Tag Archives: stocks

Epic Gold Market To Follow Epic Stock Market Bubble, by Egon von Greyerz

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.

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Waiting for the Last Dance, by Jeremy Grantham

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

Executive Summary

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.

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Getting Out Before the Crash… 5 Secrets to Spot Market Tops, by Doug Casey

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:

market tops
 
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.

Why is assessing the psychology of the market so important?

Doug Casey: The market, as Warren Buffett has pointed out, can be either a weighing machine or a voting machine. You can make money in the market either way, but you have to recognize which machine is giving you signals.

Although Mr. Market sees and knows almost everything, he pays the most attention to the voting machine, because he’s basically bipolar, a manic-depressive. As a result, not only do you have to deal with the psychological aberrations of millions of other people who are running in a crowd and voting with their dollars, but much more important, you have to deal with your own psychology. You are, after all, part of the market.

The only thing you can control, however, is your own psychology, not that of the market’s other participants. Once again quoting Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.”

It’s a matter of having good psychological judgment. Everybody wants to be a contrarian, and perhaps they think they are a contrarian. But, in reality, it’s hard to be a contrarian.

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Unhinged….. And Then Some! by David Stockman

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.

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The Robinhood Rally, by Kevin Duffy

The stock market feels a lot like a mania, and manias generally don’t end well. From Kevin Duffy at lewrockwell.com:

As cities burn and statues topple, the Nasdaq races to all-time highs.  As unemployment explodes to levels not seen since the 1930s, gambling on dicey stocks soars.  As private property becomes less secure, titles to property are bid higher.  As businesses struggle to reopen, it’s business as usual for the great bull market in financial assets.

If the statisticians at the CDC are to be believed, 0.01% of the U.S. civilian labor force has died of the coronavirus in 2020.  For a risk that compares to driving an automobile, much of the population was scared out of their wits and a third of the economy put on life support.

The Big Lie

Official narratives have proven far more contagious (and lethal) this year than any virus, and the supporting lies keep getting bigger.  Upon arrival of an unknown health risk in late February, the authorities promoted a top-down one-size-fits-all solution of universal isolation.  The centralization of knowledge was assumed and market solutions not even considered.  As “non-essential” businesses were shut down, corporate debt markets locked up and stocks lost one-third of their value.  To deal with the economic mess, only top-down government solutions saw the light of day, this time at a price tag of over $5 trillion in borrowed and printed money (with plenty more on the way).

With the death of George Floyd on May 25, caught on video for the world to see, the narrative shifted overnight from gray lives matter and “shelter in place” to “black lives matter” and protest in public.  Never mind that Floyd had enough fentanyl in his body to kill him and that the officers on the scene may have acted to save him.  The mainstream media went into overdrive, promoting the well-rehearsed narrative of systemic racism.  Keep in mind, 30% of the top 30 highest-paying celebrity endorsements last year went to blacks (even though they account for 13% of the population).  Consumers generally don’t buy products endorsed by people they hate.

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Market Crash: Is It Over, Or Is It The Revenant? by Lance Roberts

Don’t be too eager to jump back into the stock market. From Lance Roberts at realinvestmentadvice.com:

If you haven’t seen the movie “The Revenant” with Leonardo DiCaprio, it is a 2015 American survival drama describing frontiersman Hugh Glass’s experiences in 1823. Early in the movie, Hugh, an expert hunter, and tracker, is mauled by a grizzly bear. (Warning: the scene is very graphic)

In the scene, the attack comes in three distinct waves.

  1. The bear attacks, and brutally mauls Hugh, who plays dead to survive. The attack subsides.
  2. The bear comes back, and Huge shoots it, provoking the bear to maul him some more.
  3. Finally, Huge pulls out his knife as the bear attacks for a final fight to the death. (Hugh wins if you don’t want to watch the video.)

Interestingly, this is also how a “bear market” works.

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If Michael Burry Is Right, Here Is How To Trade The Coming Index Fund Disaster, by Tyler Durden

Michael Burry was one of the heroes of Michael Lewis’s book The Big Short. Now he’s got another big short. From Tyler Durden at zerohedge.com:

Last week, the Big Short’s Michael Burry sparked a fresh wave of outrage among the Gen-Z and algo traders (if not so much the handful of humans who have actually witnessed a bear market) on Wall Street, by calling the darling of modern capital markets – passive, or index/ETF, investing – the next CDO bubble. Echoing what many skeptics before him have said, Burry argued that record passive inflows, coupled with active fund outflows which suggest passive equity funds will surpass active by 2022 according to BofA…

… are distorting prices for stocks and bonds in much the same way that CDOs did for subprime mortgages. Eventually, the flows will reverse at some point, and when they do, “it will be ugly.”

