Risk/Reward Vol. 319
May I recommend an enlightening article by James Mackintosh in Tuesday's Wall Street Journal. Therein he observes that "In 1999, wild enthusiasm was elevating the market...Investors punished dividend payers for not having enough ways to spend money...The contrary is true this year. Wild pessimism...has led investors to chase dividend payments, demand buybacks and punish companies that invest." How can pessimism be a catalyst for new record highs? According to Mackintosh, the new highs reflect a belief by investors that the world economy is weak enough to keep central banks pumping out free money, but not so weak that company profits will plummet. This belief, which I share, found further support this week from the July meeting minutes released by the Federal Reserve. A fair reading of those indicates that the Fed will not raise rates until December at the earliest.
The above notwithstanding, the market looks very frothy to me. The S&P 500 is trading at 18 times projected earnings, much higher than its historic average. (N.B. Stock price/earnings per share= stock multiple. The higher the multiple the more "expensive" the stock.) Am I advocating that any of you exit? No. Why should you? I see nothing in the near or medium term that runs counter to Mr. Mackintosh's observations. Personally, my exit last month was motivated by my having achieved my goal for the year and by my desire to capture those profits---not by any great fear. That said, I am not anxious to re-enter at this point. I will await the inevitable pull back to begin buying again. Another opportunity may present after next month's OPEC meeting. Statements by Saudi Arabia's oil minister that his country may be amenable to limiting production have caused the price of Brent oil to reach $50/bbl. again. Whether a limit on production comes to pass or not, clarity from that meeting should provide me with enough visibility to buy. I have my list at the ready.
Gold continues to do well---and why not? If commercial banks in Europe and Japan follow through with their threat to pass negative rates onto depositors ( Remember, a negative rate on your savings account would require you to pay the bank for keeping your money on deposit), a very rational response is to buy gold. Gold is now viewed as an alternative currency and is much easier to store than cash. But even cash hoarding may be next. In Tuesday's Financial Times, it was reported that several European banks are considering expanding their vaults to accommodate mountains of cash instead of paying the European Central Bank negative interest to keep funds in ECB reserve accounts as they do presently
The Federal Reserve received some disappointing news this week as the consumer price index (CPI) rose only 0.8% on an annualized basis in July, far below the Fed's targeted 2% inflation rate. Have you ever wondered why the Fed targets 2% inflation? Here is the answer--as silly as it may be. Economists at the Fed contend that consumers are much more likely to purchase, even needed goods and services, if they believe that those goods and services will be more expensive in the future. Stated alternatively, the Fed economists assert that if consumers come to believe that the refrigerator or automobile or service they need will be the same price or cheaper in the future they will defer buying it. Really? Only an economist would believe such drivel. No consumer thinks that way. If a consumer needs a new refrigerator and can afford it, he/she will buy it irrespective of what the CPI registers. But that article of faith, namely the 2% inflation target, is one of the two major drivers of our monetary policy. Jeez!
And speaking of monetary policy take a look at reports out of Japan this week. Why? Because absent a change in Fed direction or a miraculous turnaround in demographics, Japan is our future. And that future includes a central bank program that purchases not only government bonds (as is done in the US now) but also corporate bonds (as the ECB does) and stocks These purchases are done to prop up a nose-diving economy born (no pun intended) of an aging and declining population. As a result, Japan's central bank, the Bank of Japan, not only owns more than 30% of all government debt but also is a top 10 shareholder in 90% of the companies in the Nikkei 225 stock average and at the current buying pace will be the largest shareholder in 55 of those companies by year end. In the short run this is good news for stocks, but ponder what it means longer term. Under the guise of monetary policy, Japan is nationalizing all of its major companies. And there is nothing preventing that from happening in Europe or, ultimately, here. Ponder that indeed.
Sunday, August 21, 2016
Sunday, August 14, 2016
August 14, 2016 Duh!
Risk/Reward Vol. 318
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HERE
Here are some observations from this week.
