Currency

Faber Warns “We Have Reached The Endgame Of Monetary Policy”

Posted by Mark Faber

on Tuesday, 1 October 2013 13:58

images-1“One day this whole credit bubble will be deflated very badly – you are going to experience a complete implosion of all asset prices and the credit system…”

Via South China Morning Post,

Marc Faber was in fine form at the CLSA Investor Forum, dispensing his trademark gloom and doom. The final keynote was a tour de force of the history of debt, asset bubbles and financial markets in the 20th and 21st centuries.

“Unlike the ’50s and ’70s when there was relatively less overall debt, a financial market crash did not inflict great damage on the economy.

Debt levels are significantly higher these days, and so a market crash can inflict serious damage on economies.

We’ve gone through a period of huge asset inflation, in stocks, bonds, commodities, and real estate, and we essentially now have in the world, a huge asset bubble.

So everything is grossly inflated.”

In addition there has since 2007 been:

    “colossal asset inflation” in high-end goods…

…..read more HERE

 

More items:

 

 

 

Richard Russell: On The Brink of Massive Change

Posted by Richard Russell - Dow Theory Letters

on Tuesday, 1 October 2013 13:39

“This site will be about the Dow formation that we see below.  This formation is known as the “megaphone formation” or the “broadening formation.

KWN Russell 9-30-13

The broadening formation is indicative of a market in turmoil, with sentiment swinging wildly from one way to the other.  Incredibly, the broadening formation has appeared in every major bear market since 1929.  It appeared prior to WWII in 1929.  It appeared in 1957 and 1965-66.  We saw a broadening top in 1987 and again in 1998-2000.  The most recent broadening formation we saw was in 2004 to 2008.

I have long speculated about the sentiment basis of broadening formations.  Each broadening formation is made up of three rising waves and two corrective waves.  As far as sentiment is concerned, I believe broadening formations are the result of wildly swinging reversals in sentiment from bearish to bullish — and then bearish, and finally a huge swing back to extreme bullishness.  This final wave of optimism is the market’s kiss of death, since this final rising wave takes stocks far above known values.

The current broadening formation is unique in that it is, by far, the largest broadening formation that I have ever seen.  Note that wave D to E has not yet touched the upper trendline.  Frankly, I don’t know whether it is necessary for the Dow to make contact with the upper trendline in order to complete the formation.

If the Dow is to touch the upper trendline of the formation, the Dow will have to advance to at least 16,000, which would be an all-time high.  An interesting thesis here is that earnings alone are not the reason for the Dow advancing.  What is driving this market higher is an increase in price/earnings.  In other words, earnings have not been rising, but what has been boosting the market is investors’ sentiment.  Investors have been increasingly bullish on the market, and therefore, they have been willing to pay more and more for the same amount of earnings.

I’ve written about this before.  The major swings in stock prices are often a result of drastic changes in the price/earnings ratio.  Investors become too bullish or too bearish about stocks.  When they become too bullish, this thrusts stocks into the dangerously overvalued zone.  The opposite is true when investors become too bearish.  Charles Dow wrote that unless there was some special reason, stocks were overvalued when dividends sank below 3.5%.

Back to the broadening formation:  In past cases, the bear market associated with a broadening formation carried to the lower trendline of the formation.  So let’s consider that the current broadening formation follows the typical pattern.  In that case, we might expect the Dow to top out anywhere from its current position to a level around 16,000 or even a bit higher.  

Assuming that a major bear market will begin from wherever the Dow tops out, we can assume that the Dow will decline to at least the right end of the lower trendline of the broadening formation.  If that holds true, then we can expect the bear market will take the Dow down to at least 5,000.  That would represent a horrendous loss, although not nearly as bad as the 1929 to 1932 bear market.

I’ve searched my mind to try to understand what a bear market to Dow 5,000 might mean.  In the first place, I think such a bear market could involve a new monetary system.  I also think a huge bear market would see the balance of international power shift from the US to China.  Finally, the giant megaphone formation that I show could be an advance message to the effect that we must all be ready for massive and radical change.

Question — How do you think we should prepare for these massive changes that you foresee?  I’m not really sure, but my first response is that we must abolish greed and become spiritual.  Currently, it seems to me that the emphasis is on profit, growth at any price, power, greed and wealth.”

 

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About Richard Russell

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

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Buffett & Klarman Not Buying, Time To Sell?

