One Year To Nowhere

[Voice of Reason 10,298]

Dunno of this applies in this particular thread, but I found it interesting...

http://www.zerohedge.com/news/2016-07-30/barack-obama-will-be-only-president-history-never-have-year-3-gdp-growth

[OriZ 3,157]

Dunno of this applies in this particular thread, but I found it interesting...

http://www.zerohedge.com/news/2016-07-30/barack-obama-will-be-only-president-history-never-have-year-3-gdp-growth

Don't you know? It's all Bush's fault

[OriZ 3,157]

As always I'm gonna back up what I say with charts. There's a very interesting study about re-election and how it relates to not specifically the economy, like most people believe but rather the stock market itself which is reflective of social mood. My view which tends to agree with this study is basically very simple: forget terrorism, forget illegal immigration, forget everything else. If this thing tanks in the next 11 months, dems are more than likely done for a while. If it doesn't, they'll get another term. Plain and simple.

But calling all Hillary fans - if she gets elected that's not a happy day. More likely it will be the end of her career. I do not see any possibility that this will wait another 5+ years. If this crisis waits another year to happen the person you want elected is not the person you like but the person you like least. Chances are after one term they will be done and so will their party for a while.

Breif explanation:

“The best single predictor of presidential re-election results that we found was the percentage change in the stock market during the three years that preceded Election Day,” said Goel. “Changes in stock prices had a positive, substantial and statistically significant association with incumbents’ performances in re-elections. We found that they accounted for more than a quarter of the variation in incumbents’ popular vote margins.”

The researchers studied every presidential re-election campaign in U.S. history back to George Washington’s successful bid of 1792. They found that incumbents who served during periods of rising stock prices typically do better in the elections than those who served during periods of falling stock prices.

Meanwhile, the relationship between how an incumbent performs and the changes in gross domestic product, inflation and unemployment is weaker and, with the latter two, “often insignificant,” according to the authors.

The study, posted on the Social Science Research Network (SSRN), acknowledges that a few incumbents were re-elected when the markets had declined and a few others were defeated when the markets had risen. But those margins of victory and defeat were smaller on average than when the direction of the markets and the incumbents’ fates matched.

Matthew Lampert, a Research Fellow of the Socionomics Institute and doctoral candidate at the University of Cambridge, says one of the study’s purposes is to address popular opinion surrounding elections. “We often hear people debate which presidential candidate will be better for the stock market,” Lampert said. “Our study comes to a different conclusion: that there is significant predictability in the opposite direction.”

The researchers also checked the measures that most analysts believe matter to voters, namely gross domestic product (GDP), inflation and unemployment. As it turns out, “Inflation and unemployment had no predictive value in any of our tests,” said statistician Goel. “GDP was a significant predictor in some of the simple models, but it was rendered insignificant when we combined it with the stock market in multiple regression analyses. In contrast, the stock market was a consistent indicator of re-election outcomes.”

The authors addressed the question of whether investors voted for or against incumbents simply because they made or lost money in stocks. “If rational self-interest were the basis for our results, then GDP and unemployment should have mattered at least equally,” said Prechter. “But they don’t.” Moreover, he said, “We contrasted eras when stocks were widely owned vs. hardly owned, and there was no difference in results.” Lampert concluded, “We think that the best explanation is that the trend of social mood is important in driving the valuations of both stocks and presidents.”

The findings are an important contribution for those who create elections forecasting models. “We demonstrated a counter-intuitive point about what matters, what doesn’t and why,” Prechter said.

For the full study:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1987160

So by the looks of it, unless something drastically changes over the course of the next 3 months, we'll end up with Clinton. Which will be good neither for her nor the country, but that's a whole nother story and forecast. As always, the market(broadest measure of social mood at any given moment) is very informative and leads the way not just with interest rates(how I was able to know there won't be 4 hikes this year), but also with politics(telling us Clinton will be elected).

Edited August 12, 2016 by OriZ

[OriZ 3,157]

U.S. companies have taken on so much debt that they’re at least as vulnerable to defaults and downgrades as they were leading up to the 2008 financial crisis, according to a report by S&P Global Ratings Tuesday.

Corporate leverage in the U.S., excluding financial firms, is at the highest level in 10 years, driven by a combination of low interest rates and slowing profits, S&P analysts Jacob Crooks and David Tesher wrote. This has resulted in record leverage ratios across a universe of 2,200 companies, they wrote.

Junk-rated firms are particularly at risk because the credit cycle may have peaked and future tightening in interest rates could shut the spigot on new borrowings right when the companies would want to refinance their debt.

“With the level of leverage that we’re seeing, some of these more-peripheral stressed sectors are going to experience some challenges to obtain new financing as well as refinancing,” Tesher said in an interview. “It’s not a question of if, it’s a question of when.”

Meanwhile, bondholders who are searching for yield are increasingly willing to accept less compensation and weaker protections than than in the past -- leaving them more vulnerable to losses in a potential downturn.

http://www.bloomberg.com/news/articles/2016-08-09/soaring-debt-has-u-s-companies-as-vulnerable-to-default-as-2008

[OriZ 3,157]

“You need to know very little to find the underlying signature of a complex phenomenon…. This is the gift of training and expertise – the ability to extract an enormous amount of meaningful information from the very thinnest slice of experience.”

Malcolm Gladwell, Blink

Lets revisit a few things... I honestly believe this is probably the most comprehensive, important post you will read right now where the economy and politics are concerned. Before we start I also would like everyone to take a look at this post http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=8240151 which would explain alot of questions some may have(80% my own words, 20% borrowed with credit given, but with the same thought process behind it).

