Bear markets happen more than people think: Since 1940 we have encountered 12 bear markets.

It should be clear that bull runs do not last forever.  In fact, there seems to be a natural ebb and flow to the stock market.  We’ve had a very solid 6 year run and the fact that wages are still not keeping up with inflation, we know that something has to give.  Either stock market gains trickle down (unlikely) or a correction is bound to occur.  The market right now is fully hooked on the Fed’s easy money policy.  Any hint that the Fed may raise rates is met by sudden minor corrections.  At some point, the market is going to fully wake up and a bear market is likely to emerge.

DYI 

Professor Hussman tell's it like it is with a no holds barred insights as to the economy and financial assets. A must read for value driven investors!

Eating Our Seed Corn: The causes of U.S. economic stagnation, and the way forward 

John P. Hussman, Ph.D.

• The U.S. has become a nation preoccupied with consumption over investment; outsourcing its jobs, hollowing out its middle class, and accumulating increasing debt burdens to do so.

• U.S. wages and salaries have plunged to the lowest share of GDP in history, while the civilian labor force participation rate has dropped to levels not seen since the 1970’s. Yet consumption as a share of GDP is near a record high. This gap between income and expenses has been financed by debt accumulation, encouraged by the Federal Reserve’s policy of zero interest rates, and enabled by fiscal policies that prioritize income replacement rather than targeted spending and investment.

One of the central policy errors since the global financial crisis, and indeed since the collapse of the technology bubble after the 2000 market peak, has been the notion that economic problems caused by financial crisis must be fixed by financial means; monetary policy in particular. Unfortunately, this line of thinking has progressively weakened the U.S. economy, making it increasingly dependent on debt, encouraging the diversion of scarce savings to speculative purposes, promoting beggar-thy-neighbor monetary policies abroad that encourage the substitution of domestic jobs for cheaper foreign labor, and creating what is now the third U.S. equity valuation bubble in 15 years.

DYI 

Generational Dynamics

John J. Xenakis

Puerto Rico bankruptcy may be imminent, potentially a 'seminal event'

Marilyn Cohen, the CEO of Envision Capital Management, appeared on Bloomberg TV on Friday to analyze the debt situation in Puerto Rico. According to Cohen, a $70 billion bankruptcy in Puerto Rico is a virtual certainty, as early as July.Many people have invested in Puerto Rico bonds because they pay 10% interest (yields) and because under federal law they're "triple-tax free," meaning that you can earn 10% interest every year and not have to pay federal, state or municipal tax on the interest you collect. It's a sweet deal, provided that Puerto Rico doesn't go bankrupt, because if it does, then you lose most or all of your initial investment. 

According to Cohen, the unemployment rate is 13.7%. Only 700,000 of the 3.5 million people, or 20%, work in the private sector. The other 80% either are on welfare, or they receive unemployment or other aid, or they work for the government. Year after year, Puerto Rico sells more and more bonds, and investors eat them up because of the high tax-free yields. But now their string has run out. 

According to Cohen, the bankruptcy will hurt a lot of people. She compares it to the Detroit bankruptcy, which didn't really hurt too many people -- the bankrupt debt was $18 billion, but few ordinary people owned Detroit bonds, as most investors were institutions that hedged their purchases with credit default swaps. 

But Puerto Rico's debt totals $70 billion, and she says that huge numbers of ordinary investors are going to be hurt. Even if they don't individually own PR bonds, they own them through their 401k's or other investment funds, which have been boosting returns by purchasing the PR bonds. These funds will all lose significant principal in a PR bankruptcy. According to Cohen, this bankruptcy will be a "seminal event." 

After Detroit and Puerto Rico, Cohen says that the most likely next municipal bankruptcy will be Chicago, whose finances are "a mess."

DYI 

The Big Four Economic Indicators: Real Retail Sales

Retail Sales fell again in February, down 0.58%, the third month of decline and substantially below estimates. The inflation-adjusted data, using the seasonally-adjusted Consumer Price Index, came in even worse at -0.80%. The chart below gives us a close look at the monthly data points in this series since 2009. I've included a linear regression to help us identify the trend.

 
DYI Comments:  Things are becoming interesting as the possibility of a recession call nears.  A global equity and junk bond bubble all that is needed is an event (recession?) for the pin to find the bubble and pop it.  Hold onto your hat and cash as better values are ahead of us.

The Great Wait Continues...
DYI

The Great Disconnect!

Currently today the U.S. stock and bond markets are at all time highs with valuations greater than prior market tops except for the year 2000.  And yet despite all of the happy talk the U.S. economy is nowhere near back to normal.

An economy on the mends?  Home ownership continues to drop precipitously.

