The Ghost Of W.D.Gann: Another Crash Is Coming

Authored by Philip Soos & Lindsay David via RenegadeInc.com,

The original wizard of Wall Street, W.D Gann was a finance trader and wealthy speculator that spent decades investigating cyclical trends in equity market patterns and found that prices could be predicted long in advance. He successfully predicted the crashes in the 1929 and Dot-Com stock market bubbles.  And according to his analysis, the US stock market is due for another crash in 2020.

Every movement in the market is the result of a natural law and of a Cause which exists long before the Effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states…

After suffering through the worst economic and financial crisis since the 1930s depression when the real estate and stock markets crashed in 2007, the United States’ bubble economy is back into full swing. Residential and commercial real estate prices are growing strongly, along with equities.

The US stock market, as defined by the S&P500 index, has boomed after collapsing to a trough in 2009. The market ‘recovered’ more quickly than anyone thought it would, and has continued surging from thereon in.

This has led to a lot of commentary and media coverage that the S&P500 is in the thrall of yet another bubble that will burst. Despite the many predictions of collapse, the bubble has powered on unhindered.

Like all asset bubbles, the primary cause is speculators taking on debt to bid up prices to ever-higher levels, generating a stream of greater fools willing to purchase at inflated valuations. In the case of equities, the type of debt used is margin debt.

The trends in the S&P500 index and margin debt are obvious. The name of the game is capital gains; income is increasingly sidelined as yields become compressed to record lows.

The annual change in margin debt (the first derivative) closely tracks that of the S&P500 index. In Australia, this was true of our largest equities bubble on record, which peaked in 2007 and then burst, declining by 55% from peak to trough.

Margin debt all too coincidently rose rapidly during the boom.

In the case of the S&P500 bubbles which peaked in 2000 and 2007, margin debt also peaked a few months beforehand in terms of absolute values, annual growth and acceleration (the second derivative).

It is therefore worth closely tracking the trends in margin debt to understand where equity prices are heading.

Another metric to watch out for is private non-financial business debt because the very low interest rates on business bank loans makes it easy for corporate executives to drive up stock prices by loading up on debt to engage in stock buybacks.

As prices are often linked to executive remuneration, they have every incentive to engage in this unproductive strategy.

The peaks in the annual change of non-financial business debt correspond with those of the equities market. It should be noted that non-financial business debt is also used to speculate on commercial land, which is why land prices cycle in tandem with debt.

The yield curve is one of the best leading indicators of recession and equity market downturns. The yield curve inverted a few months before both peaks in 2000 and 2007. Currently, the yield curve is 108 basis points above zero, and could take a while before it inverts.

While the metrics noted above can accurately indicate the peak of an equities bubbles several months in advance, they cannot tell us anything years ahead of time. For this, we must turn to the research of the original wizard of Wall Street, W.D. Gann. He was a finance trader who developed technical analysis tools and forecasting methods based on geometry, astronomy, astrology and ancient mathematics.

He was a successful and wealthy speculator, spending decades investigating patterns in equities markets. He concluded that equities exhibited a cyclical trend over decades and thus prices could be predicted long in advance.

In 1908, Gann constructed his financial timetable, which tabulated the booms and busts, peaks and troughs of the US equities market. Just like the Geoist land market cycle, there is a repeating 18-year average between every major cycle.

Gann managed to predict the crash of 1929 years in advance. He realised that the timetable would have to be recalibrated on the 25th December 1989.

The updated timetable is amazingly accurate from that date onward, predicting the Dot-Com bubble peak in 2000 and its collapse. The GFC peak was off by one year; 2007 instead of one year earlier in 2006. The trough was in 2009, followed by a minor panic in 2015, when the S&P500 dipped but has since boomed.

According to the timetable, 2020 will be the peak of the equities bubble, followed by a major crash similar to that of the Dot-Com bubble.

To the economists we’ve spoken to, the peak could range between 2019M09 to 2020M03. Given how large the S&P500 bubble has become, it is worth treading very carefully during this period for those exposed to US equities.

Gann is famous for saying: “Every movement in the market is the result of a natural law and of a Cause which exists long before the effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states…”

Due to the ETF revolution, it is a straightforward matter to gain exposure to the S&P500, including leveraged and inverse instruments. It would be even better if the government would enact policies to prevent speculation and subsequent bubbles in the first place. This can be done by banning margin debt and other securities-based loans, and heavily taxing capital gains based on the length of time they were held for (the longer, the less tax).

While the equities market boom has added a great deal of wealth to the balance sheet of US households, it is merely the latest instance in a long line of asset bubbles. No doubt many speculators believe that ‘this time is different’ but the ghost of Gann would argue otherwise.

Warren Buffett"s Favorite Indicator Just Flashed a Major Warning

It is clear stocks are in a massive bubble based on their Price to Sale (P/S valuation).

What about the economy?

Warren Buffett once famously stated that his favorite means of valuing stock was the stock market capitalization to GDP ratio.

Below is a chart for this metric. As you can see, the stock market today is as overvalued relative to the economy as it was at the peak of the 1999 Tech Mania.

So stocks are overvalued based on the most reliable corporate data point (revenues) and they are also overvalued relative to the economy. Scratch that, they’re not overvalued… they’re trading at 1999-Tech Bubble insanity levels.

We all remember what came after that...

What"s coming will take time for this to unfold, but as I recently told clients of my Private Wealth Advisory report, we"re currently in "late 2007" for the coming crisis. However, there is one main difference between 1999 and today...

Namely, that the Fed has been INTENTIONALLY creating bubbles for nearly 20 years today... and it"s out of more senior asset classes to use!

Let me explain...

The late ‘90s was the Tech Bubble.

When that burst in the mid-‘00s, the Fed created a bubble in housing.

When that burst in ’08 the Fed created a bubble in US sovereign bonds or Treasuries.

