Overvalued markets with a deteriorating economy; Houston we have a problem!

Uh-oh, Canada. China Pales as a Risk to U.S. Growth

Canada probably experienced a technical recession in the first half of 2015, and the fact that the No. 1 U.S. export market is in a slump could spell bad news for growth in the world's biggest economy. 

"When Canada hurts, U.S. exporters do, too," Bricklin Dwyer, an economist at BNP Paribas in New York, wrote in an Aug. 27 note to clients titled "Canada (not China) matters more."

DYI quick comment:  Overvalued markets with a deteriorating economy;  Houston we have a problem! 

Fed Up Investors Yank Cash From Almost Everything Just Like 2008

Since July, American households -- which account for almost all mutual fund investors -- have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse. 

Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta. 

“Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said in a phone interview. “It may be that this is an interesting oddity but if we continue to see this it could reflect a more broad-based nervousness on the part of household investors.”

If You Need to Reduce Risk, Do it Now

John P. Hussman, Ph.D.

If you need to reduce risk, do it now

It’s important to recognize that the S&P 500 is down only about 6% from its record high, while the most historically reliable valuation measures are double their historical norms; a level that we still associate with expected 10-year S&P 500 nominal total returns of approximately zero. 

"We fully expect a 40-55% market loss over the completion of the present market cycle." 

"Such a loss would only bring valuations to levels that have been historically run-of-the-mill." 

Investors need not expect, but should absolutely allow for, a market loss of that magnitude. If your investment portfolio is well-aligned with your actual risk tolerance and the horizon over which you expect to spend the funds, do nothing. Otherwise, use this moment as an opportunity to set it right. Whatever you're going to do, do it. You may not get another opportunity, and if you're taking more equity risk than you wish to carry over the completion of this cycle, you still have the opportunity to adjust at stock prices that are close to the highest levels in history. 

Again, if your portfolio is well aligned with your risk-tolerance and investment horizon, given a realistic understanding of the extent of the market losses that have emerged over past market cycles, and may emerge over the completion of this cycle, then it's fine to do nothing. Otherwise, use this opportunity to set things right. 

"If you're taking more equity risk than you can actually tolerate if the market goes south, setting your portfolio right isn't a market call 

- it's just sound financial planning." 

It's only fun to be reckless if you also turn out to be lucky. Market conditions are now more hostile than at any time since the 2007 peak. If you want to be speculating, and you can tolerate the outcome, then you're not taking too much equity risk in the first place. But it's one or the other. 

Can you tolerate a 40-55% market loss over the next 18 months or so? If not, take this opportunity to set things right. 

"That's not the worst-case scenario under present conditions; it's actually the run-of-the-mill historical expectation."

DYI Comments:  For those using a fixed asset allocation of stocks versus bonds; determine how much grief you can tolerate during a market smash (50% or greater).

I can tolerate losing ______% of my portfolio to earn higher returns:	Recommended percentage to invest in stocks:
35%	80%
30%	70%
25%	60%
20%	50%
15%	40%
10%	30%
5%	20%
0%	10%

Studies going all the way back to the 1950's and right up to the present have stayed at no higher than 20% loss for the average investor/saver.  It seems for what ever reason once past that 20% mark people will either, at best, stop investing and at worst sell out at the bottom.  My experience (40 plus years) of talking to average investors, those who understand the need to save (401k, IRA, etc) but have little or no understanding of the markets, I've placed 40% stocks / 60% bonds.  This eliminates that awful feeling in the stomach during market declines.  Of course they will have to save a higher percentage of their earnings to achieve the same goal.

What DYI attempts to accomplish through our formula based investing is to avoid or dial down your exposure to inflated markets and dial up in undervalued markets.  Using four distinctly different (uncorrelated) assets; stocks, long term bonds, gold, and cash (short term notes) hopefully a bull market can be found.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  8/1/15

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

[See Disclaimer]

Unfortunately due to the world's central banks sub atomic low interest rates plus 1st world Baby Boomers savings glut have pushed up asset prices to the moon.  Only until recently with the market smash in gold/gold & precious metal miners our allocation is up to 15%.

