The following was published at RealMoney, but I don’t know when, but I do know that this is the first draft, not the finished product — my editor did not want me to mention that I was unemployed.
“I always sell too soon.” – Baron Rothschild
In 2003, when I was briefly unemployed, I noticed that my personal account was starting to underperform. Partly to give myself more confidence at interviews, and partly to get rid of a distraction, I went over my portfolio to tune it up.
I started out by ranking my portfolio from top to bottom in terms of expected returns. Nothing complex – I just went my price targets and compared them to current prices. Highest percentages are at the top; lowest are at the bottom. My next step was to do the same for a list of replacement candidates. I then looked at the second list, and found that my top three replacement candidates beat the expected returns for the median company in my portfolio. I bought those three companies for my portfolio, and funded it by selling the four stocks in my portfolio with the lowest expected returns. At the same time, I added a small amount to two underperforming names in my portfolio. Here were my actions, and the results through 7/14/03, the date that I sold Pechiney:
|100%||Am Power Conversion||APCC|
|100%||Bank of Montreal||BMO|
With the exceptions of Pechiney and Nucor, I still hold positions in all of the purchases. When Pechiney hired the investment bankers, I tossed in the towel; I thought they were fighting for their cushy jobs, not enhancing shareholder value. I was surprised to see them sell out to Alcan. I sold Nucor in late 2003, over the rise in scrap steel prices; even though Nucor can raise its own prices, its profits will not increase as much as other steel firms. I also goofed in my evaluation of Adtran. It had much better prospects than I thought.
There were other companies on my purchase candidate list with expected returns that beat the expected returns of companies remaining in my portfolio, but did not beat the median expected return. I set the bar at the median in order to avoid excessive turnover.
The price return on the purchases versus the sales was better by more than I would ordinarily expect, and faster as well – I look for returns on my portfolio to beat the S&P 500. This series of trades certainly helped.Rebalancing
The two smaller purchases were done for a different reason than the other trades. PBR and DY were already in my portfolio, but had been performing badly. The weight that each had in my portfolio had shrunk to be the smallest in my portfolio. After a review of the fundamentals, I did what I call a rebalancing trade.
When I was interviewing managers at Provident Mutual, another question that we would ask managers is how they would rebalance positions in response to market movements. Many of them would do nothing; others had no fixed strategy. A few had really worked on this aspect of portfolio management, and to my surprise, their strategies on this topic were similar, even though other aspects of their portfolio management styles were different. One was value, one was growth, one was core, but they each had evidence that their approach improved their returns by a couple percent per year.
There is a growing academic literature on market microstructure; one thing it addresses is measurement of the total costs of trading. One of the costs of trading comes from whether a trade demands or supplies liquidity to the market. When a trader posts a limit order, he offers other market participants an option to exchange shares for liquidity at a known price. In offering liquidity, the trader hopes to get an execution at a favorable price.
The approach that the three managers use, and I employ in my personal account, is as follows:
- Define a series of fixed weights for the stocks in the portfolio.
- Do a rebalancing trade when any position gets more than 20% away from its target weight. Use this time as an opportunity to re-evaluate the thesis on the stock.
- If the rebalancing trade generates cash, invest the cash in the stocks that are the most below their target weights, to bring them up to target weight.
- If the rebalancing trade requires cash, generate the cash from stocks that are the most below their target weights, to bring them down to target weight.
This discipline forces you to buy low and sell high, and also, to reevaluate your holdings after significant relative market movement. This method works best with companies that possess low total leverage relative to others in their industries. This helps avoid the problem of averaging down to a huge loss. This also works best for diversified portfolios with 20-50 stocks, with reasonable even weights. In my portfolio, the weights range from 2 to 7.5%, with 33 companies altogether.
The 20% figure is arbitrary, but in my opinion, it strikes a balance between excessive trading, and capturing reasonable trading profits, by providing shares and liquidity to the market when it wants them. The incremental profits add up as companies and industries fall in and out of favor, and the rebalancing system buys low, and sells high.
Long DY, PBR, PCP (at that time, at present  I have no positions in companies mentioned)
Submitted by Michael Krieger of Liberty Blitzkrieg blog,
The drone issue is just another topic in which President Barrack Obama has proven himself to be a world-class liar and master of deception. Despite his claims that drone strikes do little damage to civilian populations, in July we discovered that “of the 746 people killed in drone strikes in Pakistan from 2006-2009, an incredible 20% were civilians and 94 (13% of the total) were children.”
I suppose that number just isn’t good enough, because The Pentagon has decided to change the rules of engagement when it comes to drone strikes, now making it easier to target civilians. From The Washington Times:
The Pentagon has loosened its guidelines on avoiding civilian casualties during drone strikes, modifying instructions from requiring military personnel to “ensure” civilians are not targeted to encouraging service members to “avoid targeting” civilians.
Hey cops, how about you “try to avoid” beating the shit out of people and violating their constitutional rights for no reason. Yeah, because that’ll work.
In addition, instructions now tell commanders that collateral damage “must not be excessive” in relation to mission goals, according to Public Intelligence, a nonprofit research group that analyzed the military’s directives on drone strikes.
Administration officials say the strikes are legal because the U.S. is at war with al Qaeda and its associates. They also insist there is a wide gap between the government’s civilian casualty count and those of human rights groups.
Right, we are at “war with al Qaeda,” when it is convenient to be at war with them. When it is convenient to be allies with al Qaeda, we will do that too.
Despite Mr. Obama’s pledge for more transparency on drone strikes, the administration “continues to answer legitimate questions and criticisms by saying, ‘We can’t really talk about this,’” said Naureen Shah, advocacy adviser at Amnesty International.
Can’t. Make. This. Stuff. Up.
Full article here.
The stock market. Source of unknown riches - but not necessarily for investors. So-called "professional" investors offer to manage your money. However, their fees are based on the level of assets managed, not performance. Hence their goal is to maximize assets, not performance, and prey for markets to behave. You will never hear a bad word about stocks from a professional money manager. the by-laws of many mutual funds do not allow the manager to have cash levels above 5% of assets. He has to be invested at least 95% at all times. On one hand, it is probably right to force money managers to concentrate on stock picking, not market timing. On the other hand, this puts the onus of market timing onto the inidiviual investors. Lighthouse's Alex Gloy's excellent presentation below proves finance doesn't have to be complex (people make it complex).
Via Lighthouse Investment Management's Alex Gloy,
The money management industry would like to have their clients' assets indefinitely, through bull- and bear markets. Ride the wave during good times. And simply state that "nobody could have foreseen this", "we don't have a crystal ball" or "it's too late to sell now" in case of a crash.
There must be a better way to invest.
This publication tries to assess the following questions:
1. What kind of return can be reasonably expected from stock market investments? Is that rate
2. What kind of simple tools exist to tell if the stock market is cheap or expensive?
3. Are stock market returns mean-reverting?
4. Are we going to continue to see similar cyclical fluctuations in the future, or are we in the midst of a structural break?
I will try to keep things as simple as possible. Finance doesn't have to be complex (people make it complex). A picture says more than a thousand words - I hope the following charts help.
Performance: How to Visualize It
How do we look at performance?
Above you see the S&P 500 Index since 18711. By looking at the black line (nominal, non-logarithmic scale) you would think there was no point in investing before 1981. That's why you should look at longterm data on a logarithmic scale. The green surface is the real (inflation-adjusted) S&P 500. Should we look at nominal or real returns? What good is a 10% rise in the stock market if inflation runs at 20%? Conventional wisdom has it that inflation is good for stocks. It that true? Compare the chart on the next page:
Performance: Nominal or Real
Look what the inflationary period of the 1980's did to stocks: not much in nominal terms (black line), but devastating in real terms (green surface). From 1973 to 1982, the nominal S&P remained stable (117 versus 118 points). However, in real terms, the index fell from 640 to 286 (-55%). Yes, you would have lost purchasing power, too, if you kept your money in cash. But that is a different question.
For performance measurement, real returns count.
Today, the S&P 500 is around 1,800 compared to 82 (real) in 1871, yielding a real return of 2.2%3. But the S&P 500 is a price index (as opposed to total return), so we must account for dividends (and reinvestment of those). Including dividends, the total real return is around 6.5%. Impressively, this shows how important dividends are (2/3 of total return) in the long run.
We don't live 142 years, so the average total real return from 1871 to 2013 is not so useful for the individual investor. But you can slice those 142 years into periods of 10, 20 and 30 years. Take the returns over those periods and plot their frequency (see above).