And because these bonds are the bedrock of the US financial system, the “risk-free rate” of return against which ALL risk assets are valued, when the Fed did this it created a bubble in EVERYTHING (hence our coining of the term “The Everything Bubble” and our bestselling book by the same name).

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Yes, Virginia, There Is A "Santa Rally"

Authord by Lance Roberts via RealInvestmentAdvice.com,

Yes, Virgina, There Is A Santa Claus

Every year, at this time, I republish the story of 8-year Virginia O’Hanlon who asked the most important of questions. I encourage you to read it as it reminds us of the importance, meaning and the “Spirit” of the Christmas season. 

*  *  *

Eight-year-old Virginia O’Hanlon wrote a letter to the editor of New York’s Sun, and the quick response was printed as an unsigned editorial Sept. 21, 1897. The work of veteran newsman Francis Pharcellus Church has since become history’s most reprinted newspaper editorial, appearing in part or whole in dozens of languages in books, movies, and other editorials, and on posters and stamps

THE EDITORIAL

DEAR EDITOR:

I am 8 years old.
Some of my little friends say there is no Santa Claus.
Papa says, ‘If you see it in THE SUN it’s so.’
Please tell me the truth; is there a Santa Claus?

VIRGINIA O’HANLON.
115 WEST NINETY-FIFTH STREET.

“VIRGINIA, your little friends are wrong. They have been affected by the skepticism of a skeptical age. They do not believe except they see. They think that nothing can be which is not comprehensible to their little minds. All minds, Virginia, whether they be men’s or children’s, are little. In this great universe of ours, man is a mere insect, an ant, in his intellect, as compared with the boundless world about him, as measured by the intelligence capable of grasping the whole of truth and knowledge.

 

Yes, VIRGINIA, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus? It would be as dreary as if there were no VIRGINIAS. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The eternal light with which childhood fills the world would be extinguished.

 

Not believe in Santa Claus! You might as well not believe in fairies! You might get your papa to hire men to watch in all the chimneys on Christmas Eve to catch Santa Claus, but even if they did not see Santa Claus coming down, what would that prove? Nobody sees Santa Claus, but that is no sign that there is no Santa Claus. The most real things in the world are those that neither children nor men can see. Did you ever see fairies dancing on the lawn? Of course not, but that’s no proof that they are not there. Nobody can conceive or imagine all the wonders there are unseen and unseeable in the world.

 

You may tear apart the baby’s rattle and see what makes the noise inside, but there is a veil covering the unseen world which not the strongest man, nor even the united strength of all the strongest men that ever lived, could tear apart. Only faith, fancy, poetry, love, romance, can push aside that curtain and view and picture the supernal beauty and glory beyond. Is it all real? Ah, VIRGINIA, in all this world there is nothing else real and abiding.

No Santa Claus! Thank God he lives, and he lives forever. A thousand years from now, Virginia, nay, ten times ten thousand years from now, he will continue to make glad the heart of childhood.”

Merry Christmas, and may this new year bring you joy, laughter, and prosperity.

From all of us at Real Investment Advice, Real Investment News, and Clarity Financial.

*  *  *

Santa Rally?

With the market now back to overbought conditions, it is now or never for the traditional “Santa Rally” between Christmas and New Year’s Day.

If we go back to 1990, the month of December has had average returns of 2.02% with positive returns 81% of the time. Over the past 100 years, those numbers fall slightly to a 1.39% average return with positive returns 73% of the time.

For the month of December, so far, the market has risen 1.33% which is in-line with the historical norm.

As discussed over the last couple of weeks, this is not to be unexpected as portfolio managers and hedge funds “Stuff Their Stockings” of highly visible positions to have them reflected in year-end statements. 

However, come January, it is potentially a different story. As I have been laying out over the last several weeks, the “tax cut” rally may well come to an end as portfolio managers, being reluctant to sell before year-end which would put them under the 2017 tax code, will likely sell in January to lock in gains under the new tax code when they pay taxes in 2019.

While “this time” is never exactly like the “last time,” there is a reasonable precedent that a sell-off in January is a likelihood. With the outside gains this past year, and now extreme overbought conditions as discussed last week, the odds of a correction are high.

This next week, as close to the end of the year as possible, we will likely be adding two positions to portfolios to hedge against a potential “tax gain” related sell off.  The first position will be a short-S&P 500 index combined with an intermediate-duration bond position.

Given that IF a sell-off occurs money will rotate from “risk” to “safety.” In this case, the S&P 500 should fall while bond prices rise as rates head lower. As shown below, with the stock-bond ratio at extremes, this trade is fairly low risk.

(The current stock/bond ratio is at the highest level in history. Also, note that the correlation “broke” in 2013 with QE 3. That gap will likely be filled at some point.)

If I am wrong, and the markets continue to rise, our existing long-positions, which outweigh the hedges by a large percentage, will continue to advance with the hedge only slightly inhibiting performance. If a sell-off does occur, the hedges will mitigate some of the downside risk while we evaluate our next potential moves.

We will keep you apprised of our actions next week.

Dot Com 2.0

by Michael Lebowitz, CFA

On May 20, 1999, eToys.com became a publically traded stock, offering shares to the public at a price of $20 per share. Lurching to $76 per share on the first day of trading and then over $80 a share by mid-August of that same year, investors were blindly optimistic about the prospects for this internet retailer. In early January 2001, after a weaker than expected holiday season, the company laid off half of its staff. By late February, eToys.com stock traded at meager 0.09 cents per share and filed for bankruptcy in March. The bubble had burst on eToys.com and hundreds of other tech companies selling investors on the promise of a new economic paradigm and internet fantasies.

