Ultra-Low Rates Could Last Another Decade

Since we have already seen nearly six years of ultra-low rates, how much longer can they last? 

Given the magnitude of the crisis, record levels of unemployment and debt, the best way to answer that question is by observing what the Fed did during a similar time period—the Great Depression. 

How long did rates stay low then? Nearly 15 years. 

As the Fed has made clear, given current economic conditions, they don’t expect to raise rates for a "considerable time". If you think our current experience is close to the Great Depression and it will take just as long to recover, then we may actually be looking at ultra-low rates for many years to come—or decades as bond king Bill Gross has stated. 

Question is, what will this do to the stock market and other assets as yield-starved investors continue to chase returns?

DYI Comments:  A portion of those 15 years were WWII the politicians and central bank required low rate to finance the war effort.  More likely rates may begin their upward movement is in the early 2020's as Boomers move into retirement but will continue to consume (at a lesser rate) causing a labor shortage. Add on the costs of Social Security and Medicare taxes will be raised, more borrowings, and what is left over the Federal Reserve will monetize.

For us older folks the bond rally of a lifetime is coming to a close as rates peaked in September of 1981 [10yr Treasury Bond at 15.32%].  Was July of 2012 [10yr Treasury Bond 1.53%] the bottom for interest rates?   Who knows?  What I do know is that rates are at sub atomic levels to expect a bull market in bonds to be launched from here is absurd.  This is why our model portfolio for long term bonds is at 20%.  A very real possibility is a new recession within our on going economic downturn maybe manifesting itself.

U.S. stocks gain as market looks past GDP data; Dow gains 0.29%

Investing.com - U.S. stocks rose on Wednesday after investors took a dismal first-quarter GDP report in stride, betting that the second quarter will reveal a solid uptick in economic activity. 

The Commerce Department reported earlier that U.S. gross domestic product contracted at an annual rate of 2.9% in the first quarter of the year, far surpassing consensus forecasts for a decline of 1.7%.

DYI Continues:  We all need to hope that the majority of this GDP decline is weather related.  More than likely this is the beginning of another recession and if that is correct then lower rates will prevail.  Europe is on the verge [some are there now] of out right deflation this weakness will be exported world wide along with the U.S. pushing rates far lower than anyone of us would suspect (including me).  A multi-year deflation would push bonds up to the sky along with our sentiment indicator to Max-Optimism.  As a side note this also bottoms out short term bonds [Max-Pessimism].

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds....You are Here!
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!

Capitulation

DYI Continues:  The future rate rate of return for Long term bonds, REITs, U.S. stocks is dismal.  The value player is in the waiting game for improved future returns.  Gold mining companies are pricey but have room to run.

Janet Yellen, The Fed and a System of Lies

Now let’s look at the bull markets almost everyone has been ignoring since 2001: gold and silver. No doubt about it; the old monetary metals have been in the dog house for the past few years. However, we should note that their current lows are far above the lows of their most recent correction in 2008; in addition, over the past year the bears have failed to drive precious metals prices decisively below the lows of last summer. Both gold and silver have seen some excitement this week. By Christmas I expect the market will stop worrying about gold and silver trending toward their lows of 2008, and will begin wondering when the highs of 2011 will be taken out. In a world where lying to the public has become Washington’s “policy” of choice, the old monetary metals are looking pretty good right now.

DYI

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DYI Comments:  Gold and more importantly the mining companies have become far less pricey.  This is opposed to the bargain days of 2000 when gold was dirt cheap and basic stocks were flying to the moon. The Dow/Gold Ratio was 43 to 1 at that time.  Currently the ratio is 12.76 to 1 making gold pricey but still has room to run on the upside.  This is why DYI's modeled portfolio has the mining stocks at 25% as compared to 60% during the bargain days.  As the ratio moves downward DYI will cut back the percentage.  Eventually years in the future the asset category will be replaced with REIT'S.  At that time gold will go into a speculative "blow off" just like the high tech companies at the top of that market.  The Dow/Gold Ratio at that time will most likely be below 3 to 1 signifying the end of the bull market in gold.