While everyone else is losing their heads don't go and lose yours.  This over inflated stock and bond market will pass with lower prices driving future returns higher.  For the real long term investor this is a blink of an eye.  Patient's is the mark of a value player.

DYI

GMO's 7 Year Real Return Negative -2% for Stocks...Negative -0.9% Bonds...Over Blown Market Q Ratio...Deflation is on it Way...Empire State Manufacturing Index Dropping to Recession Levels....Houston We Have a Problem......

DYI

Making Sense Of The Sudden Market Plunge

The global deflationary wave we have been tracking since last fall is picking up steam.  This is the natural and unavoidable aftereffect of a global liquidity bubble brought to you courtesy of the world’s main central banks.  What goes up must come down -- and that's especially true for the world's many poorly-constructed financial bubbles, built out of nothing more than gauzy narratives and inflated with hopium. 

Which bubbles you ask?  There are almost too many to track. But here are the main ones: 

• Corporate bond bubble

• Corporate earnings bubble

• Junk bond bubble

• Sovereign debt bubble

• Equity bubbles in various markets (US, China) and sectors (Tech, Biotech, Energy)

• Real estate bubbles, especially in the commodity exporting countries

• Central bank credibility bubble (perhaps the largest and most dangerous of them all) 

What’s the one thing that binds all of these bubbles together?  Central bank money printing.

Half Of Emerging Market Stocks Are Now In Bear Territory: The Map

DYI

When everyone is losing their heads don't go and lose yours. Patience is the friend of the value player.

Generational Dynamics

Monday was one of the most volatile days in Wall Street history, with high-volume wild swings. The DJIA fell almost 1100 points within minutes after the opening, and then recovered most of the loss, finally ending down 588 points, or almost 4%. 

The selloff was global. In Europe, stock exchanges in Britain, Germany and France fell around 5%, and in Asia, stock markets in Japan, Hong Kong and Australia fell 4-5%. 

So let's start with where we are. 

Generational Dynamics predicts that we're headed for a global financial panic and crisis. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (August 21) was at an astronomically high 21.63. This is far above the historical average of 14, indicating that the stock market is in a huge bubble that could burst at any time. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

  

I've been pointing out for years that the Wall St bubble had to burst at some point, with 100% certainty. It's impossible to predict the exact time. It's worth noting that we still don't know to this day why the stock market crashed on that particular day, Black Monday, October 28, 1929, instead of a few weeks earlier or later. 

So it's quite possible that when the crash comes, we'll never know why it occurred on precisely that day. 

Most of the commentators and analysts on Monday were their usual glib selves, saying things like, "This is a healthy correction," and "This is a buying opportunity, and "China has too small economy to affect the rest of the world." 

I listened to a number of analysts on CNBC and Bloomberg TV on Monday, and I did notice a change. Normally, mentioning the price/earnings ratio (stock valuations) is always strictly forbidden, or if it's mentioned, then the analysts simply lie, saying "it's low," which is ridiculous. But on Monday, I actually heard two or three analysts mention, however briefly, that stock valuations were unsustainably high. 

"This is quite remarkable, as if some secret code were being violated." 

There's was one particular exchange that was especially interesting. Mohamed El-Arian is quite possibly the most glib analyst on TV, always taking a professorial tone, and answering every question by intoning something like, "There are three reasons: one ... two ... three...." On Monday, he was specifically asked if stock valuations were high. He said, almost under his breath, that they were, and then quickly changed the subject to something completely different. Apparently he is not ready yet to break the secret code by saying clearly that valuations are unsustainably high, though he evidently is aware of it. It was one of the many weird things on a weird day. 

Some analysts are calling this Monday the new "Black Monday," but it's not. 

From the point of view of generational theory, October 28, 1929, is a very special day because it was a day of total panic, and it traumatized the nation, and it's remembered to this day. But this day was nothing like that, not a day of total panic. It was a bad day, but it will be soon forgotten. This was no new "Black Monday." 