By late 1999, when eToys.com was flourishing, the NASDAQ stock market was in the midst of a ten-year run in which it gained over 2,700%. Valuations, especially those in the tech sector but also in the broader-based markets, rose well above every prior instance. Caution and conservatism were thrown out the window in place of greed and rampant speculation. A decade of impressive market gains resulted in a high level of complacency.

We are now 18 years beyond the tech bubble, and we find ourselves in similar shoes. Most measures of equity valuation are currently higher than just about every other equity market peak including even some from 1999. The market has produced a constant stream of winners seemingly coming in waves over the last few years. Among the more popular is the FANG stocks and their valuations that assume perfection in perpetuity.

Further reminding us of the late 90’s tech bubble and the eToys.com era are Bitcoin and blockchain related stocks. Longfin Corp. (LFIN) for instance, just completed an initial public offering (IPO) at $5 per share on December 13th. On December 18th LFIN announced the purchase of Ziddu Coin a business lender dealing in crypto-currency loans. Following the announcement, the stock rose as high as $136 a share producing a 2620% gain for those investors that sold at the highs. As we pen this note, the stock trades at $41.

Instead of using “dot com,” companies like LFIN, Overstock, Riot Blockchain and other companies are seizing on investor greed by telling a grand story of Bitcoin and blockchain riches. It is, to be sure, the new-new paradigm.

Another recent example is Long Island Iced Tea Corp. which was a purveyor of bottled drinks with a stock price languishing around the $2 range. Well, that is until the company changed its name to Long “Blockchain” Corp. which sent investors into a buying frenzy running the stock price up nearly 500% in one day.

The instances where anything related to Bitcoin and blockchain is instantly deserving of massive valuations is a mirage; here today and gone tomorrow. The current era serves as a gentle reminder of the greed and wild speculation of the latest bubble. In early 2000, the markets topped with no-name (and no-profit) companies capturing the wild hopes of investors. The NASDAQ took over 16 years to re-capture the prior high water mark representing precious years that investors lost.

Whether LFIN and the like are signaling that we are in the bottom of the ninth of the latest bubble or still have a few innings to go is up for debate. What is important, however, is to retell yourself the story of the tech bubble and how investors ignored the glaring signals. Does today’s price action sound familiar? If so we recommend that you continue to remain cognizant of the patterns of prior market bubble episodes and proceed accordingly.

Rules For The Road

If you are long equities in the current market, we continue to recommend following some basic rules of portfolio management.

“It is through following these basic rules that, with the markets overbought, underlying fundamentals stretched, we continue to suggest some portfolio actions be taken to reduce, not eliminate, overall risk.

1. Tighten up stop-loss levels to current support levels for each position.


2. Hedge portfolios against major market declines.


3. Take profits in positions that have been big winners


4. Sell laggards and losers


5. Raise cash and rebalance portfolios to target weightings.

Notice, nothing in there says “sell everything and go to cash.”

As I noted in last week’s missive on the current bubble, our job as investors is pretty simple – protect our investment capital from short-term destruction so we can play the long-term investment game.

In case you missed it, let me repeat for you the most important lines:

Our job as investors is actually quite simple. We must focus on:

• Capital preservation


• A rate of return sufficient to keep pace with the rate of inflation.


• Expectations based on realistic objectives.  (The market does not compound at 8%, 6% or 4%)


• Higher rates of return require an exponential increase in the underlying risk profile.  This tends to not work out well.


• You can replace lost capital – but you can’t replace lost time.  Time is a precious commodity that you cannot afford to waste.


• Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on more risk) the results will likely be disastrous.

With forward returns likely to be lower and more volatile than what was witnessed in the 80-90’s, the need for a more conservative approach is rising. Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the decade ahead.

This brings up some very important investment guidelines that I have learned over the last 30 years.

• Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.


• Emotions have no place in investing.You are generally better off doing the opposite of what you “feel” you should be doing.


• The ONLY investments that you can “buy and hold” are those that provide an income stream with a return of principal function.


• Market valuations (except at extremes) are very poor market timing devices.


• Fundamentals and Economics drive long-term investment decisions – “Greed and Fear” drive short-term trading. Knowing what type of investor you are determines the basis of your strategy.


• “Market timing” is impossible– managing exposure to risk is both logical and possible.


• Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.


• There is no value in daily media commentary– turn off the television and save yourself the mental capital.


• Investing is no different than gambling– both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.


• No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

As an investment manager, I am neither bullish or bearish. I simply view the world through the lens of statistics and probabilities. My job is to manage the inherent risk to investment capital. If I protect the investment capital in the short term – the long-term capital appreciation will take of itself.

Will QE Be the Needle That Bursts the Bond Bubble in 2018?

If you wanted more evidence that Central Banks will stop at nothing to induce inflation, consider that yesterday Bank of Japan stated that it will continue with its QE program and with negative rates for as long as it takes to achieve 2% inflation.

Mind you, Japan’s economy has just posted its SEVENTH straight quarter of growth, having exited its last recession at the beginning of 2016.

Put another way, the Bank of Japan is running CRISIS-type monetary policies (NIRP and ~$750 billion in QE per year) at a time when the economy has been growing for nearly TWO YEARS.

Throw in the ECB which will continue €30 billion in QE per month in 2018 and you’ve got a combined $1.1 TRILLION in Central Bank liquidity hitting the system next year…. when inflation data is already spiking up around the globe.

Why does this matter?

As I explain in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, sovereign bonds trade based on inflation expectations.

Put simply, when inflation spikes higher, so do bond yields.

When bond yields rise, bond prices fall.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

Well, guess what? The yield on numerous sovereign bonds are already spiking, and this is BEFORE inflation has even really hit!

Put simply, the bond yields for countries representing over 60% of global GDP are already warning that the bond bubble is in major trouble.

What"s coming will take time for this to unfold, but as I recently told clients, we"re currently in "late 2007" for the coming crisis. The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Is It 1999? 2007? Or Both?

