A sampling of some of the analysis I've made that has come to pass is or happening now...
Welcome. The content below is free to the public. It might be worth what you are paying for it. Having studied economics and being in finance for over two decades, I have learned that only one thing is certain - that almost nothing is certain. As we endeavor to come up with our best analysis of the world around us, the opportunities and risks, we have to try to overcome a myriad of issues including our own ignorance, biases and emotions. What follows are my attempts to overcome those obstacles. Welcome to my view - publishing Monday and Friday afternoons.
I have seen literally hundreds of analysts, pundits and wannabes describe how they are "data dependent" in their approach to investing the past few years as the "big data" industry has made splicing and dicing numbers easier and easier. I have to say, I am not impressed with over 80% of these folks, roughly the same number I wasn't impressed with before the "data" drive to differentiate.
What I know is that no matter how much data you have, the effectiveness of an investor lies with how they interpret that data. In that regard, most people get it wrong, most of the time. Why is that? Simply, they don't understand the businesses or business sectors that they are trying to invest in. Because of that, they not only interpret the data wrong, but they often look at the wrong data to begin with.
Don't get me wrong though, data is very valuable when it's the right data for the right question. For example, I have been trading and investing in a particular oil and gas company for about six years now and most folks have no idea what the company is worth. They point to current free cash flow, current debt, yesterday's pipeline obligations and a host of other "data" to support their view of the company's share price, whether long or short the stock.
If you've been reading me the past couple years, you know I believe that the slow growth in the global economy is essentially a permanent circumstance. The short thesis is that aging demographics and massive accumulated global debt simply can not be overcome with easy money. The best we can hope for is slow growth, a smoothing of market forces and a preservation of standard of living. The worst we can expect is the type of depression, social unrest and war that many doom and gloom sellers rant on about.
Today's U.S. employment numbers demonstrate that growth, even on island America, is not likely to accelerate anytime soon past the 1-2% we've been seeing lately. While there is some seasonality to this month's number as employers wait for May graduates to hit the job market, it is more likely a harbinger of what I called a "skip straight recession" last winter.
U.S. employment numbers were not the only thing to look sluggish this week. Nations around the world reported slower growth than wished for.
Jeffrey Gundlach pointed out (make sure to watch that inteview) the deflationary problem nations are facing today. He followed up with talking about helicopter money and fiscal spending to bring back some growth and inflation. Those are the exact same ideas I talked about on MarketWatch in March.
Today's market action suggests a correlated sell-off is in the marking for the stock and other markets. Only a few assets sectors are doing particularly well, among them 20 Year U.S. Treasuries (TLT) which represent a flight to safety trade. The dollar also firmed representing a "risk off" attitude within markets.
While ease of monetary policy is cited by most of those who project the stock market higher, the reality is that easy money has about run its course. We have already talked about reduced effectiveness of central bank policy.
The markets are absolutely starting to recognize the "slow growth forever" that I have been talking about for over a year. What we know is that there are many economies already in unhealthy places. That is what is driving risk in the markets. When asset prices finally adjust for the reality of global GDP growth around 2% for the next couple decades (or longer) and not the 3.8% we knew from post WWII to 2007, we will be in a healthy market place.
Overnight that Bank of Japan refrained from adding any additional stimulus to their monetary system. It was a mild surprise, although many of us thought they'd wait until some sort of market turbulence to add more money to the money fire.
The Federal Reserve sounded, well, like the Federal Reserve yesterday. In a written statement nothing really changed from before. It was so boring, it's barely a headline today. There was an important message though that continues to be overlooked. The Fed is very concerned about a coming slowdown triggered by international factors.
Today, GDP clocked in at the slowest pace in two years with business investment the lowest since -buhm, buhm, buhm - 2008. The low business investment plays into my theme of "slow growth forever."
The markets reached an 8 month high today and breadth is wide. Normally that signals a bull trend. And to be honest, we could see one for a few more months. But that doesn't negate everything else we've been talking about recently.
Chasing markets higher is a trap that the big market players set for the little guys. Take a look at volume, it is very low. What that means is little guys are chasing higher and big guys are letting them do it by standing aside.
This is a just a quick mid-week interjection. As you know, I recently issued a crash alert. There are literally dozens of reasons I did that. However, here are three more charts that should hit home and make the point that being a very, very patient buyer right now is the play.
The lead chart is the Shiller CAPE ratio. What is that? It is the cyclically adjusted price-to-earnings ratio. Basically, it adjusts for normalized earnings over a ten-year period. It does this to represent the cycles that earnings go through from peak to trough to peak again.
The normal CAPE is around 15 or 16, but it can go a few points higher or lower with no real consequence. Right now, earnings are just coming off of peak that was the fourth highest in history. Certainly, with enough central bank money or government stimulus, the ratio could climb to challenge all-time highs. However, given global debt and general mood, the odds of central banks and governments printing and borrowing without a crisis to rally around seems remote.
The more plausible scenario is that the earnings cycle plays out, meaning that earnings, which are already heading down, fall more. So, if earnings do indeed fall, then we would expect prices of stocks to follow suit. I think this is especially true for a few reasons I mention below.
Janet Yellen spoke today and took the opposite view of several of her peers on the Federal Reserve Open Market committee and struck a very dovish tone by stating a need to "proceed cautiously" on interest rate hikes. While this was not unexpected, the tone of her remarks signals that an April rate hike is almost impossible unless there is some unexpected huge uptick in employment or inflation. She pointed out unfavorable market conditions, international concerns and uncertain inflation expectations.
Interestingly, she also said that the Fed had little room to reverse course. This is another signal to me that unless markets and the economy normalize in the direction desired - which is almost impossible due to demographics and accumulated debt - we are simply waiting for the next deflationary event so that the Fed can take "extraordinary" actions during a crisis event. As I have discussed in the forum and am discussing in an upcoming MarketWatch article, we are on the verge of inflation one way or the other. The central banks are going to create inflation, with or without growth - we know mostly without - so they can devalue debt. That devaluation will in turn diminish the standard of living of hundreds of millions of people.
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