One Year To Nowhere

[X Factor 1,111]

Looks like Feds didn't want to raise hikes ahead of Brexit vote next week

[OriZ 3,157]

Looks like Feds didn't want to raise hikes ahead of Brexit vote next week

It's not brexit it's the economy. I've said it all along they're dreaming, and they're delusional, if they think they are going to raise 4 times and now it's already down to between 1 and two times. They have like no credibility anymore, they follow the market like a little lost puppy.

[OriZ 3,157]

Imagine.

Imagine the collapse of an extended speculative tech bubble, resulting in a broad economic recession. Imagine if the Federal Reserve had persistently slashed short-term interest rates during the downturn, to no avail, leaving rates at just 1% by the time the S&P 500 had lost half of its value and the Nasdaq 100 collapsed by 83%. Imagine that the Fed kept rates suppressed, in the initially well-meaning hope of encouraging lending, growth and employment. Imagine that the depressed level of interest rates made investors feel starved for yield, and drove them to look for safe alternatives to Treasury bills.

Imagine that investors found the higher yields they sought in mortgage securities, which had historically always been safe, and that Fed policy inadvertently created voracious demand for more of that debt. Imagine Wall Street had weak enough requirements on capital and underwriting standards that financial institutions had an incentive to create more “product” by lending to borrowers with lower and lower creditworthiness. Imagine that by the magic of “financial engineering” and lax oversight of credit ratings, Wall Street could pass these mortgages off to investors either directly by bundling, slicing and dicing them into mortgage-backed securities or by piggy-backing on the good faith and credit of the government by transferring them to Fannie Mae and Freddie Mac in return for funds obtained from investors in these “agency” securities.

Imagine that this Fed-induced yield-seeking speculation changed the dynamics of the housing market, and produced a bubble in home prices, coupled with overbuilding and malinvestment. Imagine that the Federal Reserve, focused exclusively on exploiting the very weak links between monetary policy and its “mandates” of employment and price stability, ignored the phrase “long-run” in those mandates, and wholly disregarded the speculative effects of its actions, which any thoughtful central banker should have viewed as a significant risk to the long-run economic health of the nation. Imagine that the then-head of the San Francisco Federal Reserve, Janet Yellen, answered questions about 1) whether speculative risks existed, 2) whether the Fed had any role in addressing them, and 3) whether there was any doubt that the Fed could halt a resulting economic downturn if it occurred, responding with a dismissive “No, No, and No.”

Imagine that this second speculative bubble collapsed anyway, producing the worst economic downturn since the Great Depression, and that persistent easing by the Fed failed to stop any of it, just as it failed to do so during the preceding collapse. Imagine that the Fed violated the existing provisions of section 13.3 of the Federal Reserve Act (later rewritten by Congress to spell it out like a children’s book) and created off-balance sheet shell companies called “Maiden Lane” to take bad assets off of the ledgers of certain financial institutions, in order to protect the bondholders of those companies and facilitate their acquisition by purchasers.

Imagine that the crisis continued, and that what actually ended the crisis was a change in FASB accounting rules in the second week of March 2009, which relieved the need for financial institutions to mark their distressed assets to market value, and instead allowed them “significant judgment” in valuing those assets, instantly removing the specter of widespread financial insolvencies with the stroke of a pen. Imagine that legislation following the crisis was heavy on paper regulation, signed assurances, and living-wills, but was light on capital requirements, and contained provisionsthat essentially tied the hands of the FDIC and instead gave veto power to the Treasury and the best friend of the banking system, the Federal Reserve Board itself, in deciding whether a “too-big-to-fail” bank would actually go into receivership (where bondholders often lose money, but depositors are protected) if it was to become insolvent.

Imagine that in response to the collapse of a yield-seeking mortgage bubble, a resulting global financial crisis, and a 55% collapse in the S&P 500, the Federal Reserve insisted on pursuing more of what created the bubble in the first place; refusing to admit the weak cause-and-effect relationship between monetary easing and the real economy, pushing interest rates to zero, and expanding the monetary base to the point where $4 trillion of zero-interest hot potatoes constantly had to be held by someone in the financial markets. Imagine that despite pursuing this experimentation for years, the response of the real economy was no different than could have been predicted using prior values of non-monetary variables alone. Imagine that the main effect of this unprecedented intervention was to drive the most reliable measures of stock market valuation (those best correlated across history with actual subsequent 10-12 year market returns) well beyond double their historical norms, and that it prompted massive issuance of low-grade, “covenant lite” debt, in much the same way yield-seeking speculation encouraged the issuance of low-grade mortgage debt in the preceding bubble.

Imagine that the Fed not only refused to take serious account of the distorting impact of yield-seeking speculation on the financial markets, but actually welcomed it, citing it as an example of the “effectiveness” of quantitative easing, in the appallingly misguided belief that “wealth” is inherent in the price you pay for a security, rather than in the long-term stream of cash flows that the security will deliver over time. Imagine that investors adopted the same overconfidence in a Fed “put option” that they held before the 2000-2002 and 2007-2009 market collapses. Imagine the Fed failed to take any steps at all to reduce the size of its balance sheet at historically low interest rates, and painted itself into a corner because despite the weak relationship between short-term interest rates and the real economy, any normalization of policy threatened to burst a bubble that was already at a precipice.

Imagine that as a result of a massive combined deficit in the government and household sectors after the housing collapse, corporate profit margins temporarily soared to the highest level in history (an implication of the saving-investment identity under assumptions that typically hold in U.S. data). Imagine that because of this temporary elevation of profit margins, many of the borrowers that issued debt most heavily during this yield-seeking bubble were companies with elevated short-term profitability, but more fragile prospects over the full economic cycle. Imagine that energy and mining companies were among these, but were only the tip of the iceberg, exposed sooner than the rest because of early weakness in commodity prices.

Imagine if central banks took the position that when the relationship between their policy instruments and the real economy proves to be weak, the only option is to push those instruments beyond even the most extremist, historically unprecedented, and wholly experimental limits. Imagine that after years of persistent yield-seeking speculation, valuations were driven so high that the prospective 12-year return on a conventional 60% stocks, 30% bonds, 10% Treasury bills investment portfolio was compressed to just 1.6%. Imagine that corporate, state, and municipal pension funds were still assuming a 7% annual return on their investments, and that as a result of this mismatch, pension funds were becoming both massively underfunded, and vulnerable to severe capital losses over the completion of the market cycle.

Imagine that despite the delusion that low interest rates made stocks “cheap relative to bonds,” years of speculation had already created a situation where stocks were actuallylikely to underperform even the depressed yield on 10-year Treasury securities in the decade ahead, making the majority of corporate stock repurchases (which are typically financed by debt issuance), negative contributors to shareholder value. Imagine that the latest stick-save by central banks, in response to initial weakness following the 2015 peak of the bubble in global equity markets, had brought the median price/revenue ratio of the S&P 500 to the highest level in history, far exceeding even the 2000 peak (which was more focused on large-capitalization stocks, particularly in technology).