You will notice that among all 10-year periods (blue) you had a few with negative returns. When investing over 20-year periods, you would have suffered only one (ending in 1921) with close to zero return. The longer your investment horizon, the closer the returns are clustered around the average, or expected, value. You can see it visually as the distribution of returns gets "slimmer" (green surface) and contains less "outliers".
The more data points we add, the closer the annual returns lie around the same mean (average). This serves as indication that stock market returns are mean-reverting.
Conclusion: It makes little sense to invest in stocks with a time horizon of less than 10 years.
1. In 20 years, many different people will have been at the helm of the job as money manager
2. Career risk: most money managers get terminated after a few quarters of unsatisfactory
performance (hence nobody dares to stick his neck out)
3. End-user risk: very few investors would be willing to accept multiple years of disappointing performance (changing strategy mid-term and hence messing up performance)
And here lies the conundrum: almost nobody is investing according to what theory prescribes.
It doesn't help that you can check on the value of your investments every minute via your smart phone.
Do you check every day what your house is worth? No, because, luckily, that is impossible.
It would probably be beneficial for most investors if their investments traded only once a year. The constant availability of pricing information, coupled with swings from one minute to the next add to psychological pressure, leading to mistakes.
The previous chapter assumes you don't try to time the market (you just invest whenever funds are available and lock them up for at least 20 years). But the stock market rarely trades at fair value. It is either over- or undervalued. What if you could actually determine those valuations? And what do you base valuation on?
In the long run, stocks are driven by earnings:
The problem: company profits are very cyclical. Meaning: in every recession they decline by large amounts, only to recover strongly afterwards.
From 2006 to 2008, for example, real earnings for the S&P 500 declined from $94.70 to $28.50 (-70%).
The price-earnings multiple, or P/E-ratio, rose from 15.7 to 52.7 despite a drop in share prices. Stocks seem expensive when they are not and vice versa.
So Professor Robert Shiller (Yale) came up with a simple solution to smooth out cyclicality: take the average earnings from the last 10 years. Boom and bust should even out.
The "cyclically-adjusted price-earnings"-ratio (CAPE, or Shiller-P/E) was born.
It actually does a much better job in pointing out when the stock market is "cheap" or "expensive". It also shows the extent of the stock market bubble in 1999/2000.
The average 10-year CAPE-ratio since 1871 is 17 (low: 7 in 1933, high: 42.5 in 2000). Today, we are at 24.6.
This puts us pretty far towards the expensive side.
What you do know is the starting CAPE-ratio, and assume a regression to mean (17). With today's CAPE (25), we are facing strong headwinds for returns over the next 10 years. Sliding down the above regression line, the expected annual real return for -8 CAPE points is only around 1%. This does definitely not compensate for the risk associated with stocks. As a result, you should lighten up on stocks.
Gloy goes on to discuss the link between GDP and Profits, War, Inflation, and its effect on all markets.
Authored by Marc Faber, originally posted at The Daily Reckoning blog,
As a distant but interested observer of history and investment markets I am fascinated how major events that arose from longer-term trends are often explained by short-term causes. The First World War is explained as a consequence of the assassination of Archduke Franz Ferdinand, heir to the Austrian-Hungarian throne; the Depression in the 1930s as a result of the tight monetary policies of the Fed; the Second World War as having been caused by Hitler; and the Vietnam War as a result of the communist threat.
Similarly, the disinflation that followed after 1980 is attributed to Paul Volcker’s tight monetary policies. The 1987 stock market crash is blamed on portfolio insurance. And the Asian Crisis and the stock market crash of 1997 are attributed to foreigners attacking the Thai Baht (Thailand’s currency). A closer analysis of all these events, however, shows that their causes were far more complex and that there was always some “inevitability” at play.
Take the 1987 stock market crash. By the summer of 1987, the stock market had become extremely overbought and a correction was due regardless of how bright the future looked. Between the August 1987 high and the October 1987 low, the Dow Jones declined by 41%. As we all know, the Dow rose for another 20 years, to reach a high of 14,198 in October of 2007.
These swings remind us that we can have huge corrections within longer term trends. The Asian Crisis of 1997-98 is also interesting because it occurred long after Asian macroeconomic fundamentals had begun to deteriorate. Not surprisingly, the eternally optimistic Asian analysts, fund managers , and strategists remained positive about the Asian markets right up until disaster struck in 1997.
But even to the most casual observer it should have been obvious that something wasn’t quite right. The Nikkei Index and the Taiwan stock market had peaked out in 1990 and thereafter trended down or sidewards, while most other stock markets in Asia topped out in 1994. In fact, the Thailand SET Index was already down by 60% from its 1994 high when the Asian financial crisis sent the Thai Baht tumbling by 50% within a few months. That waked the perpetually over-confident bullish analyst and media crowd from their slumber of complacency.
I agree with the late Charles Kindleberger, who commented that “financial crises are associated with the peaks of business cycles”, and that financial crisis “is the culmination of a period of expansion and leads to downturn”. However, I also side with J.R. Hicks, who maintained that “really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”.
Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis. Usually, as was the case in Asia in the 1990s, macroeconomic conditions deteriorate long before the onset of the crisis. However, expansionary monetary policies and excessive debt growth can extend the life of the business expansion for a very long time.
In the case of Asia, macroeconomic conditions began to deteriorate in 1988 when Asian countries’ trade and current account surpluses turned down. They then went negative in 1990. The economic expansion, however, continued — financed largely by excessive foreign borrowings. As a result, by the late 1990s, dead ahead of the 1997-98 crisis, the Asian bears were being totally discredited by the bullish crowd and their views were largely ignored.
While Asians were not quite so gullible as to believe that “the overall level of debt makes no difference … one person’s liability is another person’s asset” (as Paul Krugman has said), they advanced numerous other arguments in favour of Asia’s continuous economic expansion and to explain why Asia would never experience the kind of “tequila crisis” Mexico had encountered at the end of 1994, when the Mexican Peso collapsed by more than 50% within a few months.
In 1994, the Fed increased the Fed Fund Rate from 3% to nearly 6%. This led to a rout in the bond market. Ten-Year Treasury Note yields rose from less than 5.5% at the end of 1993 to over 8% in November 1994. In turn, the emerging market bond and stock markets collapsed. In 1994, it became obvious that the emerging economies were cooling down and that the world was headed towards a major economic slowdown, or even a recession.
But when President Clinton decided to bail out Mexico, over Congress’s opposition but with the support of Republican leaders Newt Gingrich and Bob Dole, and tapped an obscure Treasury fund to lend Mexico more than$20 billion, the markets stabilized. Loans made by the US Treasury, the International Monetary Fund and the Bank for International Settlements totalled almost $50 billion.
However, the bailout attracted criticism. Former co-chairman of Goldman Sachs, US Treasury Secretary Robert Rubin used funds to bail out Mexican bonds of which Goldman Sachs was an underwriter and in which it owned positions valued at about $5 billion.
At this point I am not interested in discussing the merits or failures of the Mexican bailout of 1994. (Regular readers will know my critical stance on any form of bailout.) However, the consequences of the bailout were that bonds and equities soared. In particular, after 1994, emerging market bonds and loans performed superbly — that is, until the Asian Crisis in 1997. Clearly, the cost to the global economy was in the form of moral hazard because investors were emboldened by the bailout and piled into emerging market credits of even lower quality.
Above, I mentioned that, by 1994, it had become obvious that the emerging economies were cooling down and that the world was headed towards a meaningful economic slowdown or even a recession. But the bailout of Mexico prolonged the economic expansion in emerging economies by making available foreign capital with which to finance their trade and current account deficits. At the same time, it led to a far more serious crisis in Asia in 1997 and in Russia and the U.S. (LTCM) in 1998.
So, the lesson I learned from the Asian Crisis was that it was devastating because, given the natural business cycle, Asia should already have turned down in 1994. But because of the bailout of Mexico, Asia’s expansion was prolonged through the availability of foreign credits.
This debt financing in foreign currencies created a colossal mismatch of assets and liabilities. Assets that served as collateral for loans were in local currencies, whereas liabilities were denominated in foreign currencies. This mismatch exacerbated the Asian Crisis when the currencies began to weaken, because it induced local businesses to convert local currencies into dollars as fast as they could for the purpose of hedging their foreign exchange risks.