Authored by Lance Roberts via RealInvestmentAdvice.com,

In last week’s Technical Update, I discussed the potential for the S&P 500 to hit 2700 by Christmas. To wit:

“The current momentum behind the market advance is clearly bullish, and with the ‘smell of tax reform’ in the air, there is little to derail the bulls before year-end.

 

However, in the meantime, there seems to be nothing stopping the market from going higher. As stated in the title, the current push higher puts 2700 in sight by the time Santa fills the ‘stockings hung by the chimney with care."”

With the markets within striking distance of that target, the run to Nasdaq 7000, Dow 25000 and S&P 2700 are all but guaranteed at this juncture. More interestingly, all three will be ticking off milestone gains at some of the fastest paces in market history. In fact, the Dow has posted three all-time records just this year:

• 70 new highs,


• A 5000-point advance in a single year, and;


• 12-straight months of gains.

Just as a reminder of previous market bubbles, here is what they looked like.

As I discussed with Danielle Dimartino-Booth this morning. Not only is the current rally reminiscent of 1999, but to 2007 as well. In fact, the current bubble, as she states, is a combination of both.

As Danielle and I discussed, it seems eerily familiar.

In 1999:

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth was improving 


• Interest and inflation rates were rising


• Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. (Who can forget the market greats of Enron, Worldcom & Global Crossing)


• Margin-debt / leverage was at the highest level on record. 


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”


• Speculative asset of choice: Dot.com stocks

In 2007:

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth was improving 


• Interest and inflation rates were rising


• Debt and leverage provided a massive “buying” binge in real estate creating a “wealth effect” for consumers and high-valuations were justified because of the “Goldilocks economy.” 


• Margin-debt / leverage was at the highest level on record. 


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”


• Speculative asset of choice: Real Estate

In 2017:

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth is improving because of 3-hurricanes and 2-wild fires.


• Interest and inflation rates are expected to rise


• Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. 


• Margin-debt / leverage is at the highest level on record. 


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”


• Speculative asset of choice: Bitcoin

Of course, those are just some of the similarities.

Valuations in all three cases exceeded the long-term market peaks of 23x reported earnings. Investor confidence was pushing extremes and deviations from long-term means in prices, relative-strength and moving-averages were all present.

The chart below shows the S&P 500 from 1993-present. As shown, the 100-period RSI, 3-standard deviations above the 200-dma and the 50/200 day moving average MACD line are all at historical extremes. While such readings do NOT suggest a downturn is imminent, it does suggest that risk is elevated and potential upside from current levels is likely limited.

I have combined the three periods below, scaled to 100, so you can see just how far we have currently gone.

Sure. This time could be different. It just probably isn’t.

Our Job As Investors

Again, none of this suggests the market is going to crash tomorrow. But a massive mean reversion process is coming, it is inevitable, the only question is of the timing.

As I noted last week in “The Exit Problem,” it is time to start considering sitting a little closer to the “exit.” To wit:

“Am I sounding an ‘alarm bell’ and calling for the end of the known world? Should you be buying ammo and food? Of course, not.

 

However, I am suggesting that remaining fully invested in the financial markets without a thorough understanding of your ‘risk exposure’ will likely not have the desired end result you have been promised.

 

As I stated often, my job is to participate in the markets while keeping a measured approach to capital preservation. Since it is considered ‘bearish’ to point out the potential ‘risks’ that could lead to rapid capital destruction; then I guess you can call me a ‘bear.’

 

Just make sure you understand I am still in ‘theater,’ I am just moving much closer to the ‘exit.’”

What does that mean?

I have now been in the financial markets in some capacity since prior to the crash of 1987.

Yes, I am that old.

During that time I have watched investors repeat the same mistakes over and over again. From exuberance to fear, buying high to selling low, chasing returns, and always believing this time is different, only to once again be reminded it’s not. 

As the old saying goes:

“The more things change, the more they remain the same.”

If you have been around the markets for any length of time, you can quickly spot the “pigeons at the poker table.” These are the ones that continually rationalize why prices can only go higher, why this time is different than the last, and only focus on the bullish supports. Trying to “draw to an inside straight” is not impossible, it just leads to losses more often than not. 

But therein lies an important point.

As investors, our job is NOT making the case for why markets will go up.

Read that again.

Making the case for why markets will rise is a pointless endeavor because we are already invested.

If the markets rise, terrific. We all made money, and we are the better for it. However, that is not our job.

Our job, is to analyze, understand, measure, and prepare for what will reduce the value of our invested capital. 

Period.

If we are to accumulate capital over the time-span that we have available, from today until we reach retirement, the most important thing we can do to ensure our success is not suffering a large loss of capital. 

Therefore, our job as investors is actually quite simple:

• Capital preservation


• A rate of return sufficient to keep pace with the rate of inflation.


• Expectations based on realistic objectives.  (The market does not compound at 8%, 6% or 4%)


• Higher rates of return require an exponential increase in the underlying risk profile.  This tends to not work out well.


• You can replace lost capital – but you can’t replace lost time.  Time is a precious commodity that you cannot afford to waste.


• Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on more risk) the results will likely be disastrous.

With forward returns likely to be lower and more volatile than what was witnessed in the 80-90’s, the need for a more conservative approach is rising. Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the decade ahead.

This brings up some very important investment guidelines that I have learned over the last 30 years.

• Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.


• Emotions have no place in investing.You are generally better off doing the opposite of what you “feel” you should be doing.


• The ONLY investments that you can “buy and hold” are those that provide an income stream with a return of principal function.


• Market valuations (except at extremes) are very poor market timing devices.


• Fundamentals and Economics drive long-term investment decisions – “Greed and Fear” drive short-term trading. Knowing what type of investor you are determines the basis of your strategy.


• “Market timing” is impossible– managing exposure to risk is both logical and possible.


• Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.


• There is no value in daily media commentary– turn off the television and save yourself the mental capital.