Imagine that all of this could be demonstrated with a century of reliable evidence, but that hardly anyone, particularly in the investment profession, gave it any more attention than the empty lip-service they offered during the tech and housing bubbles. Imagine that central bankers were focused instead on toy models that had weak theoretical and empirical foundations, inadequate transmission mechanisms, and an inability to explain more than a tiny fraction of economic variation over-and-above what could be explained in the absence of their deranged monetary activism. Imagine that they ignored real data in preference for the comfort and bizarre allegiance to a “Phillips Curve” that does not exist (Phillips’ work actually demonstrated a relationship between unemployment and wageinflation - and real wage inflation at that, given that he studied a century of British data when the U.K. was under the gold standard).

Imagine that a divided Congress, incapable of agreeing on fiscal policies to encourage productive investment in the public and private sectors, instead allowed a handful of unelected bankers and college professors to become the untethered de-facto overlords of the financial markets, repeatedly promoting destructive speculative bubbles. Imagine that nobody cared to recognize the role of financial speculation and malinvestment as the primary source of repeated economic dislocations and crises, because they were, nearly to a person, too lazy, uninformed, or dogmatic to actually get their hands dirty by questioning their assumptions or carefully examining the historical data.

Imagine that years of speculative recklessness had driven the S&P 500 to the second most extreme level of equity market overvaluation in postwar U.S. history (the third highest if one includes the 1929 peak), and to the single most extreme point of overvaluation for the median stock. Imagine that market internals and momentum had already deteriorated, and that the market had traced out an extended top-formation, as it had in late-2000 and again in late-2007.

Now imagine what might happen next.

http://www.hussmanfunds.com/wmc/wmc160620.htm

Who needs brexit when you have the FED.

Edited June 24, 2016 by OriZ

[X Factor 1,111]

I am very light in my stock positions ahead of Brexit. Just a few bullish and bearish credit spreads.

[OriZ 3,157]

I am very light in my stock positions ahead of Brexit. Just a few bullish and bearish credit spreads.

And of course now you're already getting the CB choir all over the world saying they are "ready to take the necessary actions" after brexit. Delusional clowns.

Anyways, SPX set to open not far from support. If it can go down further and break the 2000-2025 area then we will most likely see 1930. If not then it could just be a one day flush.

[OriZ 3,157]

Would like it if topic could be changed to reflect now two years of no net movement. NYSE Composite, the broadest measure of market action is actually quite a bit lower than it was two years ago. There is no need for brexit. This is still just the early stages of a more severe decline and economic contraction.

Jun 27, 2014 - S&P500 = 1960.96

Jun 27, 2016 - S&P500 = 2000.54

Jun 27, 2014 - NYSE Composite = 10,974.43

Jun 27, 2016 - NYSE Composite = 9,973.54

[OriZ 3,157]

This is where the real outrage should be:

http://www.ft.com/fastft/2016/06/28/boe-injects-3-1bn-of-liquidity-into-banks-after-brexit/

If they default, it's a giveaway to banks, not to the people. BTW, BoE level C collateral includes asset backed securities "backed by credit cards; student loans; consumer loans". Backed?

[OriZ 3,157]

The European Union is doomed to fail, "Black Swan" author Nassim Nicholas Taleb said Thursday.

He told CNBC's "Power Lunch" the EU has become a "metastatic and rather incompetent bureaucracy" that is too intrusive.

"The way they've been building it top down from Brussels is doomed to fail. This is 2016. They are still thinking 1950 economics," said Taleb, who is also the author of "Antifragile" and is an advisor to Universa Investments.

Taleb has warned about an EU breakup for some time, calling it a horrible, stupid project back in 2012.

In fact, the U.K.'s vote to exit the EU last week didn't turn out to be the catastrophe that was expected, he said. While Brexit fears initially rattled global markets, stocks have been climbing back up over the last few days.

While he's against the current bureaucracy in place in the Europe, he still believes countries can work together, forming free trade agreements and joint military and economic policies. He envisions an Anglo-Saxon economic zone that encompasses the U.S., Ireland, Scotland and Britain.

aleb also doesn't see Brexit as an isolated event.

"People just realize that these elites don't know what they're talking about. It's nice to have elites. … you don't want them to tell you what to do," he said. "So they are tired of that and it's a rebellion."

"You have waves and of course we have a wave and I think that … it's spreading."

That can be seen in the popularity of Donald Trump, he added.

"He's a brilliant salesperson. He knows how to sell you real estate. … He knows what people want. And he detected exactly that point. And he's delivering but through trial and error."

http://www.cnbc.com/2016/06/30/the-european-union-is-doomed-to-fail-says-black-swan-author-nassim-taleb.html

[OriZ 3,157]

“Understand that securities are not net economic wealth. They are a claim of one party in the economy - by virtue of past saving - on the future output produced by others. Fundamentally, it's the act of value-added production that ‘injects’ purchasing power into the economy (as well as the objects available to be purchased), because by that action the economy has goods and services that did not exist previously with the same value. True wealth is embodied in the capacity to produce (productive capital, stored resources, infrastructure, knowledge), and net income is created when that capacity is expressed in productive activity that adds value that didn't exist before.

“New securities are created in the economy each time some amount of purchasing power is transferred to others, rather than consuming it. Once issued, all of these pieces of paper can vary in price later, so the saving that someone did in a prior period, embodied in the form of some paper security, may be worth more or less consumption in the current period than it was initially. That’s really the main effect QE has - to encourage yield-seeking speculation that drives up the prices of risky securities, but without having any material effect on the real economy or the underlying cash flows that those securities will deliver over time.

“If one carefully accounts for what is spent, what is saved, and what form those savings take (securities that transfer the savings to others, or tangible real investment of output that is not consumed), one obtains a set of ‘stock-flow consistent’ accounting identities that must be true at each point in time:

1) Total real saving in the economy must equal total real investment in the economy;

2) For every investor who calls some security an ‘asset’ there is an issuer that calls that same security a ‘liability’;

3) The net acquisition of all securities in the economy is always precisely zero, even though the gross issuance of securities can be many times the amount of underlying saving; and perhaps most importantly,

4) When one nets out all the assets and liabilities in the economy, the only thing that is left - the true basis of a society’s net worth - is the stock of real investment that it has accumulated as a result of prior saving, and its unused endowment of resources. Everything else cancels out because every security represents an asset of the holder and a liability of the issuer.”

Stock-Flow Accounting and the Coming $10 Trillion Loss in Paper Wealth
John P. Hussman, April 6, 2015

Following the British referendum to exit the European Union, the paper value of global assets briefly fell by about $3 trillion. This decline in the market capitalization immediately garnered headlines, suggesting that some destruction of “value” had occurred. No. The value of a security is embodied in the future stream of cash flows that will actually be delivered into the hands of investors over time. What occurred here was a paper loss. While the recent one was both shallow and temporary, get used to such headlines. In the U.S. alone I fully expect that $10 trillion of paper wealth will be erased from U.S. equity market capitalization over the completion of the current market cycle.

While any given holder can sell their securities here, somebody else has to buy those same securities. The fact that valuations are obscene doesn't mean that the economy has created more wealth. It just means that existing holders of stocks and long-term bonds have a temporary opportunity to obtain a wealth transfer from some unfortunate buyer. Whoever ends up holding that bag will likely earn total returns close to zero on their investment over the coming 10-12 year horizon, with profound interim losses on the way to zero returns. Investors who fail to understand the difference between paper wealth and value are likely to learn that distinction the same way they did during the 2000-2002 and 2007-2009 collapses.