In turn, the weakening of the Asian currencies reduced the value of the collateral, because local assets fall in value not only in local currency terms but even more so in US dollar terms. This led locals and foreigners to liquidate their foreign loans, bonds and local equities. So, whereas the Indonesian stock market declined by “only” 65% between its 1997 high and 1998 low, it fell by 92% in US dollar terms because of the collapse of their currency, the Rupiah.
As an aside, the US enjoys a huge advantage by having the ability to borrow in US dollars against US dollar assets, which doesn’t lead to a mismatch of assets and liabilities. So, maybe Krugman’s economic painkillers, which provided only temporary relief of the symptoms of economic illness, worked for a while in the case of Mexico, but they created a huge problem for Asia in 1997.
Similarly, the housing bubble that Krugman advocated in 2001 relieved temporarily some of the symptoms of the economic malaise but then led to the vicious 2008 crisis. Therefore, it would appear that, more often than not, bailouts create larger problems down the road, and that the authorities should use them only very rarely and with great caution.
"Earnings" matter... until they don't. What's wrong with these two charts?
EBITDA -7% from previous peak...
S&P 500 nominal price +15% from previous peak...
Still think stocks are "cheap" compared to the last cycle?
Submitted by Brandon Smith of Alt-Market blog,
“Men (people) are rarely aware of the real reasons which motivate their actions.” — Edward Bernays, Propaganda, 1928
The winter holidays are traditionally supposed to embody a certain ideal of that which is best in the hearts of human beings. As the world around us retreats into ice and snow and the Earth’s northern cycle returns to death once again, the holidays represent a time of contemplation, as well as an opportunity to shine a light in an otherwise dark and dreary period. This heritage is as old as history, dating back to an era in which agriculture was paramount and men garnered far more respect for the tides of nature. The parallel relationship between social “renewal” and seasonal renewal has served the collective psyche of Western society, in my view, for the better. Unfortunately, this process has all but vanished today, twisted and mutilated into something sinister and poisonous.
Those of us who pay attention are well aware of a trend of cultural decline within our nation, and this problem is disturbingly visible from Thanksgiving to Christmas. It’s not just the highly publicized Black Friday (now Black Thursday) riots over semi-cheap Chinese-made garbage. Those are certainly vile examples:
Rather, it’s the behavior of people throughout the season on a daily basis that is most disconcerting. I have personally witnessed, as I’m sure many people have, a magnified and astonishing disregard for conscience and basic decency growing worse each year for at least the past decade. That which is most unsettling about our society today is somehow unleashed with wild abandon every year at this time.
The idiocy and barbarism seems to span all economic “classes” — from the upper-middle-class snob screaming at bewildered cashiers over a coupon worth 50 cents, to the middle-class suburbanites brawling on the sticky floors of Wal-Mart over flat-screen TVs, to the part-time employee who sold her soul for minimum wage and who now yells at people on Thanksgiving eve to stop filming the mindless brawls that her corporate masters encourage because such videos might “reflect badly” on the company image. The dark side truly knows no social or financial bounds.
Every year, we see this behavior, shake our heads in dismay and look forward to the beginning of January, when Americans go back to being only moderately disdainful toward each other. This time, however, instead of merely gawking in disbelief at the circus sideshow, I would like to challenge people to explore more deeply the true motivations of the mob itself, as well as the motivations of the elitists who manipulate the mob for their own purposes. Let’s take a look at the fundamental dynamics of the psychology of mobs and the madness of crowds.
Filling The Emptiness
In my recent article 'You Should Feel Sorry For Sheeple; Here’s Why', I outline the inner life, or rather the lack of inner life, common to the average sheeple. Many of my compatriots find it increasingly difficult to muster any pity for the sheeple subculture, and I can see why. When given ample opportunity, sheeple always sink toward the worst humanity has to offer usually in an effort to aggrandize themselves.
But let’s set aside that sick feeling in our stomachs when thinking of sheeple and really consider what their existence is like. What does a sheeple’s daily life consist of?
In most cases I've observed, he lives what he believes to be the American dream. He wakes up in the morning swelling with superficial concerns of personal gain, scheming ways in which he can raise his perceived stature among the other sheeple around him. He then travels to his place of employment, usually a job he hates, in order to accumulate enough wealth (scraps from the plates of government and corporate financiers) to buy all the “things” he assumes everyone else wants. In the process, he pawns off his children to state-run schools designed to crush their spirits; and he becomes estranged from his spouse, who begins to forget why they ever got married in the first place. He returns home physically and emotionally drained, knowing that he did nothing worthwhile with his time, only to sit apathetically in front of his television for a few hours being bombarded with cancerous marketing propaganda and barely talking with the family he tells himself he works so hard for.
Think about it. Think of the pitch-black void that his life has become. Think of all the abandoned dreams, all the missed opportunities for experience and joy, all the moments of reflection and self-education that were lost because he was “too busy” trying to elevate himself within the ranks of a heartless collective.
Now, for one frightening moment, imagine this is your life. No sense of legitimate pride or individualism. No understanding of the underlying events that affect your environment or the high-placed people who determine your future. No thoughts outside the mainstream box. No recognition of possible alternative ways to live or how to break free. No hope for tomorrow but the endless drudgery of today’s mediocrity. Think of the unconscious rage you would have brewing inside like a putrid ball of sulfur and magma.
This rage is what sheeple use to fill the emptiness inside themselves once they subconsciously realize that no amount of frivolous consumerism will make them whole. Typically, they are on constant lookout for opportunities to vent their anger at unsuspecting victims in drive-by fashion.
Somehow, the holidays appear to have become a prime period of opportunity during which society opens the door for the dark side to come out and for sheeple to passively or not-so-passively project their failings onto others. For now, we might presume that this behavior is somewhat contained and relegated to particular moments of seasonal insanity, but the consequences of the willfully ignorant strata of American culture could go far beyond what most morally conscious people want to predict.
The Psychopath Next Door
“If thirty years ago anyone had dared to predict that our psychological development was tending towards a revival of the medieval persecutions of the Jews, that Europe would again tremble before the Roman fasces and the tramp of legions, that people would once more give the Roman salute, as two thousand years ago, and that instead of the Christian Cross an archaic swastika would lure onward millions of warriors ready for death — why, that man would have been hooted at as a mystical fool.” — Carl Jung, Archetypes And The Collective Unconscious, 1938
In his book, The Undiscovered Self, one of the fathers of modern psychology, Carl Gustav Jung, discusses the tension-filled relationship between the individual versus the collective and the state. In particular, he studies how individuals become swallowed up in the actions of the collective mob and how this momentum invariably leads to mass atrocities that defy imagination. A point of primary importance in Jung’s work is his discovery that at least 10 percent of any population at any given time is made up of individuals with latent psychopathic or sociopathic tendencies. Meaning, at least one out of every 10 random people around you today was born with the capacity for psychopathic behavior, including the ability to completely ignore inherent conscience.
The idea that one out of every 10 people near you might suddenly burst into an overwhelming animalistic blood fever is, of course, terrifying to many people. But generally, latent psychopathy in a person does not surface in immediately recognizable ways; and many people with that potential live their entire lives without ever acting on it. Some even come to terms with it through self-awareness and dispel it altogether. Problems arise, though, as Jung warned, when a society creates an environment in which emotionally or physically violent psychopathic acts become “acceptable” to the collective. That is to say, individual latent psychopaths and sociopaths are not so much a danger on their own; but when they get together in an organization or mob, the terrible floodgates open.
During national crisis, or during great ideological shifts towards collectivism, the 10 percent are given ample opportunity to act out their inner impulses. The corrupt state will often give latent psychopaths free reign or seek them out for positions of petty authority, leaving the gates to hell ajar, as it were.
Another dangerous reality is that these same people tend to pursue positions of authority, or they unconsciously gravitate toward events and situations that allow them to act on their darker side without facing consequences. One might even suggest that there will always be a potential for despotic regimes exactly because the 10 percent will likely always be around to be used as a weapon by dictatorships.
The mass rage and self-absorption we witness during the holidays feels ominous to us because it is just a glimpse of the greater shadow side of the American public. It is a glimpse of the kind of mentality that makes all human catastrophe possible. Like the tip of a shark fin cutting the surface of the water, we swim fearing not the dorsal, but the monster we KNOW it is connected to.
