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Musings Report #40 10-4-14
Fall Investment/Market Outlook
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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Fall Investment/Market Outlook
My goal here is to make this interesting even to those who don't manage their own investment accounts (and those with no investments in markets).
Two things are triggering major changes in the global markets and economy:
1. The Federal Reserve is ending its major money-printing program (quantitative easing - QE). This means there are fewer dollars being issued and it's one reason the dollar is strengthening.
2. The rest of the global economy is stagnating/falling apart, which is causing wealth/capital to seek safe haven in North America. Wealthy people from China, India, Europe, etc. are buying U.S. real estate, stocks, bonds, etc. to secure their wealth from devaluation, confiscation, bail-ins, capital controls, etc.
Although pundits and institutions (such as the Fed) claim to know how these forces will affect markets and the global economy, the truth is nobody knows what will happen because the scale of central bank intervention is truly unprecedented.
On first glance, common sense suggests the Fed ending QE would be negative for stocks: the less cash the Fed prints, the less cash goes into stocks, and this decline in demand will eventually cause prices to decline.
In previous eras, weakening economies around the world and geopolitical crises would also trigger declines in stock markets.
But we may have entered an era which is different in important ways: if China, Japan, Europe and the emerging market economies are all faltering at the same time, despite the differences between their systems, and the central banks in these economies are still printing money as a cure-all, that sets up a very powerful dynamic:
-- As it becomes increasingly obvious that printing more credit/money is not going to fix what's broken in China, Japan and the European Union, the incentives for those with wealth to get it out of those economies before devaluations, capital controls, etc. ravages their assets dramatically increases.
-- Since the U.S. is no longer creating credit/dollars at the same rate as other central banks, the dollar becomes more valuable relative to other currencies.
(Note that the Fed appears to still be buying mortgage-backed securities with newly created money, but the bottom line is the Fed's money-printing has been massively scaled back.)
Together these generate a self-reinforcing feedback loop: the more the rest of the world enters "risk-off," the more attractive U.S. assets become. As the U.S. dollar strengthens, those holding other currencies see their purchasing power decline, which further incentivizes the flow of capital to the dollar and U.S. assets.
We can see evidence for this global capital flow in bonds--foreign ownership of U.S. bonds is rising again. Foreign buyers of U.S. real estate are dominating many markets (see the link to Seattle suburbs and Chinese buyers in From Left Field), and though I have no data on U.S. stocks, it seems likely that foreign buyers are one reason U.S. stocks keep levitating higher.
For the past 5.5 years, the basic driver of U.S. assets going higher was the Federal Reserve printing money/credit and lowering interest rates so people could afford to buy houses and vehicles.
But now that the Fed is ending QE and signaling higher interest rates ahead, foreign buyers are pouring in, supplanting domestic investors as the driving force of higher asset valuations.
Foreign ownership of U.S. assets has a long history. The Brits and Canadians have long been major owners of U.S. assets, and despite fears that Japan would end up owning America in the late 1980s, U.S. markets have absorbed waves of phantom assets fleeing bubble economies without too much disruption.
The enormous scale of phantom bubble-created wealth fleeing China, Japan, Europe and the emerging markets at the same time is new: never before have central banks issued so many trillions of dollars in new credit and cash, with so little positive effect on their real economies.
For those holding currencies that could devalue 30% overnight or wealth that could be confiscated or locked down by capital controls, the urgency to buy some "insurance" in the U.S. or Canada is increasingly pressing.
This creates the potential for a new and unsettling scenario in the U.S.: even as the real economy rolls over into recession/stagnation, assets such as real estate, bonds and stocks could soar ever higher on the back of global capital flows into the U.S.
Those owning assets will become wealthier even as wages stagnate and those without assets become poorer in terms of purchasing power. Wealth inequality could increase significantly. Young Americans could be priced out of housing as tens of thousands of wealthy foreign buyers seek safe haven ownership of U.S. real estate.
Globally, risk-off means: sell now for whatever you can get, pay off debt and move the remaining cash to the U.S. by whatever means are available. If moving the money to the U.S. is not possible, then move it into dollars in U.S. bank accounts. If that's not possible, then open dollar-denominated accounts in multinational banks based in Switzerland, Singapore, etc.
This dynamic is changing my reckoning of the odds of a stock market decline. If the Fed's printing is being replaced with cash printed in China, Europe and Japan, I may have over-estimated the impact of QE ending.
Summary of the Blog This Past Week
At Home in Two Places 10/4/14 a paean to Hawaii...
What Are We So Afraid Of? 10/3/14
The Sources of America's Political & Financial Dysfunction 10/2/14
Oil, Empire and Playing the Great Game 10/1/14
Is the Stock market Top In? 9/30/14
The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive 9/29/14
Best Thing That Happened To Me This Week
Stumbling through the jungle in Manoa Valley where the Agee House once stood. 35 years after the house burned down, the only evidence that there was a culturally important structure here with manicured lawns and views of waterfalls are a few broken bricks. It is impressive how the jungle has completely reclaimed the site.