The higher the price an investor pays for a given stream of future cash flows, the lower the long-term return the investor can expect to achieve over time. As the price of a security rises, what investors considered “expected future return” only a moment before is suddenly converted into “realized past return.” The higher the current price rises, the more expected future returns are converted into realized past returns, and the less expected future return is left on the table. Because of this dynamic, the point where a security seems most enticing on the basis of realized past returns is also the point where the security is least promising on the basis of expected future returns. See Blowing Bubbles: QE and the Iron Laws for a straightforward demonstration of this idea.

This is why good valuation measures, such as the ratio of market capitalization to corporate gross value-added, are inversely related to actual subsequent market returns across history. Bubbles do not create wealth. They simply raise the current price of a security, lower the future expected long-term return, and, at best, leave long-term cash flows unchanged.

I say “at best” because there’s no evidence that yield-seeking speculation, encouraged by central banks, has any positive effect on long-term cash flows at all. Indeed, I don’t think there’s any real doubt that the crisis and disruption following the collapse of prior yield-seeking bubbles is precisely what has crippled the accumulation of productive capital at every level (real investment, work experience, infrastructure) in the real economy. Given that the accumulated stock of productive capital is the basis for the net worth of our nation (as detailed above), it follows that yield-seeking speculation, intentionally encouraged by the Federal Reserve, is perhaps the single most destructive force in the U.S. economy, and in the lives of the American people.

If one looks at the chart below, it may appear that American households are “wealthier” than they have ever been, in the sense that financial assets held by households have never been higher as a fraction of disposable income (the Federal Reserve Z.1 flow of funds data include non-profit organizations in this figure, but the effect is comparatively small). As I observed in May, one might imagine that a high value of financial assets relative to disposable income is actually a good thing, and that it reflects greater saving by households. Unfortunately, since 2000, saving as a fraction of household income has plunged to half the savings rate observed in the previous half-century. No, the elevated level of financial assets reflects extreme valuations, not an increase in the rate of financial investment.

Unfortunately, the chart above only depicts paper wealth, and not surprisingly, it turns out that the best moments for paper wealth are actually the worst moments for future investment returns. The chart below shows the same data as above, but places financial assets / disposable income on an inverted log scale (blue line, left). Actual subsequent 12-year S&P 500 nominal total returns are plotted in red (right scale). Though alternative measures vary slightly, the implication of roughly zero, or even negative, expected total returns on the S&P 500 over the coming 12-year period is broadly consistent with other reliable valuation measures that are most closely correlated with actual subsequent market returns (see Choose Your Weapon).

Understand that what appears to be a substantial amount of paper “wealth” embodied in securities here is actually a reflection of massive overvaluation, relative to the stock of productive investment and the cash flows (from value-added production) that will actually be delivered into the hands of security holders over time. These rich valuations imply poor long-term investment returns, but in the end, these securities will deliver a stream of cash flows that is no different than the stream of cash flows that investors would receive at lower valuations. Again, paper wealth may change as valuations fluctuate, but the value of any security is embodied in those future cash flows.

The return/risk profiles of investment securities are not constant

Investors tend to believe that the return/risk characteristics of a particular investment class are given, associating bonds with “safety” and equities with “growth, though with greater volatility.” But a central feature of bubbles, always overlooked by investors until the collapse, is that an extended period of speculation dramatically changes the return/risk characteristics of whatever market is involved. Throughout the housing bubble, for example, mortgage debt was considered safe, gains were attributed to “fundamentals,” and a generalized decline in the national housing market was seen as inconceivable. In the words of Ben Bernanke as the housing bubble was in full swing:

“Unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.”

Despite Bernanke's assurances, speculation in mortgage debt had already changed the return/risk characteristics of the housing market, fueled by yield-seeking speculation in response to a Federal Reserve that dropped short-term interest rates to just 1% after the tech bubble collapsed. A market that had historically been safe and nearly immune from widespread loss ended up provoking the deepest economic crisis since the Great Depression. Likewise, speculation in equities, junk debt and even investment grade debt has dramatically changed the return/risk profile of these asset classes in recent years, to the point where they bear no resemblance to what passive investors might expect based on historical norms. When one stops to realize that the amount of global debt yielding negative interest rates now exceeds $12 trillion, it should be clear how extreme central bank distortions have become. To imagine that equity valuations have not already fully responded to this situation after years of yield-seeking competition is, quite frankly, ignorant both of reliable valuation measures and of financial history.

Over the completion of the current market cycle, we expect the S&P 500 to retreat by 40-55%; a decline that would be merely run-of-the-mill in the sense that it would bring the most historically reliable measures of valuation back into a range that has been visited or breached during the completion of every single market cycle in history (including cycles prior to the 1960’s when interest rates were often quite low). With the yield on the 10-year Treasury bond currently just 1.45%, investors already know that they will earn next to nothing on their investment over the coming decade, the only question being whether to hold out for a few percent in gains that might be available in a recessionary environment that drives yields below 1%. Across the corporate bond market, and not only in junk debt, the combination of steep increases in corporate debt, justified by temporarily high profit margins that make these debt burdens seem reasonable, is likely to unravel into a much deeper default problem than investors seem to anticipate. While default rates remain quite low for now, and “investment grade” debt rarely defaults in one fell-swoop, I expect a cascade of downgrades in the coming years as “transition probabilities” from high-grade to lower-grade rankings soar beyond their historical norms.

Head of the snake

The evidence, if one cares to examine it, is that Fed-induced yield-seeking speculation is not the cure but the cause of economic malaise. Much of America has still not recovered from the violent consequences of the last yield-seeking bubble the Fed engineered. Now the Fed has engineered another, and has drawn nearly every pendulum to an extreme.

For me, probably the saddest part of this whole spectacle was watching an earnest, well-meaning congressman asking Janet Yellen, during her Humphrey-Hawkins testimony two weeks ago, why the Fed was not doing “more” on behalf of unemployed people of color. The problem here is that the underlying assumption is false. If one actually examines data across history, there is no reliable or economically meaningful relationship between activist monetary policy and subsequent changes in output or employment. This congressman was essentially begging the Fed to deliver poison to his community.

I distinguish “activist monetary policy” from “rules-based monetary policy”; the fluctuations in interest rates and the monetary base that can be predicted from past values of non-monetary variables alone, such as GDP, inflation, and unemployment. Statistically, it’s difficult to determine whether that “predictable” component of monetary policy is economically useful or not, since by definition, it's perfectly correlated with non-monetary data and “spans the same space.” What we can say, however, is that deviations from those predictable monetary responses - “activist” policy interventions - have no reliable or economically significant impact on the subsequent performance of the economy, other than to create yield-seeking bubbles that exert violent long-term injury when they collapse.