Additionally, I think the whole page this post is in, is also recommended:

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/page-32

Especially the several posts right prior to it. This will give you an overall view and insight that is hard to find nowadays.

At the risk of sounding like a broken record, it bears repeating yet again that the Federal Reserve's actions, backed by president Obama, only create more wealth transfer and more wealth disparity in this country. This is why I cannot understand how people cannot see that supporting the people who support these actions is the complete opposite of what they want to accomplish by narrowing the gap beteen rich and poor. As I've explained in detail before - when you lower interest rates to zero, savers can't save anything. When you engage in QE, speculation runs amoc. This means, that at best the savers will get nothing for their money, and at worst they will end up joining in on the speculation and lose once the market crashes.

All the while, the professional speculators will make money during the bubble as well as during the crash(via shorting), all the while, big institutions like banks will make even more money during the bubble, and get bailed out during the crash. All the while, large company shareholders will make more money during the bubble, and sell with perfect timing to the "used-to-be savers" turned fools. I don't understand how you can't see this happening right infront of your eyes. Again, FED policy, backed by Obama, or for that matter Clinton or Trump, is creating an even bigger gap between rich and poor. How can one stand by and let that happen while talking about equality? And of course it was in Obama's interest to keep it that way because it gave the appearance that he saved the economy. Nobody wants a recession on their watch, but all he did was kick the can down the road.I am seriously beginning to think Obama really doesn't like Clinton and that he endorsed and sabotaged her on purpose because I have no doubt we will see a recession while she is president. Yes folks, I will say it right now and I will repeat it again once it happens - it will not be her fault, it will be Obama's fault. Obama did nothing to save the economy, and worse, he planted the seeds for the next crisis.

The Fed is one of the biggest sources right now of wealth transfer and disparity creation, and any politician backing these same policies is equally responsible. So this ridiculous notion by some that Obama ended the recession and saved the economy could not be further from the truth. Or that any of his policies actually benefitted the middle or lower classes. The crisis would have ended when it did no matter who the president was at the time. Markets bottomed 2 months after Obama came into office, due to reasons I have already mentioned before. Part of it was completely technical/cyclical, and the rest I will repeat later in this post. You can't tell me in 2 months he did miracles. If anything, if the right policies would have been in place we would have seen a much stronger recovery.

The true wealth of any nation is embodied in its accumulated stock of productive capital, infrastructure, unused resources and knowledge. The use of this productive capital to generate “value added” - goods and services that have a greater value than the inputs used to produce them - is how new income, productive capital and wealth emerge. The Federal Reserve’s deranged and wholly experimental attempt to create illusory paper “wealth” through speculative overvaluation - a policy backed and supported by all presidents in recent memory - is no substitute for thoughtful and historically informed economic policy.

Investors are currently paying extravagant multiples on earnings that are elevated cyclically, at a point where a misplaced focus on debt financed consumption and yield seeking speculation has ravaged US real investment and the accumulation of productive capital, setting the stage for persistently anemic economic growth. The situation will become far more promising after a steep retreat in valuations, particularly if policy makers ever become enlightened enough to shift their economic focus toward incentives for productive capital investment at the private level, expanded infrastructure at the public level, and the accumulation of knowledge, job training and education at the individual level. It is utterly mind numbing that US economic policy has gone off the rails to prioritize debt financed consumption over productive investment. This misguided focus will destroy the US economic future if we don’t diminish the FED and build up our productive capital stock.

This whole speculative mania will end tragically. Why does nobody want to learn from 2000-2002, or 2007-2009, or the collapse of every other mania in history? My sense is that it’s a mistake to assume that yield seeking hasn’t been fully exhausted across every class of securities. The notion that some “pocket” of value and opportunity remains untapped is largely based on a misunderstanding of yield relationships. An environment of continued low interest rates is almost necessarily an environment of dismal economic growth. There’s some potential for Treasury yields to decline a bit further in the event of an economic softening, but at this point, even that is more a speculation than an investment. The bottom line is that one should limit risk exposure in every class of investment here.

For those who insist that there is always a bull market somewhere, I would suggest that the most likely bull market to emerge here will be in bear market assets. Fortunately, inevitable periods of investor panic, speculative collapse and improved valuation can shift market return/risk prospects substantially, which creates new opportunities for conventional assets. Long live impermanence.

The 5 year growth of the US labor force has averaged just 0.7%, and demographic trends suggest a slowing to 0.5% in the coming years. Even if the participation of this potential labor force in the job market (currently the lowest level since 1977) was to increase back to the highs of 2000, it would only add another 0.6% annually to employment over the coming decade. Given zero growth in gross domestic investment over the past decade, stagnant labor productivity appears likely, but lets optimistically assume it remains at 0.8% annually. Combine labor force growth and participation with productivity, and the upshot is that without a substantial boost to gross domestic investment, 2% real GDP growth is a best case scenario in the coming decade, with GDP growth of just 1% being more likely.

Meanwhile, with unit labor costs now rising substantially faster than the GDP deflator, corporate profit margins are shrinking, not expanding. Slow growth in real and nominal revenues, combined with narrowing profit margins, implies a challenging outlook for corporate profits.

A related problem is evident in corporate bonds. Nonfinancial corporate debt has easily reached the highest ratio in history to corporate gross value added, but appears less extreme relative to “EBITDA”. The problem is that corporate profit margins are enormously variable over the economic cycle, which is why corporate defaults spike dramatically during recessions. Given that nearly 70% of outstanding corporate debt is now “covenant lite,” offering substantially less protection in the event of default, we’ve seen average recovery rates on recent defaults plunge to just 20% - the lowest level in history. The recent market cycle has joined extremely high debt burdens with extremely low recovery rates, which will create a wide gap between stated yields and actual realized returns as the economic cycle is completed.