Market Musings: Stocks and Gold
My approach to speculation is KISS: keep it searingly simple. While I enjoy pondering the many drivers of human behavior, when it comes to betting money I rely on basic charts.
Just as a statement of fact (though I realize it sounds like boasting), I've tripled my modest speculative nest-egg since late July by buying options that have caught each swing up and down in stocks. First down, then up, then down, and now up again. So far, my simple-minded reliance on simple charts has caught the trends reasonably well.
Last month I noted the extremes in various indicators, and listed the three schools of thought:
1. these extremes will revert to the mean and stocks will fall sharply.
2. central planners control the market and they will not let it decline.
3. the U.S. economy is fixed and so markets should continue higher on all the good news
As I noted above, a fourth factor is the flood of foreign capital seeking safe haven in U.S. assets as "risk-off" prudence/fear replaces speculative (and highly leveraged) euphoria in most global economies.
Adam Taggart (of Peak Prosperity) recently posed an excellent question to me: if global capital is seeking safe haven, why is gold being crushed? The standard answer is "gold goes down when the dollar goes up," but as I have shown, gold and the dollar are poorly correlated over the long term.
I don't have an answer to Adam's question, but the chart of gold leads me to suspect the global flight to safety might soon push gold higher, and perhaps with a short-covering ferocity that few expect.
Let's look at two charts: one of the S&P 500 (SPX) and one of gold:
Though I am more than willing to find some bearish indicators on this chart of the SPX, I can't find any: this dip looks just like previous violations of the lower Bollinger Band that led to rallies that reaches the upper Bollinger band. That would target 2020 on the SPX at a minimum.
If the market is due for a major swoon, price could be expected to at least go back up to kiss the key 2,000 level before rolling over.
As for gold, look at this huge descending triangle:
Gold bears will see this as a continuation pattern, i.e. it's setting up another cascade decline below $1,000. The number of analysts calling for such a decline is growing (something I see as contrarian bullish signal).
Gold bulls hope this is a reversal pattern, i.e. it's setting up a break-out to the upside.
Discussions of gold-backed currencies etc. are interesting but of little to no bearing on my odds of speculating wisely. My goal is always simple: identify an extreme that is about to reverse and take advantage of that.
The stochcastics are indicating a tradable bottom in gold is at hand, and MACD has been positively diverged (rising) while gold has noodled around building a base around $1,180 - $1,190. MACD recently turned down, and my instinct is that it is not the start of a new downleg but the final head-fake that encourages gold bears and disheartens what's left of the thinned herd of gold bulls.
Please note I am not making a recommendation here; I am simply pointing out some simple chart indicators that suggest SPX might rally to at least the 2,000 level. There's still a few more weeks to see if October's fierce reputation for sharp declines will be manifested or ignored.
Gold is interesting simply because the bearish sentiment is extreme while the chart is open to a bullish interpretation. We shouldn't discount Tom McClellan's call for a reversal based on his 13.5-month cycle out of hand.
From Left Field
Finalists Of The 2014 Wildlife Photographer Of The Year
How Exercise May Protect Against Depression -- endorphins....
Hiker Discovers an Abandoned Town Inside Tennessee's Great Smoky Mountains National Park
Police state: A natural result of collapse of moral leadership at the highest levels (via Chad D.)
These nine basic principles are often referred to as "The Peelian Principles: Sir Robert Peel 1788 - 1850 - "The Founder of Modern Policing"
‘Star Citizen’ earns Guinness World Record for insane crowdfunding haul (via Chad D.)
The creator of classic video games like Wing Commander has entered the Guinness Book of World Records for Star Citizen, his upcoming space adventure game. Since kicking off a Kickstarter campaign nearly two years ago, Roberts and crew have raised more than $55 million.
Washoku (traditional Japanese cuisine) designated as a UNESCO Intangible Cultural Heritage of Humanity (via Dustin B.) lots of soy products here: tofu, miso, shoyu....
The incredible story of former CIA agent John T. Downey, the longest held American captive of war. well worth reading...combine this account of Chinese prison life with the 1967 CIA report below....
Danny Macaskill rides stunning ridge on Isle of Skye (7:39) -- phenomenal mountain-bike riding skills and vistas...
Here's The College Major That Defines Each State -- this must be wrong... it seems like every other college graduate in Calif. goes to law school... does the nation create jobs for all these attorneys and MBAs?
Higher Education’s Aristocrats
Over five years, administrators enjoyed pay increases of between 40 percent and 135 percent, and as a result each received $450,000 to $3.3 million from cumulative increases by the end of 2012-2013, the most recent year for which tax data is available.
In Suburban Seattle, New Nests for China’s Rich - flashy McMansions are favorites, apparently...
The Chinese Cultural Revolution - 1967 CIA analysis, released under FOIA (via Maoxian)
"Politics is war without bloodshed while war is politics with bloodshed." Mao Zedong
Thanks for reading--
charles |
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