Virtually nobody cares to look at the utterly weak and insignificant correlation between monetary policy and desired outcomes, apparently preferring a dogmatic insistence on some little graph or model they learned in Economics 101. While Janet Yellen showed enough conceit to give the Fed credit for millions of new jobs since 2009, the path of the economy since the crisis has been nearly identical to what one would have anticipated in the absence of all of this monetary insanity (a result that one can demonstrate using vector autoregression). The crisis itself was not “fixed” by monetary policy, but ended the same week that the Financial Accounting Standards Board announced it would waive the requirement for financial institutions to mark their assets to market value, allowing them “significant judgment” in how they valued those assets, and eliminating the specter of widespread insolvency with the stroke of a pen.

The bottom line is this: speculation does not create wealth. The true wealth of a nation is in its accumulated stock of productive capital, stored resources, infrastructure and knowledge. This wealth contributes to the nation’s income and welfare when it is used to create value-added output - goods and services did not exist before, that have a greater value than the inputs used to produce them. It shouldn’t be surprising, then, that the ratio of market capitalization to corporate gross value-added is the single most reliable valuation indicator we identify, with a 93% correlation with actual subsequent 10-12 year total returns in the S&P 500 (see The New Era is an Old Story).

From an investment standpoint, the value of any security is inherent in the long-term stream of cash flows it will deliver to investors over time. Artificially jacking up financial securities through reckless monetary policy doesn’t change the cash flows that those securities will deliver over time; it only converts future expected return into past realized return, leaving nothing but risk on the table for years to come. Central bank intervention is not a benefit to long-term economic prosperity. It is the head of the snake.

We expect $10 trillion of “paper wealth” to be wiped from the U.S. equity market over the completion of this cycle, because it is not “wealth” at all. Again, since every security that is issued has to be held by someone until it is retired, the main consequence of Fed-induced speculation is the opportunity for wealth transfer - the chance for existing holders to sell their overvalued securities to some poor bagholder who will reap the whirlwind over the completion of the market cycle. We wish this on nobody, but it’s unavoidable that someone must assume that role. Those bagholders would best be those who understand our concerns and either accept the risks or choose to deny them.

As I’ve regularly emphasized, an improvement in our measures of market internals to the kind of uniformity that prevailed prior to about mid-2014 would indicate a shift back to risk-seeking among investors, in contrast to the current trend of increasing risk-aversion. When investors are in a speculative mood, they tend to be indiscriminate about it, so uniformity of market internals across a broad range of individual stocks, industries, sectors, and security types provides a useful signal of that disposition. Fresh speculation would do nothing to improve the dismal outlook for stocks over the completion of this cycle, or over the coming 10-12 year period, but could extend this topping phase enough to preclude a hard-negative market outlook until internals deteriorated again. At present, the combination of obscene valuations on historically reliable measures, coupled with broadly unfavorable market action and internals on our measures, holds us to a defensive outlook for now.

Meanwhile, keep in mind that central bank easing only reliably encourages speculation when investors are already inclined to seek risk. As we’ve demonstrated in both U.S. andJapanese data, central bank easing fails to support stocks (beyond an immediate knee-jerk rally) once market action has deteriorated and investors are inclined toward risk aversion. In a risk-averse environment, safe liquidity is a desirable asset, not an inferior one, so creating more of it doesn’t ignite yield-seeking. The Japanese stock market has suffered two separate losses in excess of 60% since 2000 despite short-term interest rates that were regularly pegged at zero, and never above 1%, during the entire period.

On Friday, interest rates went negative on the entire stock of Swiss government bonds. German government yields are now negative beyond a 15-year maturity. From current valuations, the prospect of positive 10-12 year investment returns on U.S. stocks has also died. Still, the relationship between equity valuations and bond yields is far weaker than investors seem to recognize (the “Fed Model” is an artifact of the 1980-1997 disinflation), and low interest rates have never durably removed equity market volatility, downside risk, or the tendency for compressed equity risk premiums to be restored over the completion of the market cycle. So maintain a patient, disciplined confidence that this market cycle will be completed, valuations will change, and fresh opportunities will emerge.

http://www.hussmanfunds.com/wmc/wmc160704.htm

[Expat1 971]

I have little to no faith right now in paper assets of any kind. We are looking at some new developments just outside Jakarta that appear to easily rent for 10-12% annual return after management fees and expenses.

Other than real estate and EM there really aren't any good valuations anywhere.

[OriZ 3,157]

Here's the thing though, he might be right about one thing: The markets are short term slightly oversold according to some measures. This is mostly due to the declines in the secondary indexes that unlike the headline indexes are still very close to their August bottoms, and a bounce may be upon us. If we do bounce further, the headline indexes might actually eke out marginal new highs, while the secondary indexes will just experience a shallow correction, thus creating another classic divergence or non confirmation. I view new highs as unlikely at the moment, but have been in this market long enough to know that sometimes, only short term, the unlikely beats the likely.

One more thing:

http://www.zerohedge.com/news/2015-12-15/virtually-every-wall-street-strategist-expects-bull-market-continue

OriZ, on 12 Mar 2016 - 3:38 PM, said:

lol...well, anyway there's nothing to hurry into. Even if certain indexes make a marginal new high(and it's far from certain, and it will not be all of them) that will be another perfect trap, only to the upside this time. There is absolutely no need to buy at valuations that imply zero return over the next 12 years.

2,100-2,200 is possible(yet still not probable), nothing beyond that.

Oil - 40% rally already. Getting to the bottom part of the target range.

At this point the S&P500(after having held above 1820) can definitely eke out new highs. My guess is IF it does, it will be marginal, and without the participation of the broader market indexes that topped late 2014 already and are much further from their all time highs at the moment. Nor would it be accompanied by the banking index or the Russell. Nevertheless, it is a possibility, but it won't change the longer term picture which is valuations that currently imply near zero 10-12 year returns and negative 10-12 year real returns. Even this scenario is not certain, I think we will at the very least get a pullback first(towards the 1950-2000 range) possibly even this week. Once we get there it will be much easier to assess if they're going back up again or continuing lower.

Unlike dailies, the monthlies don't change on a dime. I will post something later that shows the bear is still here.

OriZ, on 03 Apr 2016 - 6:06 PM, said:

I wouldn't mind newer highs and it ain't going to change the monthly picture with the indicators IMO. If anything it will strengthen the longer term bearish case via divergences - ie. new highs in S&P500 and DJIA would not be confirmed by new highs in the FTSE, DAX, NYSE Composite, Russell or the banking index to name a few(as those are still way under their previous highs, some more than 10% lower despite the blue chip US indexes being 2-3% from the top - on their own). It would be classic. Junk is not even close to the previous highs either. AND it would be new highs with the backdrop of declining earnings. Earnings have dropped by 18% yet US markets are close to all time highs. It all has to confirm and if it doesn't that's bad - brings me back to what I said during the Oct-Nov rally(pretty similar to what I wrote here), but in the end no new highs were made and the market dropped again in Jan before recovering yet again.

I continue to believe any new high even in the heaviest indexes will more than likely be marginal, and will complete an Elliott structure for me that while I did not consider the most probable, is definitely possible.