The chart below shows the year-over-year growth rate of nonfinancial gross value added, expressed in real terms by dividing by the GDP deflator. I’ve deferred table pounding about recession risks until we see a more significant deterioration in the market coupled with widening credit spreads and a slowing in employment growth below about 1.4% annually (it’s currently about 1.7%), but it’s clear that the overall pace of economic activity has rolled over considerably in recent quarters.

But wait, didn't the FED save the economy? No. From another previous post:

The FED is also in a rather difficult situation. Based on a broad range of economic factors, I currently have a guarded expectation of recession[as I have said this has been deferred for now]. Now, if there was historical evidence to demonstrate that activist FED policy had a significant and reliable impact on the real economy, and didn’t result in ultimately violent side effects, I would argue that a FED hike here and now might be a “policy error.” In reality, however, decades of economic evidence demonstrate that activist monetary interventions (deviations from straightforward rules of thumb like the Taylor Rule) have unreliable, weak and lagging effects on the real economy.

Nothing was learned from the global financial crisis; When the FED holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed's mandate is really to support long run employment and price stability, the first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed's ability to promote yield seeking speculation and malinvestment that only produces inevitable crises and weakens long run US economic prospects.

The fact is that a quarter point hike comes too late to avert the consequences of years of speculation, and while the hike itself will have little economic effect, the timing is ironic because a recession is already likely. The main effect of a rate hike will be to add volatility to an already speculative and now increasingly risk averse market. The Fed’s real policy error, as it was during the housing bubble, was to hold interest rates so low for so long in the first place, encouraging years of yield seeking speculation and malinvestment by doing so.

The financial crisis was caused because the Fed overly depressed interest rates in the early 2000’s, encouraging investors to reach for yield in mortgage securities. In response, poorly regulated financial institutions, with banks free from the constraints of Glass Steagall, and other institutions having inadequate capital requirements, created a huge mountain of new, low-grade mortgages in the frenzy to create more “product.” The easy lending created a housing bubble, but someone had to hold the mortgages when they went belly-up, and those holders were banks, insurance companies, hedge funds, and individuals. As the mortgages went into foreclosure, banks had to mark the value of those mortgages to market value on their books, to the point where the value of their assets was less than the value of their liabilities: insolvency.

The crisis actually ended - precisely - in March 2009. How? The Financial Accounting Standards Board changed rule FAS 157 and overturned the mark-to-market requirement, instead allowing financial institutions "significant judgement" in the way they valued their assets: often called mark-to-model (or as some of us call it, mark-to-unicorn). That has given financial institutions time to build up their capital and clean up their balance sheets, for the time being. However, another sign of trouble is that unlike the headline indexes, the indexes comprised of only financial institutions have not gone up to new highs since then, but have been in a rather weak upwards correction over the past 6 years. The Fed’s policy of buying up government backed mortgage securities (Fannie Mae, Freddie Mac) can certainly be credited for stabilizing the housing market in the depths of the crisis, but don’t think for a second that years of zero interest rate policy, nor Obama, is what produced the recent recovery.

I know there will be those who will try and twist what has been written in this thread and claim I was wrong. So for that reason and that reason only(not to pat myself on the back) here is a short summary of the predictions that have come true, as well as the ones that are still going to at some point down the line in the near future. For starters you can review some of them on this page:

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/page-29

The point is also to make it easier for those who may have not been following from the beginning, but are interested in it, and don't have the time to look through 33 pages, so that they don't have to read post by post but only the ones with real merit. Everyone is already aware of the forecast for gas, to drop towards and under $2 a gallon. This was made before this thread even opened when "experts" saw gas over $5. As usual they were wrong and I was right. Since then...

*I correctly forecasted the FED raising rates in Dec 2015.

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=7927384

Sure, you can say "everyone" knew that was coming. But "everyone" has been saying they will raise for the last 6 years, wrong time after time. And even after that raise, the expectation was for 4 rate hikes in 2016, to which I said: Btw, as far as bonds are concerned again, there is no further rate hike seen atm. If that changes I will make sure to mention it but for now it's done.

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=7938011

And then proceeded to update on it here as well as here.

Current status of the forecast: At current time, I still see no rate hike; but that could change given a change in T-Bills. I will keep monitoring those and update my view based on potential changes. There may be 1 hike(as opposed to the 4 initially believed) but I don't believe even that will happen before December.

*The prediction that Clinton will win if the market doesn't decline. Sure this has not yet happened but it will. You read it here first folks(and in Jan 2016 on the quoted part). To add to this comment, here is a chart of the S&P500, and right underneath it is a graphic depiction of the RCP avg gap between Clinton and Trump.

Very easy to see here that when the market declined, we usually see a narrowing of the gap or even a Trump lead, but when it rises, we see Clinton widening the gap. Notice that the point is not to make new highs for new highs, as Trump's starting point was real bad. So while the S&P500 is at new highs, the margin between the two is not, however what we're looking at here is the trend. For that reason I drew red lines on the S&P500 and the lead advantage every time they both declined, and green lines every time they have both risen at the same time. Correlation is never 100%, with anything, but very close to it here. Like I said only and as long as and assuming there is no drastic decline in the market, which basically serves as a barometer here, in the next 2.5 months or so...by drastic I mean 10% or more. I'd say 10% would probably make it anyone's game...20% and more would mean likely Trump. Staying where we are today, I don't think he's got much of a chance.