1) An article in Tuesday's Wall Street Journal reported that central bankers are surprised that lower rates have spurred excessive savings as opposed to more borrowing and more consumption. Really? Are you kidding? Sorry, bankers, but most people recognize that they are personally responsible for their own well being---including saving for retirement. Unlike central banks, they cannot print more money. When low interest rates rob savers of a decent return, the only rational response is to save more----not spend more. Savings rates in Germany for example are their highest since 1995. The financial world is beginning to awaken to the idea that central banks may have it wrong. I recommend to your attention the opinion piece written by author and hedge fund manager Eric Lonergan in Saturday's Financial Times. Here are three quotes: "Central bank models assume that, when real interest rates fall, consumer spending rises." "This assumed relationship has little empirical support and there are good reasons, particularly when rates are extremely low or negative, to doubt it." "The relationship of spending to lower interest rates may well be the reverse of that assumed by policymakers." And here are some quotes from an article by James Dorn of the Cato Institute in Saturday's Investor's Business Daily. "The manipulation of interest rates by central bankers to support asset prices and fund government debt is a recipe for disaster....Central bankers have too much power and too little humility regarding the limits of monetary policy." Are our central bankers and the economists they employ really just a bunch of unthinking, blind following the blind sheep leading us down a wrong path? I think so.
2) Many commentators are surprised that the price of gold has appreciated 26% year to date given that inflation is near zero? Really? Gold operates not only as a hedge against inflation but also as a hedge against currency debasement. Take a look at the British Pound. As a result of Brexit and the newest round of quantitative easing (discussed below), the pound has fallen 12% against the dollar so far this year and 17% against the Euro. If a Brit had owned gold instead of pounds on January 1st, he/she would have seen an additional commensurate gain since gold prices are denominated in dollars.
3) And speaking of the UK, the Bank of England had an inauspicious beginning to its ambitious bond buying program (quantitative easing) on Tuesday. It could not find enough government bonds (gilts) to buy! That's right, despite a willingness to pay almost any price, it could not catch an ask. Why? Because the current holders either are required to own gilts (eg. pension funds or insurance companies) or they are holding out for even higher bids. In any event, the 10Year gilt hit an all time high that day meaning that it set a record low yield, 0.5%, and the yield on the 2year gilt went negative. Britain's experience is emblematic of the limits of quantitative easing. Already, the BOE owns 25% of all of Britain's sovereign debt. The Bank of Japan owns 1/3rd of Japan's sovereign debt and the ECB owns 25% of Eurozone sovereign debt. No ordinary citizen would be caught dead owning a bond with a negative or nearly negative yield. Can anyone say Ponzi---only this time governments are cheating themselves (or should I say their citizens). Think of the loss each central bank would take if interest rates increase and they try to unload these pigs?
4) Tandem Investment Advisors is one of the investment managers that Barb and I employ for a portion of the money that I do not manage personally. From time to time, Tandem issues investment letters. I highly recommend reading its most recent one which can be found here. http://tandemadvisors.com/wp-content/uploads/2016/07/The-TANDEM-Report-July-2016.pdf Therein it compares the amount of risk that an investor needed to take to achieve a 7.5% return in 1995 (nearly none) to the amount of risk needed to achieve such a return today (almost not worth it). Why? Because of what I have been harping about for lo these past months and years---suppression of rates by central bankers. As noted by Tandem, people like me who should be mostly in bonds cannot get a decent return and are forced to own equities or other like instruments. This causes the stock market bubble to be even more engorged. With all three major indices hitting record highs this week, Tandem's advice is very timely: "We love rising stock prices. But...be mindful of the fact that the higher stock prices go the less the margin of error becomes. Enjoy the party, but stay close to the exit." I always do.
5) Oil prices dipped on Wednesday only to recover nicely on Thursday. The cause of the fall was a report that Saudi Arabia pumped a record 11million barrels/day in July and that both Iraq and Iran are ramping up their production. The rise resulted from comments from the Saudi oil minister that he was open to price stabilization talks at next months OPEC meeting. This insane volatility may last for a while---at least until the Saudi's get closer to selling a portion of their state owned oil company to the public. Then look for some stability.
6) On Thursday, the former head demographer for the United Nations issued a report that by 2030, fifty six (56) countries will have more people over the age of 65 than under the age of 15. And economists still think we can achieve 3+% growth consistently? They have been wrong with their predictions for more than 8 years. What makes them (or you) think they will get it right now? Read Ben Bernanke's Brookings Institute blog issued last week which can be found here. The Fed’s shifting perspective on the economy and its implications for monetary policy | Brookings Institution . Even he doubts the Fed's prognosticating skills.
7) I am still in cash, and happily so.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HERE
Here are some observations from this week.