The Magicians Of Manufactured Consent
Jung, once a favorite of Sigmund Freud’s, broke sharply with Freud’s analytical school when he realized Freud would not accept the idea of inherent psychological properties beyond base instincts. Freud believed that conscience, morality, artistic ability, reason, etc. were all extensions of environment and experience. Freud’s theories on psychology focused on the idea that man was driven by base animal urges at his core, that people have no complex inborn contents and that all one needed to do was manipulate his environment to make himself “healthy.” Jung’s studies proved otherwise, finding that there are vast layers of inborn knowledge and personality in every individual.
It was not until Freud was near death that he admitted the merit of Jung’s work. Jung was shunned by the mainstream and labeled everything from a “charlatan” to an “anti-Semite” because of his opposition to the Freudian method.
Some industrious elites did find Freud’s notions of environmental manipulation useful, though, including his nephew, Edward Bernays, who saw it not as a way to make people healthy, but rather, to make them unhealthy. Bernays wrote extensively on the use of propaganda to control what he called “herd instinct,” believing (as most elitists believe) that self-governance of common people was “dangerous” and that the irrational public had to be controlled for their own good and the good of the nation. His entire philosophy is summed up in this quote:
"The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. … We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. … In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons… who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind."
Bernays was instrumental in promoting Freudian psychology in the United States, where it became the mainstay of universities across the country. He helped establish the Tavistock Institute, a globalist think-tank much like the Council On Foreign Relations, focused on molding public opinion. He was also instrumental in promoting psychological propaganda models in everyday corporate marketing and political campaigns. He called this “engineering consent.”
It was Bernays who taught the marketing world how to appeal to the basest instincts of human beings and to use those instinctual desires to covertly control them. Corporations used Bernays’ strategies to create an atmosphere of decadent consumption in America that has lasted since the end of World War II. The idea was simple: Convince the public that buying corporate products will satisfy their animal urges. All commercialism to this day revolves around this method (which is why almost every beer commercial for several decades has included scantily clad women or sexual innuendo, for example).
But Bernays was not only teaching corporations how to tap into existing human impulses, he was also teaching corporations and governments how to use psychological trickery to manipulate the citizenry to RELY on their basest impulses. Essentially, Bernays taught the establishment how to convince people, or shame people, into ignoring their greater selves and indulging their psychopathic and sociopathic urges. Bernays taught the establishment how to turn people into zombies.
We see the clear results today all around us as we enter into the absurdity that Christmas has become. The ramifications are dire. The holidays have come to represent not hope, but despair; not reflection, but callowness; not compassion, but narcissism and selfishness. They have become a yearly measure of our Nation’s sharp fall into something more or less horrific, something ironically inhuman.
The only solution is to strive with everything we have to remind others, and ourselves, that we are more than the sum of our darker instincts. That we have been living in the midst of a carefully crafted lie meant to make us impotent and non-threatening to the establishment. That there are greater and more meaningful contents at our core, and these elements of our being can only be satisfied by one thing: the truth.
Submitted by Alasdair Macleod via Peak Prosperity blog,
Western central banks have tried to shake off the constraints of gold for a long time, which have created enormous difficulties for them. They have generally succeeded in managing opinion in the developed nations but been demonstrably unsuccessful in the lesser-developed world, particularly in Asia. It is the growing wealth earned by these nations that has fuelled demand for gold since the late 1960s. There is precious little bullion left in the West today to supply rapidly increasing Asian demand, and it is important to understand how little there is and the dangers this poses for financial stability.
An examination of the facts shows central banks have been on the back foot with respect to Asian gold demand since the emergence of the petrodollar. In the late 1960s, demand for oil began to expand rapidly, with oil pegged at $1.80 per barrel. By 1971 the average price had increased to $2.24, and there is little doubt that the appetite for gold from Middle-Eastern oil exporters was growing; and it should have been clear to President Nixon’s advisers in 1971 that this was a developing problem when he decided to halt the run on the US’s gold reserves by suspending the last vestiges of gold convertibility.
After all, the new arrangement was: America issued the petrodollars to pay for the oil, which were then recycled to Latin America and other countries in the West’s sphere of influence through the American banks. The Arabs knew exactly what was happening and gold was simply their escape route from this dodgy deal.
The run on US gold reserves leading up to the Nixon Shock in August 1971 is blamed by monetary historians on France. But note this important passage from Ferdinand Lips’s book GoldWars:
“Because Arabs did not understand bonds and stocks they invested their surplus funds in either real estate and/or gold. Since Biblical times, gold has been the best means to keep wealth and to transfer it from generation to generation. Gold therefore was the ideal vehicle for them. Furthermore after their oil reserves are exhausted in the distant future, they would still own gold. And gold, contrary to oil, could never be wasted.”
According to Lips, Swiss private bankers to whom many of the newly-enriched Arabs turned recommended a minimum of 10% and even as much as 40% should be held in gold bullion. This advice was wholly in tune with Arab thinking, creating extra demand for America’s gold reserves, some of which was auctioned off in the following years. Furthermore, Arab investors were unlikely to have been deterred by high dollar interest rates in the early eighties, because high interest rates simply compounded their rapidly-growing exposure to dollars.
Using numbers from BP’s Statistical Review and contemporary US Treasury 10-year bond yields to gauge dollar returns, we can estimate gross Arab petrodollar income including interest from 1965 to 2000 to total about $4.5 trillion. Taking average annual gold prices over that period, ten per cent of this would equate to about 50,500 tonnes, which compares with total mine production during those years of 62,750 tonnes, over 90% of which went into jewellery.
This is not to say that 50,000 tonnes were bought by the Arabs: it could only be partly accommodated even if the central banks supplied them gold in very large quantities, of which there is some evidence they did. Instead, it is to ram the point home that the Arabs, awash with printed-for-export petrodollars had good reason to buy all available gold. And importantly it also gives substance to Frank Veneroso’s conclusion in 2002 that official intervention, i.e. undeclared sales of significant quantities of government-owned gold, was effectively being used to manage the price in the face of persistent demand for physical gold as late as the 1990s.Transition from Arab demand
Arabs trying to invest a portion of their petrodollars would have left for the advanced economies very little investment gold. As it happened, US citizens had been banned from holding bullion until 1974 and British citizens were banned until 1971. Instead they invested mainly in mining shares and Krugerrands, continuing this tradition by using derivatives and unbacked unallocated accounts with bullion banks in preference to bullion itself. This meant that, until the mid-seventies, investment in physical gold in the West was minimal, almost all gold being held in illiquid jewellery form. Western bullion investors were restricted to mainly German, French and Italians, mostly through Swiss banks. The 1970s bull market was therefore an Arab affair, and they will have continued to absorb gold through the subsequent bear market.
By the late-nineties a new generation of Swiss investment managers schooled in modern portfolio theory and less keen on gold, persuaded many of their European clients to reduce and even eliminate bullion holdings. At the same time, a younger generation of Western-educated Arabs began to replace more conservative patriarchs so it is reasonable to assume that Arab demand for gold waned somewhat, as infrastructure spending and investment in equity markets began to provide portfolio diversification. This was therefore a period of transition for bullion, driven by declining western investment sentiment and changing social structures in the Arab world.
It also marked the beginning of accelerating demand in emerging economies, notably India, but also in other countries such as Turkey and those in South-East Asia which were rapidly industrialising. In 1990 the Indian Government freed up the gold market by abolishing the Gold Control Act of 1968, paving the way for Indians to become the largest officially-recognised importers of gold until overtaken by China last year.
Lower prices in the 1990s stimulated demand for jewellery in the advanced economies, with Italy becoming the largest European manufacturing centre. At the same time gold leasing by central banks increased substantially, as bullion banks exploited the differential between gold lease rates and the yield on short-term government debt. This leased gold satisfied jewellery demand as well continuing Asian demand for gold bars.
So, despite the fall in prices between 1997-2000, all supply was absorbed into firm hands. When gold prices bottomed out, Western central banks almost certainly had less gold than publicly stated, the result of managing the price until 1985, and through leasing thereafter. This was the background to the London Bullion Market Association which was founded in 1987.The LBMA
In 1987 the unallocated account system became formalized under LBMA rules, allowing the bullion banks to issue gold IOUs to their customers, making efficient use of the bullion available. The ability to expand customer business in the gold market without having to acquire physical bullion is the chief characteristic of the LBMA to this day. Futures markets in the US also expanded, and so derivatives and unallocated accounts became central to Western investment in gold. Today the only significant bullion held by Western investors is likely to be a small European residual plus ETF holdings. In total (including ETFs) this probably amounts to no more than a few thousand tonnes.