DYI
   

Why These Fake Rallies Will End In Tears: Central Bank Create Bubbles, Not Sustainable Wealth

It is obvious that most markets would not be trading where they are trading today were it not for the longstanding combination of ultra-low policy rates and various programs of ‘quantitative easing’ around the world, some presently diminishing (US), others potentially increasing (Japan, eurozone). As major US equity indices closed last week at another record high and overall market volatility remains low, some observers may say that the central banks have won. 

The US Fed wants higher equity prices and lower yields on corporate debt? – Just a moment, ladies and gentlemen, if you say so, I am sure we can arrange it. Who would ever dare to bet against the folks who are entrusted with the legal monopoly of unlimited money creation? 

“Never fight the Fed” has, of course, been an old adage in the investment community. But it gets a whole new meaning when central banks busy themselves with managing all sorts of financial variables directly, from the shape of the yield curve, the spreads on mortgages, to the proceedings in the reverse repo market. 

In this debate I come down on the side of Mr. Ahmed (and I assume Sir Michael). This cannot last, in my view. It will end and end badly. Policy has greatly distorted markets, and financial risk seems to be mis-priced in many places. Market interventions by central banks, governments and various regulators will not lead to a stable economy but to renewed crises. Prepare for volatility! 

1. Six years of super-low rates and ‘quantitative easing’ have planted new imbalances and the seeds of another crisis.Where are these imbalances? How big are they? – I don’t know. But I do know one thing: You do not manipulate capital markets for years on end with impunity. It is simply a fact that capital allocation has been distorted for political reasons for years. Many assets look mispriced to me, from European peripheral bond markets to US corporate and “high yield” debt, to many stocks. There is tremendous scope for a painful shake-out, and my prime candidate would again be credit markets, although it may still be too early.

DYI Comment:  Old commercial advertising Chiffon margarine that fools mother nature our central bank will fool the markets in the short term but never in the long run.  Markets will regress back (up or down) to the mean.  In the end markets will prevail they always do!

DYI's model portfolio remains the same....THE GREAT WAIT CONTINUES......

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 06/24/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VBIRX

25% -Gold- Precious Metals & Mining - VGPMX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]

DYI

This Time is Different, Yet with the Same Ending 

John P. Hussman, Ph.D.

I’m not saying a market crash is imminent, but it is a risk because very reliable valuation methods (that have remained reliable even in the recurring bubbles since the late-1990’s) presently estimate negative prospective nominal total returns for the S&P 500 on every horizon of 7 years or less, and an annual total return of about 1.9% over the coming decade. On the other hand, these same methods projected negative 10-year prospective returns – even on optimistic assumptions – at the 2000 peak (see the August 2000 Hussman Investment Research & Insight). While those projections turned out to be perfectly accurate (indeed, the 10-year total return of the S&P 500 was still negative even after the index had nearly doubled from its 2009 low), it also means that the overvaluation of the S&P 500 Index in 2000 was even greater than it is today. As I’ve noted before, the median S&P 500 component is more overvalued today than in 2000, and the average component is similarly overvalued. It’s only the capitalization-weighted valuation that was higher in 2000, primarily because of eye-popping valuations of large technology companies.

In any event, it’s fair to say that valuations could go higher still, and we can’t rule that out. Historically, the emergence of similarly extreme overvalued, overbought, overbullish syndromes (as we also observed in 1929, 1972, 1987, 2000 and 2007) would suggest that the possibility is negligible – but we’ve been punished for our knowledge of history in this cycle. Overvalued, overbought, overbullish syndromes have now been extended without consequence for a much longer period than at any prior speculative extreme. Once you’ve seen a single flying pig, you’re forced to conclude that it’s at least possible for a pig to fly – even if you’re fairly sure it’s only been shot out of cannon.

Those constructive opportunities will emerge soon enough, even if valuations never return to “normal” levels. As I’ve noted frequently, the strongest estimated market return/risk profiles are associated with at least a moderate retreat in valuations coupled with an early improvement in measures of market internals. We don’t rule out a retreat to historically undervalued levels at some near or distant point in the future, but very constructive investment opportunities in the interim would not require the market to retreat anywhere near historical valuation norms (which are presently more than 50% below current market levels). Meanwhile, we expect that the completion of the present cycle will be a welcome reminder that patient, informed discipline is as vital as ever.