1) An article in Tuesday's Wall Street Journal reported that central bankers are surprised that lower rates have spurred excessive savings as opposed to more borrowing and more consumption. Really? Are you kidding? Sorry, bankers, but most people recognize that they are personally responsible for their own well being---including saving for retirement. Unlike central banks, they cannot print more money. When low interest rates rob savers of a decent return, the only rational response is to save more----not spend more. Savings rates in Germany for example are their highest since 1995. The financial world is beginning to awaken to the idea that central banks may have it wrong. I recommend to your attention the opinion piece written by author and hedge fund manager Eric Lonergan in Saturday's Financial Times. Here are three quotes: "Central bank models assume that, when real interest rates fall, consumer spending rises." "This assumed relationship has little empirical support and there are good reasons, particularly when rates are extremely low or negative, to doubt it." "The relationship of spending to lower interest rates may well be the reverse of that assumed by policymakers." And here are some quotes from an article by James Dorn of the Cato Institute in Saturday's Investor's Business Daily. "The manipulation of interest rates by central bankers to support asset prices and fund government debt is a recipe for disaster....Central bankers have too much power and too little humility regarding the limits of monetary policy." Are our central bankers and the economists they employ really just a bunch of unthinking, blind following the blind sheep leading us down a wrong path? I think so.
2) Many commentators are surprised that the price of gold has appreciated 26% year to date given that inflation is near zero? Really? Gold operates not only as a hedge against inflation but also as a hedge against currency debasement. Take a look at the British Pound. As a result of Brexit and the newest round of quantitative easing (discussed below), the pound has fallen 12% against the dollar so far this year and 17% against the Euro. If a Brit had owned gold instead of pounds on January 1st, he/she would have seen an additional commensurate gain since gold prices are denominated in dollars.
3) And speaking of the UK, the Bank of England had an inauspicious beginning to its ambitious bond buying program (quantitative easing) on Tuesday. It could not find enough government bonds (gilts) to buy! That's right, despite a willingness to pay almost any price, it could not catch an ask. Why? Because the current holders either are required to own gilts (eg. pension funds or insurance companies) or they are holding out for even higher bids. In any event, the 10Year gilt hit an all time high that day meaning that it set a record low yield, 0.5%, and the yield on the 2year gilt went negative. Britain's experience is emblematic of the limits of quantitative easing. Already, the BOE owns 25% of all of Britain's sovereign debt. The Bank of Japan owns 1/3rd of Japan's sovereign debt and the ECB owns 25% of Eurozone sovereign debt. No ordinary citizen would be caught dead owning a bond with a negative or nearly negative yield. Can anyone say Ponzi---only this time governments are cheating themselves (or should I say their citizens). Think of the loss each central bank would take if interest rates increase and they try to unload these pigs?
4) Tandem Investment Advisors is one of the investment managers that Barb and I employ for a portion of the money that I do not manage personally. From time to time, Tandem issues investment letters. I highly recommend reading its most recent one which can be found here. http://tandemadvisors.com/wp-content/uploads/2016/07/The-TANDEM-Report-July-2016.pdf Therein it compares the amount of risk that an investor needed to take to achieve a 7.5% return in 1995 (nearly none) to the amount of risk needed to achieve such a return today (almost not worth it). Why? Because of what I have been harping about for lo these past months and years---suppression of rates by central bankers. As noted by Tandem, people like me who should be mostly in bonds cannot get a decent return and are forced to own equities or other like instruments. This causes the stock market bubble to be even more engorged. With all three major indices hitting record highs this week, Tandem's advice is very timely: "We love rising stock prices. But...be mindful of the fact that the higher stock prices go the less the margin of error becomes. Enjoy the party, but stay close to the exit." I always do.
5) Oil prices dipped on Wednesday only to recover nicely on Thursday. The cause of the fall was a report that Saudi Arabia pumped a record 11million barrels/day in July and that both Iraq and Iran are ramping up their production. The rise resulted from comments from the Saudi oil minister that he was open to price stabilization talks at next months OPEC meeting. This insane volatility may last for a while---at least until the Saudi's get closer to selling a portion of their state owned oil company to the public. Then look for some stability.
6) On Thursday, the former head demographer for the United Nations issued a report that by 2030, fifty six (56) countries will have more people over the age of 65 than under the age of 15. And economists still think we can achieve 3+% growth consistently? They have been wrong with their predictions for more than 8 years. What makes them (or you) think they will get it right now? Read Ben Bernanke's Brookings Institute blog issued last week which can be found here. The Fed’s shifting perspective on the economy and its implications for monetary policy | Brookings Institution . Even he doubts the Fed's prognosticating skills.
7) I am still in cash, and happily so.