The LBMA was established in 1987 in the wake of the Financial Services Act in 1986. Prior to that date, the twice-daily gold fix had become the standard pricing mechanism for international dealers, whose ranks grew on the back of the 1970s bull market. This meant that international banks established their bullion dealing activities in London in preference to Zurich which was the investment centre for physical bullion. The establishment of the LBMA was the formalization of an existing gold market, based on the 400 ounce good delivery standard and the operation of both allocated and unallocated accounts.
During the twenty-year bear market attitudes to gold diverged, with capital markets increasingly taking the view that the inflation dragon had been slain and gold’s bull market with it. At the same time Asian demand, initially from the Arab oil exporters, but increasingly from other nations led by Turkey, India and Iran ensured there were buyers for all the physical gold available. Mine supply, which benefited from the introduction of heap-leaching techniques, had increased from 1,314 tonnes in 1980 to 2,137 tonnes in 1990, and 2,625 tonnes by 2000. Together with scrap supply London was in a strong position to intermediate between a substantial increase in gold flows to Asian buyers, and it was from this that central bank leasing naturally developed.
Gold backed by these physical flows was the ideal asset for the carry trade. A bullion bank would lease gold from a central bank, sell the gold and invest the proceeds in short-term government debt. It was profitable for the bullion bank, governments were happy to have the finance, and the lessor was happy to see an idle asset work up some extra income. However, leasing only works so long as the bullion bank can hedge by accessing future supply, so that the lease can eventually be terminated.
Before 2000 this was a growing activity, fuelled further by Swiss portfolio disinvestment in the late 1990s. As is usual in markets with a long-term behavioral trend, competition for this business extended the risks beyond being dangerous. This culminated in a crisis in September 1999, when a 30% jump in the price threatened to bankrupt some of the bullion banks who were in the habit of running short positions.Post-2000
Bull markets always start with very little mainstream and public involvement, and so it has proved with gold since the start of this century. So let us recap where all the gold was at that time.
- Total above-ground gold stocks were about 129,000 tonnes, of which 31,800 tonnes were officially monetary gold. Of the balance, approximately 85-90% was turned into jewellery or other wrought forms, leaving only 10-15,000 tonnes invested in bar and coins and allocated for industrial use.
- Out of a maximum of 15,000 tonnes, coins (mostly krugerrands) accounted for about 1,500 tonnes and other uses (non-recovered industrial and dental) say 1,000 tonnes. This leaves a maximum of 12,500 tonnes and possibly as little as 7,500 tonnes of investment gold worldwide at that time.
- After Swiss fund managers disposed of most of the bullion held in portfolios for their clients in the late 1990s, there was very little investment gold left in European and American ownership.
- Frank Veneroso in 2002 concluded after diligent research that central banks had by then supplied between 10-15,000 tonnes of monetary gold into the market. Much of this would have gone into jewellery particularly in Asia but some would have gone to the Middle East. This explains how extra investment gold may have been supplied to satisfy Middle-East demand.
- Middle-Eastern countries must have been the largest holders of non-monetary gold in bar form at this time. We can see that 10% of petrodollars invested in gold would have totalled over 50,000 tonnes, yet there can only have been between 7,500-12,500 tonnes available in bar form for all investor categories world-wide. This may have been increased somewhat by the addition of monetary gold leased by central banks and acquired through the market.
It was at this point that the second gold bull market commenced against a background of very little liquidity. Investment bullion was tightly held, the central banks were badly short of their declared holdings of monetary gold, and from about 2004 onwards ETFs were to grow to over 1,500 tonnes. Asian demand continued to grow led by India, and China began actively promoting private ownership of gold at about the same time.
Other than through physically-backed ETFs Western investors were encouraged to satisfy their demand for bullion through derivatives and unallocated accounts at the bullion banks. There are no publicly available records detailing the extent of these unallocated accounts, but the point is Western demand has not resulted in increased holdings of bullion except through securitised ETFs. Instead the liabilities faced by the bullion banks on uncovered accounts will have increased to accommodate growth in demand. Therefore, the vested interests of the bullion banks and the central banks overseeing the gold market call for continued suppression of the gold price, so as to avoid a repeat of the crisis faced in September 1999 when the price increased by 30% in only two weeks.Where are the sellers?
Price suppression can only be a temporary stop-gap, and there has never been sufficient supply to allow the central banks to retrieve their leased gold from the bullion banks. Therefore, Frank Veneroso’s conclusion in 2002 that there had to be existing leases totalling 10-15,000 tonnes is a starting point from which leases and loans have increased. There are two events which will almost certainly have increased this figure dramatically:
- When the price rose to $1900 in September 2011 there was a concerted attempt to suppress the price from further rises. The lesson from the 1999 crisis is that the bullion banks’ geared exposure to unallocated accounts was forcing a crisis upon them; and if they had been forced to cash-settle these accounts the gold price would almost certainly have risen further risking a widespread monetary crisis.
- Through 2012 Asian demand, particularly from China coinciding with continued investor demand for ETFs, was already proving impossible to contain. In February this year the Cyprus bail-in banking crisis warned depositors in the eurozone that all bank deposits over the insured limit risked being confiscated in the event of a wider eurozone banking crisis. This drove many unallocated account holders to seek delivery of physical gold from their banks, forcing ABN-AMRO and Rabobank to suspend all gold deliveries from their unallocated accounts. This was followed by a concerted central and bullion-bank bear raid on the market in early April, driving the price down to trigger stop-loss sales in derivative markets and subsequent liquidation of ETF holdings.
It is widely assumed that the unexpected rise in demand for bullion that resulted from the April take-down was satisfied through ETF sales; but an examination of the quantities involved shows they were insufficient. The table below includes officially reported demand for China and India alone, not taking into account escalating demand from the Chinese diaspora in the Far East, and from elsewhere in Asia.
These figures do not include Chinese and Indian purchases of gold in foreign markets and stored abroad, typically carried out by the rich and very rich. Nor do they include foreign purchases by the Chinese Government and its agencies. Despite these omissions, in 2012 recorded demand from these two countries left the world in a supply deficit of 131 tonnes. Furthermore, ahead of the April smash-down in the first quarter of this year the deficit had jumped to 88 tons or an annualised rate of 352 tonnes.
Demands for delivery by panicking Europeans in the wake of the Cyprus fiasco could only provoke one reaction. On Friday 12th April 400 tonnes of paper gold were dumped on the market in two orders, triggering stop-loss sales and turning market sentiment bearish in the extreme. Western investors started to think about cutting their losses, and they sold down ETF holdings to the tune of 325 tonnes in 2013 by the end of May. However, it triggered record demand among those who looked on gold as insurance against currency and systemic risks.
Later that year in July Ben Bernanke told the Senate Banking Committee he didn’t understand gold. That was probably a reference to the April gold price smash orchestrated by the central banks, and how it unleashed record levels of demand. It was an admission that he thought everyone would follow the new trend acting like portfolio investors, forgetting that if you lower the price of a commodity you merely unleash demand. It was also an important admission of policy failure.
Since those events in April, someone has been supplying the market with significant quantities of gold to keep the price down. We know it is not Arab gold, because I have discovered through interviewing a director of a major Swiss refiner that Arab gold is being recast from LBMA specification bars into one kilo 9999 bars, which has become the new Asian standard. Arab gold does not appear to be being sold, only recast, and anyway it is only a small part of their overall wealth. We also know from our long-term analysis that any European gold bullion is relatively small in quantity and tightly held. There can only be one source for this gold, and that is the central banks.
I discovered that there was a discrepancy in the Bank of England’s custodial gold of up to 1,300 tonnes between the date of its last Annual Report (28th February) and mid-June when a lower figure was given out to the public on the Bank’s website. This fits in well with the additional amount of gold needed to manage the price between those months. Furthermore, the Finnish Central Bank recently admitted that all its gold held at the Bank of England was “invested”, i.e. sold, and further added that the practice “was common for central banks”.
Bearing in mind Veneroso’s conclusion in 2002 that there must be 10,000-15,000 tonnes out on lease and loan from the central banks at that time, one could imagine that this figure has increased significantly. Officially, the signatories of the Central Bank Gold Agreement, plus the US and UK own 20,393 tonnes. A number of other central banks are likely to have been persuaded to “invest” their gold, but this is bound to exclude Russia, China, the Central Asian States, Iran, and Venezuela. Taking these holders out (amounting to about 3,000 tonnes) leaves a balance of 8,401 tonnes for all the rest. If we further assume that half of that has been deposited in London, New York or Zurich and leased out that means the total gold leased and available for leasing since 2002 is about 12,000 tonnes. And once that has gone there is no monetary gold left for the purpose of price suppression.