I am excited. Why am I excited? Because it seems like markets might finally be ready to make some new temporary ATH. Which means this whole debacle will be coming even closer to an end and make the case for a crash that much more compelling. As the quotes above show this will not be blindsiding me. While I thought it was less probable, I also thought it would create some inter-market divergences that are usually very classic near a top. And as written above, the banking index and the russell indeed, right now are still far far away from their tops. Yet according to futures at the moment, SPX tomorrow should FINALLY hit a new ATH. Things are gearing up to get even more interesting, for sure.

Edited July 11, 2016 by OriZ

[OriZ 3,157]

http://www.hussmanfunds.com/wmc/wmc160711.htm

Very adequate summary, especially the second half.

[OriZ 3,157]

Excerpt:

One of the hallmarks of the bubble period since the late-1990’s is that the growth rate of real U.S. gross domestic investment has slowed to less than one-quarter of the rate it enjoyed in the preceding half-century. Yet because central banks have stomped on the accelerator at every turn, the quantity of outstanding debt has never been higher, and the combined value of corporate equities and debt (“enterprise value”) is now at the highest multiple of corporate gross value-added since the 2000 bubble extreme. The chart below illustrates the current situation. While this might be incorrectly seen as a sign of corporate strength, it turns out that just like the ratio of household financial wealth to household disposable income, this ratio has a powerful and negative correlation with actual subsequentinvestment returns.

The Iron Law of Valuation is simple: the higher the price investors pay for a given stream of future cash flows, the lower their future returns will be. Because profit margins are highly variable across the economic cycle, the fact is that corporate gross value-added is a dramatically more reliable “sufficient statistic” for that future stream of cash flows than any earnings measure available (see Choose Your Weapon for a review of various valuation measures, ranked by their correlation with actual subsequent market returns).

As a Stanford-trained economist (with the good fortune to have John Taylor, Thomas Sargent, Ronald McKinnon, Robert Hall, and Joseph Stiglitz as my doctoral committee) and former professor of economics and international finance at the University of Michigan and Michigan Business School, I wince at the Federal Reserve’s nearly complete disregard of the link between financial speculation and subsequent economic injury. Instead, central bankers seem to view elevated security valuations as “wealth.” The longer this fallacy persists, the worse the subsequent fallout will be. It will help to review how financial securities are actually linked to the real economy.

Securities are created by the act of transferring some amount of savings that was withheld from consumption, and instead providing it to someone else. A security is no more and no less than a claim on some expected stream of future cash flows, in return for the funds provided today. In prior commentaries, I’ve observed that because every security is an asset to the holder and a liability to the issuer, financial securities actually net out to zero in the calculation of a nation’s wealth. Instead, the true wealth of a nation is embodied in itscapacity to produce, as measured by the stock of real investment (productive capital, stored resources, infrastructure, knowledge) it has accumulated as a result of prior saving.

It’s not a theory, but an accounting identity, that total saving in an economy is equal to total real investment. By “investment” here, we’re talking about goods and services that are not consumed - real investment - as opposed to financial investment. That distinction is important, because the gross issuance of securities in an economy can be many times the amount of underlying saving. That’s because securities are issued every time funds are intermediated, whether or not they are used to finance real investment. Suppose, for example, that someone borrows money and spends it on consumption goods. In that case, the lender may be a saver, the borrower is a “dis-saver,” and a loan is created even though the total saving (and the total real investment) in the economy is zero.

In a healthy economy, savings are channeled to productive investment, and the new securities that are issued in the process are evidence of that transfer. In an unhealthy economy, and particularly one with very large wealth disparities, a large volume of securities may be created, but they are often simply a way of supporting debt-financed consumption. As a result, no productive investment occurs, and no national “wealth” is created. All that occurs is a wealth transfer from savers to dis-savers. Over the past 16 years, U.S. real gross domestic investment has crawled at a growth rate of just 1.0% annually, compared with a growth rate of 4.6% annually over the preceding half-century. There’s your trouble.

Instead of productive saving and investment raising the U.S. standard of living through growth, the primary way that Americans have maintained their standard of living in recent years is through debt-financed consumption. Enormous “intra-sectoral” deficits and surpluses have been created in the process, which have sustained the distortions, but only temporarily. See, deficits in one sector of the economy have to be matched, in equilibrium, by mirror-image surpluses in other sectors. In the years following the financial crisis, weak household savings and large government budget deficits created a huge, mirror image surplus: specifically, a historically unsustainable surplus in the corporate sector (which was observed as record profit margins).

Essentially, wages and salaries as a share of the economy collapsed, but government transfer payments and debt-financed consumption filled the void, so companies were able to sell the same amount of goods and services, even though their wage costs were dramatically below historical norms. In recent quarters, that situation has begun to normalize, with household savings increasing and government budget deficits narrowing. The combined effect, of course, is that corporate profits have hit the skids. Unfortunately, debt has been created, and equity valuations have been elevated, under the delusion that those elevated profit margins were permanent. Likewise, suppressed interest rates enabled an enormous quantity of low-quality “covenant lite” debt to be created, even though U.S. real gross domestic investment has grown at a rate of just 0.24% annually - literally one-nineteenth of its pre-2000 growth rate - over the past decade.

The key point here is that rampant issuance of securities, without real investment, is symptomatic of a distorted, unhealthy economy, and of broad wealth disparities. The problem is that future obligations are created without creating the productive means to service them. Worse, when central banks encourage yield-seeking speculation in the financial markets, valuations are driven up so that investors are offered the illusion of “paper wealth,” even though long-term stream of cash flows represented by those securities (which embody the actual “value” of a security) hasn’t changed at all. As speculative yield-seeking continues, and as valuations increase, the long-term stream of cash flows underlying those securities becomes smaller and smaller per dollar of paper “wealth.” Ultimately, the outlook for the future features nothing other than poor long-term returns and defaults.

While it’s certainly possible for any individual holder to sell their overvalued holdings, equilibrium requires that someone else, by necessity, has to buy those same securities. It’s essential to recognize that yield-seeking speculation doesn’t create wealth. It only creates the opportunity for wealth transfer - primarily away from speculators who buy those securities at extreme valuations, and toward the previous holders with the foresight to sell to those “greater fools.”

Simply put, the only thing QE really does is to distort the financial side of the economy, enabling and encouraging yield-seeking speculation and massive sectoral imbalances that we observe as wealth disparities and bizarrely distorted securities markets. The proper course of economic policy is to expand productive investment at every level of the economy through the action of Congress (including infrastructure investment, corporate investment tax incentives, workforce development credits, and other measures ideally tied to the creation of new jobs). The Federal Reserve is not a source of prosperity. It is the single most dangerous and unregulated risk factor in the U.S. economy. We should have learned that during the yield-seeking mortgage bubble and the collapse that followed. We have not, so we now face the equivalent prospect again.

Illusory prosperity, cheap money, and the road to financial crisis

"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."

Ludwig von Mises, The Causes of Economic Crisis (1931)
Historical note: The stock market would go on to lose two-thirds of its value over the following year, bringing the cumulative market loss from the 1929 peak to -89%.

In the current cycle, the question of “sooner or later” has been answered by sequentially kicking the consequences further and further down the road, as global central banks initiate ever larger interventions at every turn. When will it end? Unfortunately, it’s unlikely to end by central bankers suddenly seeing the light, by recognizing the weak correlation between activist monetary policy and the real economy, or by recognizing that the race to the bottom of zero and even negative interest rates only brings financial distortion. Instead, it will end as credit defaults rise, bank bailouts become necessary, covenant lite debt proves to be, indeed, lite on covenants, and financial assets pushed to zero long-term yields prove, indeed, to yield zero returns over the long-term.