*Predicted recent rally in gold and oil, and the moves in bonds and currencies. Gold received a target range of 1,200-1,400(and is right at the upper end now), and oil received a target of $50, when it was at $30, which seemed really far fetched at the time, yet only took several months to materialize. All can be found here, here, here, here, here, here and here.

Current status of forecast: For current status of forecast keep reading on.

*As far as stocks go, Almost one year ago when I started the thread(Dec 4, 2015) S&P was at 2091, now it's at 2182 - just over 4% higher. On Dec 5, 2014 it stood at 2075, so add another 1%, but basically two years to nowhere despite record bullishness and massive central bank intervention. But even worse, NYSE which is alot broader than the S&P500, was at 10,408 and 10,970 respectively(2015 and 2014). Now it's 10,858, lower than where it was in Dec 2014. Since I first started talking about the market's rise coming to an end, somewhere around 2.5 years ago, we have about a 15% total gain in the S&P500, and a 4% gain in the NYSE. So basically been pretty successful so far at identifying the point where an average annual return of almost 30%(between 2009-2014) turned into a TOTAL return of 15% or under since then in a 2.5 year time period. Definitely slowed down, however, we have not gotten the crash yet that I have been calling for.

However, new highs were not excluded, they were actually embraced.

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=7924517

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=8050705

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=8081783

I have also written about the fact it could go into 2017,

http://www.visajourney.com/forums/topic/577938-one-year-to-nowhere/?p=8113426

And then later on even added 2018. I do believe now that that's what we're looking at.

Also to add something to the conversation before about the importance of getting things right, even at the risk of being a little early, I want to add this lil excerpt from one of John Hussman's commentaries(This is about the Big Short movie):

As one of the few who anticipated both the 2000-2002 and 2007-2009 collapses (and having shifted in 2003 to a constructive outlook in-between), what I thought the film particularly got right was just how excruciating the wait was before the crisis unfolded, even for those who expected it (see, for example, my November 2007 weekly comment Critical Point). Though I don’t take leveraged positions in credit default swaps, or sell bank stocks short, even refusing to take equity market risk in the later stages of that bubble was excruciating enough. One had to suffer fools parroting things like “being early is the same thing as being wrong” until the collapse demonstrated that, actually no, it’s really not. The 2007-2009 collapse wiped out the entire total return of the S&P 500, in excess of risk-free Treasury bills, all the way back to June 1995. I love that the line made it into the movie.

I couldn't agree more...it's funny how people never learn from history. That same cocky attitude you received from bankers if you wanted to buy credit default swaps in 2007, the same sentiment that they are untouchable, don't bet against the banks, don't bet against the housing market, don't bet against stocks, or against the FED...it's all here again, yet the chickens are about to come home to roost after several years of reckless speculation. The banks themselves are still not done if you ask me, watch for bad news to come out of Deutsche to start with. Don't trust their reassurances, it is the same reassurance we got from all of them in 2008.

Now as I have promised, I did say that if internals improve enough it would defer the immediacy of my concerns, but not change the longer term picture. Over the last several months the improvement has been sufficient to allow for further speculation. I would not rule out that Clinton might still get to enjoy a relatively smooth ride in the first year or two. However, by mid 2018 at the latest I would expect things to turn around. Valuations might become even more obscene by then, and my expectation would still be for a 50-60% decline. So, even allowing for say S&P500 at 2,500(about another 15% or so from here) we're still looking at a bottom not before 1,000-1,250, which is still much lower than current levels(roughly 40-50% from current levels). Even allowing for 3,000, we are looking at 1,200-1,500, which again is much lower than current levels(35-45% or so). So I would still not buy this market if I'm an investor, only for speculation. Once internals deteriorate enough, as they did in 2014 and 2015, it would mean we are close to another decline.

The chart below shows where valuations stand right now. As you can see(where I circled), there were different periods where just like today, due to the market being priced higher than where it should be, there was a gap between expected 12 year return based on these valuations, and subsequent returns, however this never lasts forever. Eventually reality will catch up in this case as it always has.

*We have been able to predict that Brexit will not necessarily lead to pandemonium as some here have feared. Again, the market leads, not any external event. If the market felt that this was important enough, it would have led to much more severe consequences and then that would have been viewed as a major crisis point and reason for a decline, just as Lehman was. However, when the market decides an event is not important enough and doesn't react, no matter how important others initially believe it is, people tend to forget it ever even happened quite fast and it just goes away very quietly. In this case, we got the opposite of what people feared. Once the uncertainty was out of the way after the decision, new highs came rather quickly after more than a year of sideways action.

As I have promised in the past; Certain tools, especially market internals and technicals, help identify tops and bottoms. While I was not here in 2003 or 2009, these bottoms were pretty obvious, as will be this next one which will be a huge buying opportunity. I will keep this thread open until that happens, and when it does there will be no one happier than me to announce that it is time to buy.

Regardless of whether or not calling an exact bottom is possible, it does not change the fact that valuations can always be understood in real time. The valuations in 2003 and 2009 implied 10-12 year returns of approx 8-10% annually, which meant it was a good time to buy. That would not have changed regardless of whether or not the market dropped an additional 20%, just like today valuations implying zero return, and negative real return over the next 10-12 years mean it is a bad time to invest, regardless of the market continuing to push higher in the short term. As a matter of fact, today is the second worst time in history to invest.

So the big question - what to do with the money? After calling the dollar run it is now on a break which I also called for; Bonds were a good place to be, but now have already gone too far. Called the drop in commodities since 2011 and so shorting commodities would have been a good place to be, and; in this very thread, also called the recent rally(over 20% in gold and 60% in oil) in them. Going forward I believe cash is king.