DYI Comments: The Great Wait Continues....Once again for the true value players this wait will be a "blink of an eye" for the bearish speculator the wait will be equivalent to "eternity!"  For those who can handle the volatility a small short position of 5% to 10% would be warranted.  Eventually "the cat will be out of the bag" sentiment will change to bearish and no matter how much money the Feds throw at the market it will decline.  How much of a drop?  It would not surprise me in the magnitude of 45% to 60%.  However Professor Hussman has stated that due to ultra low interest rates 30% to 40% decline is more probable which is more than enough to justify a short position such as the Prudent Bear Fund.

Everything you need to know about investors in one chart

Josh here – If you knew nothing else about your fellow investors at all – nothing – but committed this concept to your consciousness and built a strategy to exploit it, you would attain a spot amongst the top half of all investors in the country within a single generation. You’d be better than average with only this single bit of information at your disposal. I know this for a fact because I’ve seen the dollar-weighted returns tables going back decades.

DYI Comments:  When everyone is bullish you are reducing your exposure to stocks; when they are bearish you are increasing your percentage to equities.  Old Josh is "spot on" doing just that would put you into the top half (possibly higher) of money managers.  Excellent chart worth the look.

DYI  

  

5 political crises that are threatening to wreck the global economy and life as we know it

1. Iraq and Syria: Two conflicts beat as one

2. China vs. Japan: Asia’s next great war?

3. The rise of Europe’s far right

4. Russia vs. Ukraine (and the rest of Europe): Back in the USSR?

5. Washington, DC: A snake pit of vitriolic ineptitude

'Markets are in party mode, but the music's about to stop'

Both these markets have been buoyed by the huge "quantitative easing" programmes that their respective central banks have conducted over recent years, pumping massive amounts of money into the financial system, with all manner of unintended consequences in other areas. Share prices over the past couple of years have been driven largely by investors being prepared to pay more for a given level of profits, rather than any rise in earnings. This inevitably leaves markets more vulnerable to sudden shifts in sentiment. 

The markets’ mood though has remained remarkably calm recently – perhaps worryingly so. It has been observed that measures of volatility in most major markets have fallen – in bonds, currencies and shares all are close to multi-year lows. The commonly quoted "fear index" in the US, the Vix, is at a seven-year low. It would appear that the Bank of England and its counterpart in the US, the Federal Reserve, have successfully managed to persuade investors that interest rates are not going to rise imminently.

Why 'I'll just work longer' is not a good retirement plan

For pre-retirees (those over 55), the top reason cited for putting off retirement should come as no surprise: money. Not only are Americans living longer today, but fixed costs like health care and housing continue to outpace inflation. For cash-strapped workers, clocking in for a few more years may seem like the only reasonable solution to solving their financial anxieties.

One-third of Americans only have $1,000 saved for retirement

More Americans are confident about their retirement prospects for the first time in seven years, but even so, more than one-third of workers (36%) have a measly $1,000 saved for their later years, according to a new study by the Employee Benefit Research Institute. (Compare that to the 28% of workers who said they had $1,000 saved in last year's survey, and the picture gets a little more grim.) 

They’ve got money (and they know how to use it). Obviously, saving for the future is easier when there's more to start with. Workers earning more than $75,000 a year were far more likely to report feeling more confident about retirement than those earning less, according to the EBRI. On the other hand, of those workers who say they've saved less than $1,000 for retirement, 68% reported earning $35,000 or less. 

Why Every Millennial Should Consider A Roth IRA

DYI

Reading Assignments:

China No-Money-Down Housing Echoes U.S. Subprime Loan Risks

China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis. 

Deals skirting government requirements for minimum 30 percent down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers.

Chinese Dominance Isn't Certain

Not a chance. Two new books provide a corrective to the lately fashionable gloom-and-doom analysis. Each is by a crack journalist. The first, Geoff Dyer’s The Contest of the Century, addresses the U.S.-Chinese relationship through the prism of China’s military, political, diplomatic and economic development. The second, Robert Kaplan’s Asia’s Cauldron, focuses on the competition between China and the states around the South China Sea—the central route for shipping between the Middle East and East Asia, and the site of disputed claims to resource-rich maritime territory.