What this Monday seemed like was a prelude to the real day of panic. And with stock markets plunging globally, the panic may not begin on Wall Street at all -- it may begin elsewhere and spread to Wall Street. As I wrote yesterday ( "24-Aug-15 World View -- Asian stock markets in freefall, with China in full-scale panic"), it may be that China already appears to be in full-scale panic, though it's hard for me to judge for sure from this distance. 

If I were to guess what's going to happen in the next few days it would be this: I would expect Wall Street stocks to bounce back up on Tuesday. Expect to see a lot more volatility, with stocks rebounding one day, and plunging the next. 

"Then, one day, a real panic will occur, and that will be the day that will be remembered for years." 

That day has to come, with 100% certainty. We just don't know exactly when. AP and ZeroHedge 

African currencies crashing, along with commodities and ChinaStock markets usually get most of the attention, but in fact the global selloff is applying to currencies and commodities as well.As we wrote last week ( "21-Aug-15 World View -- Kazakhstan joins the 'currency wars' as global stocks plummet"), a number of currencies are falling against the dollar, following in the lead of China's surprise devaluation of its yuan currency. 

African economies, and African currencies, are being hit hard China's devaluation and economic slowdown. More than one-quarter of Africa's exports go to China, and countries like South Africa, Kenya and Zambia are being hit hard. Zambia derives almost 70% of its export earnings from copper, and with copper prices falling, Zambia's currency fell 4.6%. The price of oil keeps falling, and oil-exporting countries Nigeria and Angola are losing substantial portions of their income. 

The price of oil is falling dramatically, reaching as low as $38 per barrel on Monday. Countries outside Africa, such as Venezuela, Russia and Saudi Arabia, are suffering because their income depends on oil being closer to $100 per barrel. 

What makes the global financial situation so precarious is that there doesn't seem to be any good news anywhere. Economic growth is tepid in the the U.S. and slowing, while there's no growth to speak of in China, Europe, or any of the developing countries with the possible exception of India.

Another bizarre twist in today's world is that investors are very concerned when the US Federal Reserve is going to raise interest rates, with the base Fed Funds Rate currently almost zero (0.13%). With all of these currencies weakening and devaluing against the dollar, the dollar is getting stronger, which will make America less competitive in the world, and affect the US economy. 

However, there's another angle to this. With near-zero interest rates in the U.S., it's been possible for countries and businesses around the world to borrow a lot of money, and go deeply into debt. If the Fed Funds Rate goes up, then the interest rates on those debts will also grow, causing further problems for these borrowers. Bloomberg and BBC and Zero Hedge

Why one economist isn’t running with the bulls: Dow 5,000 remains closer than you think

But don’t get accustomed to that, warns Chapman University professor Terry Burnham. The former Harvard economics professor, author of “Mean Genes” and “Mean Markets and Lizard Brains,” Burnham argued on this page last summer that we would see Dow 5,000 before Dow 20,000. Ten months later, and a lot closer to an eventual end to the Federal Reserve’s stimulus program, the Dow has crept closer to 20,000. But Burnham’s sticking by his prediction, suggesting that U.S. macroeconomic policy is about to look a lot less fair to people who failed to recognize it as foul.

DYI Comment:  The next few paragraphs are from his Dow 5,000 before Dow 20,000 article his reason are shorter and more concrete.  Despite the flamboyant titles I agree with the basic premise for a secular decline of this magnitude.

 But I’m not predicting a Dow of 5,000 just because it hit 15,000 so rapidly. I’ve been saying since well before the Crash of ’08 that the U.S. economy was headed for disaster. Here, then, are three rational economic reasons I think we should all be terrified. 

Americans should be saving close to 50 percent of our income. Instead, we are saving zero percent. 

Why should we be saving so much more than we are? First, we have saved too little for too long. The median person approaching retirement has approximately $100,000 saved. As Paul has pointed out repeatedly, and most recently in the NewsHour online retirement page “New Adventures for Older Workers,” that is far too little, especially given the rates of return the stock and bond markets both suggest given their high valuations. In fact, the Treasury Inflation-Protected Securities (U.S. TIPS) that Boston University economist  

"Zvi Bodie and Paul Solman have so long written about on the Making Sen$e Business Desk are actually suggesting negative returns in the future." 