• Investing is no different than gambling– both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.


• No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

As an investment manager, I am neither bullish or bearish. I simply view the world through the lens of statistics and probabilities. My job is to manage the inherent risk to investment capital. If I protect the investment capital in the short term – the long-term capital appreciation will take of itself.

Warning: Real Inflation is Already 3%... and the Fed Wants More!

While the Fed Board of Governors continues with its “we don’t see inflation anywhere” shtick, one of its own in-house measures (the underlying inflation gauge or UIG) is about to hit 3%.

The UIG estimated on the “full data set” increased from a revised 2.91% in October to 2.95% in November.

Source: the NY Fed.

Yes, one of the Fed’s OWN inflation measures (and one that leads the CPI) is about to hit 3%. And by the way, the UIG is from the NY-Fed: the regional Fed bank involved in daily market operations with the best understanding of how the financial system actually works.

Why does this matter?

Because, as I outlined in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, since the mid-1990s, the Fed has embarked on a policy of intentionally creating asset bubbles to keep the financial system afloat.

In the late ‘90s we had the Tech Bubble or bubble in Technology stocks.

When that bubble burst in 2000, the Fed dealt with it by intentionally creating a bubble in housing: a more senior asset class that was more systemically important.

When that bubble burst in 2008, triggering the Great Financial Crisis, the Fed dealt with it by intentionally creating yet another bubble…

… this time in US sovereign bonds, also called Treasuries.

By the way, these bonds are THE most senior asset class in the US financial system. The yields on these bonds represent the “risk-free” rate against which EVERY asset class in the financial system is priced.

So when these bonds went into a bubble, EVERYTHING followed.

This is THE endgame for Central Bank policy. And the bad news is that inflation is what will lead to this bubble bursting.

You see, bond yields track inflation (as well as economic growth). So as inflation rises (again, the UIG is clocking in at 3% already, bond yields will rise.

When bond yields rise, bond prices fall.

When bond prices fall, the Bond Bubble bursts.

When the Bond Bubble bursts, the EVERYTHING bubble follows.

The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

Bank of Canada Governor Is Right To Be Worried About The Economy

Written by Peter Diekmeyer, Sprott Money News

 

 

 

Bank of Canada governor Stephen Poloz cited numerous worries plaguing the economy during his speech to Toronto’s financial elites yesterday at the prestigious Canadian Club.

However, the title of Poloz’s presentation, “Three things keeping me awake at night” seemed odd, given positive recent Canadian employment, GDP and other data.

Poloz highlighted high personal debts, housing prices, cryptocurrencies and other causes for concern, along with actions that the BoC is taking to alleviate them. His implicit message was (as always) “We have things under control.”

But if that’s all true, then Canada’s central bank governor should be sleeping like a baby. So, what is really keeping Mr. Poloz up at night? Three possibilities come to mind.

The Poloz Bubble

Firstly, far from just a housing bubble, Canada’s economy shows signs of being in the midst of an “everything bubble.” Bitcoin, for example, hovered near CDN $23,000 this week. Stock and bond valuations are not far behind in their relative loftiness.

Worse for Poloz, who took office four years ago, his fingerprints are all over those bubble-like levels.

Canadian stock, bond and house prices were already at dizzying heights when Stephen Harper hired Poloz with the implicit expectation that he would juice up the economy, in preparation for what Canada’s then-Prime Minister knew would be a tough upcoming election.

Poloz didn’t disappoint, promptly delivering a nice Benjamin Strong-styled “coup de whiskey” to asset prices in the form of two interest rate cuts, which brought the BoC’s policy rate down to just 0.50% during the ensuing months.

Although Harper lost the election, loose BoC policy continues to provide the Canadian government with free money to borrow and spend as it wishes.

More broadly, the Poloz BoC’s current policy, like that of the US Federal Reserve, is to boost asset prices even higher in the hope that the resulting wealth effect will trickle down to spur economic activity among ordinary Canadians.

 

At the household level, the BoC’s low interest rates enticed Canadian families to borrow themselves to the hilt. Businesses haven’t been that far behind.

The upshot is that total government, private sector and personal debts are now in nosebleed territory with Canada’s economy seemingly on a knife’s edge, in danger of crumbling at the first patch of rough road.

Chained to a Ponzi

Another worry is that the Poloz BoC, by broadly mirroring the Federal Reserve’s actions, has firmly lashed Canada to a US economy which could prove to be an even bigger Ponzi than its own.

America’s “everything bubble”, like Canada’s, has been stroked by a central bank that has been pushing credit growth at a rate faster than GDP growth, a textbook Ponzi scenario.

 

 

One result, as Grant Williams, co-founder of Real Vision Television, noted in a recent presentation, is that US stock prices are currently far higher than they were during the Internet and housing bubbles. “[Central bankers] keep hoping that this time is different,” Williams warned. “But ladies and gentlemen – it’s never different.”

Refusal to ring fence Canada

Another worry for Poloz to ponder, is that although the BoC has identified financial system interconnectedness as a key concern, the central bank has done little to ring fence Canada’s economy from huge global macro threats on the horizon.

That’s particularly true of the hundreds of trillions of dollars in global derivatives books, many of which are unquantifiable, as they are trading outside of traditional exchanges. This threat is particularly acute, as it was the failure of AIG, a derivatives player, to cover its bets (not the subprime mortgage and Lehman implosions as most assume) that sparked the 2008 financial crisis.

Poloz, had he been ready to condone a recession, could have encouraged broader interest rate hikes to incentivize Canadian governments, businesses and households to pay down debts, build up savings and increase overall system stability.

Similarly, instead of building up Canada’s gold reserves to cushion against potential external shocks, the supposedly-independent BoC (as noted above) gives the money it prints to the big banks and the Canadian government to help it finance raises for politicians and bureaucrats.

