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Musings Report #18 5-3-14 Investment/Market Outlook - Notes From the Wine Country Conference
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Investment/Market Outlook - Notes From the Wine Country Conference
At the invitation of Mish Shedlock, John Hussman, Adam Taggart & Chris Martenson, I attended the Wine Country Conference, not as a speaker but as an observer.
I had the pleasure of meeting longtime subscriber Jose S., a charming gentleman, as well as sharing a lunch table with John Hussman, Stephanie Pomboy and Adam Taggart.
Here's the key take-away for anyone with money in the market, either in their own account or in 401Ks, etc.: a 30% decline is highly likely, with a potential bottom in Q1 2015, if past correlations and previously accurate models hold.
Summaries don't do justice to each speaker's presentation, but these are the conclusions I drew:
John Hussman:
Investors have been pushed into chasing yield. In a 0% interest-rate environment, money velocity declines to match the marginal-utility of money (as opposed to goods and services). the system is increasingly vulnerable to exogenous/external shocks. Based on numerous correlations that have signaled tops in the past, the U.S. stock market is tracing out a major top now. Once the U.S. market declines, the rest of the world will follow.
Stephanie Pomboy:
Most of the of the drivers of this 5-year Bull Market are one-offs and cannot be repeated or extended: for example, the $350 billion homeowners withdrew from home equity. The Fed has reached the "no-exit" moment: more bond-buying and easy-money (QE) will drive foreign buyers away from U.S. bonds, hurting the dollar, but limiting QE will sink the stock market. More QE will not generate the same positive effects that drove the market higher from 2009-14.
Mebane Faber:
U.S. markets are pricey at 26 P/E (price earnings ratio). Over time, the returns are near-zero at these levels. Better to buy markets trading at multiples under 10--Greece and Argentina are examples. He does not recommend buying these markets, he simply pointed to them as hated/undervalued.
Steen Jakobsen:
Based on his 20+ valuation and timing models, he sees a 30% decline in the 2nd half of 2014 as extremely likely, with a bottom likely in the first few months of 2015. Although it may seem unlikely based on fundamentals, his models point to a sharp rally from that low up to the 2016 elections.
Chris Martenson:
Paper capital claims on real-world capital (land, minerals, etc.) are driving a massive wealth transfer, as the top .1% who own most of the paper/financial capital can outbid the bottom 99.9% for real assets.
Mish Shedlock:
If we look beneath the hood of the supposed housing recovery, we find little to no evidence of strong demand from new households or buyers. Rather, we find abundant evidence that the "recovery" in valuations was all based on super-low mortgage rates that disappeared last year and investor demand (the 40+% cash sales that have pushed valuations higher).
Interestingly, this chart of the Coppock Curve from longtime correspondent B.C. suggests the same scenario: a near-term bottom in Q1 2015 and another rally into 2016:
This also aligns with the outlook of Jeremy Grantham, who recently said he thinks there is one more blow-off rise ahead, with a target for the SPX (S&P 500) of around 2,200 (it is currently 1,881).
I don't see any driver for another 18-month "final leg of the rally" in early 2015, as the fundamentals are deteriorating globally and creating more credit will be increasingly ineffective. As noted in last week's Market Musings, I see this reliance on liquidity is akin to metabolic syndrome, a.k.a. pre-diabetes. The financial system described by the speakers is one that is insensitive to more cheap money, as rates have been near-zero for years and the Fed can no longer print trillions of dollars to buy U.S. bonds without increasing the risk to the bond market and the dollar.
If corporate profits crater, what's "fair value"? If investors view P/E's above 15 as pricey/risky and stop buying until P/E's decline to 10, then the market must drop far below what is currently perceived as "fair value."
Nonetheless, with analysts such as Granthan and Jakobsen calling for one more leg higher after a 6-9 month decline, we have to make room for this possibility.
Summary of the Blog This Past Week
NASDAQ: Classic Head-and-Shoulders and Blow-Off Top? 5/3/14
Please Stop Me Before I Vote for a Bought-&-Paid-For Demopublican Again 5/2/14
International Workers' Day (May 1) and the New Class: Mobile Creatives 5/1/14
Want to Fix Income/Wealth Inequality? Here's How 4/30/14
America's Nine Classes: The New Class Hierarchy 4/29/14
A Critique of Piketty's Solution to Widening Wealth Inequality 4/28/14
It appears I've coined the phrase "Mobile Creatives" as a new class of workers/owners of their own productive capital. Let's see if it resonates enough for others to start using it.
Best Thing That Happened To Me This Week
Attended the Wine Country Conference--one of the few times I venture into the real world of alternative financial media gatherings.
Market Musings
Many at the conference were discussing the possibility of interest rates rising despite the Fed's insistence that rates will stay low essentially forever.
Various charts were displayed that suggested that the rates of long-duration bonds (10-year, 30-year, mortgages) could rise even as the short-duration bonds (3-month, 6-month Treasuries) are pegged at near-zero by Fed purchases.
As Zero Hedge has noted, the Fed already owns much of the good collateral in the Treasury market. As the low rates drive foreign buyers away (i.e. they're seeking higher yields elsewhere), the Fed has isolated itself as the buyer of last resort.
As the Fed is forced to taper, the bond market could push rates higher despite the near-zero-yield on short-duration bonds.
As Mish and John Hussman noted, both corporate and Treasury bonds are "lumpy," meaning that the bonds are not spread out evenly in maturation; at certain points, big clumps of maturing debt must be rolled over, and if corporations have to pay even slightly higher rates on their trillions of dollars in debt, that will drop profits.
That will in turn nudge the P/E ratio even higher, pushing the market even further into nose-bleed valuation territory.
From Left Field
Jascha Heifetz plays Tchaikovsky Violin Concerto: 1st Movement (12:35) excerpt from an old film.... love his "attack"--the crispness of his two-string playing--check out 6:30 on, when he is playing solo, unaccompanied by the orchestra--
Albert Camus Wins the Nobel Prize & Sends a Letter of Gratitude to His Elementary School Teacher (1957) (via G.F.B.)-- I wonder if President Obama did the same when he won his Nobel....
A 1-Year-Old Magazine About Farming Is the Talk of the Media World -- trend change?
Hotties from history: the geisha of Japan’s first beauty pageant -- staged photography defines the era...
Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State -- Ralph Nader's latest... an idea that everyone but the top .1% supports but not enough to make it happen....
Chinese property boom on its last legs -- interesting correlation of global property bubbles to US GDP....
Midway Island (video, 3:54) -- what the dying birds have eaten: plastic trash
Birth Tourism Goes Stateside: And Chinese efforts to discourage it aren't working
Feeding Nine Billion: Five Steps to the Wrong Solution -- waste not, want not, eat lower on the food chain...
Smart People Need To Stop Becoming Lawyers -- amen--plus, there's no jobs for most new attorneys anyway...
White-Collar World: What the office has done to American life -- interesting reminder of C. Wright Mills, once a voice of skepticism in American academia, now mostly forgotten.... not sure I agree with the basic contentions here, but interesting nonetheless....
The Long Goodbye (Andy Xie) -- one of the best overviews of speculative excess and how "buying time" by extending these excesses have bloated the financial sector into a dangerous dominance...
"The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion." Albert Camus
Thanks for reading--
charles |
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