John P. Hussman, Ph.D.
A final note: There is a danger in ignoring the concerns of value-conscious investors as a bubble proceeds. The danger is that the longer these concerns are “proven wrong” by further advances, the more severely they are likely to be proven correct by an even deeper loss over the completion of the cycle. Roger Babson offers a useful lesson in that regard. Babson, whose first rule of investing was to “keep speculation and investments separate,” is known not only for founding Babson College in Massachusetts, but also for a speech at the National Business Conference on September 5, 1929, at the peak of the market, saying “sooner or later a crash is coming, and it may be terrific.”
The back-story, however, is that Babson’s presentation began as follows: “I’m about to repeat what I said at this time last year, and the year before…” The fact is that Babson had been “proven wrong” by an advance that had taken stocks relentlessly higher during the preceding years. Over the next 10 weeks, all of those market gains would be erased. From the low of the 1929 plunge, the stock market would then lose an additional 75% of its value by its eventual bottom in 1932 because of add-on policy errors that resulted in the Great Depression. As a side note, those policy errors were not that banks were allowed to fail, but that policy makers allowed them to fail in a disorganized way, forcing loans to be called in rather than taking banks into receivership and restructuring existing debt. It's a distinction our own policy makers still haven't learned, and simply obscured and papered over in the 2008-2009 crisis through distortionary monetary policy, bailouts, and FASB accounting changes. As a consequence, the debt overhang is still very much intact, as the Center for Economic Policy Research recently warned in its 16th annual Geneva Report. But that's now a problem for another day.
In any event, be careful in believing that a market advance “proves” concerns about valuations wrong. What further advances actually do is simply extend the scope of the potential losses that are likely to follow. That lesson has been repeated across history. The chart below offers a visual of this story, and may serve as a useful reminder that valuation concerns are generally not durably proven wrong by further advances, particularly when market valuation concerns have been ignored for a long while.
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Fred's Intelligent Bear Site brought to you by Fred Filskov. Public, private, and commercial distribution of this material is permitted as long as a link to this site is attached.
How ugly will gold's selloff get?
A break below key support $1,180 would spell further pain for gold, said Chris Weston, chief market strategist at IG (London Stock Exchange: IGG-GB). Gold fell to the $1,180 level twice last year, in the second and fourth quarter, but rebounded on both occasions.
"If we get break of $1,180, $1,100 is on the cards before year-end," Weston told CNBC. "There's a perfect storm for gold. Inflation expectations in the U.S., Europe and Japan - three of the biggest economies - have been falling. There's no reason to hedge yourself."
"Gold is oversold at this level. I think it's an overreaction to U.S. dollar strength," he said. U.S. dollar strength is set to ease, said Su, who expects Federal Reserve Chair Janet Yellen will soon reassure investors that the first rate hike is still some time away.
"I think there will be a rebound driven by short-covering," he said, predicting that gold will rise to $1,250-$1,300 by year-end.
DYI Comments: Finally a break in prices for one of our four not so uncorrelated assets due to the Fed's sub atomic low interest rates. Investors (and many bank saver's pushed into investments) in their "zeal for yield" have pushed all asset prices to the heavens. Normally at least one our four assets (Stocks, REIT's,Gold, Lt. Bonds) would be in the bargain range boding well for future returns. As an example, at the top of the 2000 market for stocks, gold and gold mining stocks along with REIT's and long term bonds (especially 30 year T bonds) were a screaming bargain. Currently today no such bargains exist. In time these totally different asset categories will go their separate ways despite the Fed's meddling and bargains will present themselves. Unfortunately "The Great Wait Continues!" [Currently today it is not the return on your money but the return OF your money.]
DYI
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Best of Times, Worst of Times
Meb Faber: The U.S. market is a little bit expensive. And one of the challenges of the valuation is that people want to fall into one of two camps. They either want to believe that things are cheap (“It’s screaming buy!”) or that things are expensive (“It’s going to crash!”). People think in very binary terms, and they hate thinking in terms of it being a spectrum of future probabilities.
It’s boring to hear, but the more the market goes up, the fewer future returns there are going to be over the next, say, 10 years. The more it goes down, the higher the returns will be. We expect future returns to be in the 4 to 5 percent nominal range going forward.
It’s not horrific. It’s better than bonds. But you run into some problems as the market gets more expensive. The higher it gets, the higher the chance you have of a large drawdown.
There’s a study out now that tracked the median stock valuation for the S&P 500, and on a price-to-sales basis, going back to 1960s, it’s the highest it’s ever been—ever!
The good news is most of the rest of the world is really cheap, and in some places, it’s exceptionally cheap. In our global value fund, we look at the bottom quartile of developed and emerging countries, and that bucket is the cheapest it’s been since the bottom in 2009, the bottom of 2003 and the early 1980s. And if you wondered what the three best times to invest in our lifetime are, those are pretty good starting points.DYI Comments: If I'm able to find quality stats for foreign markets DYI will apply our averaging formula to those markets until then we will stick with our four domestic assets.
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The New Normal for the American Dream – 3 Cornerstones: Low wage jobs, high levels of college debt, and a retirement that consists of working until you pass away.
There seems to be a growing acceptance that the American Dream is hardly as accessible as it once was. Low wage jobs, higher education tuition pushing many into untenable levels of debt, and a new vision of retirement all seem to connect into one new theme. The new theme revolves on a much more challenging road in achieving the American Dream. The majority of working Americans have no sizable portion of stock wealth. In fact, close to 90 percent of stock wealth is in the hands of 10 percent of the population. That is why in spite of the rise of the stock market by 200 percent since 2009, many Americans remain gloomy when it comes to the economy. They are merely spectators to the high flying charts of Wall Street. Most Americans do know that their wages are stagnant, that food costs are jumping, healthcare is anything but affordable, and the road to a college education is paved with high levels of debt. Even the cornerstone of the American Dream which is a home, is very expensive thanks to hot money flowing into the sector and crowding out regular home buyers and pushing the home ownership rate to multi-decade lows. What is the New Normal when it comes to the American Dream?
1 out of 3 Americans have no savings at all. Half of the country is living paycheck to paycheck. Most retirees are going to rely on Social Security as their primary source of income in retirement. This is why for most of the country, the new retirement is no retirement. Many will be working until their hearts stop beating.
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Borrowing from 401(k) can cost more than you think
The number of investors borrowing from their 401(k)s has been steadily increasing for more than a decade. Today, more than one in five people, or 22.5% of Fidelity's 401(k) investors, borrow against their retirement savings, up from 18.7% in 2000, according to Fidelity's analysis of 13 million investors.
What's most concerning, says Jeanne Thompson, vice president of thought leadership for Fidelity, is that the analysis finds that a significant portion of those who borrow aren't able to maintain their previous savings rate: 40% of borrowers reduce their savings rate, and of those, more than a third stop contributing to their 401(k) altogether within five years of taking a loan.
They may also be in the most trouble when it comes to paying the loans back. Known for only staying at companies a few years, Gen Y could be hurting their retirement savings even more when they leave a company, which is when 401(k) loans have to be paid off. Those who can't pay off their loans in full still have to pay all taxes owed on the balance and a 10% penalty if they're younger than 59.5, Thompson says.DYI Comment: For first time home buyers here is my take on borrowing money from your 401k. Those who are purchasing a home with a cost at or below two times your income then using monies from your 401k to drive down the mortgage closer to one time income or less; this is not only perfectly acceptable but a very conservative strategy. 15 year mortgage or if possible 10 year loan you can can have your house free and clear very quickly. Believe me their is nothing like having a paid for house especially when the next economic downturn arrives.
DYI
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