There have been plenty of other opportunities for investment in the last couple years, or for trading, better than stocks. And, while an exact top or bottom can't be called, the lousy return over the next decade is already baked in the cake. This thread will serve as a testament that anticipating future returns is indeed possible. Once we are at a buying opportunity similar to that of 2003 or 2009, I will be the first to say it. However, again, today is the second worst time ever to buy stocks. I believe what we saw here is kind of classic in the way correlations behave. At first, you have an initial move in a certain group or asset, in this case metals/commodities, as well as interest rates/bonds, which was down, (with the dollar up and most other currencies down) and stocks did not really participate. Now you've got an upward correction in the first two groups, with stocks joining in on the fun and some indexes going to new highs, while commodities, credit spreads, etc. are still far from their respective highs. The third phase is for all to align and decline together in a severe deflation.

So what I believe will happen is that in the next and last leg of the decline in commodities after this upwards correction is over, could be in 2017 or even 2018, stocks will drop too. Once that exhauts itself, at lower levels than those printed at the bottom almost a year ago, a multi decade rally will begin again in stocks, oil, gold, bonds, etc. with the dollar dropping. That will be where we transition from a very long period of disinflation and deflation(and perhaps a depression or another deep recession), back to a period of inflation. I believe once we turn up, probably by the end of this decade/early next decade, the era of low interest rates will be over for a long time. Last chance to refinance that mortgage, folks!

Last word: Holding interest rates down too low, for too long, is exactly how FED induced yield seeking speculation created a bubble in mortgage debt and housing, and triggered the deepest financial collapse since the Great Depression. Now that the Fed has repeated this error, it has painted itself into a corner where even a timid quarter point interest rate hike is the subject of quivering indecision. Unfortunately, having pushed the system to a speculative extreme, a collapse is baked in the cake. The problem with speculative bubbles is that until the consequences arrive, idiocy can masquerade as genius, and vice versa. Those two have a remarkable way of reversing over the completion of a market cycle.

Borrowed:

The insistence of central banks on promoting yield-seeking speculation, a game that always ends in destruction, reminds me of the 1983 Cold War movie “War Games” where a teenage Matthew Broderick hacks into a Defense Department computer called WOPR, and launches a “global thermonuclear war” simulation that’s mistaken for the real thing. How much yield-seeking speculation do central banks have to provoke, and how much do future economic prospects have to be injured, before they stumble onto the same conclusion as WOPR: “A strange game. The only winning move is not to play.”

Edited August 18, 2016 by OriZ

[OriZ 3,157]

“Bears are like broken clocks, they are only right twice a day.”

This is a statement that is often thrown out during rising bull markets by the inherently optimistic crowd. However, such a statement really points to the ignorance of those that make such a claim. Why? Because if the “bears” are right twice a day, then the “bulls,” logically speaking, are wrong twice a day as well. In the game of investing, it is the timing of being “wrong” that is the most critical.

The chart below shows the bullish and bearish cycles, in terms of “real,” inflation-adjusted price, for the S&P 500 from 1871-present.

Throughout history, bull market cycles are only one-half of the “full market” cycle. This is because during every “bull market” cycle the markets and economy build up excesses that are then “reverted” during the following “bear market.”In the other words, as Sir Issac Newton once stated:

“What goes up, must come down.”

The next chart shows the full market cycles over time. Since the current “full market” cycle is yet to be completed I have drawn a long-term trend line with the most logical completion point of the current cycle.

[Note:

I am not stating that I “believe” the markets are about to crash to the 700 level on the S&P 500. I am simply showing where the current uptrend line intersects with the price.

The longer that it takes for the markets to mean revert the higher the intersection point will be.

Furthermore, the 700 level is not out of the question either.

Famed investor Jack Bogle

stated that over the next decade we are likely to see two more 50% declines. A 50% decline from current levels would put the market below 1000 which would likely be in the “ballpark” of completing the current full market cycle.)

The Problem Of Time

The biggest fallacy perpetrated on investors today is how long-term investing is promoted. A quick glimpse at the chart above tells you that if you had just invested in stocks in 1871, and held them, that you would be wealthy beyond imagination today. Unfortunately, you died long before you ever realized such wealth.

During my morning routine of caffeine supported information injections, I ran across several articles that just contained generally bad investment advice and poorly formed analysis. Each argument was hinged on the belief that bull markets last indefinitely, bear markets are simply an opportunity to “buy” more, and investing for the long term always works.

This got me to thinking about the how we are told to invest in the markets. When markets are rising, and valuations are increasing, individuals are berated by financial media and Wall Street into shoving their hard earned “savings” into a rising risk environment. They are always told to “buy” but never to “sell.” When markets invariably revert, they are told to “hold on,” “average down,” or “buy more.” After all, you are investing for the long term, right?

There are several problems which need to be addressed. First, while markets have indeed risen over long-term time frames, the markets have spent roughly 95% of their time making up for previous losses. The chart below shows this fairly clearly.

Secondly, exactly how much time do individuals really have? While it certainly sounds charming “youngsters” should throw their money into the Wall Street casino, the reality is this is hardly the case. Youngsters rarely have sufficient levels of investible savings to actually invest. Between starting a career, raising a family and maintaining their specific standard of living there is rarely little remaining to be “saved.” For most, it is not until the late 30’s or early 40’s that individuals are earning enough money to begin to save aggressively for retirement and have enough investable capital to actually make investing work for them after fees, expenses and taxes. Therefore, by the time most achieve a level of income and stability to begin actually saving and investing for retirement – they have, on average, about 40 years of investable time horizon before they expire.