  

The Labor Force Participation Rate.  So many of our citizens have simply given up looking for work dropping our headline unemployment so touted by our politicians.  The chart below is far more indicative of employment.

 

Inactivity Rate for Working Age Men 25-54.  Since the end of the recession has increased from 10% to 12%.  If this goes any higher this will have severe societal implications.

 

 Real Medium Household Income.  Incomes are down from the year 2000 and hasn't shone any  positive upward trend.

Inflation.  Prices are up 50% since the year 2000.  It is amazing that incomes have done as well as they have with this headwind.

Government Social Benefits SNAP (food stamps).  So many on relief programs and no real sign of abatement.

The Velocity of Money:  In a healthy economy money turns over quickly and yet continues to drop after the recession ended.

 

The Great Recession continues despite all the happy talk from the talking heads on TV the economy at best is trolling at the bottom, unfortunately this so called recovery is long in the tooth an upcoming recession should be anticipated.  Before things get better the odds favor them getting worse.

DYI 

A Patient Fed Considers Losing Patience

By: 

 Peter Schiff

Tuesday, March 10, 2015

With the economy now clearly losing steam, based on the drop in GDP from 3rd to 4th quarters, and general macro data coming in very weak (Zero Hedge, 2/18/15), I believe the Fed wants desperately to move those goalposts. But after a series of seemingly strong jobs reports, culminating with a strong 295,000 jobs in February, the market expects that "patient" will soon disappear from the statement. The Fed wants to comply, thereby signaling that everything is fine. But at the same time it doesn't want the markets to conclude that rate hikes are imminent when it does.

In other words, they are searching for a way to drop the word "patient" without communicating a loss of patience. What? This is like a driver telling other drivers that she plans on engaging her turn signal before making a left, but then wonders how to hit the blinker without actually creating an expectation that a turn is imminent. This seems to be a question for psychologists not bankers. Perhaps it is looking for a new word to replace "patient"? Something that implies a slightly less patient outlook, but that certainly does not imply imminence. "Casual" or "nonchalance" may fit the bill. How would the markets react to a "nonchalant" Fed? Time for a focus group. 

The business cycle tells us that recoveries do lose momentum over time. The current recovery is already five years old, and is, statistically speaking, already well past its prime. And since low rates encourage the economy to take on more debt, the longer the Fed waits to raise rates, the more debt we will have when it does. This means that the debt will be more costly to service when rates rise, which will throw even more cold water on the "recovery."

The Fed's real predicament is not how to raise rates, but how to talk about raising interest rates without ever having to actually raise them. If we had a real recovery, the Fed would not need to couch its language so delicately. It would have just pulled the trigger already. But when its communications and its intentions are different, credibility becomes a very delicate asset.

Yellen Sends Odds of Any Rate Increase Below 50% Until December

The likelihood that policy makers will lift their benchmark rate from near zero in September fell to 39 percent from 55 percent on Tuesday, according to calculations by Bloomberg using federal fund futures contracts. Futures traders have wiped out the chance of an increase in June, assigning it an 11 percent probability. 

Eurodollar futures, which are used to speculate on the path of the Fed’s policy rate, signal that traders estimate the policy rate reaching a peak rate of 1.93 percent by the end of 2018, down from 2.14 percent priced-in on Tuesday. Fed officials project the long-run policy rate at 3.75 percent.

DYI Comments:  DYI's time line for debt deleveraging to conclude is five to seven years from now or around 2020 to 2022.  Only then will the Fed's move to reduce their balance sheet and allow rates to move upward in any meaningful fashion.  The nosedive in commodity prices has deflationary implications which will stretch out our central bank time line for raising rates including many other central banks, as exampled European Central Bank, Bank of Canada, Bank of England, and Bank of Japan.  On balance there is significant pressure for rates to stay low or decline for years to come.

It is unfortunate that with sub atomic low interest rates our ability to generated profits in the securities markets has been hampered significantly.  Institutions and citizens alike now have a zeal for yield mentality (desperation) and have "jacked up" prices way beyond their historical averages.  It is now nothing more than a speculator's market for the past two years.  So far the speculators are the winners with the value players appearing to be out of step.  The old expression, "they don't ring a bell when the market tops."  Not to worry these gains of the last two years will be transitory as any value player will point out (that bell has been ringing for two years).  The return of your capital today is far more important than the return on your money.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  3/1/15

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

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

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

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

DYI

Nowhere to Hide!

Extremes in Every Pendulum 

John P. Hussman, Ph.D.