Posted by CDM Capital

on Tuesday, 1 October 2013 13:38

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.” -Benjamin Graham

Let us just preface this article by stating it is typically very difficult, if not impossible, to properly time the market. We do think, however, that it is possible to lower risks (raising cash) at times when earnings multiples seem elevated to historical averages. We are currently seeing multiple indicators giving warning signs to the astute investor. Since late 2008, we have been fully invested and have ridden up with most of the bull market with very few errors of commission (except Knight Capital), but mainly errors of omission. We think at this point in the market cycle it is time to become more defensive and raise cash levels and/or rotate into lower duration fixed income investments.

Margin debt at all time high.

2522931-13799721802273998-CDM-Capital

11

*NYSE margin debt statistics

Though the NYSE has not yet published the August margin data, we can surmise that August will inevitably be higher than July, due to the pattern of markets continuing to find new highs at the beginning of the month. At current levels, we are in new territory with respect to leverage; in our opinion, most of this excess leverage is due to the easy money policies from the fed. It will be quite interesting to see how the markets react when rates get into the 3.0%+ range; we think there is a higher likelihood now for a substantial correction in equity prices of 15-20%. While there is definitely money on the sidelines, we think investors are still justifiably skeptical as a result of the financial crisis of 08′ and 09′. Given the metrics above we feel the next selloff is likely to trigger forced margin selling which could propel stocks sharply lower.

112

The McClellan oscillator is a market breadth indicator used to evaluate the rate of money entering or leaving the market, and is indicative of overbought and oversold conditions of the market. A recent six month high on the NYSE McClellan Oscillator also may confirm our suspicion that markets have come a little too far, too fast.

113

The cyclically adjusted P/E ratio is based on the average inflation-adjusted earnings from the prior 10 years. The Shiller cyclically adjusted P/E ratio shows an alarmingly high multiple of 24.27, which is at the high end of the 130 year plus timeframe.

Upward sloping yield curve

While we think the markets are overbought at these levels, the Treasury yield curve is still sharply positive. Therefore, we find it very difficult to be constructively negative long-term with a steep upward sloping yield curve. An inverted yield curve is usually an excellent leading indicator that stocks will enter a bear market within 6-12 months. Yield curve inversions have preceded each of the last seven recessions in the U.S., and we believe that yield curves inversions continue to be one of the most important recessionary indicators.

114

Though Warren Buffet has put away his elephant gun, we think it is notable that the size of his cash hoard is almost $50 billion. If Buffet is not buying anything in this market, that to us is the equivalent of a sell recommendation. Mr. Buffet hardly ever gives market timing advice, but he has, on numerous occasions, been very close to selling at market tops and buying close to market bottoms. Another notable investor, Seth Klarman, has also been giving investors cash back. Klarman says it is, “to better match our assets under management with the opportunity set we see for new investments”. We think this is yet another sign that Klarman is having a hard time putting his money to work. While these indicators may just be clues, we feel investors at the very least should avoid putting new money to work at today’s market prices.

Our current strategy has been trimming some of our longs like Exco Resources Inc. (XCO) and adding to shorts on large up days like Sandstorm Gold (SAND) and SPDR Gold Trust (GLD). Finally, we also suggest selling short-term out of the money calls on the SPDR S&P 500 (SPY).

Disclaimer: This report is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author’s commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate.

At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information. At the time this report was published, the author had a long position in XCO, and a short position in SAND and GLD; either in his personal account or in accounts that he managed for others.

THIS REPORT IS NOT A RECOMMENDATION TO BUY OR SELL ANY SECURITIES MENTIONED. THE AUTHOR ACCEPTS NO LIABILITY FOR HOW READERS MAY CHOOSE TO UTILIZE THE INFORMATION PRESENTED ABOVE.

 

Additional disclosure: We are short SAND and GLD, and will potentially enter into a transaction in the SPY within the next 72 hours.

 

The U.S. government began its first partial shutdown in 17 years, idling as many as 800,000 federal employees, closing national parks and halting some services after Congress failed to break a partisan deadlock by a midnight deadline.

Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns among some lawmakers that the shutdown could bleed into the more consequential fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.

The standard wisdom on gold is that it does well in times of economic bad news such as in the 1970s, a period of stagflation and recessions, when the yellow metal rose from $35/oz to peak at $850/oz in 1980. But this time, Don Coxe, a portfolio adviser to the BMO Asset Management, believes things are different. In this interview with The Gold Report, Coxe explains why gold will rise when the economy improves.

 

The Gold Report: Are the days of easy money drawing to a close?

Don Coxe: I don’t think so. Even if the Federal Reserve begins to taper quantitative easing, the front of the curve is going to stay at zero interest rates. A trillion dollars is going through the Fed’s balance sheet, which works its way through the system. As long as the Fed keeps interest rates at zero, it’s easy money.