I have prepared two different charts to show you the impact of investing over 40-year time spans. I used an initial investment of $1000 at the beginning of each decade and analyzed the capital appreciation for the ensuing 40-year period. In this regard, we can garner a clearer picture about the impact of both secular bull and bear market cycles on the total investment returns. [Note: The data below uses Shiller’s price data on a nominal basis and is based on monthly capital appreciation only.]

The first chart shows the average annual return for each starting decade.

The next chart shows the capital appreciation of a $1000 initial investment.

“Importantly, the

major difference on the ending result depends greatly on ‘WHEN’ you start

investing. If you started investing during the 50’s and 60’s, then you were lucky enough to capture the raging ‘bull market’ of the 80’s and 90’s which offset the secular bear market of the 70’s. However, if you started in 1990, so far, results haven’t been all that great as the secular bear market of the 21st century has slowly chipped away at the gains of the 90’s.”

The problem for most is time. While we can manufacture more “money,” we can not create more “time.”

The reality is that no one has 100 years to invest to achieve the long-term investment returns often touted on Wall Street. What all investors do face is the reality of the incredible time crunch between the beginning and end of the“accumulation phase.” The problem is that the “accumulation phase” is generally much shorter than the “distribution”phase particularly as life expectancy creeps ever closer to 100 years of age. Therefore, investing mistakes made early on have a tremendous impact on the end result due to the lack of “time.”

Psychological Failure

In reality, the problem is far worse than what is shown. Dalbar Research produces an annual report on investor behavior that clearly shows investors compound their investment problems by “buying high and selling low.” The growth of the markets, as shown in the charts above, has NEVER been achieved by investors when including the impact of fees, expenses, taxes and emotional mistakes.

Despite the media’s commentary that ‘if an investor had ‘bought’ the bottom of the market…’ the reality is that few, if any, actually did. The biggest drag on investor performance over time is allowing ‘emotions’ to dictate investment decisions. Investor studies show “psychological factors” account for between 45-55% of underperformance. From Dalbar:

“Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market. Market upswings rarely coincide with mutual fund inflows while market downturns do not coincide with mutual fund outflows.”

In other words, investors consistently bought the ‘tops’ and sold the ‘bottoms.’ The other two primary reasons of underperformance from the study related to a lack of capital to invest. This is also not surprising given the current economic environment where roughly 80% of Americans lack sufficient savings to meet a $500 emergency.

These psychological investment mistakes are never discussed by the mainstream media, but they are real and extremely destructive to long-term returns. What is interesting is that these investment mistakes are generally made during the first half of the full-market cycle as “greed” overtakes a logical and disciplined investment process. Those mistakes, however, are only recognized during the second half of the cycle as the “panic to sell” overwhelms individuals.

The Fallacy Of The “Broken Clock”

In this past weekend’s newsletter, I quoted John Hussman who put a very fine point on the importance of understanding the “full market cycle:”

“

Put simply, most apparent “opportunities” to obtain investment returns above zero in conventional assets over the coming decade are based on a misunderstanding of valuations, total returns, and historical yield relationships. At current valuations, virtually everything is priced for a decade of zero.

The unwinding of these speculative extremes is likely to be chaotic, and will likely occur over a shorter horizon than investors imagine. That chaos, driven not by central bank tightening but by an emerging default cycle, will usher in fresh investment opportunities in conventional assets, where presently there are none.

Looking beyond the near-term, my view is that a ‘permanently high plateau’ is unlikely,

and we will instead see a violent unwinding of recent speculative extremes over the completion of the current market cycle,

even if central banks ease aggressively, as they did throughout the 2000-2002 and 2007-2009 collapses. Corporate income growth and profit margins have already begun to narrow from their extremes, and

the default cycle has already turned higher

. The completion of this cycle won’t arrive because central banks suddenly become enlightened enough to abandon their recklessness.

It will arrive precisely because they have sustained yield-seeking speculation for too long already; because they have amplified the vulnerability of the debt and equity markets to normal economic fluctuations; and because the consequences of this fragility are now fully baked in the cake.

”

While John is absolutely correct, he is often dismissed because of his bearish overtone. In my opinion, this is a mistake. However, it is exactly that dismissal which is indicative of the willful blindness to the underlying problems and the inherent disaster to long-term goals that awaits many unwary individuals in the markets currently.

As I have often stated, I am not bullish or bearish. My job as a portfolio manager is simple; invest money in a manner that creates returns on a short-term basis but reduces the possibility of catastrophic losses which wipe out years of growth.

In the end, it does not matter IF you are “bullish” or “bearish.” The reality is that both “bulls” and “bears” are owned by the “broken clock” syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

https://realinvestmentadvice.com/bulls-bears-the-broken-clock-syndrome/

[Rob L 3,811]

I have done well in the market the last 18mos...with dollar cost averaging and target sector index funds close to 10%. So glad I did not buy into the crash myth.

[Voice of Reason 10,298]

Wow. Sounds like Mason jars are where to put the money today!

[OriZ 3,157]

I have done well in the market the last 18mos...with dollar cost averaging and target sector index funds close to 10%. So glad I did not buy into the crash myth.

Good luck

[OriZ 3,157]

Memo to Janet Yellen: Don't say things at Jackson Hole like this:

When yield seeking has elevated financial assets/economic activity like this:

Creating the third speculative bubble in 16 years, and valuations like this:

After you told congress this in your confirmation hearings:

And virtually guarantee dismal future returns and a pension crisis because of this:

[OriZ 3,157]

The Feds are megalomaniac idiots that think they can unravel the laws of nature...

We'll all pay a price for their hubris.

Sad.