Whether or not it is fully appreciated, we are observing extremes in nearly every pendulum of the global financial markets. The situation is likely to be seen in hindsight as one of the broadest points of financial distortion in history. Broadest, because unlike the 2000 peak when technology and large capitalization stocks were more overvalued on reliable measures than they are today.

The median stock price is now more overvalued than in the year 2000.

It’s true that on historically reliable valuation measures that are best correlated with actual subsequent total returns on stocks, the 2000 peak remains the most overvalued point for the S&P 500 in U.S. history, though only about 20% above present valuation levels on those measures (there are certainly many popular but unreliable measures that suggest only moderate overvaluation here). Aside from that 2000 peak, the S&P 500 itself is now more overvalued than at the 1929 peak, not to mention the lesser 1972, 1987 and 2007 extremes. We estimate that the S&P 500 Index is likely to be below its present level a decade from now, though adding dividends is likely to raise the nominal total return to about 1.6% annually on a 10-year horizon.

DYI's  

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.

Market indicators suggesting a correction is coming: On Black Tuesday Shiller PE Ratio was at 30. Today it is at 26.2 and volatility is back in a big way.

Stocks are incredibly overvalued based on earnings.  While companies like Amazon and Apple blow it out of the water, many others are not.  The current PE ratio is inflated. 

When you evaluate a company looking at price-to-earnings is important.  How much are you willing to pay to get a dollar back?  In essence that is what we are looking at with the PE ratio and right now we are looking frothy:

What this is signifying to us is that the demand to ship goods is low thus pushing prices lower.  The last time we saw a crash like this we ended up with the Great Recession.  Take a look at oil prices:

Oil has collapsed in the last few months alone.  Many were getting accustomed to $100 a barrel oil only to see it drop to $47 a barrel.  The big push for this is plenty of supply with moderating demand.  Then you have OPEC maintaining output to flush out high cost producers and gain market share.  Of course this hit is going to reflect in oil producing countries like Russia, Canada, and Venezuela.

Does any of this sound like a stable market?  Having a system addicted to perpetual debt is not a solution.  It is merely a temporary measure to allow the financial wizards to siphon off real production into their hands.  In housing you had Wall Street buy up many homes driving prices higher and rents higher only to suck away more income from working families.  How is that good?  This was subsidized by the Fed with their negative interest rate policies.  Again, nothing comes for free in this world. 

The S&P 500 has gone up 200 percent since 2009.  A correction is bound to happen and the amount of volatility hitting the system currently is bound to expose some cracks.

Continuing with Professor Hussman

Next, consider the bond market. Unlike 2000, when 10-year Treasury yields of 6.5% still offered somewhere to hide, the present environment offers bond yields to investors that are scarcely higher than 2% in the U.S., with German yields at negative levels even beyond a 5-year maturity. In recent years, yield-seeking speculation has encouraged record issuance of junk debt and “covenant lite” leveraged loans (loans to already highly-indebted borrowers). This is simply a different iteration of what we observed prior to the mortgage crisis, when the yield-seeking security of choice was mortgage debt, and Wall Street’s rush to create more “product” fueled a speculative housing boom as credit was extended to borrowers lacking durable creditworthiness. The current episode is likely to end just as badly, though even more concentrated on the equity market, as a primary object of speculation in recent years has been debt issuance for the purpose of leveraged buyouts and equity buybacks, all of which looks fine only while historically volatile corporate profit margins remain extended at cyclical extremes.

DYI Comment:  Here we go again....Another debt blow off; this time in the junk bond arena. Central bank inspired boom bust cycle.  With interest rates so low on high quality debt especially Treasury securities, there is nowhere to go to for a historically competitive return.  If you believe rates will be moving up soon don't bet on it.  Here is a chart from the Atlanta Fed forecasting GDP growth for Q1 of this year.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 0.3 percent on March 17, down from 0.6 percent on March 12.

   Continuing with Professor Hussman

Again, it’s tempting to think about currencies in simplistic terms, assuming that the quantity of the currency is all that matters for valuation, and therefore that quantitative easing in Japan and Europe, coupled with less accommodative policy in the U.S., should result in unending depreciation in foreign currencies. Just as elevated equity valuations in recent years hasn’t prevented even further speculative extremes, we can’t rule out the possibility that investors will continue to act on a simplistic mindset that results in massive undervaluation of foreign currencies and overvaluation of the U.S. dollar on the foreign exchange markets. Rather, our assertion is that the deviations of prices from valuation norms mean something about subsequent returns, particularly over the complete cycle. Because the present extreme in the global financial markets couples extreme U.S. equity valuations with extreme overvaluation of the U.S. dollar, we view investment prospects for U.S. stocks as even worse from the standpoint of foreign speculators as they are for U.S. speculators (neither can aptly be considered investors at these valuations).