My personal suggestion is that people assume zero return on investments. That’s right: zero percent. While this could be too pessimistic, it could also be too optimistic if markets tumble, as I expect them to, following the pattern of a few weeks ago. (I’m not predicting that this is the beginning of the end however — though I suppose it could be — just that we’ll see Dow 5,000 sooner than we’ll see Dow 20,000 — a lot sooner.)

 Stocks right now are terrible investments. 

As noted above, the vast majority of individuals are absolutely horrible at market timing. Investors tend to get scared in declines and excited in rallies. They buy high and sell low. In early 2009, for example, when stocks were the best buy in decades, individuals were selling stocks in record amounts. Only after stocks had doubled did individuals begin buying stocks again. Just in time, I predict, for investors to get slaughtered again. 

Conventional wisdom is to buy and hold stocks. In this case it is wisdom because people have almost always been — and will be — rewarded for hanging tight. However, lizard brain wisdom says individuals should only own stocks when the expected returns are extraordinarily high. In normal or negative times, individuals will not be able to capture equity market returns. 

Most people should not own stocks today — none. Yet individuals have been getting back into the stock market with a vengeance, and they have far more of their meager savings in stocks than they should. 

DYI Comments:  I completely agree with Chapman University professor Terry Burnham the best time to own stocks or at least a high percentage of your portfolio is when the expected return is high.  High is defined by a return higher than the long term average going back to 1926.

100% stocks

Historical Risk/Return (1926–2014)
Average annual return	10.2%
Best year (1933)	54.2%
Worst year (1931)	–43.1%
Years with a loss	25 of 89

Source: Vanguard Funds

DYI's four asset categories which are diametrically different (uncorrelated assets) that at least one will be in a undervalued bull market.  As sad as it is the most undervalued of our four asset (stocks, long term bonds, gold miners, cash[short term bonds]) cash is the decisive winner with gold at a distanced 2nd place.

Unfortunately today due to massive world wide money printing markets for traditional stocks and bonds have been priced to the moon.  Returns at best will be zero and at worst negative for the next 10 years using today as a starting point.  The Great Wait may be ending sooner than later if this is the beginning of a multi-month long roller coaster slide.  How far down?  No one knows for sure; however, don't rule out the possibility for a market smash of -45% to -60%.  Stock prices and the general economy are that disconnected.

When everyone is losing their heads don't go and lose yours.  Patience is the friend of the value player.

DYI

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  8/1/15

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

[See Disclaimer]

DYI Comments:  If this is the beginning of the long awaited market decline there will be many months of downward roller coaster market action before we reach a cyclical bottom.  So far our allocation of 0% stocks is serving DYI well.

Only until our averaging formula breaks below 46 times dividends (2.17% S&P 500 yield) will we begin make small percentage purchases (2% or 3%).  This market in relation to sales, earnings, and dividends continues to be too high for anything larger.

DYI    

 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.

"A 1930s-style global currency war, or "race to the bottom," appears to be in full swing."

Generational Dynamics

Yesterday, we reported that China's yuan devaluation was causing currency chaos in Asia. On Thursday, that chaos deepened in Asia, and spread to global stock markets. 

Thursday's most dramatic event was the crash in Kazakhstan's currency, devaluing by 23%. 

Kazakhstan's economy has been hit from all sides. It's biggest export is oil, and the price of oil has fallen almost 60% in the last year, and is still falling. The 23% tenge devaluation means that now Kazakhstan will get about 23% more for its oil. Russia and China are its top trading partners, and both Russia and China have already had substantial currency devaluations against the US dollar. The 23% tenge devaluation will help Kazakhstan's balance of trade with these and other countries. 

The global currency war that we discussed last week ( "12-Aug-15 World View -- China's yuan devaluation a humiliating setback for 'China dream'") seems to be in full swing. South Africa's rand, Brazil's real, and Malaysia's ringgit currencies all fell to multi-year lows against the US dollar in the last week. 