I’m on my way to join the world’s central bankers at Jackson Hole for the 35th annual monetary-policy conference in the Grand Teton Mountains. I attended the first monetary-policy conference there in 1982, and I may be the only person to attend both the 1st and the 35th. I know the Tetons will still be there, but virtually everything else will be different. As the Wall Street Journal front page headline screamed out on Monday, central bank Stimulus Efforts Get Weirder. I’m looking forward to it.

Paul Volcker chaired the Fed in 1982. He went to Jackson Hole, but he was not on the program to give the opening address, and no one was speculating on what he might say. No other Fed governors were there, nor governors of any other central bank. In contrast, this year many central bankers will be there, including from emerging markets. Only four reporters came in 1982 — William Eaton (LA Times), Jonathan Fuerbringer (New York Times), Ken Bacon (Wall Street Journal) and John Berry (Washington Post). This year there will be scores. And there were no television people to interview central bankers in 1982 (with the awesome Grand Teton as backdrop).

It was clear to everyone in 1982 that Volcker had a policy strategy in place, so he didn’t need to use Jackson Hole to announce new interventions or tools. The strategy was to focus on price stability and thereby get inflation down, which would then restore economic growth and reduce unemployment. Some at the meeting, such as Nobel Laureate James Tobin, didn’t like Volcker’s strategy, but others did. I presented a paper at the 1982 conference which supported the strategy.

The federal funds rate was over 10.1% in August 1982 down from 19.1% the previous summer. Today the policy rate is .5% in the U.S. and negative in the Eurozone, Japan, Switzerland, Sweden and Denmark. There will be lot of discussion about the impact of these unusual central bank policy rates, as well the unusual large scale purchases of corporate bonds and stock, and of course the possibility of helicopter money and other new tools, some of which greatly expand the scope of central banks.

I hope there is also a discussion of less weird policy, and in particular about the normalization of policy and the benefits of normalization. In fact, with so many central bankers from around the world at Jackson Hole, it will be an opportunity to discuss the global benefits of recent proposals to return to a rules-based international monetary system along the lines that Paul Volcker has argued for.

https://economicsone.com/2016/08/24/a-less-weird-time-at-jackson-hole/

[OriZ 3,157]

As Janet Yellen discusses Federal Reserve's "toolkit", understand sole effect of the newer tools is to ensure crisis. By boosting financial assets relative to economic activity, "toolkit" only ensures future crises. What the "toolkit" has really done is to ensure near zero 10-12 year returns for conventional portfolios. Neither careful econometrics nor basic scatterplots validate cause-effect links the FED presumes to exploit. Yellen suggests "future policymakers" consider broader range of assets. That would be Congress - Federal Reserve Act Sec 13-14 prohibits it. When you look back over your shoulder and you've gone nowhere but up, don't become too certain the ride is diagonal.

NEW YORK — America has a debt problem, but it’s not what you think.

Yes, the federal government owes trillions of dollars more than it did a few years ago. Yes, Americans are still struggling to pay off mortgages and student loans. But it’s the buildup in debt elsewhere that most worries some experts, and the big borrower this time may come as a surprise: Corporate America.

You might think big companies, if anything, have been too conservative with their finances. They’ve collectively hoarded hundreds of billions of dollars in cash, instead of spending it to hire workers or expand their operations.

The reality is different, and more worrisome. Much of the cash is held by just a precious few companies, while debt is ballooning at other, weaker businesses as investors desperate for income rush to lend to them. These investors could face losses, perhaps steep, if economic growth falters. The broader economy is also vulnerable because companies with more debt have to cut back further and lay off more whenever downturns hit.

“There’s a misconception that companies are swimming in cash,” said Andrew Chang, a director at S&P Global Ratings. “They’re actually drowning in debt.”

It turns out there’s a wealth gap among companies, just like among people. Of the $1.8 trillion in cash that’s sitting in U.S. corporate accounts, half of it belongs to just 25 of the 2,000 companies tracked by S&P Global Ratings. Outside of Apple, Google and the rest of the corporate 1 percent, cash has been falling over the last two years even as debt has been rising. It now covers only $15 of every $100 they owe, less than it did even during the financial crisis in 2008 when finances were crumbling.

You don’t have to look hard to find other signs of trouble.

The number of companies that have defaulted so far this year has already passed the total for all of last year, which itself had the most since the financial crisis. Even among companies considered high-quality, or investment grade, credit rating agencies say a record number are so stretched financially that they’re one bad quarter or so from being downgraded to “junk” status.

Companies whose debt is already deemed “junk” are in the worst shape in years. To pay back all they owe, they would have to set aside every dollar of their operating earnings over the next eight and a half years, more than twice as long as it would have taken during the 2008 crisis, according to Bank of America Merrill Lynch.

The problem with high debt is it leaves less wiggle room for even seemingly well-run companies if things go wrong.

In March, S&P cut its ratings on Macy’s to triple-B, two notches above junk, as competition from Internet retailers continues to dig into the department store chain’s sales. The company’s debt has risen over the past three years. Meanwhile, it has spent $5.2 billion buying its own stock, or $1.4 billion more than those shares are worth now, according to data provider FactSet. Companies often buy their shares and take them off the market to goose their earnings per share, a widely watched measure of success.

Oil company Hess also saw its rating downgraded recently, mostly because of a plunge in oil prices beyond its control. But its own moves hurt, too. Instead of whittling away at its debt with the cash it raised in recent years from selling parts of its business, it has spent billions buying its stock. Moody’s Investors Service cited Hess’ heavy debt burden when it downgraded the company.

Hess is what ratings agencies call a “fallen angel” — a formerly highly rated corporate borrower that was cut to junk and thus made too risky for many bond funds. Moody’s tallied 55 other fallen angels in the first six months this year.