Government and academic elites would argue that Poloz’s actions are understandable as he has only limited powers. They cite key constraints on the central bank’s actions.

These range from the BoC’s agreement with the Department of Finance to target 2% inflation, the fact that the government has primary authority over foreign exchange purchases and by realpolitik which dictates that Canada has to follow US policies – or else.

Tied to discredited Keynesian econometrics

Others, such as James Rickards, author of The Road to Ruin, would argue that Poloz is plagued with the same “group think” problem that faces Fed Chairmen.

Almost all the top economists these days, despite obvious brilliance, remain trapped by Keynesian/econometrics educations they endured to get their graduate degrees, which left them with few ideas regarding how to generate growth other than to print more money.

Canada’s top central banker rarely deviates from his talking points. So, it’s almost impossible to know what he really thinks.

However, a base case scenario suggests that Poloz (who has considerable private sector experience from his days at BCA Research) knows full well the treacherous position in which the BoC has placed the Canadian economy.

If that’s true, it’s little wonder that he is having trouble sleeping.

 

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

Bank of Canada Governor Is Right To Be Worried About The Economy

Written by Peter Diekmeyer, Sprott Money News

 

 

Check out these other articles by our contributors:

Bitcoin Proves You Cannot Have Your Digital Cake and Eat it Too - Nathan McDonald

Political Pizza - Jeff Thomas

For Clues On The Economy, Follow The Money - Dave Kranzler

Eric Sprott Talks Lows in Gold, Comex Shenanigans, and Answers Your Questions (Weekly Wrap-Up, December 15, 2017)

 

This Map Shows Where Millennials Are Buying Houses (And For How Much)

Millennial homeownership rates are essential to understanding the housing market because they facilitate additional home sales for other people.

How does this work? As HowMuch.net explains, suppose you make an offer on a house. The current owner is also probably on the market, and he or she likely has a contingent offer on another house. This sets off a chain reaction throughout the economy. Millennial homeownership rates are therefore an easy way to judge the economic vitality of any given area.

That’s why HowMuch.net created this new map...

Source: HowMuch.net

Our viz takes millennial homeownership data from Abodo and maps it by metro area across the country. Abodo adopted the data from the U.S. Census Bureau, which regularly collects a variety of information about the population, including the age of homeowners, the estimated value of their homes, and how long it would take to accumulate a 20% down payment. Our numbers are from 2015. We then overlaid this information across metro areas with bubbles representing the portion of millennial homeowners in each market: the bigger the bubble, the more millennial homeowners there are. We also color-coded each bubble to represent the median value of their homes—dark red circles mean the homes are worth over $500k, and dark blue means under $200k. This gives you a quick snapshot of the overall economy and the housing market.

The first trend you can see on the map is a clustering of red circles on both the West Coast and along the Northeast.

The most expensive city in the country for millennials is San Jose, CA, where the average millennial buys a home worth $737,077. Seattle, WA in the Northwest is also relatively expensive at $342,769. These are population-dense areas with booming tech sectors. At the other end of the spectrum, you can see clusters of blue bubbles across the Midwest in old manufacturing cities like Detroit, MI ($148,404) and Cleveland, OH ($160,251). Memphis, TN is the cheapest place for millennials at $142,795. Southern states like Texas and Florida are also relatively affordable thanks in large part to their suburban sprawl, which Zillow predicts will expand next year.

It’s no surprise that homes are more expensive in California (think Silicon Valley) than the industrial heartland, but consider how homeownership rates change based on affordability. The red bubbles all tend to be smaller than the blue bubbles. This means that as homes get more expensive, millennials become increasingly unable to afford them. It’s not like there’s a surplus of ultra-rich millennials buying up all the houses in California and New York. Millennials are just as sensitive to high prices as everyone else.

Let’s break the map down into a top ten list of the urban areas with the highest rates of millennial homeownership, combined with the average price of their home. A full 42% of the millennials living in Minneapolis-St. Paul, MN own their own home, the highest rate in the country.

1. Minneapolis-St. Paul-Bloomington, MN-WI: 42.4% and $222,528

2. St. Louis, MO-IL: 40.2% and $167,791

3. Detroit-Warren-Dearborn, MI: 40.2% and $148,404

4. Louisville/Jefferson County, KY-IN: 38.5% and $158,974

5. Pittsburgh, PA: 37.5% and $152,731

6. Indianapolis-Carmel-Anderson, IN: 37.4% and $161,856

7. Kansas City, MO-KS: 37.1% and $170,254

8. Nashville-Davidson--Murfreesboro-Franklin, TN: 37.0% and $213,090

9. Oklahoma City, OK: 36.7% and $172,485

10. Baltimore-Columbia-Towson, MD: 36.3% and $272,805

Buying a home is often the biggest financial decision anybody makes, and that’s especially true for young people. And there’s a lot to consider when buying your first home, but one thing other than affordability to keep in mind is how many other millennials are in the same situation. If you’re a millennial looking to buy a home, and you want to live next to other young people, you just might have to move to the Midwest.

Why We Should Worry About China

Authored by Daniel Lacalle via The Mises Institute,

Many of our readers might remember the late 80s. There were hundreds of movies, songs and books about the inevitable Japanese economic invasion.

The ones of you that did not live that period can see that it did not happen.

Why? Because the Japanese growth miracle was built on a massive debt bubble and, once it burst, the country fell into stagnation for the better part of two decades. It still has not recovered.

China presents many similarities in its economic model. Massive debt, overcapacity and central planned growth targets.

Many economists and investors feel relieved because China is still growing at 6.8%. They should think twice. On one side, that level of growth is clearly overestimated. By any realistic measure of growth, China’s Gross Domestic Product annual increase is significantly lower than the official figures show. Patrick Artus, global chief economist at Natixis Global Asset Management, as well as other economists have noted that there has been a significant decoupling since mid-2014 between the government’s official growth reading and more reliable indicators. On the other hand, even if we agree with the official readings, this growth has been achieved using a worryingly high level of debt.