DYI Continues:  Three asset categories that have value for the long term investor.  One: Gold mining companies (Vanguard's Precious Metals & Mining Fund symbol VGPMX) that have been beaten down from peak to bottom around 70%.  A tremendous sell off.  Our model portfolio currently holds 15% as gold stocks have long term potential value, however they are no longer the great bargain of 1998 - 2002 time period.  Dow to Gold Ratio is pricey, as shown in the chart below.
  
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AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  3/1/15

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

85% - Cash -Short Term Bond Index - VBIRX

15% -Gold- Precious Metals & Mining - VGPMX

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

 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

[See Disclaimer]

Two:  Oil/gas/service stocks have been beaten down as well and represent long term value.  Oil and gas prices could fall further as the world economy slows or possible outright recession.  Recommend dollar cost averaging only, to lower your cost basis. DYI's favorite, as might have guessed is Vanguard's Energy Fund symbol VGENX.

Three:  The Euro is now undervalued.  The current exchange rate is $1.06 to 1 Euro or almost parity. At the same time Vanguard's European Stock Index Fund symbol VEUSX has a 4.33% yield from dividends as compared to 1.90% for the S&P 500.  Higher dividend yield plus an undervalued currency.  I would only recommend dollar cost averaging as the Euro could drop further( only encouragement to buy more) and an overvalued U.S. stock market that very could bring down world wide markets (including Europe) again encouraging us to continue purchasing.

Tide turning in favour of European stocks after years of underperformance

* Euro zone stocks at 50-year low vs US stocks -BoA-Merrill

* Euro STOXX 50 still needs 40 pct rally to reach 2007 peak

* Region offers a better risk-reward -JPMorgan

Happy Hunting 

DYI

Updated 3-17-15

THE DIVIDEND ROOM

Just as the name Dividend Yield Investor indicates is my affinity with dividends; for they have never gone out of style as far as I'm concerned.  In the end they are the real reason investors, as opposed to speculators, purchase quality companies with increasing dividends.  In my mind these are the true growth stocks.  As the dividend is increased over time so will the stock price. As the legendary Charles Dow has written:

"To know values is to know the meaning of the market.  And values, when applied to stocks, are determined in the end by the dividend yield."  

The Dividend Room is a new addition to my blog showing a list of high quality dividend paying stocks for your further study.  All picks are basic time tested value approach. All companies have a reasonable low level of debt for their respective industry and a low PE multiple. Of course a competitive dividend yield two times greater than the S&P 500 with a payout ratio less than 85% for utilities and all others less than 50%.  Also screened companies that have increased their dividends on a regular basis (the true growth stocks). Included is additional screens based upon the Benjamin Graham approach for the defensive investor.

Our attempt is to find ten high quality companies with a yield double that of the S&P 500.  Recommend selling when the dividend yield is less than the S&P 500.

Please note:  Companies that fall off the list are not necessarily companies gone bad they simply have risen in price or no longer represent the deepest value and/or highest dividend yield.

For diversification purposes recommend building up to 40 to 50 companies.

Yield     S&P 500 Dividend Yield 1.90%

             Oil/Gas/Service 

4.00%  Helmerich & Payne symbol HP   

             Industrial Metals & Minerals
7.40%  Alliance Resource Partners LP symbol ARLP

            Utilities

6.90% Companhia de Saneamento Basico symbol SBS

4.70%   Spectra Energy symbol SEP
4.30%   AGL Resources symbol GAS

4.30%   Empire District Electric symbol EDE
4.10%   SCANA Corp. symbol SCG
4.00%  Avista Corp. symbol AVA

             Tobacco Products

4.50%  Universal Corp. symbol UVV

           

DYI recommends that you use our stock allocation formula to arrive at your allocation of stocks to bonds.  Currently it is at 28% for stocks.  For your cash holdings Vanguard's Short Term Bond Index symbol VBIRX or for those in a high tax bracket Vanguard's Limited Term Tax Exempt VMLTX.

 This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.

This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.

Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

America Is In Deflation. So What?

Instead, the U.S. has now technically slipped into deflation for the first time since shortly after the Great Recession. Consumer prices as measured by the Labor Department fell 0.7 percent from December to January — the largest monthly drop since December 2008 — as the result of plunging gas prices. That left the Consumer Price Index down 0.1 percent from the previous year, the first such drop since October 2009. 

 
As they consider the timing of their first interest rate hike since 2006, Federal Reserve officials, including Fed Chair Janet Yellen, seem to agree. In her testimony before Congress this week, Yellen noted that the Fed’s preferred measure of inflation continues to run below the 2 percent target rate. Yet the central bankers are looking beyond what they expect to be a short-term dip. 