Could this have disappeared since 2002 at an average rate of 1,000 tonnes per annum? Quite possibly: in which case the central banks are very close to losing all control over the gold price.
In Part 2: The Very Real Danger of a Failure in the Gold Market, I discuss why the Chinese are buying so much gold, and why the Reserve Bank of India is trying to suppress gold demand. I show that gold is substantially undervalued, and why that undervaluation is likely to correct itself spectacularly, precipitating a financial crisis.
With the world almost in total agreement that rates can only go up, that the 30-year bull market in rates is over and a return to "normal" rates is timely, perhaps a glance at the following chart of 700 years of government bond yields will enlighten a little as to where the anomalies and what the "normal" is. All too often investors are caught up in their cognitive dissonance-driving recency bias when a bigger picture may just help those who always proclaim to invest for the long-term.
It is fascinating to look at where we have been over the years and compare it to today’s markets. In looking at the data, you are trying to identify trends that will help you prepare for opportunities that the future holds. Sometimes you find similarities and sometimes you find differences with the data you are analyzing. That’s what makes it interesting. What never changes, is the fact that for centuries Governments have issued debt and paid interest on that debt.
How much interest they pay has certainly fluctuated throughout the years as demonstrated by the chart below.
But what if we have a window that can peer into the past and see what interest rates have done not for 100 or 200 years, but for 700! To do so, you just have to follow the changing center of financial power.
Over the past eight centuries, the locus of economic power has gradually shifted from Italy to Spain to the Netherlands to Great Britain and currently to the United States. The country at the center of the world’s power and economy issues bonds to cover expenses. Investors in that country and abroad purchase the bonds because they represent the safest bonds that are available for investment.
The country at the center of economic power can issue more bonds at a lower cost because of the lower risk of the world’s economic center. Over time, power ebbs away from that country and investors begin placing their money in the bonds of the new world economic power. Italy was the center of the western economic world until the 1500s. Until then, the Mediterranean was the gateway to Byzantium, the Middle East, and through those countries, to India and China.
The Italian city-states of Venice, Genoa, Florence and others grew from this trade, but also fought wars against each other requiring funds for those wars. By the 1600s, the nexus of economic power had shifted to the Netherlands as trade in the Atlantic and with northern Europe enabled the Dutch to strengthen their role in the global economy. The surplus of capital in the Netherlands is illustrated by the fact that Tulipmania, the world’s first bubble, which occurred in the Netherlands in the 1630s.
The Netherlands was too small to maintain its role as the center of the global economy for long, and the combination of trade, and commercial and industrial revolutions moved the center of economic power to Great Britain at the end of the 1600s.
The Glorious Revolution of 1688 realigned political power in England and put Britain on a sound economic footing that enabled it to remain the center of world economic and political power until 1914. After World War I, the center of economic power clearly shifted from London to New York and today, New York remains the center of the global economy. The Dollar is the world’s reserve currency, a fact that enables Washington to issue bonds at a lower cost than would otherwise be the case.
Global Financial Data has put together an index of Government Bond yields that uses bonds from each of these centers of economic power over time to trace the course of interest rates over the past seven centuries. From 1285 to 1600, Italian bonds are used. Data are available for the Prestiti of Venice from 1285 to 1303 and from 1408 to 1500 while data from 1304 to 1407 use the Consolidated Bonds of Genoa and the Juros of Italy from 1520 to 1598.
General Government Bonds from the Netherlands are used from 1606 to 1699. Yields from Britain are used from 1700 to 1914, using yields on Million Bank stock (which invested in government securities) from 1700 to 1728 and British Consols from 1729 to 1918. From 1919 to date, the yield on US 10-year bond is used.
Below is a chart that reflects 700 years of Long Term Government Bond Yields to 1285:
A few years back, we were stunned when we reported that as a result of McDonalds' first hiring day in 2011, the company retained the services of 62,000 very qualified line cooks and other minimum wage workers. What was stunning is that one million Americans applied for these jobs, or a 6.2% success rate, or just a fraction above the 5.8% admission rate at Harvard. Alas, as we speculated at the time, this was merely the first of many such indications of the historic mismatch between labor supply and demand, both domestically and globally. Sure enough, today we find an even more glaring example of just how unprecedented the New Normal demand for labor is in a world drowning with unemployment, courtesy of an NPR report according to which on Monday, Spain's Ikea's started taking applications for 400 jobs at a new megastore set to be opened near the Mediterranean coast town of Valencia.
As NPR says, "The company wasn't prepared for what came next. Within 48 hours, more than 20,000 people had applied online for those 400 jobs." An "acceptance rate" of 2%.
It gets better, as Spain experienced its own mini Obamacare debacle: the sheer volume of applicants promptly "crashed Ikea's computer servers in Spain."
"We had an avalanche of applicants!" Ikea spokesman Rodrigo Sanchez told NPR in a phone interview. "With that quantity, our servers just didn't have the capacity. They collapsed. After 48 hours, we had to temporarily close the job application process. We're working on a solution, to reopen the as soon as possible."
And since the analogies to Obamacare never end, one has no idea how many additional applicants would have tried to get a job had the servers continued to run:
... that's factoring in only the applicants in the first 48 hours, who managed to apply online before Ikea's servers crashed. Once Ikea gets its servers back up and running, the job application window will still stay open until Dec. 31, allowing potentially tens of thousands more job seekers to file applications, Sanchez said.
"I feel lucky to have a job. Ikea is a great company. In this case we have 20,000 initial people who want to work with us," he said. "But we know we're in this situation at least in part because of the state of the Spanish economy."
Why the deluge of applicants? Simple: Spain's record high unemployment rate of 26.7% is the second highest in the eurozone, matched only by Greece's 27.3%. What's worse: Spain's youth unemployment is also a record high 57.4%: nearly two out of every three people under 25 have no job. But that's ok: according to the Spanish prime minister, Spain's economy is growing and the recovery is so bright everyone's ECB rehypothecated shades will be made available shortly (together with the latest batch of Spiderman towels).
In the meantime, it is three times more difficult to get a minimum wage job at Ikea in Spain than it is to get into Harvard.
Submitted by Lance Roberts of STA Wealth Management,
With just a tad more than three weeks left in the year it is time to start focusing on what 2014 will likely bring. Of course, what really happens over the next twelve months is likely to be far different than what is currently expected but issuing prognostications, making conjectures and telling fortunes has always kept business brisk on Wall Street.
1) 5 Reasons The Market Will Rally Again In 2014 via MSN Money
Jamie Dlugosch presents his case for another bullish year in the stock market.
The Federal Reserve
Fear In Market
Stable Geopolitical Climate
2) 6 Things That Could Cause The Market To Drop 20% via 24/7 Wall Street
RBS says stocks could rise 30% next year. A slew of other investment banks and market analysts may not be that optimistic, but there is plenty of talk about the Dow Jones Industrial Average at 20,000 and the Nasdaq at 5,000. It has been a long time since a market correction of 10%, 15% or even 20%. Optimists say there is no catalyst for such a plunge. Pessimists mostly have been shouted down, but probably not with entirely good reason.
There are several factors that could undermine the market's phenomenal run. Most are obvious, but experts have chosen to ignore them.
The most important six are these:
1. The battle over the federal budget and debt ceiling debate
2. Holiday spending could likly be weaker than expected.
3. Energy prices rise.
4. Fourth quarter earnings come in weaker than expected.
5. Markets will correct sooner or later...because they always do.
6. Investors seem to forget that unemployment around 7% is historically high.
The market will correct soon, unexpectedly, and it will be ugly.
3) 7 Reasons To Be Cautious via Pragmatic Capitalist
In a recent piece by Doug Kass at TheStreet.com he highlights some reasons to be cautious about the equity markets. I don't like the concept that "everyone is in the pool", as he mentions, because it implies something like the "cash on the sidelines" fallacy, but I do think his piece is well thought out and worth considering. I've attached his 7 reasons to be cautious:
1. "The median price-to-revenue ratio of the S&P 500 is now at an historic high, eclipsing even the 2000 level.
2. The Shiller P/E is above 25, exceeding all observations prior to the late-1990s' bubble except for three weeks in 1929.