 Certainly the fresh attention to China’s aspirations is a good thing. As late as 2006 the defense correspondent Fred Kaplan (no relation to Robert) was belittling the Pentagon’s attention to Chinese military modernization in its annual congressionally mandated report on the subject. In an article called “The China Syndrome,” Kaplan wrote:

“At present,” the report states, “China’s conceptfor sea-denial appears limited to sea-control in water surrounding Taiwan and its immediate periphery. If China were to shift to a broader ‘sea-control’ strategy”—in other words, if it were seeking a military presence farther away from its shores—“the principal indicators would include development of an aircraft carrier, development of robust, deep-water anti-submarine-warfare capabilities, development of a true area anti-aircraft warfare capability, acquisition of large numbers of nuclear attack submarines,” etc., etc. The point is: The Chinese aren’t doing—they’re not even close to doing—any of those things [Kaplan’s italics].

Junk Loan Market Getting “Silly And Sillier”: Cov Lite Loans At All-Time High

More than half of the loans in the $747 billion U.S. market for loans made to junk-rated companies don’t have financial “covenants,” triggers that could cause a borrower to shore up its health, including periodic tests of overall debt levels and cash flow to cover scheduled interest payments. Thus far this year through Thursday, 62% of leveraged loans lacked these regular requirements, up from 57% for all of 2013, according to S&P Capital IQ LCD.

 

 DYI

How to start saving for retirement at 50

What about those who have not saved at all? They make up around 25% of the U.S. population, and they are not necessarily the youngest among us. These days, the average balance in a typical 50-year-old's retirement savings account is a measly $43,797 – despite the fact that many baby boomers believe that they need approximately $800,000 in order to retire.

DYI Comments:  The voluntary 401k, IRA, Roth IRA etc. has been a failure.  It just seems that a substantial percentage of our population is NOT capable emotionally to save money.  The answer is simple the Federal government has their Thrift Savings Plan (their 401k) with mutual funds every working adult will (mandated) have 10% of their income sent into the the plan.  Each will have a separate account as this will be an add on to Social Security. Withdrawals will only occur (1.) when the individual is 60 years of age (2.) is deceased (3.) disabled [confirmed by two physicians].  Lump sums are prohibited.  Systematic withdrawal rate based on mortality or a purchase of a lifetime annuity.  THAT'S IT!

As far as the 50 year old who hasn't saved anything?  BUY LOTTERY TICKETS, YOUR TOAST!

DYI

A Generational Selling Opportunity for the U S Long Bond

DYI Comment:  No doubt the long bond interest rates are at all time lows, however with another recession looming along with a sky high stock market a flight to quality is in the realm of possibility.  DYI is one step away from pushing our sentiment indicator for long term bonds to Max-Optimism all that is needed as stated is a flight to quality.  Please note that long bonds would not be toxic for deflation will be with us for at least the next 3 to 5 years.  Of course the capital gain aspect that began in 1981 would be over pushing our asset allocation model down to its lowest level of 10%.  Excellent article with great charts.  Have a nice weekend. You too NICK!

DYI

Is this the perfect investment portfolio?

I want a simple investment portfolio that I don’t have to fool around with, and which I know maximizes my chances of earning a good long-term return, and minimizes my chance of ending up in the poor house. 

I want an investment portfolio that is exposed to all likely environments, and committed to none. One which is based on intelligence and reasonable suppositions about the future, and not merely data mining from the past.

And so, what is in this all-weather portfolio? 

It’s 10% each in the following 10 asset classes: 

U.S. “Minimum Volatility” stocks

International Developed “Minimum Volatility” stocks

Emerging Markets “Minimum Volatility” stocks

Global natural resource stocks

US Real Estate Investment Trusts

International Real Estate Investment Trusts

30-Year Zero Coupon Treasury bonds

30-Year TIPS

Global bonds

2-Year Treasury bonds (cash equivalent)

For simplicity’s sake, the portfolio I’ve modeled is rebalanced once a year, on Dec. 30.