“Despite the very low recent readings on actual inflation, inflation expectations as measured in a range of surveys of households and professional forecasters have thus far remained stable,” Yellen testified. “The [Federal Open Market] Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

DYI Comments:  The only notion that I have for the Fed's to raise rates providing room to drop rates when the next recession occurs.  Currently and for the next four or five years deflation or very low inflation will rule the day.  When Boomers retire in numbers soaking up unemployment until we go into a labor shortage.  Add on the costs of Medicare and Social Security the Fed's will relent to political pressure to monetize a portion of future borrowings. The 2020's will be marked by high taxes, high inflation, and a labor shortage.  Until then low inflation/deflation will rule the day.

DYI  

Copper prices have further downside risks

Is China’s 1929 moment coming?

How did China get here? Well, once upon a time, China got rich by making low-cost things and selling them to rich countries. Now this was always going to run out once its workforce stopped growing and its wages started rising faster, like they already have, and it got undercut by countries witheven cheaper labor. But it ran out a little sooner than that because the global financial crisis crippled its customers. So now China is getting rich by making the things it needed to be a rich country. New houses, subway lines, and roads, all sleek, all modern, and all paid for with borrowed money. A lot of it came from unregulated lenders, so-called "shadow banks," and was funneled through local governments and state-owned companies that then plowed the money into the property market. 

But there's still something ... wrong. It's a bubble mentality that comes out of the fact that China has more savings than it knows what to do with. Now a big part of the problem is that China's banks are only allowed to pay people piddling interest rates, all so that exporters can borrow for less. That means, though, that people don't like to keep their money in banks, since they're really losing money on it once you account for inflation. Instead, they pour their money into property, snatching up empty apartments and leaving them like that, because they think those are a better store of value. Or they buy shadow bank products with names like "Golden Elephant No. 38" that promise 7.2 percent returns, but, it turns out, are only backed by an almost-abandoned housing project. In short, anytime people find anything that resembles a decent investment, it gets bid up until it's unmoored from any kind of economic reality. 

And now that's happening to stocks. It's still nowhere near its 2007 highs—in fact, it's barely halfway there—but the Shanghai index has nonetheless been on a tear the last six months, up 50 percent in that time. Why? Well, it's not earnings. Those are down. No, it's the debt. Investors have become so exuberant, perhaps irrationally so, that they aren't just throwing their own money into the stock market, but borrowed money, too. Margin accounts, which let people do this, more than doubled in 2014. And to give you an idea how important this has become to the market, stocks tanked7.7 percent in a single day after the government announced it wouldn't let the three biggest brokerages open any new margin accounts for the next three months. It sure looks like China is replacing its housing bubble that just popped with a new stock bubble. 

The nightmare scenario is that China's stock and housing bubbles both burst at the same time that rates and inflation are low. That's because there wouldn't be any new, shiny bubble for people to get excited about, not that they'd need one when inflation is barely in positive territory. They could just sit on their cash instead—and they might. Psychology is a tricky thing. It's not easy to make people feel confident again, even for a government that has the kind of singular control over its economy that China's does. Especially when that's already become harder than it used to be now that money, for the first time in a long time, is leaving the country. The snag is that China's currency "wants" to weaken, but they're not willing to give up their dollar peg—which forces them to shrink their money supply at the exact moment that their economy needs a bigger one. China, in other words, has plenty of problems even if its people don't become too scared to do anything with their money. But if they do, watch out. 

It could be 1929 with Chinese characteristics.

Copper prices have further downside risks

A. Gray Shilling

So why are copper producers ignoring all the obvious economic signals -- lower demand, excess supply and falling prices -- and ratcheting up production? The answer is that producers have powerful incentives to increase output. (Disclosure: Gary Shilling manages investment portfolios in which copper is shorted, so I have a financial interest in falling copper prices.)  

Let me explain. Think back to the early 2000s, when it was accepted wisdom that fast-growing China would soak up most of the world’s commodities. China, indeed, has been buying more than 40 percent of annual global output of copper, tin, lead, zinc and other nonferrous metals. It's been gobbling up 50 percent of seaborne iron ore and huge quantities of coal. And it has built large stockpiles of crude oil. 

As manufacturing shifted to China from Europe and North America, the Middle Kingdom became a much bigger buyer and user of commodities than its domestic economy required.  

The jump in prices led commodity producers to invest in big new operations in Australia, Brazil and elsewhere. Many of these projects came online just as global demand slowed in a classic boom-to-bust commodity cycle. 

