or sell high and buy low). So how come so many people do the exact opposite? From doug Casey at internationalman.com:
International Man: Markets have extreme emotions. They can go from irrational exuberance—where it seems everyone is swinging from the chandeliers—to a bottom-of-the-barrel bear market where people don’t even want to look at the business section.
Buy stocks because bonds are so central-bank suppressed that they’re the guaranteed investment from hell. That’s what passes for wisdom on Wall Street these days. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:
Jerome Powell puts you in mind of the boy who killed both of his parents and then threw himself on the mercy of the court on the grounds that he was an orphan!
That’s what JayPo essentially did in his presser yesterday while trying to explain that the most hideous equity market bubble in history is actually not that at all:
“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.
“Admittedly P/Es are high but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a return perspective,” Powell said.
Right. The Fed has essentially murdered the bond yield. So relatively speaking, grossly inflated stocks are a bargain compared to dead-in-the-water bonds.
Bloomberg even has a chart to prove all this based on the so-called “Fed model”:
The S&P 500’s earnings yield – profit relative to share price – is 2.5 percentage points higher than the yield on 10-year Treasury notes. The comparison, loosely labeled the Fed model, sits well above what the spread was before the burst of the internet bubble, when bonds yielded more than equities by that measure.
Then again, the “earnings yield” is not exactly cash you can take to the bank, unlike a bond coupon as meager as it might be at present. The former is just a computational hope that today’s vastly inflated stock prices relative to earnings stay inflated indefinitely, world without end.