June 27, 2016

Brexit and the Bubble in Search of A Pin

John P. Hussman, Ph.D.

First things first. While the full attention of financial market participants is focused on “Brexit” - last week’s British referendum to exit the European Union - the singular factor to recognize here is that the vulnerability of the financial markets to steep losses has very little to do with Brexit per se. 

Rather, years of yield-seeking speculation, encouraged by central banks, had already brought the financial markets to a precipice prior to last week’s vote.  

It’s not entirely clear whether Brexit is a sufficient catalyst to burst the bubble, as we recall that the failure of Bear Stearns in early-2008 was followed by a period of calm before the crisis was sealed by Lehman's failure, and numerous dot-com stocks had already been obliterated by September 2000, when the tech bubble began its collapse in earnest. We’ll take the evidence as it comes, but we’re certainly defensive at present, for reasons that have little to do with Brexit at all. 

The high-level churning in global financial markets since late-2014 represents what we view as the top formation of the third speculative bubble in 16 years. 

For the U.S. market, valuation measures most reliably correlated with actual subsequent market returns pushed to the third most offensive extreme in history at the May 2015 market high, eclipsed only by the 2000 and 1929 peaks 

(see Choose Your Weapon for a ranking of various measures, and the chart series in Imagine for a current perspective). 

Because this speculative episode has infected nearly every asset class, rather than favoring tech stocks or mortgage securities as in previous bubbles, 

the median price/revenue ratio across individual U.S. stocks actually pushed to the most extreme level on record in recent weeks, before promptly retreating on Friday.

Republican ex-Treasury chief Paulson slams Trump, to vote for Clinton

"When it comes to the presidency, I will not vote for Donald Trump," Paulson, who was chief executive of Goldman Sachs before becoming Treasury chief under Republican President George W. Bush, wrote in an opinion piece in the Washington Post. 

"I'll be voting for Hillary Clinton, with the hope that she can bring Americans together to do the things necessary to strengthen our economy, our environment and our place in the world," he said.

DYI Comments:  A bubble looking for a pin.  Whether it is Brexit or something else this bubble will burst as every bubble the world over has done before.  DYI's model portfolio is in great shape to weather any financial storm.

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

Active Allocation Bands (excluding cash) 0% to 60%

83% - Cash -Short Term Bond Index - VBIRX

17% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

The reason I posted the article regarding Hank Paulson not voting for Trump he is nervous for his former firm Goldman Sachs along with many others who are now heavily leveraged. When this bubble bursts and it will - with Trump in the White house, Trump will tell these boys to file bankruptcy just as he had to do in the past. There will be no bail out.

It is also highly likely Trump would unleash the Department of Justice prosecuting the firm(s) and more importantly the top brass for fraud.  This would not be a witch hunt the amount of securities fraud is rampant especially the top tier commercial, investment, and merchant banks.  The misdeeds is endless.

Unfortunately for the sake of justice the statute of limitations has run out for Hank Paulson. Seeing this scalawag in prison would be a step in the right direction.  When he was Treasury Secretary(2009 downturn) he misled Congress from buying the toxic asset to outright bailout for Goldman Sachs and all the rest.  On top of that it went against the American public who were and continues today dead set against bail outs.

Simply, this rat wants to privatize their gains and have the American public pay their losses.           

DYI