But even as China's commodity-intensive exports to North America and Europe atrophy and China's own infrastructure spending slows, excess capacity keeps building. The reason: It’s not economical to suspend some of these projects due to high sunk costs and shutdown expenses. Some producers, moreover, may not be free to slash output as prices swoon, especially if they’re government-controlled and need foreign exchange to service sovereign debts.  

To see how market versus non-market forces are interacting, compare two widely used metals, aluminum and copper. Aluminum prices are down 32 percent from their April 2011 top, much less than copper's 41 percent freefall. Six of the top 10 aluminum companies are in Russia and China, where government decisions, not economic forces, often prevail. 

The government and state-owned enterprises in China push aluminum output to provide employment and to achieve other national goals, such as self-sufficiency in aluminum. In Russia and India, the goal is to generate revenue from aluminum exports that can be exchanged for currencies needed to pay down debt; in Brazil, the driver is substituting domestically produced aluminum for imports. 

Aluminum production in these emerging economies has been booming. Even though half of China’s output is produced at a loss, the Chinese government buys excess metal from smelters to avoid bankruptcies, bad bank debts and unemployment. 

 Much of the surge in aluminum output, however, is offset by cutbacks in the U.S., Canada and Australia. Alcoa, for example, is closing high-cost plants around the world. Since 2009, the aluminum industry in developed countries has shuttered more than 50 smelters. These moves have kept global prices from plummeting.  

By contrast, copper is produced mainly in the developing countries of Chile, Peru, Congo, Zambia and Russia. China is a net exporter of aluminum but an importer of copper. China had been building copper stockpiles but apparently that has slowed, along with China's slackened growth. The premium paid for copper on the Shanghai market over the London Metal Exchange was $85 a ton at the end of January, down from $160 a year earlier. 

Copper output in developed countries has been restrained by falling prices, except in the U.S. and Australia, where output has risen because the marginal cost of production is even lower than market prices. Copper inventories are rising as output grows in Chile, China, Russia and other countries. In Chile, the world’s largest copper producer, stocks rose by 170,000 tons in the second half of 2014, the highest in a decade except for a brief spurt in 2013. 

Copper is used in almost every manufactured product, from plumbing fixtures to autos to machinery. Some 56 percent goes into electrical equipment and construction, which are weakening as China's economy shifts from an emphasis on manufactured exports, infrastructure and construction to consumer spending and services. 

Since copper is traded in dollars, the strong greenback makes it more expensive for non-U.S. buyers, putting more downward pressure on prices. At the same time, since about 93 percent of copper is produced outside the U.S., labor and other production costs are dropping in dollar terms, encouraging yet more output. 

The upshot is that about 20 percent of mined copper worldwide is unprofitable at current prices.  A global copper surplus is likely this year, the first since 2009, with supply exceeding demand by 500,000 tons, or 2 percent of annual refined production, according to Goldman Sachs. The International Copper Study Group, made up of copper-producing and consuming countries, says demand will rise just 1.1 percent this year while output jumps 4.3 percent.  

In an atmosphere of falling commodity prices, copper will probably continue to be weak; it's a favorite short in portfolios I manage. The lower the price of copper, the more developing economies must produce and export to get the same number of dollars to service their foreign debts. And the more they export, the more the downward pressure on copper prices. That forces them to produce and export even more, in a self-reinforcing downward spiral. 

Bull market for stocks is 6 years old: Is the run-up over?

The housing market had collapsed. Lehman Brothers had gone under and General Motors was on the verge of bankruptcy reorganization. The U.S. was in a deep recession, and stocks had plunged 57 per cent from their high in October 2007. 

Fast forward six years, and investors are enjoying one of the longest bull markets since the 1940s. 

James Abate, chief investment officer of Centre Funds, says he sees a much stronger probability of the U.S. economy falling into recession than most investors and analysts. He says the stock market's gains are at odds with the performance of the economy. Growth remains steady, but could hardly be described as robust. That means companies will have a hard time boosting sales, ultimately undermining their earnings. 

"We will not be celebrating the seventh anniversary of the current bull market," Abate says.

DYI

Majority of U.S. public school students are in poverty

For the first time in at least 50 years, a majority of public school students across the country are considered “low-income”, according to a new study by the Southern Education Foundation. While poor children are spread across the country, concentrations are highest in the South and in the West. 

The Southern Education Foundation reports that 51 percent of students in pre-kindergarten through 12th grade in the 2012-2013 school year were eligible for the federal program that provides free and reduced-price lunches. The lunch program is a rough proxy for poverty, but the explosion in the number of needy children in the nation’s public classrooms is a recent phenomenon that has been gaining attention among educators, public officials and researchers. 