This nascent passive bubble is also why Burry had avoided large caps and was focusing entirely on small-cap value stocks: to Burry, they tend to be underrepresented in index funds, or left out entirely, which is why they are i) cheap and also why ii) when the passive bubble bursts, they will be the few names left standing.

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The Economic Bubble Bath, by Jeff Thomas

Bubbles, bubbles everywhere. Pop one and the rest will burst, too. From Jeff Thomas at internationalman.com:

At the end of a long, tiring day, we may choose to treat ourselves to a soothing bubble bath. Surrounded by steaming water and a froth of sweet-smelling bubbles, it’s easy to forget the cares of everyday life.

This fact is equally true of economic bubbles. When the markets are up, we’re inclined to feel as though life is rosy. Unfortunately, it does seem to be the norm that investors fail to recognize when a healthy up-market transforms into a dangerous bubble. We tend to be soothed into overlooking the fact that we’re in hot water, and economically, that’s not an advantageous situation to be in.

Periodically, any economy will experience bubbles. It’s bound to happen. Human nature dictates that, if the value of an asset is on the rise, the more success it experiences, the more we want to get in on the success.

Sadly, the great majority of investors have a tendency to fail to educate themselves on how markets work. It’s easier to just trust their broker. Unfortunately, our broker doesn’t make his living through our success; he makes it through brokering transactions. The more buys he can encourage us to make, the more commissions he enjoys.

It’s been said that a broker is “someone who invests your money until it’s gone,” and there’s a great deal of truth in that assessment.

And so, we can expect to continue to witness periodic bubbles in the markets. They’ll occur roughly as often as it takes for us to forget the devastation of the last one and we once again dive in, only to be sheared once again.

But we’re presently seeing an economic anomaly – a host of bubbles, inflating dramatically at the same time.

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The Freak Chart, by the Northman Trader

Long-term stock market charts are perhaps sending a message that US equity markets may in for a lengthy period of consolidation at best, and perhaps a long bear market. From the Northman Trader at northmantrader.com:

I got a freak chart for you that’s stunning, but bear with me here because it requires some background and patience. Most of us are focused on the daily or weekly action and it’s easy to lose sight of big cyclical trends. We don’t think of them as they take a long time to unfold and the daily noise is so much more dominant.

With the advent of permanent central bank intervention sparked by the financial crisis all of us have come accustomed to markets always going up with the occasional correction in between and the timing of corrections have seemingly become shorter and shorter. Big fat bottoms that happen after just a few days of temporary terror. We haven’t seen a true bear market since the financial crisis and even that one lasted barely more than a year as central banks stepped in. The last longer term bear market came after the technology bust in 2000 when markets bottomed in 2002 and 2003 and then proceeded onto the next bull market.

It didn’t always used to be this way. Going back to 1900 there were multiple extended periods of stock markets going nowhere and trading in wide chop ranges:

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Is All Lost? Record Share Buybacks But Stocks Get Crushed, by Wolf Richter

One thing that happens when stocks go into bear markets and the economy heads south is that practices that were overlooked when rising markets were lifting all boats get intense scrutiny. If the current downtrend continues, count on Congressional hearings on share buybacks, especially those funded with debt. From Wolf Richter at wolfstreet.com:

The vengeance of share buybacks: buyback queen Apple plunges.

In the third quarter, share buybacks by S&P 500 companies totaled $203.8 billion, according to S&P Dow Jones Indices today. These are actual buybacks, not hyperventilated announcements of possible future share buybacks:

  • Share buybacks in Q3 jumped 57.7% from a year earlier.
  • This was the third quarter in a row of record share buybacks.
  • For the first three quarters this year, buybacks totaled a mind-bending $583 billion.
  • This $583 billion was up 34% from the same period in 2017.
  • This $583 billion was within a hair of beating the full-year all-time record of $589 billion set in 2007 before it all collapsed.
  • Since Q1 2012 — in less than seven years — all share buybacks combined totaled an even more mind-bending $3.54 trillion.

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