TGR: Will overt monetary inflation return any time soon?

DC: It will return when we have sustained economic growth. The Eurozone has been the big drag. It is definitely stronger than it was a year ago. The Eurozone has lots of problems, but it is experiencing economic growth despite the European Central Bank reducing its balance sheet in the last 12 months by almost exactly the same percentage amount that the Fed increased its balance sheet. This says that it has lots of firepower if it needs it. In addition, the Eurozone government deficits are lower than ours in terms of percentage of GDP. The Eurozone actually, despite all its highly publicized problems, has improved its financial shape relative to ours.

Also, in the last 12 months, Japan, the world’s third biggest economy, has gone from negative growth to strongly positive growth. It is doing that by printing yen at a prodigious rate. The days of easy money are going strong.

TGR: If inflation returns, will it first appear in goods or services?

DC: In goods. If I had to pick the one point at which we’ll start to see the change, it’s when the razor-thin inventory-to-sales ratio comes under strain. Corporations are controlled by people who learned in business school over the last 20 years that the first thing to manage is inventories. This way they don’t have to worry about prices going up and don’t use corporate cash to finance an inventory that may decline in value. Therefore, when things change, it will show up in the pressure that comes because companies have so little inventory on hand. Corporations will decide that they’ve got to invest in more inventory because they’ve got more demand.

TGR: Do you think that will shake loose the vast amount of capital that’s being retained by the multinationals?

DC: It will shake loose some of it, but the big thing is it will come because prices are starting to rise. The two reinforce each other.

TGR: What do increases in monetary inflation and capital growth mean for gold?

DC: Gold rose along with the Fed balance sheet for years. The two have decoupled in the last two years. I believe the reason is people have just thrown in the towel that there will ever be inflation. If you’re Waiting for Godot, at some point you can reach the conclusion that Godot may never come.

TGR: Should investors bet on gold’s return to previous highs or something in that direction?

DC: I don’t think we’re going to see anything like the double-digit inflation that we saw back in the 1970s. The big difference was the tremendous power of unions then. They all had cost of living adjustments in their contracts; the Consumer Price Index (CPI) would rise in a quarter, then automatically wage rates would increase and the two fed off each other. The weakened power of unions today has meant that we don’t have an automatic reinforcement right at the core of the system.

TGR: Let’s talk about monopolies and competition and why does the focus of big investors shift from growth to income?

DC: I’m not convinced that we’ve got a lot of monopolies out there. OPEC is no longer able to control oil prices, for example, because its share is no longer large enough to give it freedom on pricing. I believe that oil fracking will gradually start spreading from the U.S. to other parts of the world. We don’t have that monopoly, which was the big one back in the 1970s that made it possible for OPEC to quadruple the price of oil. A quadrupling of the price of oil here is impossible because the global economy would collapse with a doubling of oil prices.

TGR: Are companies borrowing money at cheap rates to increase dividends and buy back stock? And, if so, how does that affect the system?

DC: Yes, companies are basically removing from the system what I believe is the core of capitalism, that corporate cash is used to grow a business. Investors pay a high price-earnings ratio for companies because they believe the companies can reinvest that cash and sustain their growth. When we see that corporate cash is being used to buy back stock and pay dividends, the decision-making force in the system becomes stockholders redeploying cash. In the past it was the corporations themselves through their retained earnings and effective reinvestment that drove the system.

If money that people got in dividends was invested in shares of companies that were issuing new stock in order to grow their business, then the whole system would not be losing the money. When you have a system where corporate treasurers do not assume strong future growth and they assume that these zero interest rates are going to continue for a long time, the incentive to retain earnings and plan on capital expenditures (capex) goes away.

“Companies are basically removing from the system what I believe is the core of capitalism, that corporate cash is used to grow a business.”

Capex is putting money out at great cost, where companies get no immediate returns from it, whether it’s building a new building or opening up a whole area of the country. When you take that out of the system, the result is that you turn the system on its head. It used to be that the companies would, when they had the cash, decide how much was needed for capex; after that they figured out how much they would payout in dividends. The decision makers within the companies are no longer focused on creating overall economic growth through capex and expanding production.

TGR: Are we in a triple dip or a quadruple dip recession here?

DC: No, I think we’re coming out of it, but we’ve come out of it at a gigantic cost. The Fed had to quadruple its balance sheet, which raises all sorts of problems. We have no precedent in history of this kind of expansion of the Fed’s balance sheet.