DYI Comments:  I'm surprised the author of the article didn't mention the Permanent Portfolio Fund that has been around since December 1, 1982.  They own 35% in Dollar assets [corporate bonds, treasury bills, notes, bonds and zero coupon bonds] 20% gold, 5% silver, 10% Swiss Franc bonds, 15% U.S. and foreign natural resource stocks and real estate, 15% growth stocks.  That is broad diversification in one package.  Very simple and with low turnover making for an efficient mutual fund.  An excellent core fund.

Here at DYI I use five different funds depending on the historical over or under valuations.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 06/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VBIRX

25% -Gold- Precious Metals & Mining - VGPMX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

[See Disclaimer]

Lessons for investors from Japan's lost decades

The world’s major economies have entered a remarkable period – one marked by record-low interest rates, stubbornly slow growth and persistent unemployment.

Investors searching for clues about how to navigate this unfamiliar terrain may want to take their cues from one country that has been experiencing similar conditions for more than 20 years: Japan. 

The lesson? Broad diversification works. 

A Japanese investor who held government bonds, foreign stocks, precious metals and cash, in addition to domestic shares, would have blunted the Nikkei’s fall and even earned a profit. That may not be the most exciting take-away from Japan’s experience, but it’s one time-tested result that investors should keep in mind as they seek a refuge from today’s market weakness.

DYI  

  

"Men, it has been said, think in herds; it will be seen they go mad in herds, while they only recover their senses slowly, and one by one." Charles Mackay Extraordinary Popular Delusions and the Madness of Crowds

We Learn From History That We Do Not Learn From History 

John P. Hussman, Ph.D.

Market conditions presently match those that have repeatedly preceded either market crashes or extended losses approaching 50% or more. Such losses have not always occurred immediately, but they have typically been significant enough to wipe out years of prior market gains. Aside from the 2000-2002 instance, they also have historically ended at valuations associated with prospective 10-year S&P 500 nominal total returns in excess of 10%. At present, reliable valuation measures are associated with estimated total returns for the S&P 500 of just 2.0% annually over the coming decade. On the basis of historically reliable measures, the S&P 500 would have to move slightly below the 1000 level to raise its prospective returns to a historically normal 10% annually. Given short-term interest rates near zero, economic disruptions would probably be required in order to produce that outcome over the completion of the current cycle, and we have no forecast or requirement for that to occur. Of course, there is no shortage of historically unreliable measures available to offer assurance that equity valuations are just fine. 

Regardless of whether the market’s losses in this cycle turn out to be closer to 32% (which is the average run-of-the-mill bear market loss) or greater than 50% (which would be required to take historically reliable valuation measures to historical norms, though most bear markets have continued to undervalued levels), it’s going to be difficult to avoid steep losses without a plan of action. In our view, that action should be rather immediate even if the market’s losses are not. However uncomfortable it might be in the shorter-term, the historical evidence suggests that once overvalued, overbought, overbullish conditions become as extreme as they are today, it’s advisable to panic before everyone else does.

U.S. pensions ‘cash negative’ by 2016:

America's sprawling 401(k) pension system will turn cash flow negative in 2016, threatening disruption for asset managers and selling of equities, according to analysis by Cerulli Associates, a research house. 

However, by 2016 it forecasts that inflows will be $364 billion and outflows $366 billion, with the deficit only widening year on year after that as the core of the baby-boomer generation retires.

Amin Rajan, chief executive of Create Research, a consultancy, said IRAs tend to have a 20-35 per cent exposure to equities, compared with 45-60 per cent in 401(k) plans. This suggests equity-focused houses could lose market share to bond-based rivals such as Pimco and Principal Global Investors as the demographic changes mean the 401(k) system shrinks relative to the IRA market, which is already larger at about $5.4 trillion.

 Personal Income Tax Revenues Show
Significant Softening in the Fourth
Quarter of 2013

Preliminary Figures for the First Quarter of 2014

Signal Possible Declines in Income Tax Collections

Are Americans filling up on too much debt?

Americans love cars and debt, so it's only natural that they would combine the two. A new report finds that auto loans are becoming more supercharged than ever as financing terms reach record highs. However, consumers should remember to steer clear of buying more car than they can really afford. 