Chinese growth of 6.5% per annum came with more than 14% annual growth in money supply. Total debt has quadrupled since the financial crisis, and official messages of “measures to curb indebtedness” have shown a different reality. China has added more debt in 2017 than the The European Union, the US, UK, and Japan combined. The IMF estimates debt as a proportion of Gross Domestic Product may rise from 235% to almost 300% by 2022.

This increase in debt would not be a concern if it yielded solid economic returns, but the latest figures show that more than 40%of the Hang Seng Index components are adding debt to repay interests, and China needs now four times more debt to generate the same growth as in 2007. Now bond yields are soaring, which triggered a rise in bond cancellations. Companies postponed or canceled a total of 71 bond issuances worth a combined $13.42 billion in November, according to Reuters. Although bond yields are not at excessive levels, with the Chinese 10-year bond still below 4%, most companies and households cannot absorb a modest rise in yields due to the weak returns and revenues they have. A massive housing bubble has made high-risk debt rise.

Overcapacity has soared, and industries face the impossible task of keeping capacity and jobs as well as deleveraging. And exporting its way out of overcapacity is not easy. In 1992, only two G20 countries had China as one of their top five export destinations, now there are fifteen. However, in 1992 China had a productive capacity deficit, now it has 60% overcapacity, and – as it cannot destroy that excess in a centralized planned economy – it intends to export it. But this is almost impossible to achieve when excess capacity is an endemic problem all over the world.

It is true that Chinese imbalances are mostly local-currency denominated, that household savings rate is healthy and that the high productivity sectors are doing well, but that was the case with Japan in the late 80s as well. And none of these factors offset the large risks created by the housing bubble and excess debt taken by state-owned conglomerates and private businesses. These risks are highly disinflationary and are likely going to impact long-term growth and inflation expectations globally. As China tries to export its way out of the bubble, the impact on prices and trade all over the world should not be underestimated. We should not ignore the financial risks either. Although China’s financial concerns are mostly concentrated in its own system and currency, this does not mean that worldwide spill-over effects can be ruled out.

China is a big risk, and the best outcome for all the world economies is that the government forgets impossible growth targets and focuses on reducing the rising financial imbalances. All of us will prefer a modest Chinese growth-rate rather than an inevitable crisis.

Four Charts Prove The "Economic Recovery" Is Just A Fed-Induced Entitlement Program For The Wealthy

"Economic recovery" in America no longer means what it used to mean.  Historically "economic recovery" was largely characterized by job and wage growth, distributed across the income spectrum, and a rebound in GDP growth to north of ~3%-5%.  These days, the notion of "economic recovery" has been hijacked by the Fed and bastardized in such a way that they celebrate "asset bubbles" rather than real growth in economic output.

Presented as "exhibit A", here is the Fed"s modern-day definition of "economic recovery" (chart per Bloomberg):

Of course, digging a little deeper you quickly realize that the problem is even worse than what the data in the chart above might suggest.  While overall average wage growth has been anemic since 2009, to say the least, it has been almost nonexistent for those on the bottom end of the income spectrum.

Soaring markets helped the top 1 percent of Americans increase their slice of the national wealth to 39 percent in 2016, according to the Fed’s Survey of Consumer Finances. The bottom 90 percent of families held a one-third share in 1989; that’s now shrunk to less than one-quarter.

 

The current one has helped millions of people find work; it’s also benefited asset-owners far more than people who trade their labor for a paycheck. Income distribution, already the most unequal in the developed world, is getting worse. And that’s starting to influence everything from America’s spending habits to its elections.

In fact, those in the bottom quintile of wage earners in the U.S. basically haven"t experienced wage growth, on a real basis, since the late 1970"s whereas those in the top quintile have nearly doubled theirs.

Of course, none of this should be particularly surprising to those who are paying attention as the top quintile of earners are the only ones financially positioned to benefit from Yellen"s economic recovery asset bubbles...

Meanwhile, the growing wealth disparity has seemingly put America on a collision course with political chaos as fringe candidates on both the Left and Right increasingly promise to have an "easy" solution for the seemingly inescapeable economic plight of the poorest households. 

Unfortunately, the sad truth just might be that there is no solution, absent some transformational technological advancements, and that the U.S. has just reached the maturity phase of it"s "business cycle"...and while the Fed may try to cover up that fact by repeatedly blowing assets bubbles, per the charts above, they"re only making the problem worse with each successive iteration.

Swedish Housing Bubble Pops As Stockholm Apartment Prices Crash Most Since June 2009

Even though Sweden’s property bubble is not the longest running (that accolade goes to Australia at 55 years), it is probably the world’s biggest with prices up roughly 6-fold since starting its meteoric rise in 1995.

Of course, as we noted last month when the SEB"s housing price indicator, which measures the difference between those who believe prices will rise and those who expect them to drop, took its first substantial tumble, the era of the steadily inflating housing bubble in Stockholm may finally have come to an end.

Now, it seems that the "hard data" is aligning with the "soft data" as Swedish home prices across the Nordic country posted their first decline since the spring of 2012, down 0.2% year-over-year and 2.9% sequentially.  Per Bloomberg:

The property market in the largest Nordic economy is rapidly cooling after years of price increases that were driven largely by housing shortages and ultra-low interest rates. Supply is now outstripping demand and stricter mortgage rules, as well as growing apprehension among households, are driving prices lower. The drop is being led by high-end apartments in Stockholm.

 

According to Maklarstatistik’s number, nationwide apartment prices fell a monthly 3 percent in November, adding to October’s 1 percent drop. House prices fell 1 percent in the month, after being unchanged in October. Apartment prices in greater Stockholm fell 3 percent in the month and were down 4 percent from a year earlier, the first such decline in almost six years.