We’ve learned quite well that speculative psychology can outweigh even warning signals that were regularly followed by vertical losses in prior market cycles, and we’ve adapted our discipline to reflect that lesson. Quantitative easing has certainly deferred the consequences of extreme valuations and persistent speculation, but I believe that investors would be foolish to assume that those consequences will not arrive. It’s easy to understand the concept of yield-seeking, and the allure of “front running” a race to the bottom in yields. Still, it’s unrealistic to believe that credit defaults will not accelerate on the massive volume of low-grade, “covenant lite” debt that has been issued in this cycle. It’s equally unrealistic to believe that every shock to the global economy can be fixed by the act of central banks buying assets and creating more zero-interest paper. If one understands history, one should recognize that financial distortion and malinvestment always ends in tears, and the longer it continues, the worse the outcomes are likely to be.

A lot of future misery could be avoided if the Congress and the general public recognized the risks the Fed has created, and abandoned the ridiculous concept that it is somehow a third rail of “political influence” to place boundaries on the recklessness of the Federal Reserve. These boundaries are essential for the public good, and perhaps even the economic survival of the nation. The American public should never, never, abdicate the right to restrain the behavior and assert checks and balances on an unelected agency of the government. Yet even if this recklessness brings another global financial crisis or depression, my sense is that the Fed will again be called on to “save” the economy with exactly the same poison that has created recurrent bubbles and collapses in the first place. In the financial markets, we’ve learned our lessons from QE and made our adaptations, and I expect we’ll navigate the cycles ahead just fine. What I worry about is the human impact of the collapse of this speculative episode. Aside from the short-term prospect of even greater speculative yield-seeking (which will only make the ultimate consequences worse), I believe that such a collapse is now unavoidable.

The Austrian economist Ludwig von Mises (1881-1973) was virtually alone in anticipating the Great Depression. He never lived to witness the current episode of deranged experimental recklessness that central banks have unleashed on the global economy. He was spared the spectacle of watching the grotesque brainchild of Ben Bernanke’s warped misconceptions swelling to a foul monstrosity. But he instantly would have recognized and anticipated the ultimate consequences. He had already seen those consequences accurately played out in episodes across history, the worst being the Depression and the Weimar hyperinflation. In describing the economic consequences of cheap money, he may as well have been writing about today. Read slowly, and take in every sentence:

"If the market rate of interest is reduced by credit expansion, many projects which were previously deemed unprofitable get the appearance of profitability. The entrepreneur who embarks upon their execution must, however, very soon discover that his calculations were based on erroneous assumptions. However, as the banks do not stop expanding credit and providing business with 'easy money,' the entrepreneurs see no cause to worry. Everybody feels happy and is convinced that now finally mankind has overcome the gloomy state of scarcity and reached everlasting prosperity.

"In fact, all this amazing wealth is fragile, a castle built on the sands of illusion. The artificial prosperity cannot last because the lowering of the rate of interest, purely technical as it was and not corresponding to the real state of the market data, has misled entrepreneurial calculations. Deluded by false reckoning, businessmen have expanded their activities beyond the limits drawn by the state of society's wealth. In short, they have squandered scarce capital by malinvestment.

"The sooner one stops, the less grievous are the damages inflicted and the losses suffered. Public opinion is utterly wrong in its appraisal of the cycle. The artificial boom is not prosperity, but the deceptive appearance of good business. Its illusions lead people astray and cause malinvestment and the consumption of unreal apparent gains which amount to virtual consumption of capital. The depression is the necessary process of readjusting the structure of business activities to the real state of the market data, i.e., the supply of capital goods and the valuations of the public. The depression is the first step on the return to normal conditions, the beginning of recovery and the foundation of real prosperity based on the solid production of goods and not on the sands of credit expansion.

"It is vain to object that the public favors the policy of cheap money. The masses are misled by the assertions of pseudo-experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by savings. What counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes or by loans on the bank books.

"If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing, and by letting the market determine the height of interest rates, one chooses the German way of 1923."

Ludwig von Mises, The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money

[OriZ 3,157]

This cannot be answered in short. I've made this point pretty clear(at least I thought) in the other thread. It's not as much a function of time, as it is of price, and even with time I clearly stated that I cannot pinpoint the exact timing of a top(it would be foolish and pretentious to attempt/pretend to do so).

I started talking about this being close to over(while also emphasizing that it's not quite yet - and that as long as the S&P500 was above the 1820 level - which it had stayed above for the next{last} two years, it was still in the clear) at the end of 2013. Keep in mind that that was at a time where between 2009-2013 the market rose by an average of almost 70% per two years, with a total return of roughly 170% in the 4 years before my post. In the two years since, some indexes are down and most are flat while the headline indexes(those who gave people 70% every two years) are up a measly 8%. So anyone who thought to themselves, 'wow, look at these markets - I'll get in here and make 70% in the next two years' only made 8% this time around. I've said it many times that tops are a process and not an event and this one sure has taken its sweet time due to all the people out there trying to fight it.

Of course a downturn is always inevitable, but I was quite bullish starting in early 2009 all the way to the end of 2013. That's only when I turned bearish so I think price wise - my timing was pretty good. Time wise - As I have written above - market internals have turned unfavorable in mid 2014. In past cycles, that was quickly followed by a broader deterioration in the headline indexes as well - normally no longer than a few months later. We are now almost 18 months later. Make no mistake about it, it will happen, but again those are only the headline indexes.

The broad market(in which market internals are in part inferred from) is indeed down for the year. Only around 30% of individual stocks are actually trending up, most of them large caps that are themselves in a bubble such as MSFT, AAPL, GOOG, etc. When those come down(and they will), they will come down hard, which will affect the market just as much as their rise has held it up.

This is the clearest sign of a fractured market on the verge of collapse. Credit spreads are already diverging and signaling trouble. That was not the case between 2009-2014 where credit spreads were aligned with the moves of the stock market. It's often said that the stock market, and especially the heavier stocks are the last to change direction. Credit spreads and bonds often signal trouble, or in the case of a bottom they signal a positive shift in the economy long before stocks do. Right now what we are witnessing is a divergence that so long as it lasts makes a severe stock market drop imminent.

As I've written above, a change in market internals or the technical picture would defer the immediacy of my concerns but would not change the bigger picture. I know you said you don't want to dig more deeply but considering everything I have just written above I'd like to understand which markers exactly I have missed. I will repeat the points that I wrote in that other thread:

* The market is in a very tiring uptrend and is on the verge of another trend change

* That trend change has not yet been completed as long as certain criteria is met for me - among those - a break of the Oct 2014 lows(I brought that up two years ago).

* Unemployment will not go much lower than 5% if it even does that, before it goes back up above 8%.

* There will be another recession before this decade comes to an end, probably even more severe than the last one(*This was the original post. I now wish to add that I believe it will be by the end of 2016).

