America's debt is getting dumped left and right as the global slowdown worsens.
China has been selling U.S. debt but it's not alone. Lots of emerging markets like Brazil, India and Mexico are also selling U.S. Treasuries. Not that long ago all these countries were all huge buyers of U.S. debt, which is viewed as one of the safest places to park money."Five or six years ago, the big concern was that China was going to own the United States," says Gus Faucher, senior economist at PNC Bank. "Now the concern is that China is selling them."
DYI Quick Comment: I've been predicting for over 5 years that China will experience their modern version of our 1930's depression (deflationary smash). China, however, is not a country but an empire that could very easily lose their autonomous regions either by becoming separate countries or merging with friendly neighbors.
Just in the first seven months of the year, foreign governments sold off $103 billion of U.S. debt, according to CNNMoney's analysis of Treasury Department data. Last year there was an overall increase of nearly $45 billion.
It's a reality of the global economic slowdown.When commodity prices boomed a decade ago, emerging market countries took their profits and invested them in U.S. Treasury bonds and other types of assets that are similar to cash.Former Federal Reserve Chair Ben Bernanke coined it the "global savings glut" in 2005.DYI: Ben Bernanke actually is correct about a global savings glut that continues today as 1st world Boomer's (those who can) save at a furious pace. Nothing like good old fashion FEAR of not having enough money for retirement to become highly motivated. As time rolls on Boomer's will begin to retire in statistically significant numbers in the early 2020's along with their massive savings that will begin to dry up.
Around the early to mid 2020's Boomer's this will reverse as Boomer's will become net sellers for stocks, bonds, and real estate. Generation X is too small and the Millennial far too in debt (student loans and cars) to absorb all of these high priced assets. Excess supply with weakened demand, lower prices will prevail. Mr. Market may sense this earlier than expected and begin to drop one or more of these three asset categories.
STOCK MARKET
John P. Hussman, Ph.D.
It’s also important to consider the current position of the market from a longer-term perspective. On valuation measures that we find most strongly correlated with actual subsequent market returns, current valuations now exceed every extreme in history except for the period from July 1999 to December 2000. Indeed, the more historically reliable the measure (see the mean-inversion commentary above for a relative ranking), the closer current valuations are to the 2000 extreme.
"On a 12-year horizon, we presently estimate average annual nominal total returns for the S&P 500 averaging just 1% annually, with negative expected returns on horizons of 10-years and less."
"Investors are free to take their chances if they believe the 93% correlation between valuations and subsequent market returns is merely random or spurious."
"Those hoping for actual 12-year returns to significantly overshoot roughly 1% annually are actually relying on a future valuation bubble."
For a more extensive historical review of reliable valuation measures and their implications for long-term returns, see All Their Eggs In Janet’s Basket, Ockham’s Razor and The Market Cycle, Why Stocks Are Not Cheap Relative To Bonds, and Valuations Do Not Only Mean-Revert, They Mean-Invert.
John P. Hussman, Ph.D.
Risk-seeking among investors can often defer the immediate consequences of extreme valuations, while vertical losses can suddenly emerge when extreme overvaluation is joined by increasing risk-aversion among investors (as evidenced by deterioration in broad market internals).
In any event, investors should expect market overvaluation or undervaluation to be reliably “worked off” within a period of about 12 years, on average. That’s mean-reversion, but that’s not where the process ends.
"Rather, the valuation extremes of the market tend to be fully inverted over a horizon of about 18-21 years; ending with extremes of the same degree but in the opposite direction. That’s what we’ll call “mean-inversion.”
Statistically, a period of somewhere close to two decades has typically stood between the wildest exuberance and the deepest despair on Wall Street, and vice-versa. Valuations remain on the wildly exuberant side here.
DYI Continues: Clearly on a valuation basis the U.S. market peaked in the year 2000.
Using Professor Hussman's mean-inversion [Puke Point] will occur in 18 to 21 years or 2018 to 2021 time frame. Close enough based on demographics as well. Don't be surprised when the U.S. stock market hits ultimate valuation low, the puke point, the Shiller PE10 is below 10 with dividend yields in the 6% to 8% range.
BOND MARKET
The bond market has been on a tear to the upside with declining interest rates when the 10 year Treasury bond peaked September 1981 at 15.32% [(price to interest 6.48 to 1) (1 / 15.43 x 100 = 6.48)]. So far....the bottom for the 10 year Treasury happened on July 2012 at the lowest rate in history (for the 10yr Treasury) at 1.53% or price to interest ratio of 65.36 to 1! WOW! That is a high priced bond especially when the average rate since 1871 is 4.61% or price to interest ratio of 21.69!
Multpl.comUsing price to interest using the 10yr Treasury as our proxy the bond market is now (current rate 2.04%) 126% above its average yield! Any wonder our weighted averaging formula "Kicked us out of the bond market!" Markets can stay far longer irrational with rates staying at their sub atomic low rates. There is also the possibility of the U.S. experiencing a deflationary bust during the next recession pushing long term yields even lower. It is entirely within its realm having the 30 year Treasury below 2% and the 10 year Treasury below 1% and then stay near there until the early 2020's!
Whether a deflationary bust will occur is anyone's guess. DYI will stick with our weighted formula and avoid the temptation of a potential speculative outcome. Our two portfolio's remain very defensive.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION
Active Allocation Bands (excluding cash) 0% to 60%
83% - Cash -Short Term Bond Index - VBIRX
17% - Gold - Precious Metals & Mining - VGPMX
0% - Lt. Bonds - Long Term Bond Index - VBLTX
0% - Stocks - Total Stock Market Index Fund - VTSAX
[See Disclaimer]
**************
Maximum Aggressive Portfolio
(Super Max)
Active Allocation Bands (excluding cash) 0% to 60%
83% Cash - Hussman Strategic Total Return Fund - HSTRX
17% Gold - Tocqueville Gold Fund - TGDLX
0% Lt. Bonds - Zero Coupon 2025 Fund - BTTRX
0% Stocks - Federated Prudent Bear Fund - BEARX
[See Disclaimer]
DYI'S "weighted" averaging formula "kicks you in" at a greater amount below the average AND "kicks you out" at a greater amount when you are above the average. Is it perfect? Of course not! What it does do is put you into the correct direction of reducing your exposure significantly above the average and increasing significantly below. Selling into high markets and buying into low markets.DYI follows four basic asset categories Stocks, Bonds, Gold, and Cash. On a secular basis these assets are very uncorrelated....So....finding a bull market in one or two of them is entirely possible.
Of course over short to cyclical periods of time (2 to 5 years) these four assets can become very correlated.
Over very long periods of time greater than 7 - 10 plus years valuations and the general direction of the economy will push asset prices higher or lower making these four distinct assets very uncorrelated.
Currently today stocks, long term bonds, and cash are priced to the moon and behaving very very correlated. But alas, Mr. Economy's changed reducing fear of massive defaults For a time all four assets where moving up in price until finally valuations and the general change in the economy dropped gold significantly. The mining companies have gone through a brutal bear market with the average precious metals mining fund off around 75%.
The next shoe to drop will most likely be the U.S. stock market as valuations are sky high and it appears that a world wide recession is brewing. Mr. Market and Mr. Economy has a high probability of delivering a one two punch to stock prices. A 45% to 60% decline is a very real possibility as stocks are way above their long term averages for dividends, earnings, or sales.
So hang on to your head while everyone is losing theirs.
DYI
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