Sunday, August 7, 2016
August 7, 2016 Secular Stagnation
Risk/Reward Vol. 317
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I do not blame Barack Obama any more than I blame Xi Jinping, Shinzo Abe, David Cameron, Angela Merkel, Mario Renzi or Francois Hollande for what I discuss below.
The disappointing gross domestic product (GDP) numbers reported last week guarantee that Barack Obama will be the first president in history to fail to have even one year of 3% growth in GDP. For context, between 1948 and 2007, the GDP grew at an average of 3.5%. The anemic performance over the past eight years occurred despite doubling the national debt, deploying $800 billion in stimulus, and the Federal Reserve purchasing $4.5 trillion of Treasury bonds and mortgages (QE) and maintaining interest rates at historic lows. The result of all of this stimulus has been to inflate bond and stock prices to record highs. (Remember record low bond yields mean record high bond prices.) However, it has done little to spur the "real" economy which struggles to grow more than 1-2% per year. Without growth, wages stagnate. And one wonders why those with financial assets ("the rich") get richer, and the working class gets poorer?
So why not blame Barack Obama and the others? Because not even they can fight demographics. The population of those who actively participate in the economies of the developed world (including the United States) is aging and shrinking. And their birthrate is well below replacement levels. One need look only at Japan to see our future. For more than 20 years, Japan has had low interest rates, economic stimulus, quantitative easing, in short, all of the "goodies" we have deployed since 2008. And still Japan cannot spur its economy. Why? There is an ever shrinking demand for goods and services. This is hardly surprising given that its citizens purchase more adult than baby diapers, and that by 2060 it will have 1/3rd fewer people than it does today. It does not take an economist to comprehend that no economy can grow with a shrinking population of earners and consumers.
And yet the central bankers here and elsewhere cling to the belief that more and more monetary stimulus (low rates, bond buying, etc.) will somehow spur growth in the real economy. They believe this (or at least profess that they do) despite proven failure these past several years and despite the fact that low rates are a major contributor to wealth inequality. Indeed, just last Thursday, the Bank of England lowered interest rates once again and launched another round of bond buying (quantitative easing) ostensibly to spur growth. Japan is even contemplating distributing "helicopter money". Google that term and it will shock you. Yes, Japan is thinking about giving every man, woman and child some extra cash with no obligation other than to spend it---figuratively dropping cash out of a helicopter. So I ask you, given our poor economic performance and given that other central bankers are doubling down on "easy money", how can the Federal Reserve raise interest rates in September or December, Friday's speculation that it will notwithstanding? It can't---pure and simple. If it did it would send shock waves through the markets. Take a look at what happened this week in Japan when its central bank did not lower rates further into the negative. Bondholders got clobbered, as Mr. Market-san, feared that the bond bubble was beginning to burst.
So what does this mean to investors? As I wrote last week, I see the Federal Reserve continuing to prop up financial assets with low interest rates. Clearly, Mr. Market is on edge so more volatility can be expected. That said, absent a black swan, I do not foresee a major collapse . As indicated by Friday's jobs report, our economy will continue to plod along. But do not expect significant growth here or anywhere in the world. The building boom in China which spurred economic growth in commodity rich emerging markets (Remember the BRIC's?) back in 2008-2010 will not be repeated. Due to its disastrous one child policy, China faces its own demographic cliff. For me, the state of things means the following. In the short run, with spreads on some assets (e.g. preferred stock closed end funds, a few real estate investment trusts, and a smattering of other dividend payers) still priced as if a rate increase is likely this year, I may pick up some on the cheap. Longer term I see the current oversupply of oil balancing, an event which may present another opportunity to garner profits.
I write this edition not as a commentary on social issues, but to explain why we are in for a prolonged period of "more of the same." In sum, I do not see a turn around in the real economy. The reason is simple, but rarely discussed because there is no quick fix. A decrease in buyers means a decrease in demand which equates to slow to no growth---no matter how cheap or plentiful the available credit. The simple truth is that no matter how well-to-do one may be or how much one may be able to borrow, one neither needs nor wants a house or to shop at Krogers or to buy onesies, trikes or birthday cakes if one does not have children. And that is the circumstance for a large percentage of the child-producing-age population in the developed world---including the United States. So if you are like me and rely upon investments for a living, you need a market strategy that takes into account a prolonged period of slow to no growth. As explained previously, mine involves correlating interest rates and income producing securities, locating mispriced assets and taking profits frequently. In addition, I mitigate against the downside by maintaining a large cash position and cutting losses early. Welcome to secular stagnation.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I do not blame Barack Obama any more than I blame Xi Jinping, Shinzo Abe, David Cameron, Angela Merkel, Mario Renzi or Francois Hollande for what I discuss below.