Worse yet, the slump in Stockholm specifically is even more dramatic with apartment prices down 4.2% sequentially, the steepest since October 2008, and 6.0% year-over-year, the biggest June 2009.

Not surprisingly, the sudden pricing collapse has sparked a bit of a panic supply boost as sellers attempt to beat the bursting of the bubble.  Of course, we"re sure this strategy will work out perfectly, as it always does, because nothing helps correct an over-supplied market like a massive flood of even more supply. 

Greater supply “has resulted in buyers having more to choose from and taking longer before buying,” Hans Flink, head of sales and business development at Maklarstatistik, said in a statement. “The sellers are therefore starting to adjust their prices to the tougher competition, which is pushing prices down somewhat.”

Luckily, Bloomberg was able to find at least one economist who dug up some "rather encouraging" signs amongst the wreckage...

But there may be glimmers of hope. Andreas Wallstrom, an economist at Nordea Bank AB in Stockholm, said data for the last few weeks from property-listings website Booli “are rather encouraging,” as they indicate that prices have leveled out since mid-November and up until the first week of December. Average prices per square meter have even increased somewhat in both Stockholm and in the country as a whole in that period, he said.

 

“Our tentative call for December is that home prices will stay unchanged compared to November,” Wallstrom said. “In all, we forecast relatively stable home prices from here. To see a sustained downturn in prices, it will likely require a change in households’ housing costs. As long as mortgage rates remain low, which we expect, it is difficult to see a marked decline.”

Of course, we remember some Bear Stearns analysts who saw similarly "rather encouraging" signs in the U.S. housing market back in 2008...

2 Charts That Might Define The Fed"s Jerome Powell Era

Authored by Daniel Nevins via FFWiley.com,

In September, we proposed a theory of the Fed and suggested that the FOMC will soon worry mostly about financial imbalances without much concern for recession risks. We reached that conclusion by simply weighing the reputational pitfalls faced by the economists on the committee, but now we’ll add more meat to our argument, using financial flows data released last week.

We’ve created two charts, beginning with a look at cumulative, inflation-adjusted asset gains during the last seven business cycles:

According to the way that the Fed defines its policy approach, our first chart stamps a giant “Mission Accomplished” on the unconventional policies of recent years. Recall that policy makers explained their actions with reference to the portfolio balance channel, meaning they were deliberately enticing investors to buy riskier assets than they would otherwise hold. Policy makers hoped to push asset prices higher, and they seem to have succeeded, notwithstanding the usual debates about how much of the price gains should be attributed to central bankers. (See one of our contributions here and a couple of other papers here and here.) But whatever the impetus for assets to rise, it’s obvious that they responded. In fact, judging by the data shown in the chart, policy makers could have checked the higher-asset-prices box long ago, and with a King Size Sharpie.

Consider the measure on the vertical axis, percent of personal income. From the risky asset trough in Q1 2009 through Q3 2017, households accumulated asset gains, in real terms, equivalent to 139% of personal income. (Nominal gains were much greater, but we used the CPI to deduct the amount of purchasing power that households lost on their asset holdings. Also, we defined asset holdings as the four biggest categories that the Fed computes gains for—equities, mutual funds, real estate, and pensions.)

In other words, households are enjoying an investment windfall that amounts to nearly sixteen months of personal income, which is larger than the windfalls accrued in any other business cycle since the Fed began tracking asset gains in 1947. Not only that but the gap continues to widen—as of this writing, we’re likely approaching 145% of personal income and well clear of the previous peak of 128% from the 1991–2001 expansion.

Getting back to policy priorities, the chart seems to tell us that asset prices no longer need boosting. The Fed’s pooh-bahs proved they could boss the investment markets, and they’ve almost certainly moved on to new endeavors.

Bull, bear, or donkey?

But record asset gains are just one of the reasons the Fed’s priorities are likely to be changing. To describe another reason, we’ll first show that policy makers may wield a King Size Sharpie but that it’s not a Permanent Marker:

As you can see, our second chart looks like the first, except that we pinned the tails on the asset price donkeys.

We tacked on the down halves of each cycle, showing that the portfolio balance channel has a reverse mode.

So what should we make of the result that asset price cycles, adjusted for inflation, have ended with busts that reverse a large portion and often the entirety of the prior booms?

According to our beliefs about how investment markets work, the up and down phases of asset cycles are closely connected. Also, monetary stimulus influences both phases at the same time. It helped fuel the giant gains of recent expansions, but it also helped create the imbalances that led to giant losses. And after the accelerated advances of 2016-17, it’s fair to wonder if today’s imbalances are approaching the extremes of 2000 and 2007. Even some FOMC members are gently acknowledging that risk.

But we think the committee members are even more concerned than you would know by just reading their meeting minutes. We expect financial imbalances to become their biggest worry, bigger than the risk of recession, which should matter less and less to the central bankers’ reputations as the business cycle expansion continues to lengthen. In fact, a garden variety recession would barely affect their legacies at all by mid-2019, when the expansion, if still intact, would become the longest ever. By that time, the FOMC’s greatest reputational threat would be another financial market debacle, which would suggest that manipulating asset prices maybe wasn’t such a good idea, after all. In other words, the committee’s reputational calculus will change significantly during Jerome Powell’s first few years as chairperson.

All that said, Powell probably wants a recession-free economy in, say, his first year or two in the position. Moreover, he’ll certainly stress continuity with his predecessors’ policies. But once he becomes comfortable in the job, the Fed’s priorities will look nothing like they did under Janet Yellen and Ben Bernanke. Instead of fueling asset gains, Powell’s biggest challenge will be containing imbalances connected to prior gains. He and his peers will aim to avoid pinning another oversized tail on the donkey—or at least to manage the fallout from said tail—and that’s a challenge that could very well define his regime.