The Next Domino Falls as We Predicted… Here’s What Comes Next
A Banking Crisis
The Italian banking system is a mile-high house of cards.It’s looking wobblier every day.The triumph of the “No” side will also accelerate the crises in the Italian banking system, which was already on the verge of collapse.The collapse now appears imminent. It could start as soon as this weekend.
The Super Bubble in Italian Government Bonds Will Burst
Italy has one of the most indebted governments in the world. It’s borrowed over $2.4 trillion, and its debt-to-GDP ratio is north of 130%. (For comparison, the US debt-to-GDP ratio is 104%.)But the situation is actually much worse.GDP measures a country’s economic output. However, it’s highly misleading. Mainstream economists count government spending as a positive when calculating GDP. A more honest approach would count government spending as a big negative.In Italy, government spending accounts for a whopping 50%-plus of GDP. A more accurate debt-to-GDP ratio would exclude government spending from economic output. I suspect that figure would reveal the Italian government’s hopeless insolvency.
Other Key European Elections
A populist tsunami is washing through Europe. It will drastically change the Continent’s political landscape in a way not seen since before World War II.This wave will flush away traditional “mainstream” parties and usher in anti-establishment populists who want to leave the euro currency and the European Union.
The Bottom Line
My thesis for the collapse of the EU is getting stronger and stronger.We're now much closer to seeing—as one Italian politician recently put it—the euro melt away like a gelato left out in the August sun. I think the failure of the Italian referendum marks the beginning of the end for the currency.
I expect the euro to tank soon.
DYI: With Central Europe in disarray along with their currency the Euro going into the tank - the U.S. stock market will come under pressure. Will this be the pin that pops our stock market bubble? I have no idea - however I would put this possibility at the front of the line! Again - who knows what will knock down this house of cards the Fed's have built with their sub atomic low interest rates plus massive QE? Long term corporate bonds have been in the process of sagging in value for months pushing up yields providing a competitive return to our leaping stock market.
Ben Graham's Corner
Margin of Safety!
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."
Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]
EYC Ratio = [ (1/PE10) x 100] x 1.1] / Bond Rate
1.75 plus: Safe for large lump sums & DCA
1.30 plus: Safe for DCA
1.29 or less: Mid-Point - Hold stocks and purchase bonds.
1.00 or less: Sell stocks - rebalance portfolio - Re-think stock/bond allocation.
DYI : If you want to dial down your exposure no argument here as we are very close to dropping below 1.o on the EYC Ratio. As exampled 60% stocks/40% bonds may want to flip this to 40% stocks / 60% bonds.
I've been following the EYC Ratio in its strict form and have only been buying bonds (short term bonds /cash equivalents) only recently buying at the long end of the market.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 12/1/16
Current EYC Ratio: 1.01
As of 12-09-16
Updated Monthly
Updated Monthly
PE10 as report by Multpl.com
Bond Rate is the rate as reported by
Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)
DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.
PE10 .........27.94
Bond Rate...3.90%
Lump Sum any amount greater than yearly salary.
PE10 .........27.94
Bond Rate...3.90%
Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety. The danger to investors lies in concentrating their purchases in the upper levels of the market.....
DYI
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