That's only going to be the start, according to a new report by Morgan Stanley that lists the top ten troubled currencies: Taiwan dollar, Singapore dollar, Russian ruble, Thai baht, South Korean won, Peruvian sol, S. African rand, Chilean peso, Colombian peso, Brazilian real. 

According to Morgan Stanley's foreign exchange strategy head Hans Redeker: It’s all about vulnerability. Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China." 

"A 1930s-style global currency war, or "race to the bottom," appears to be in full swing." 

 

So far, the United States dollar is not directly affected by the devaluations, but that may have to change. All of these currency devaluations have been against the US dollar, which is the international reserve currency, which means that as the other currencies have been getting weaker, the US dollar has been getting stronger. Currency devaluations are a zero-sum game, in that one country's devaluation is another country's revaluation. 

The global devaluations and the dollar's strengthening are going to affect America's balance of trade with other countries, which means that the US will be able to export fewer goods. This will affect the US economy, as hinted by the sharp Wall Street plunges on Wednesday and Thursday, and that effect will grow as the devaluations continue, so that at some point the US may have to devalue as well, and join the race to the bottom. Bloomberg and Reuters and Bloomberg(8/16) 

Global stock markets plummet over currency devaluations China's Shanghai stock market index plummeted 8.2% in the last three days (Tuesday-Thursday). As those who have been following the situation in China will recall, China's stocks are in huge bubble that began to implode on June 12, with the index quickly plummeting 30% within a couple of weeks. 

The Chinese Communist Party (CCP) went into full-scale panic, and poured hundreds of billions of dollars into the stock market to prop it up, and also passed regulations making it illegal for large companies to sell stocks, or for the media or bloggers to use words like "panic." 

So the significance of the 8.2% fall in the last three days, beyond just the fact that a lot of elderly Chinese are losing their life savings, is that the CCP is rapidly losing more and more credibility, and chances of a "people's rebellion" against the CCP are increasing. 

Other stock markets followed suit. Wall Street stocks sold off broadly, as did European and Asian shares. 

The S&P 500 price/earnings ratio (stock valuation index) is still above 21, far above the historical average of 14, indicating a huge Wall Street stock market bubble. China's bubble had to implode sooner or later, and the same is true of Wall Street. It's possible that it's happening right now. Guardian (London) and Reuters

Comstock Partner, Inc

We have been warning our viewers since 1999 about the word “deflation”, and the negative stock market action when the deflation occurs.  In fact, we authored the chart, “Cycle of Deflation” (first attachment) which shows the flow of the typical deflation.  The deflation starts with excess debt and over-investment leading to excess capacity and weakness in pricing power.  This leads to the devaluation of the countries’ currency. When that starts to affect exports the deflationary country typically gets into a “currency war” with its’ trading partners.  This competitive devaluation leads to protectionism and tariffs followed by “beggar-thy-neighbor”, where countries affected by deflation resort to selling goods and services below cost in order to keep their plants open.  As you can see this is a vicious cycle that eventually leads to plant closings and debt defaults until pricing power returns.  

Commodities are clearly the “canary in the coal mine” as far as deflation is concerned.  Remember when we first talked about this in 1999, (Windows Word) never heard of deflation and kept trying to correct us by stating, “do you mean inflation?”  Now, the world is concerned about almost every commodity on earth declining in sync with each other.  Ever since Saudi Arabia announced last fall that they will not decrease oil production to support crude oil prices, the price of crude has plummeted. 

The concurrent economic slowdown in China has exacerbated this decline not only for oil but also most other industrial commodities.  Zinc, lead, copper, nickel, aluminum, precious metals and many more commodities are breaking through technical support areas that have held up for years.  Actually the CRB Raw Industrial Spot Index (Chart 3 from our best data resource Ned Davis Research—middle chart) represents these metals as well as many more commodities. 

Since we started warning our viewers about the impact of deflation the CRB had some major declines and rebounds as the Fed pumped in a flood of money to try to prevent the inevitable deflation as the debt continues to decline.  This index peaked about 1998 as the dot com bubble was about to burst and declined to the 220 area in 2002 (that also troughed after the 1987 stock market crash).  Then the Fed dropped the Fed Funds Rate to 1% in 2003 and kept it there for a year. 