3. Market cap-to-GDP is already past its 2007 peak and is approaching the 2000 extreme. (This ratio is stretched at over two standard deviations above its long-term average.)
4. The implied profit margin in the Shiller P/E (denominator of Shiller P/E divided by S&P 500 revenue) is 18% above the historical norm. On normal profit margins, the Shiller P/E would already be 30.
5. If one examines the data, these raw valuation measures typically have a fraction of the relationship to subsequent S&P 500 total returns as measures that adjust for the cyclicality of profit margins (or are unaffected by those variations), such as Shiller P/E, price-to-revenue, market cap-to-GDP and even price-to-cyclically-adjusted-forward-operating-earnings.
6. Because the deficit of one sector must emerge as the surplus of another, one can show that corporate profits (as a share of GDP) move inversely to the sum of government and private savings, particularly with a four- to six-quarter lag. The record profit margins of recent years are the mirror-image of record deficits in combined government and household savings, which began to normalize about a few quarters ago. The impact on profit margins is almost entirely ahead of us.
7. The impact of 10-year Treasury yields (duration 8.8 years) on an equity market with a 50-year duration (duration in equities mathematically works out to be close to the price-to-dividend ratio) is far smaller than one would assume. Ten-year bonds are too short to impact the discount rate applied to the long tail of cash flows that equities represent. In fact, prior to 1970, and since the late-1990s, bond yields and stock yields have had a negative correlation. The positive correlation between bond yields and equity yields is entirely a reflection of the strong inflation-disinflation cycle from 1970 to about 1998."
Read the whole thing here.
4) What Keeps Me Up At Night by Bill Gross
I have written often that QE does not boost economic growth and that the artificial inflation of assets actually has deflationary effects. The comments by Bill Gross are critically important to this point.
Yet this now near 5-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space. If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration. If they cannot smell the distant water or sense a taller strand of Serengeti grass, astute investors might move away from traditional risk such as duration as opposed to towards it. Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.
5) Proof That Shiller's CAPE Works via Mebane Faber
"I've been publishing CAPE updates for countries quarterly on The Idea Farm, and below I highlight a blurb from our upcoming year end outlook. This chart shows the returns to country ETFs and the 10 cheapest and 10 most expensive markets. Notice why I was so unpopular in Bogota in January when I said they have one of the most expensive markets in the world! Also notice the big outlier in the expensive country bucket (the US). Due to all of the expensive countries declining and the US appreciating, we are now the most expensive in the world."
6) Risk Parity = "Snake Oil In New Bottles" via Zero Hedge
Nearly a year ago, we penned "Return = Cash + Beta + Alpha": in which we performed "An Inside Look At The World's Biggest And Most Successful "Beta" Hedge Fund. The fund in question was Bridgewater, and Bridgewater's performance was immaculate... until the summer when the sudden and dramatic rise in yields as a result of the Bernanke Taper experiment, blew up Bridgewater's returns for 2013 and at last check, at the end of June, was down 8% for the year. As further explained in "Yield Speed Limits" And When Will "Risk Parity" Blow Up Again", an environment in which rates gap suddenly higher (and in the current kneejerk reaction market all moves are purely in the form of gaps as risk reprices from one quantum to another in milliseconds) is the last thing Ray Dalio's strategy wants. Be that as it may, and successful as Dalio's fund may have been until now, tonight James Montier of Jeremy Grantham's GMO takes none other than Bridgewater to task, in a letter in which among other things, he calls risk parity "just old snake oil in new bottles", and sums up his view about the strategy behind Bridgewater in the following equation:
Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea
and proceeds to skewer it: 'At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. "
Just For Fun - Wall Street Stupidity Index via CNN Money
The day Twitter went public not only was profitable in the fiscal sense, but also illuminated a metric that has heretofore been underappreciated by those attempting to comprehend and thereby profit from the laws that guide the market. We will call this potent new tool the Wall Street Stupidity Index.
Have a great weekend.
Next week eurozone finance ministers will hammer out the ...
Presented with one comment... fundamentals...
Still confused at what drove stocks higher?
Despite every effort to sell as much JPY as possible to lift stocks and create the best run for the S&P since 2004, the algos failed (by pennies) but with solid gains nevertheless just to disprove all the good news is bad news believers - for now. While the NASDAQ managed a green close on the week (though underperformed today), stocks couldn't quite make it all back today but broke the 5-day losing streak. Treasuries ended the day unchanged and 10-13bps higher on the week. The USD dollar lost considerable ground this week (-0.5%) but it was safe-haven Swissy that stood out as the last 4 days are the best run in 5 months. Gold and Silver ended the week -2% or so and despite the intraday swings relatively flat today. All-in-all, stocks and JPY carry were in charge today as bonds and commodities were not playing at all. VIX dropped the most in 2 months back under 14% as the front-end drop removed the inversion.
It was a good try but a fail in the end...
Good to see stocks trading on JPY-carry fundamentals...
The NASDAQ managed a green close on the week but despite the best efforts, the rest of the majors were unable to recover...
But off the debt-ceiling lows, the index dispersion is growing...
Treasuries were sold, bought, sold, and then bought again into the close for a small gain... but weak on the week...
FX markets were volatile but the trend is clear - USD weakness - though the surge into safe-haven Swissy is very notable...to near its highest vs USD in over 2 years
While not the end-of-the-world that its name indicates, the confusion (highs, lows, advancers, decliners, and momentum) required to create a "Hindenburg Omen" means markets are not as gung-ho as the headlines might suggest. The last 2 Hindenburg Omens this year saw notable corrections (of course only to be un-corrected higher on the waves of liquidity).
of course, each dip has been met by more flow from the Fed in the past...
Today's consumer credit report did not tell us anything we didn't already know: in October, total consumer credit rose by $18.2 billion, the most since May 2013, with the usual massive historical revisions. However, of this $18.2 billion, $13.9 billion was non-revolving credit, while revolving (credit card) debt rose by $4.3 billion. Which means revolving credit is still a woefully low $856.8 billion, or well below the $1.02 trillion when Lehman failed, even as credit issued mostly by Uncle Sam to fund car purchases and liberal educations, has exploded.
Total monthly consumer credit broken down by revolving and non-revolving.
Finally, and most troubling, in the past year over 95% of all consumer credit has been used
to purchase rapidly amortizing cars and even more rapidly amortizing
Finally, in the past year over 95% of all consumer credit has been used to purchase rapidly amortizing cars and even more rapidly amortizing college educations.
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Obamacare is a catastrophe that cannot be fixed, because it doesn't fix what's broken in American healthcare.
I just finished a detailed comparison of my current grandfathered health insurance plan from Kaiser Permanente (kp.org), a respected non-profit healthcare provider, and Kaiser's Affordable Care Act (Obamacare) options. I reviewed all the information and detailed tables of coverage and then called a Kaiser specialist to clarify a few questions.
First, the context of my analysis: we are self-employed, meaning there is no employer to pay our healthcare insurance. We pay the full market-rate cost of healthcare insurance. We have had a co-pay plan with kp.org for the past 20+ years that we pay in full because there's nobody else to pay it.
What we pay is pretty much what employers pay. In other words, if I went to work for a company that offered full healthcare coverage, that company would pay what we pay.
Kaiser Permanente (kp.org) is a non-profit. That doesn't mean it can lose money on providing healthcare; if it loses millions of dollars a year (and some years it does lose millions of dollars), eventually it goes broke. All non-profit means is that kp.org does not have to charge a premium to generate profits that flow to shareholders. But it must generate enough profit to maintain its hospitals, clinics, etc., build reserves against future losses, and have capital to reinvest in plant, equipment, training, etc.
As an employer in the 1980s, a manager in non-profit organizations in the early 1990s and self-employed for 20+ years, I have detailed knowledge of previous healthcare insurance costs and coverage. As an employer in the 1980s, I paid for standard 80/20 deductible healthcare insurance for my employees. The cost was about $50 per month per employee, who were mostly in their 20s and 30s. In today's money, that equals $108 per month.
In other words, I have 30+ years of knowledgeable experience with the full (real) costs of healthcare insurance and what is covered by that insurance.
Our grandfathered Kaiser Plan costs $1,217 per month. There is no coverage for medications, eyewear or dental. That is $14,604 per year for two 60-year old adults. We pay a $50 co-pay for any office visit and $10 for lab tests. Maximum out-of-pocket costs per person are $3,500, or $7,000 for the two of us.
We pay $500 per day for all hospital stays and related surgery; out-patient surgery has a $250 co-pay.