“When they first come in my door in the morning, the first thing I do is an inventory of immediate needs: Did you eat? Are you clean? A big part of my job is making them feel safe,” said Sonya Romero-Smith, a veteran teacher at Lew Wallace Elementary School in Albuquerque. Fourteen of her 18 kindergartners are eligible for free lunches. 

She helps them clean up with bathroom wipes and toothbrushes, and she stocks a drawer with clean socks, underwear, pants and shoes. 

“We have to think about how to give these kids a meaningful education,” he said. “We have to give them quality teachers, small class sizes, up-to-date equipment. But in addition, if we’re serious, we have to do things that overcome the damages­ of poverty. We have to meet their health needs, their mental health needs, after-school programs, summer programs, parent engagement, early-childhood services. These are the so-called wraparound services. Some people think of them as add-ons. They’re not. They’re imperative.”

DYI Comment:  Education and poverty and their controversial solutions have been with us since at least the 1960's.  One area which deals with the expanding income inequality is shown by this chart below.

1971 Tricky Dick, or for you younger folks President Richard Nixon closed the gold window for international convertibility dollars to gold.  Almost immediately the bottom 90% began their journey of lower standards of living only having a brief respite during the roaring 90's.  The top 1% after a brief pause during the 1970's went almost vertical except for the stock crashes of 1987, 2000, 2007. This chart does not show the bottom 10% or 20% who's income has fallen off a cliff.  Without gold as a standard politicians will allow budget deficits to explode.


This admission of credit ends up into the hands of the top 10% (especially the 1%) first, slowing filtering through our different strata's until the poor only receive inflated currency that has reduce their standard of living.  What little disposable income is available to save it becomes a worthless endeavor with inflation greater than their return.

To be sure there are myriad of other problems not related to currency debasement.  This however is so huge that hopefully the left and right could agree upon.

DYI
    

From bust to boom: How the world became addicted to debt

$27 trillion. That's the amount global public debt has grown by since the financial crisis gripped the world eight years ago, according to the McKinsey Global Institute. 

By and large, the story of the world economy has been one in which emerging markets have loaded on debt, while the developed world has struggled to reduce the burdens it amassed in the wake of banking bail-outs and years of stagnant economic growth. 

The Bank of International Settlements calculates government debt in G7 countries has grown by 40 percentage points to 120pc of GDP since 2007. 

China's total debt has quadrupled since 2007, rising to $28 trillion from just $7 trillion before the crisis. At 282pc, China’s debt as a share of economic output is now larger than the United States, and is only surpassed by Japan. 

With the global indebtedness reaching its highest level in 200 years, the IMF has warned the world will need a wave of defaults, savings taxes and higher inflation to finally clear the way for recovery.

IMF paper warns of 'savings tax' and mass write-offs as West's debt hits 200-year high

Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund. 

The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.

The paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression - defined as an “opaque tax on savers” - as used in countless IMF rescues for emerging markets. 

Financial repression can take many forms, including capital controls, interest rate caps or the force-feeding of government debt to captive pension funds and insurance companies. Some of these methods are already in use but not yet on the scale seen in the late 1940s and early 1950s as countries resorted to every trick to tackle their war debts. 

The policy is essentially a confiscation of savings, partly achieved by pushing up inflation while rigging the system to stop markets taking evasive action. The UK and the US ran negative real interest rates of -2pc to -4pc for several years after the Second World War. Real rates in Italy and Australia were -5pc.

Austria is fast becoming Europe's latest debt nightmare

Ah Austria, land of schnitzel, lederhosen, Mozart, alpine meadows and beer drinking. Less widely appreciated is its special place in the history of catastrophic banking crises. 

It was the failure of Creditanstalt, a Viennese bank founded in 1855 byAnselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America. 

No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right? 

Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events. 

In Hypo’s case, the bail-in also threatens knock-on consequences for public bodies elsewhere, including Bayern Landesbank, a big holder of Hypo bonds which is owned by the German state of Bavaria, and the Munich based FMSW, which is again publicly underwritten. 

All this is just the tip of the iceberg; Europe is awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off. 

Massive creditor losses are in prospect. The European authorities had us all half convinced that Europe’s debt crisis was over. In truth, it may have barely begun.

DYI Comments:  No doubt additional problems await Europe as the EU tightropes keeping the union together.  This has pounded down security prices of your leading European companies as their average yield is at a competitive 4.33% as compared to the S&P 500 of 1.92%.  DYI's favorite is Vanguard's European Stock Index Fund symbol VEUSX. Recommend dollar cost averaging only; with the U.S. market at nose bleed levels any meaningful sell off will drop European markets, at least temporally.

DYI    

By the Year 2030 Driverless Vehicles will be Common Place! A Huge Change for the World's Transportation Industry.