This started the housing bubble which was made worse when sub-prime loans exploded as Alan Greenspan encouraged banks and mortgage companies to make these loans (and put his blessing on the home price frenzy).  The peak of the housing market in 2010 coincided with the next peak in the CRB at 610.  The CRB has declined to 440 presently from 610 and it is our opinion that this decline will continue down below the trough of 310 in 2009 and the 220 trough that occurred in 2002 and 1987.

Gary Shilling Blog 

Oil could go to $10 to $20 [VIDEO]

DYI Comments:  If oil and other commodities drop to the equivalent of $10 to $20 dollars per barrel the U.S. will be back in recession and the stock and junk bond market will take a 50% plus decline.

OH Canada, OH Canada!  Despite 75% of their population lives within 100 miles of the U.S. border due to high commodity prices and ultra low interest rates has created a massive debt bubble manifesting a housing bubble larger than the U.S. experience.  At the very least Canada will experience a nasty recession AND a possible depression. This petroleum commodity state country is in big trouble.  If oil does reach a ten dollar handle then the U.S. will have an additional illegal immigration problem; Canadians looking for jobs south of the 49th parallel!

DYI    

What is the Price of Oil Telling Us?

As the world's central energy commodity, oil is a good indicator of economic activity. With the nearly universal conviction that the previous bounce in oil prices to around $60 signaled a stronger economy and thus stronger oil demand, logic would dictate that we now consider the opposite: That the new slide in oil prices is signaling new weakness in the world economy. If so, it's the kind that ought to frighten even the optimists this time. 

Having said all this, it might be wise to take any day's price reports in the same way as the low or high temperatures on a particular day. A cool morning in summer does not mean winter is right around the corner. Nor does a hot day in mid-winter spell the end of the season. What's more important is to look at the overall picture to see if the season is changing--or even more important, if the climate itself has shifted, both literally and metaphorically. 

That takes a lot more analysis than the daily market reports can provide and than most people--even those whose job it is to follow markets--have patience for. 

In that regard the long view suggests that the acute investment slump in oil which is unfolding will lead to tight supplies in a few years (because of all the wells that are not going to be drilled to replace the depletion from existing wells). That would set us up for a price spike at some point as it takes a considerable amount of time to ramp up new drilling after a long period of decline. 

All this assumes that the current seeming weakness in the economy doesn't morph into something that would cause a long-term economic decline or stagnation which would keep oil prices low for a much longer period.

DYI Comments:  The possibility of a global recession is growing stronger, however, that possibility negates lump summing into your favorite oil/gas/service stocks/mutual fund.  Dollar cost averaging is the perfect method when an asset category is cheap(good value) but may become even cheaper.  No one knows for sure the direction of oil prices especially in the short term.  The only time when it is recommended to lump sum is when the VIX ratio sky rockets(October 2008).

 At these low prices you are setting yourself up for the next upward run in oil/gas prices.  This is a great time to get in with elevated dividend yields and low stock prices in relation to sales, earnings, and dividends.  The same can be said regarding mining companies as well.  Happy hunting!

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control

1 - China slowdown

The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.

2 - Commodity collapse

The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.

3 - Resource sector credit crisis

With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.

4 - Dominoes begin to fall

The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

5 - Credit markets roll over

Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).

6 - Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.

7 - Bull market third longest on record

The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.

8 - Overvalued US market

In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.

 



DYI Continues:  My model portfolio remains the same based upon our averaging formula for our three asset categories.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  8/1/15

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

[See Disclaimer]

Stocks and long term bonds are priced to the moon providing future returns to be dismal.  Expect at these levels stocks to deliver a nominal return of 2% and a real return after inflation, taxation, fees and commission plus trading impact costs of around -2% to -4% on average for the next ten years. Long bonds around 2% to 3% nominal and real return approximately 0%. Cash(short term bonds) at these levels is the better deal.  So hang on to head while everyone else is losing theirs.  Better values are ahead.

The Great Wait Continues

DYI   

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.