The ratio of paper wealth to GDP is so high at a time when it’s going to be difficult for corporations to expand because, as I said, they will need a large amount of capex to meet rising demand at a time when there’s all that money out there. I would regard that as a virtual guarantee that at some point we’re going to see inflation.

This time inflation won’t come from rising wages. It will come from rising demand and the inability of corporations to swiftly respond to that demand. The technology industry can expand in a hurry because it keeps coming out with new products, but for most of the rest of the economy, it takes a while to build a plant and get the machinery ready and test it out before there actually is any production. That period of time, if you’ve got strong demand because there’s so much paper money, is the moment at which you will see inflation coming.

TGR: How will that affect gold?

DC: It will deal with the problem of faith in gold. When gold tracked the growth in the monetary base, which it did so well, there was a general conviction based on Milton Friedman’s theories that expanding the monetary base too fast eventually translates into inflation. Inflation is harder to stop than it is to just watch start growing.

We will see that interest rates will have to rise because of another group that has not been heard from in a long time, bond vigilantes. They are threatened with extinction. It will be a combination of rising interest rates and rising prices that will get people to say, ah-ha, Milton Friedman was right after all, if you print the money eventually you’re going to have the inflation.

TGR: When you talk about bond vigilantes are you talking about junk bonds or what’s known as private equity?

“I believe monetarism will prove to be right because all past experiments with paper money eventually led to inflation and monetary collapse. At some point the fear of that will come. You need gold for insurance.”

DC: The bond vigilantes work primarily on government bonds because they are the ones they can trade most effectively. Junk bonds are a small part of the market. With inflation the bond vigilantes sell off their 30- and 10-year bonds and move down to the 2-year note. At that point the cost of capital for expansion rises through the system because corporations can use short-term cash for some of their work, but they tend to use long-term borrowing from banks and the bond market for major projects. The cost of building those projects increases because of the steep yield curve.

TGR: Do you consider yourself to be a bear or a bull on gold?

DC: I am neutral in the short term. I’m not a bear. I’m a bull in the long term because I believe it’s not a question of if but when all this money printing eventually comes to haunt us. Gold as an asset class is so tiny in relation to the vast expansion of money around the world. With the printing that’s gone on, China has had to expand its renminbi supplies to prevent the currency from soaring relative to the dollar.

TGR: You are appearing at the upcoming Casey Fall Summit. Are you going to talk about gold there and will it be more or less what you just said?

DC: Yes. I am going to point out that the big story for gold is up until now gold has been only a bad news story. The reason why it’s in trouble right now is there always seems to be bad news in terms of inflation. People say if inflation hasn’t come now with the quadrupling of the Fed’s balance sheet, it’s never going to come and the Fed is going to have to keep on pouring out more money because the economy isn’t growing.

When the economy starts to grow all of a sudden because, as I said earlier, of the inventory cycle, we are going to start to see inflation. Gold will become a good news story in the sense it will be responding to strong economic news at a time of massive liquidity, which translates into inflation. The fact that we’ve had all that money printing, which has only prevented us from going down into a pit, at such time as this actually leads to good economic growth. That is the point at which we’re going to see people wanting to have gold. It’s because we didn’t get the direct pass over of the money printing into rising prices that gave people a loss of faith saying, well, if it hasn’t come with quadrupling the Fed’s balance sheet, it’s never going to come.

TGR: Given that, is it a good idea for investors to buy gold stocks while they’re available at basement prices?

DC: I believe that everybody should have gold insurance now. The question varies from investor to investor. What we have is an extremely high-risk central bank policy in the world and it’s high-risk based on monetarism. I believe monetarism will prove to be right because all past experiments with paper money eventually led to inflation and monetary collapse. At some point the fear of that will come. You need gold for insurance, but this time the payoff will come when the economy improves; in the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth.

TGR: Thank you for your insights.

Don Coxe has 40 years of institutional investment experience in Canada and the U.S. As a strategist and investor, he has been engaged at the senior level in global capital markets through every recession and boom since the onset of stagflation in 1972. He has worked on the buy side and the sell side in many capacities and has managed both bond and equity portfolios and served as CEO, CIO and research director. From his office in Chicago, Coxe heads up the Global Commodity Strategy investment management team, a collaboration of Coxe Advisors and BMO Global Asset Management. He is advisor to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and to the Virtus Global Commodities Stock Fund in the U.S. Coxe has consistently been named as a top portfolio strategist by Brendan Wood International; in 2011, he was awarded a lifetime achievement award and was ranked number one in the 2007, 2008 and 2009 surveys.’

Learn more about the agenda for the Casey Research Summit, October 4-6.

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