Self-Driving Cars Will Be in 30 U.S. Cities 

by the End of Next Year 

Automated vehicle pilot projects will roll out in the U.K. and in six to 10 U.S. cities this year, with the first unveiling projected to be in Tampa, Fla. as soon as late spring. The following year, trial programs will launch in 12 to 20 more U.S. locations, which means driverless cars will be on roads in up to 30 U.S. cities by the end of 2016. The trials will be run by Comet LLC, a consulting firm focused on automated vehicle commercialization. 

“We’re looking at college campuses, theme parks, airports, downtown areas—places like that,” Corey Clothier, a strategist for automated transportation systems who runs the firm told, The New York Observer. 

At the first test site in Tampa, the plan is to start with public transit around the Museum of Science and Industry and eventually expand to the University of Southern Florida campus, as well as the neighboring City of Temple Terrace. The Comet team is also planning trials in two other Florida cities, in Greenville, S.C. and in Seattle, where the 70-person buses will be used in public transit. 

At 25 to 40 percent cheaper, the cost to ride the driverless public transit vehicles will be significantly less expensive than traditional buses and trains, according to Mr. Clothier. They’ll also be far less expensive to operate. The vehicles are electric, rechargeable and could cost as low as $1 to $3 to run per day. 

“You can imagine a lot of the journalists wanted to see this thing run into pedestrians, so they were almost jumping in front of it,” Mr. Reed said laughing. “But it was doing what it was supposed to do and stopping.” 

He described his first experience in a driverless vehicle as feeling “vulnerable at first,” but said that it quickly became very comfortable. 

“It’s a bit unnerving to begin with because you realize the system is in control and you’re relying on the sensors and brakes to keep you safe, but very quickly after seeing it respond to pedestrians and such, you see it work and become very comfortable. I became relaxed even,” he said, adding how happy we’ll all be able to just watch Netflix while our cars drive us around.

DYI Comments:  Driverless vehicles will be arriving much faster than expected.  This change is being propelled to save on mountainous labor costs in our transportation industry. Closed type circuits for hotels, hospitals, universities, etc. will be the first to switch.  This will serve as a test bed for the new technology which will provide the base such as city bus services.  The big labor reducer is long haul trucking.  Once that is in place then driverless cars and trucks for individuals will quickly fall into place.

Irving Kahn, the world's oldest investor, dies at 109

The investment veteran, who doubled his money by predicting the 1929 crash, was a disciple of Benjamin Graham. He spoke to the Telegraph last summer about how he picked winners

Irving Kahn, feted as the world's oldest professional investor, has died aged 109.Just six months ago he told the Telegraph, in one of his last interviews, how he doubled his money by side-stepping the 1929 Wall Street crash. 

Co-founder and chairman of Kahn Brothers Group Inc, Mr Kahn was a disciple and colleague of Benjamin Graham, Columbia Business School professor and arguably the most influential investment expert of the 20th Century. 

Mr Kahn said: “In the Thirties Ben Graham and others developed security analysis and the concept of value investing, which has been the focus of my life ever since. Value investing was the blueprint for analytical investing, as opposed to speculation.” 

Graham was a lecturer at Columbia University in New York, where his pupils included Warren Buffett, and Mr Kahn was his teaching assistant. “They’d take the subway to Columbia together,” said Tom Kahn, Irving Kahn’s son, who also works for the family investment firm.

What he said about the market last summerMr Kahn said he was finding few bargains after the S&P 500 index had hit repeated record highs. 

“I try not to pontificate about the market, but I can say that my son and I find very few instances of value when we look at the market today. That is usually a sign of widespread speculation,” he said.

US Stock Market: Is the Bell Finally Ringing Loudly Enough?

When do retail investors and corporations usually agree to such an extent that there was never a better time to buy stocks than now? As a rule, they are only doing so after the market has risen for several years. Needless to say, they also agreed that the absolute worst time to buy equities was when the S&P 500 traded below 700 points in early 2009. Stock buybacks collapsed at the time and retail investors yanked record amounts from stocks. The Daily Sentiment Index showed a mere 3% of S&P futures traders were bullish at the March 2009 low.

The caveat mentioned above that when buyback records were broken in 2006, the market still kept rising for a while before entering the twilight zone of the financial crisis should of course not be dismissed out of hand. However, no two periods of market history are exactly the same. What worked last time, may not work in the same manner this time. There is another parallel with 2006, and that is the fact that the market was overvalued on both occasions – only, it is a lot more overvalued now. As we have previously pointed out, in terms of the median stock, the stock market is actually at its most overvalued level in history.

DYI