* While I can not definitively tell you right now when exactly such recession shall begin, I WILL be able to do that once my requirements for a market top are met. So that will be as real time as it gets(again, we're not trying to PREDICT but rather work with tools that allow us to IDENTIFY far enough ahead of time).

* I am shorting the market already, with an expectation for a 40-50% decline from current levels. However, it could still creep up for a while longer if it wants to, but the return will be no more than another 10% on the upside from current levels, which will be ADDED to the total losses in the end so basically not worth the risk(again, this is an original post from half a year ago, so nothing has changed with the level of the market since. Even if it did in the near future, it will not change the prospects for a roughly 50% decline from current levels, and will just cause it to fall further).

* The market will have an avg annual return of ZERO for the next decade.

And it wasn't only the oil call but also the dollar and some others but either way that's not what matters. I'm not what matters. It's the bigger picture that I think is important for people to see that matters.

Look, if it doesn't turn, I can't always say it's still looming and be right. I don't play those games. I promise if the market rises another 100% from here over the next 4 years and then drops 50% back to current levels, I won't say "see, I told you do". BUT, if the market goes up another 10% from here over the next year, and then falls 60% by the end of the decade(from that top, and around 50% from current levels) you bet I will say I was right. So that's how it works, and I don't believe it's vague at all. If anything it may seem a little vague because there are of course limitations to trying to "predict" the market and I acknowledge those fully. I won't come here and say I can tell you exactly what the market is going to do tomorrow because I certainly can't.

OriZ, on 07 Dec 2015 - 11:19 PM, said:

Continuing the discussion from here - http://www.visajourney.com/forums/topic/603206-ted-cruz-dashes-hopes-for-unity-by-snubbing-donald-trum/?p=8239831 I wanted to share my updated views based on recent developments.

The above quoted post was written by me as a response to GandD's question just over half a year ago or so. As I've routinely emphasized, it is not time that matters, as much as it is price. So far I have seen nothing in this market to make me change my mind about it, the opposite is true; Every day that passes we are nearing another economic catastrophe. I would strongly encourage everyone to read the above post quoting a commentary by my pal John Hussman, as well as the one shortly above it from July 5th(with the bolded parts). It should tell you everything you need to know about where or why the real transfer of wealth is occuring. Please, take the time - I guarantee that it is worth it. Now, maybe Obama was not directly involved in that, but he also did not directly try to prevent it. He's been enjoying the fruits of it. You see, while many of his policies are flawed it is not just the fiscal policies that I am talking about. We have already discussed many of those(taxes, jobs which are not even the government's job to start with, etc) in the past so that's not what this is about this time.

Obama did not save the economy. The downturn was cyclical and so was the upturn that followed. What has transpired since, is that reckless FED encouraged speculation has been allowed in the market with Obama standing by. A president that I could get behind is one who would stop the madness, which neither Trump, Obama or Clinton seem to be willing or able to do. The very weak recovery that we have seen and the fact we are not yet already in another crisis have no positive correlation with Obama's policies while in office. Under normal circumstances, we would have already seen another recession. And we will, in due time, but these are no normal circumstances. No doubt, whoever the sitting pres is at the time will be blamed for it, but the truth is the seeds were planted during Obama's term and you read it here first.

In an experiment that will ultimately have disastrous consequences, the FED's policy of quantitative easing intentionally encouraged yield seeking speculation in this cycle far beyond the point where the market, and as a consequence the economy(and not the other way around) would react harshly in the past. In other cycles across history, patient adherence to a value conscious, historically informed investment discipline was rewarded, if occasionally after some delay. In the advancing portion of this cycle, Ben Bernanke’s blind, stubborn recklessness made patient adherence to a value conscious, historically informed investment discipline itself indistinguishable from blind, stubborn recklessness. While Obama does not *directly* have a say in what the FED does, he does have some impact. For one he appoints the chairman(or woman in this case) based on their policies. For two, if they are doing something he does not approve of, there are many ways to let them know that. Trump has already expressed he will want the current policy of low interest rates and QE to continue. Any president that sits back and lets this happen is responsible in part for the consequential crisis.

As Pauline Boss and Pema Chodron have both observed in different contexts, the only way to find peace in the face of ambiguity is the willingness to hold two diametrically opposed ideas in your mind at the same time:

First, regardless of short term speculation, the present yield seeking speculative extreme is likely to be seen in hindsight as one of the three most reckless financial bubbles in U.S. history, on par with the 1929 and 2000 extremes. The current market cycle is likely to be completed by a collapse where a wholly run of the mill outcome would be a decline of 40-60% in the S&P 500 Index. On the basis of valuation measures most tightly related to actual subsequent long term market returns, the S&P 500 is likely to be lower 12 years from now, compared with current levels, though dividend income may push the total return just over zero on that horizon. All of these outcomes are unavoidably baked in the cake as a consequence of current extremes. Despite this outlook, the uncomfortable possibility of further short term speculation still exists.

Still, the rare extremes of current overvalued, overbought, overbullish conditions here, suggest that we may be experiencing the best opportunity to exit the US stock market that investors will see in a generation. Now, it is true that I have been saying that for the last 2 and a half years. However, what is also true is that during that time, the broad market has basically been moving sideways, even accounting for recent new ATH in the S&P500 and the Dow. And as I emphasized in the quoted post above, the key here is not time as much as it is price. The current advance is remarkably long in the tooth. There is little basis for investment at these valuations - only speculation. This does not invalidate any of the points I have been making in recent months nor does it do anything to alter my outlook. Without a strong safety net, that speculation amounts to an attempt to gather pennies under a chainsaw. With the exception of the 2000 extreme, every secular bull market has died before reaching even the current level of valuations.

Despite the uninhibited imagery it evokes, “helicopter money” is nothing but a legislatively approved fiscal stimulus package, financed by issuing bonds that are purchased by the central bank. Every country already does it, but the size is limited to the willingness of a legislature to pursue deficit spending. Central banks, on their own, can’t “do” helicopter money without a spending package approved by the legislature. Well, at least the Federal Reserve can’t under current law. To some extent, Europe and Japan can do it by purchasing low quality bonds that subsequently default, but in that case, it’s a private bailout rather than an economic stimulus. See, those central banks have resorted to buying lower tier assets like asset backed securities and corporate debt. If any of that debt defaults, the central bank has given a de facto bailout, with public funds, to the bondholder who otherwise would have taken a loss. So almost by definition, low tier asset purchases by the ECB and Bank of Japan act as publicly funded subsidies for bondholders, rather than ordinary citizens. If the European and Japanese public had a better sense of this, they would tear down both central banks brick by brick.

As for the US, I’d actually be quite comfortable with a reasonable amount of “helicopter money” provided that the accompanying fiscal stimulus package was focused, not on consumption, but on productive investment at the public, private and individual level (infrastructure, investment and R&D tax credits, workforce training, education, and so forth). It’s the absence of productive real investment, which since 2000 has slumped to a small fraction of its historical growth rate, along with the encouragement of rank yield seeking speculation by the Fed, that has repeatedly injured the U.S. economy, and is likely to insult the economy with further crises before any durable lessons are learned.