Despite the warning signs, investors continue to lend to companies as if there is nothing to fear.

They put a net $22.8 billion into mutual funds specializing in corporate bonds in the 12 months through July, lifting total investments in such funds to $144 billion, according to Morningstar. The headlong rush reflects desperation for something a little more rewarding than the stingy interest paid by Treasurys and other traditionally safe bond offerings. The yield on the 10-year Treasury hit a record low last month.

Joseph LaVorgna, chief economist at Deutsche Bank, is worried about the risk posed beyond investment portfolios.

He says mounting debt has made companies vulnerable to outside shocks — a natural disaster, for instance, or a rise in inflation or a sharp slowdown in China. A little bad news could force companies to pull back from spending and slam the economy.

“It’s like someone’s immune system is weak,” LaVorgna said. “If you run yourself down, you get sick.”

To be sure, few experts are so worried that they expect corporate debt to be the source of the next financial crisis. And not all the numbers on corporate debt are bad.

Defaults are jumping, but they’re mostly confined to energy companies hit hard by a collapse in oil prices. Exclude those companies, and defaults are still ahead of last year’s tally, though not at a post-crisis high.

And while debt is high, low interest rates have helped lighten the burden.

Companies in the Standard & Poor’s 500 index are generating enough operating earnings to pay the annual interest due on all their debt six times over, according to Goldman Sachs. That interest coverage ratio isn’t great, but it’s not terrible, either. It was higher — meaning healthier — a few years ago before companies went on a borrowing streak, but it’s not far off its long-term average.

Chang of S&P Global says his company doesn’t break out the numbers for the 1 percent compared with the 99 percent, but doesn’t think the ratios for the bulk of companies have become alarmingly worse.

Chris Gootkind, director of credit research at fund company Loomis Sayles, says debt at many companies is still at a reasonable level, and thinks investors in corporate debt have gotten things largely right. The profits they’ve reaped have certainly been lucrative. Corporate bond mutual funds have returned an average of 9.5 percent this year, more than an S&P 500 index fund.

“If the market gets concerned,” Gootkind said, “they’ll start demanding significantly higher rates.”

Of course, investors can get things horribly wrong. They didn’t catch the last debt bubble, pouring money into bonds containing mortgages despite signs that homeowners couldn’t afford them.

The similarities to the last debt crisis may not end there. Like folks who kept refinancing their mortgages instead of paying them off, companies have “rolled over” their old loans by taking out new ones. This makes sense at many companies because interest rates are so low.

But when things start falling apart, the high debt hurts.

The largest owner of radio stations in the U.S., iHeartMedia, has paid off parts of its $21 billion debt several times since the financial crisis, but elected to do so with money raised from new loans. Its debt is no lower than it was since the crisis.

Investors have been selling iHeartMedia’s stock as advertisers that used to go on the radio migrate to online competitors. Its bonds have dropped sharply, too. In the past two years, the ones due in 2019 have plunged 25 percent.

http://www.sfgate.com/business/article/The-hidden-risk-to-the-economy-in-corporate-9182807.php

Of the $1.8 trillion in cash that’s sitting in U.S. corporate accounts, half of it belongs to just 25 of the 2,000 companies tracked by S&P Global Ratings.

[OriZ 3,157]

I'll be the first to admit that this decline has taken longer than I originally thought it would, and longer than the last two did. But to those who think that the crash scenario is a "myth"(they probably thought so in 2000 and 2007 too) I have one chart to show. This chart depicts the times in the past where I have believed the market to be neutral, bullish and bearish. Sure some of the older calls weren't made here so you're just going to have to take my word for it, oh well. Black lines are neutral, red is bearish and green bullish. As you an see the last couple of times the decline came alot closer to the red lines, and even this time around it came but then due to massive central bank intervention among other factors I have mentioned in these pages we printed new highs in some indexes but not in all of them(the top is the S&P500 index, the bottom the NYSE Composite which gives a much broader picture of the market as a whole and did not make a new high, at least as of yet). But, while we did not get a crash yet, we haven't made much net progress yet either. I am still patient and confident in my system so for now we are still bearish.

The lines I have drawn on it are my optimistic expectation(meaning even that might not happen and we might go down much sooner) in case the market goes up a little further as per my previous post. However after that I expect a decline to the levels seen on the chart, so we will revisit this chart within a couple of years and compare it to what the market has actually done in that time.

Again, the crash is not a "myth"...it is a simple, baked in the cake consequence of the obscene valuations we are currently seeing. Invest in these valuations at your own peril.

[OriZ 3,157]

The Stock Market as Monetary Policy Junkie: Quantifying the Fed’s Impact on the S&P 500

An amazing must read piece from GMO. Too long to quote though, but here it is:

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/the-stock-market-as-monetary-policy-junkie-quantifying-the-fed's-impact-on-the-s-p-500.pdf?sfvrsn=3

Who Ate Joe’s Retirement Money? Sequence Risk and its Insidious Drag on Retirement Wealth

Another GMO White Paper must read:

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/who-ate-joe-s-retirement-money-sequence-risk-and-its-insidious-drag-on-retirement-wealth-.pdf?sfvrsn=20

[Neonred 3,562]

Great info but a little too technical for me. I've been saving like crazy since I started working thinking about retirement some day (I'm self employed). I have a large portfolio that in the past I thought I could manage but recently realized I have neither the time or desire to closely evaluate where I need to be and what I need to avoid. Yesterday met with a new professional that I liked an will enlist his help and the experts he has access to. Should have done this years ago but I feel good about making the first big step.

Any tips for evaluating and working with an advisor?