The average auto-loan term increased to 66 months during the first quarter, according to Experian Automotive, a global information services company. That is the highest level since Experian began publicly reporting the data in 2006. 

Making matters worse, nearly 25% of all new vehicle loans originated during the quarter had terms extending out 73 months to 84 months, representing a 27.6% surge from a year earlier. The average amount financed for a new vehicle loan also reached an all time high of $27,612.

DYI Comments:  NOBODY RINGS A BELL AT THE TOP!  We are now close to the end of a business cycle along with a credit cycle (cars compared to houses).  Corporations around the world are using their over inflated stocks to effect "Merger Monday" and its back with a vengeance!

Merger Monday's back: TWC, Nest, Suntory bids

DYI's 10 year averaged annual estimated return is approaching ZERO.  PLEASE NOTE:  That is a nominal return before taxes, fees, trading costs, and inflation.  Depending on your fund your estimated 10 year return is NEGATIVE.

The S&P 500 dividend yield is 1.86% as report by Multpl.com   

Estimated 10yr return on Stocks

Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.

Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%) 
2.0%------------------------1.3% You are Here!
2.5%------------------------3.8%

3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%------------------------9.4%
4.5%-----------------------10.9%

5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%

7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%

*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.

DYI Continues:  If the madness of crowds push up the market dropping the 10 year average annual estimated return negative I will move our sentiment indicator for stocks to Max-Optimism.  This would be a history maker marking a DOUBLE SECULAR TOP!

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

Now is not the time to be purchasing stocks not even on a Dollar cost averaging basis!

DYI 

Why the Housing Market Recovery Is Over

The Basic Problem: Death of the Trade-Up Market

During the roughly 50 years of rising home prices, the first-time buyer was the foundation of the housing market boom. This younger buyer would purchase a home which was smaller and less expensive than most houses. That would enable the seller to "trade up" to a larger, nicer home. These trade-up sellers would then buy and enable another trade-up buyer to do the same. 

And so the trade-up game came to a screeching halt. It has never returned. You need to understand that it will not be coming back. Do I mean never? Not quite. My answer -- not for a long, long time. 

Finally, inventory of homes for sale is rising rapidly. As I have predicted in several articles, homeowners who had waited have decided it is time to put their home on the market. This is also happening in other states covered by raveis.com. If you want to do some research yourself, just go to the raveis.com homepage and link to "Local Housing Data." 

To get a more comprehensive picture of the number of underwater homes, you need to add in the millions of homeowners with HELOCs taken out between 2005 and 2007. These HELOCs will be resetting into fully amortizing loans over the next 3 ½ years. Monthly payments on resetting HELOCs could double or triple. This reset will come as a real shock to these homeowners. 

If you are not sure whether your clients should sell their investment homes, my advice is to list them now before markets weaken further. 

Finally, as I have made clear in previous writings, this is the time to sell mortgage REITs, not to buy them.

Half of Americans can’t afford their house

Over half of Americans (52%) have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years, according to the “How Housing Matters Survey,” which was commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation and carried out by Hart Research Associates. These sacrifices include getting a second job, deferring saving for retirement, cutting back on health care, running up credit card debt, or even moving to a less safe neighborhood or one with worse schools.

The Q Ratio and Market Valuation: Monthly Update

YES YOU CAN TIME THE MARKET

DYI Comment:  Above is a 15 year inflation corrected moving average showing an over blown, over priced stock market.

DYI

Vietnam Mulling New Strategies to Deter China

What is Vietnam’s strategy for resisting Chinese coercion?

International media coverage of the confrontation between China and Vietnam over Beijing’s placement of a mega oil rig in waters claimed by Vietnam has dried up with the passage of time. But daily confrontations continue. The present situation is not a standoff but a determined effort by China to alter the status quo by pushing the Vietnamese Coast Guard and Fishery Surveillance Forces back beyond China’s self-proclaimed nine-dash line. 

Vietnamese government sources express concern that China will move the oil rig closer to Vietnam than its original placement. They worry about where it will be placed because, these sources argue, neither China nor Vietnam knows precisely where the nine-dash line is located. 