Only a pessimist believes that investors are forever doomed to suffer these elevated valuations and dismal long term return prospects. Only those who are historically uninformed believe that valuations have no relationship to subsequent returns, or place their faith in scraps of analytical debris like the “Fed Model” without examining their poor correlation with actual subsequent market returns. It is an act of historically informed optimism to expect this market cycle, like all market cycles, to be completed. Every market cycle in history has drawn valuations to levels that have offered investors far higher return prospects than are available at present.

The only wrinkle in an otherwise spectacularly hostile investment environment is that speculators appear to be so possessed by collapsing global interest rates that the immediacy of a market loss may be deferred until this fresh round of yield-seeking exhausts itself. From Bloomberg the other week: “they’re out there scrounging through the dumpster looking for yield.” http://www.bloomberg.com/news/articles/2016-07-15/junk-rated-borrowers-reap-rewards-in-a-world-of-negative-yields

Again, the completion of every market cycle in history, even those associated with very low interest rates, has brought 10-12 year expected equity returns into or beyond the 8-10% range. Investors are overestimating the capacity for Fed easing to avert every market loss, recession, or credit default cycle. Unfortunately, that assumption doesn’t even hold up to the 2000-2002 and 2007-2009 collapses, both which were accompanied by persistent, aggressive, and ineffective easing by the Federal Reserve. Neither the likelihood of zero 10-12 year S&P 500 nominal total returns, nor negative real returns over that horizon, nor a 40-60% market loss over the completion of this cycle is dependent on any particular event. Once extremely high latent risks have built up in a system, held together by a network of fragile interactions, attempting to predict the specific grain of sand that will trigger the avalanche isn’t particularly useful. Put simply, stocks will collapse over the completion of the present market cycle, even given a zero interest rate environment, because the combination of frantic yield seeking speculation and weak prospects for economic growth has already established the most punitive and unattractive full cycle return/risk tradeoff for stocks since 1929.

Reliable valuation measures are highly informative about long term investment returns and full cycle risks, but they often have very little relationship with market outcomes over shorter segments of the market cycle. During the Fed induced yield seeking bubble of recent years, this has been particularly true, as the novelty, persistence, and breathtaking recklessness of central bank easing outweighed even the usefulness of “overvalued, overbought, overbullish” syndromes that had reliably warned of steep market losses in prior cycles. From the standpoint of the real economy, quantitative easing has no measurable economic impact. The global financial crisis ended the moment the Financial Accounting Standards Board abandoned mark to market accounting requirements for bank balance sheets in March 2009, and the trajectory of GDP and employment since then has been essentially no different than what could have been predicted from lagged values of wholly non monetary variables.

Nevertheless from a technical perspective, The bottom of the 2008-9 crash, and consequent rally, was due regardless of any FED QE, Obama action, or even the action taken by the Financial Accounting Standards Board. It was this rally, predicted fully by technical measures, that also helped get the real economy back on its feet(albeit shaky, to this day). However, the FED did cause this rally to extend beyond what one would have expected otherwise. Anybody who thinks Obama ended the crisis is nothing but a fool, and a tool in the game. The main effect of QE has been breathtaking distortion in the financial markets, as the Fed has replaced interest bearing bonds with trillions of dollars in zero interest currency and bank reserves that must be held by someone at every moment in time. These hot potatoes created such discomfort that investors abandoned any consideration of risk premiums or potential capital losses, in a desperate speculative reach for yield.

With their egos distended by delusions of grandeur, central bankers have become frantic to sustain the belief of investors that QE “works,” because only then can those beliefs be self fulfilling. That’s why Haruhiko Kuroda, the head of the Bank of Japan, openly stated in early June, “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’” It’s also why the world was subjected last week to the narcissistic spectacle of 14 separate speeches from Federal Reserve members. A con game doesn’t work without confidence.

So the bottom line from the above posts is this - noting has changed to alter my opinion on the course of the market and economy in coming years. What has happened so far with marginal new highs in some indexes but not all was an option I made clear was entirely possible. So far in the last 2.5 years, the S&P500 is up roughly 15%, after, as I wrote to GandD, going up roughly 170% in the 4 years prior. Since my post late last year, the market has been pretty flat. So far nothing to write home about on either side - haven't been right yet but also haven't been wrong so far. I believe in the end history is on my side. The bubble that has been created by Obama and his(and Hilary's and Trump's) friends at the Federal Reserve, WILL pop, but likely under the next president.

It’s essential to recognize that yield seeking speculation doesn’t create wealth. It only creates the opportunity for wealth transfer - primarily away from speculators who buy those securities at extreme valuations, and toward the previous holders with the foresight to sell to those “greater fools.”

Simply put, the only thing QE really does is to distort the financial side of the economy, enabling and encouraging yield seeking speculation and massive sectoral imbalances that we observe as wealth disparities and bizarrely distorted securities markets. The proper course of economic policy is to expand productive investment at every level of the economy through the action of Congress (including infrastructure investment, corporate investment tax incentives, workforce development credits). The Federal Reserve is not a source of prosperity. It is the single most dangerous and unregulated risk factor in the U.S. economy. We should have learned that during the yield seeking mortgage bubble and the collapse that followed. We have not, so we now face the equivalent prospect again.

So please explain to me how you expect to not have wealth transfer, when you hurt savers by offering them low interest rates, and reward speculators and large company shareholders when speculation drives stock prices up. Any president that allows this kind of thing is doing nothing but kicking the can down the road.

So sit back, relax and enjoy the show. At some point down the road, you will appreciate having the insight you have gotten for free while everyone else is scrambling trying to figure out what the hell just happened. What happened was Obama and the FED created the third bubble in 16 years, and once that bubble bursts, expect pain.

[OriZ 3,157]

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks.

Noting the recent run-up in the benchmark Standard & Poor's 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a “world of uber complacency.”

The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. gross domestic product in the second quarter grew at a meager 1.2 percent rate.

“The artist Christopher Wool has a word painting, 'Sell the house, sell the car, sell the kids.' That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview. "The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong."

Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went "maximum negative" on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent.

"We never short in our mainline strategies. We also never go to zero Treasuries. We went to lower weightings and change the duration," Gundlach said.

Currently, the yield on the 10-year Treasury note is 1.45 percent, which has translated into some profits so far for DoubleLine.

"The yield on the 10-year yield may reverse and go lower again but I am not interested. You don't make any money. The risk-reward is horrific," Gundlach said. "There is no upside" in Treasury prices.

Gundlach reiterated that gold and gold miners are the best alternative to Treasuries and predicted gold prices will reach $1,400. U.S. gold on Friday settled up at $1,349 per ounce.

Gundlach lambasted Federal Reserve officials yet again for talking up rate hikes for this year while the latest GDP data showed disappointing economic growth. "The Fed is out to lunch. Does the Fed look at what's going on in the economy? It is unbelievable," he said.

Overall, Gundlach said the Bank of Japan's decision on Friday to stick with its minus 0.1 percent benchmark rate - and refrain from deeper cuts - reflects the limitations of monetary policy. "You can't save your economy by destroying your financial system," he said.

http://www.reuters.com/article/us-funds-doubleline-gundlach-idUSKCN1092BO

Edited August 1, 2016 by OriZ