So if I suffered a heart attack and was hospitalized and required surgery, I would pay a maximum of $3,500 for services that would be billed out at $100,000 or more were Kaiser providing those services to Medicare.
(Yes, I know Medicare wouldn't pay the full charges, but if Medicare is billed $150,000--not uncommon for a few days in the hospital and surgery-- it will pay $80,000+ for a few days in the hospital and related charges. All of this is opaque to the patient, so it's hard to know what's actually billed and paid.)
In other words, this plan offers excellent coverage of major catastrophic expenses and relatively affordable co-pays for all services.
The closest equivalent coverage under Obamacare is Kaiser's Gold Plan. The cost to us is $1,937 per month or $23,244 a year. The Gold Plan covers medications ($50 per prescription for name-brand, $19 for generics) and free preventive-health visits and tests, but otherwise the coverage is inferior: the out-of-pocket limits are $6,350 per person or $12,700 for the two of us. Lab tests are also more expensive, as are X-rays, emergency care co-pays and a host of other typical charges. Specialty doctor's visits have a $50 co-pay.
The Obamacare Gold Plan would cost us $8,640 more per year. This is a 60% increase. It could be argued that the meds coverage is worth more, but since we don't have any meds that cost more than $8 per bottle at Costco (i.e. generics), the coverage is meaningless to us.
The real unsubsidized cost of Obamacare for two healthy adults ($23,244 annually) exceeds the cost of rent or a mortgage for the vast majority of Americans. Please ponder this for a moment: buying healthcare insurance under Obamacare costs as much or more as buying a house.
A close examination of lower-cost Obamacare options (Bronze) reveals that they are simulacra of actual healthcare insurance, facsimiles of coverage rather than meaningful insurance. The coverage requires subscribers to pay 40% of costs after the deductible, which is $9,000 per family. Total maximum out-of-pocket expenses are $12,700 per family. This coverage would cost us $1,150 per month, and considerably less for younger people.
How many families in America have $9,000 in cash to pay the deductibles, plus the $13,800 annual insurance fees? That totals $22,800 per year. If some serious health issue arose, the family would have to come up with $12,700 (out-of-pocket maximum) and $13,800 (annual cost of insurance), or $26,500 annually.
Is healthcare that costs $26,500 per year truly "insurance"? I would say it is very expensive catastrophic insurance in a system with runaway costs.
The entire Obamacare scheme depends on somebody paying stupendous fees for coverage which then subsidizes the costs for lower-income families and individuals. How many households can afford $23,244 a year for Gold coverage plus $12,700 out-of-pocket for a total of $35,944 annually? How many can afford $26,500 for Bronze coverage?
Recall that the median household income in the U.S. is around $50,000.
How many companies can afford to pay almost $2,000 a month for healthcare insurance per employee? Even if employees pay a few hundred dollars a month, the employers are still paying $20,000 a year per (older) employee.
If an employer can hire someone in a country with considerably lower social-welfare/healthcare costs to do the same work as an American costing them $2,000 per month for healthcare insurance, they'd be crazy to keep the worker in America, unless the worker was so young that the Obamacare costs were low or the worker was a contract/free-lance employee who has to pay his own healthcare costs.
Uninformed "progressives" have suggested that "Medicare for all" is the answer. Their ignorance of exactly how Medicare functions is appalling; recall that Medicare is the system in which an estimated 40% of all expenditures are fraudulent, unneccessary or counter-productive, where a few days in the hospital is billed at $120,000 (first-hand knowledge) and a one-hour out-patient operation is billed at $12,000, along with a half-hour wait in a room that's billed at several thousand more dollars for "observation." (Also first-hand knowledge.)
Medicare is the acme of an out-of-control program that invites profiteering, fraud, billing for phantom services, services that add no value to care, and services designed to game the system's guidelines for maximum profit. If an evil genius set out to design a system that provided the least effective care for the highest possible cost while incentivizing the most egregious profiteering and fraud, he would come up with Medicare.
Does Medicare look remotely sustainable to you? Strip out inventory builds and adjustments from imports/exports and the real economy is growing at about 1.5% annually. As noted yesterday in What Does It Take To Be Middle Class?, the real income of the bottom 90% hasn't changed for 40 years, and has declined by 7% since 2000 when adjusted for inflation.
Here is Medicare's twin for under-age-65 care for low-income households, Medicaid:
As I have observed for years, Obamacare and Medicare/Medicaid do not tackle the underlying problems of Sickcare costs in America. If you haven't read these analyses, please have a look:
Why "Healthcare Reform" Is Not Reform, Part I (December 28, 2009)
Why "Healthcare Reform" Is Not Reform, Part II (December 29, 2009)
Type sickcare into the custom search box at the top of the left-hand column of the main blog page and you will find dozens of essays addressing what's broken with American healthcare.
Obamacare is a catastrophe that cannot be fixed, because it doesn't fix what's broken in American healthcare. It is a phony reform that extends everything that makes the U.S. healthcare unsustainable sickcare.
Bitcoin is being sold aggressively on heavy volume as this headline hits:
- *BAIDU SUSPENDS BITCOIN PAYMENT ACCEPTANCE ON VALUE FLUCTUATION
And the official, google-translated announcement from the BIDU website:
This is one of the reasons Citi and BofAML noted as 'disadvantages' and it seems Baidu agrees (for now).
and as a reminder...
It appears Mt.Gox has crashed trying to handle a very large sell order... and the resulting algo mess is as follows...
SEC Officially Above The Law: Prosecutors Decline To Charge SEC Employee For Violating Internal Rules
Two weeks ago we wrote of SEC compliance examiner (yes, compliance examiner) Steven Glichrist who was arrested for being non-compliant with the SEC's ethics requirement to disclose his financial holdings. "New York-based SEC employee Steven Gilchrist was charged with three counts of making false statements regarding the nature of his personal financial holdings. As WSJ reports, the 48-year-old compliance examiner at the agency, allegedly certified that his stock holdings were in compliance with the agency's ethics rules, when in reality he had held shares of six companies that agency staffers are barred from holding. The SEC is "very disappointed that an employee allegedly made false statements to conceal prohibited holdings after being told by our ethics office to divest." Fast forward to today when we learn that not only was the SEC not disappointed when another SEC employee was found to have flouted virtually the same rules, but that, inexplicably, federal prosecutors decided not to prosecute.
Why did this anonymous staffer somehow get an immunity from prosecution (and how is he or she any different from Gilchrist)? There is no immediate answer but for some hints we go to the WSJ:
The SEC has strict rules on the stocks employees can hold and goes further in its employee-trading restrictions than many other federal agencies. The rules cover a spouse’s holdings as well.
The watchdog’s office found evidence that the employee’s spouse owned stakes in entities “directly regulated” by the agency, which are prohibited, according to the report. The employee also didn’t disclose “the vast majority” of his or her spouse’s holdings through required agency channels, which include getting clearance to make trades through a computer system, the report said.
The report said there was evidence that the “senior officer” shared non-public information with his or her spouse. There was also evidence that the employee had worked on a matter that involved former employees of a company in which the spouse owned stock. The referral for the investigation came from the agency’s ethics office, the report said.
Ok, so he clearly broke pretty much every rule in the book, and doubly so considering who his employer is. So his actions surely would have been met with harsh punishment right? Wrong.
Federal prosecutors decided not to prosecute a Securities and Exchange Commission employee who showed signs of flouting rules restricting personal securities holdings, according to a new report from the SEC. The decision to not file charges came in the months before prosecutors charged another SEC staffer for similar alleged conduct. It’s unclear if the investigations of the two are related but the report sheds light on recent steps the agency’s inspector general has taken to investigate employee holdings.
Federal prosecutors declined to prosecute the employee and the watchdog’s office told the agency’s management of the investigation’s findings in early September, according to the report, which did not specify which particular U.S. Attorney’s office was involved. The agency’s administrative response to the investigation was “pending” as of the end of September.
It is not clear what role, if any, federal prosecutors played in the investigation. The SEC didn’t immediately respond to a request for comment on this and whether this probe is linked to the investigation of New York-based employee Steven Gilchrist.
What else is there to say here: the regulator in charge of enforcing a fair and honest "market" picks and chooses which of its employees should comply with the rules that the same regulator is supposed to enforce upon everyone else.
And some still wonder why no rational human being, who manages their own and not other people's money, opts out of this manipulated, canterally-planned, algorothmic casino.