The disappointing gross domestic product (GDP) numbers reported last week guarantee that Barack Obama will be the first president in history to fail to have even one year of 3% growth in GDP. For context, between 1948 and 2007, the GDP grew at an average of 3.5%. The anemic performance over the past eight years occurred despite doubling the national debt, deploying $800 billion in stimulus, and the Federal Reserve purchasing $4.5 trillion of Treasury bonds and mortgages (QE) and maintaining interest rates at historic lows. The result of all of this stimulus has been to inflate bond and stock prices to record highs. (Remember record low bond yields mean record high bond prices.) However, it has done little to spur the "real" economy which struggles to grow more than 1-2% per year. Without growth, wages stagnate. And one wonders why those with financial assets ("the rich") get richer, and the working class gets poorer?
So why not blame Barack Obama and the others? Because not even they can fight demographics. The population of those who actively participate in the economies of the developed world (including the United States) is aging and shrinking. And their birthrate is well below replacement levels. One need look only at Japan to see our future. For more than 20 years, Japan has had low interest rates, economic stimulus, quantitative easing, in short, all of the "goodies" we have deployed since 2008. And still Japan cannot spur its economy. Why? There is an ever shrinking demand for goods and services. This is hardly surprising given that its citizens purchase more adult than baby diapers, and that by 2060 it will have 1/3rd fewer people than it does today. It does not take an economist to comprehend that no economy can grow with a shrinking population of earners and consumers.
And yet the central bankers here and elsewhere cling to the belief that more and more monetary stimulus (low rates, bond buying, etc.) will somehow spur growth in the real economy. They believe this (or at least profess that they do) despite proven failure these past several years and despite the fact that low rates are a major contributor to wealth inequality. Indeed, just last Thursday, the Bank of England lowered interest rates once again and launched another round of bond buying (quantitative easing) ostensibly to spur growth. Japan is even contemplating distributing "helicopter money". Google that term and it will shock you. Yes, Japan is thinking about giving every man, woman and child some extra cash with no obligation other than to spend it---figuratively dropping cash out of a helicopter. So I ask you, given our poor economic performance and given that other central bankers are doubling down on "easy money", how can the Federal Reserve raise interest rates in September or December, Friday's speculation that it will notwithstanding? It can't---pure and simple. If it did it would send shock waves through the markets. Take a look at what happened this week in Japan when its central bank did not lower rates further into the negative. Bondholders got clobbered, as Mr. Market-san, feared that the bond bubble was beginning to burst.
So what does this mean to investors? As I wrote last week, I see the Federal Reserve continuing to prop up financial assets with low interest rates. Clearly, Mr. Market is on edge so more volatility can be expected. That said, absent a black swan, I do not foresee a major collapse . As indicated by Friday's jobs report, our economy will continue to plod along. But do not expect significant growth here or anywhere in the world. The building boom in China which spurred economic growth in commodity rich emerging markets (Remember the BRIC's?) back in 2008-2010 will not be repeated. Due to its disastrous one child policy, China faces its own demographic cliff. For me, the state of things means the following. In the short run, with spreads on some assets (e.g. preferred stock closed end funds, a few real estate investment trusts, and a smattering of other dividend payers) still priced as if a rate increase is likely this year, I may pick up some on the cheap. Longer term I see the current oversupply of oil balancing, an event which may present another opportunity to garner profits.
I write this edition not as a commentary on social issues, but to explain why we are in for a prolonged period of "more of the same." In sum, I do not see a turn around in the real economy. The reason is simple, but rarely discussed because there is no quick fix. A decrease in buyers means a decrease in demand which equates to slow to no growth---no matter how cheap or plentiful the available credit. The simple truth is that no matter how well-to-do one may be or how much one may be able to borrow, one neither needs nor wants a house or to shop at Krogers or to buy onesies, trikes or birthday cakes if one does not have children. And that is the circumstance for a large percentage of the child-producing-age population in the developed world---including the United States. So if you are like me and rely upon investments for a living, you need a market strategy that takes into account a prolonged period of slow to no growth. As explained previously, mine involves correlating interest rates and income producing securities, locating mispriced assets and taking profits frequently. In addition, I mitigate against the downside by maintaining a large cash position and cutting losses early. Welcome to secular stagnation.
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