Media coverage of Chinese Coast Guard ships using water cannons to douse Vietnamese boats and Chinese ships ramming Vietnamese maritime enforcement vessels made for good visual news clips but fell far short of serious analysis. China is engaged in an unequal “war of attrition” with Vietnam. China’s tactics of ramming Vietnamese vessels two to four times lighter in weight is designed to damage them sufficiently to require repair. 

Some Vietnamese analysts speculate that if the current rate of damage continues, Vietnam may not have enough vessels to confront China in the waters surrounding the rig.

DYI Comments:  No doubt war is coming in South East Asia with China being the instigator flexing their new found economic and regional naval strength.  A war with Vietnam is an attempt to scare the major players, Philippines, Japan and Australia into Chinese compliance.  With the U.S. citizens so worn down from the two conflicts of Iraq and Afghanistan they may not have the stomach for a slug fest with China.  Throw in the possibility of nuclear weapons it is difficult to see the U.S. having direct involvement.

DYI 


  

Bad Trend Breaking: Why Retail Results Are Not Better Than Expected, But Worse Than Ever!

  

It does not take much analysis to see that these bell ringers do not represent sustainable prosperity unfolding across the land. For example, around 1990 real median income was $56k per household and now, 25 years later, its just $51k—-meaning that main street living standards have plunged by about 9% during the last quarter century. But what has not dropped is the opportunity for Americans to drop shopping: square footage per capita during the same period more than doubled, rising from 19 square feet per capita at the earlier date to 47 at present. 

This complete contradiction—declining real living standards and soaring investment in retail space—did not occur due to some embedded irrational impulse in America to speculate in real estate, or because capitalism has an inherent tendency to go off the deep-end. The fact that in equally “prosperous” Germany today there is only 12 square feet of retail space per capita is an obvious tip-off, and this is not a teutonic aberration. America’s prize-winning number of 47 square feet of retail space per capita is 3-8X higher than anywhere else in the developed world!

 The answer is the relentless drive for yield among fixed income investors during a period when time and again the Fed intervened in financial markets to prevent the benchmark rate—that is, the 10 year treasury note—-  from finding its natural economic price/yield in what was becoming a savings parched economy. Accordingly, there developed a massive tidal wave called “retail operating leases” that quenched this thirst for yield—helped along by accounting loopholes which allowed trillions of these operating leases to be kept off borrower balance sheets and which thrived on the illusion that the proliferating chains of new retail concepts served up by the Wall Street IPO machine were “national credit tenants” That is, these overnight sensations had such solid and sustainable “business models” as to imply blue chip credit status—meaning such attractive terms (10-15 years) and interest rate spreads over benchmark rates that retail occupancy costs were dirt cheap relative to the true long-run economics and risks.

DYI Comments:  REIT's valuations are on top of the mountain; no matter which direction they go it is down hill.  A broad sector of our economy that is over blown, add in internet sales brick and mortar retail outlet's will be in for a long decline.  Note our sentiment indicator for REIT's.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds

Max-Optimism *Market Tops*--REITs

Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

Currently Vanguard's REIT Index Fund adjusted effective dividend yield is 2.62%.  Very slim pickings with the median dividend yield being 7.93%.

Additional reading....THE RETAIL DEATH RATTLE

DYI

The truth is out: money is just an IOU, and the banks are rolling in it

The Bank of England's dose of honesty throws the theoretical basis for austerity out the window

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

Money creation in the modern

economy

DYI Comments: The other effect not mentioned in the article is the great booms and busts fostered by the central and commercial banks.  Currently the stock and junk bond market have been "pumped up" in price due to sub atomic low interest rates that can be borrowed to purchase securities.  Of course this is nothing more than a house of cards that will be blown down easily.  What the trigger will be is anyone's guess, such as the current GDP numbers that went negative or simply that prices will become too high, sentiment will change direction, markets will tumble.

We are at the tail end of a securities price boom all fostered by our Central and Commercial banks.  Be prepared.

DYI  

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Reading Assignments:

Worst money mistakes you can make at any age

Avoid these financial blunders at every stage of life

The Right to Forget the Stock Market’s

blemished Past

It Wasn't Household Debt That Caused the Great Recession

It was how that debt was disproportionately distributed to America’s most economically fragile communities.

DYI