If these guys are right, the S&P 500 could fall below its 2008 low
This year’s SocGen bearfest was suitably scary. Albert Edwards reiterated his ‘Ice Age’ thesis. This is essentially the idea that Japan was just a warm-up act for the rest of the world. The entire global economy will be crushed by deflation, before at some point rampant inflation kicks in as central bankers panic and take things way too far.
Edwards reckons that “the US equity market is in a valuation bear market that did not fully play itself out in March 2009, when the S&P touched the 666 level… we will see new lows.” He also reckons that the Federal Reserve’s interest rate could fall as low as negative 5%.
DYI Comments: Here at DYI it would come as no surprise from T-bills up to 5 year T-notes go to negative interest rates. Along with 10 year T-bonds under 1% and 30 year T-bonds in the low 2% range. A. Gary Shilling of InSights has stated many times the big wars such as our Civil War, WWI, WWII, Korea, Cold War or the never ending Vietnam saga chews up massive amounts of natural resources along with tons of dollars, inflation will prevail. Absence major wars our defense spending drops not only nominally but after inflation on a real basis. [This author of DYI is ex military (U.S. Army) I realize full well for the families who lost loved ones in our two Gulf wars and the on going war on terror will never be a small war].
Inflation cools off and interest rates will follow as well.
Currently today on a price to interest(PI) basis bonds as measured by 10 year T-bonds are now 123%(rounded) above their average! The 1930's didn't produce bond values this high or rates this low as they are today. DYI's weighted averaging formula has "kick us out" of the market and rightfully so. Once you have passed 100% greater than the average rate expressed in price to interest we are done in the bond market.
Mankind being as we are there will be other big war out there. Along the way is also massive entitlements Social Security and Medicare to be paid for the soon to be retiring Boomer generation. This expense which ramps up significantly in the 2020's will produce inflation as a best guess in the high single digits. All in all high quality bond interest rates on a secular basis are in the process of bottoming. That bottom of course will be in a few years in the making or as I've said for stocks The Great Wait Continues. The Great Wait for bonds will be just that as it will most likely be 3 to 5 years before rates begin to move upward in any meaningful degree.
Market Sentiment
The current shenanigans in China are just a sign that this is happening. China devalues, and exports deflation across the globe, alongside collapsing commodity prices. Countries become locked in a competitive devaluation spiral and we end up in a situation not far off the 1930's: “an outright deflationary bust accompanied by a trade war”.
The coming boom in sovereign busts
Emerging markets are at risk of going bust as capital flees their shores. They’ve got too much dollar-denominated debt. Given the choice between servicing this or protecting the best interests of their populations by defaulting on it, there’s no contest.
This in turn could cause a crisis, as that debt goes unpaid. Investors holding this emerging market debt (and there are a lot more of them these days) will panic, find they’re unable to sell in an illiquid market, and will instead sell anything else that they can get their hands on. (Not unlike in 2008.)
In any case, Russell’s suggestions for what to buy look pretty good to us – he likes gold and Japanese equities among other things.DYI Continues: DYI has many times pointed out that oil/gas/service stocks along with precious metals mining companies being bargains. I would also mention that Japanese stocks are or have bottomed.
DYI favorite fund, as you may have guessed, is Vanguard's Pacific Stock Index Fund. Admittedly not a pure play for Japanese stocks but has been close enough for the majority of companies in the fund are Japanese.
A direct play would be The Matthew Asian Funds using their Matthew's Japan Fund symbol MJFOX. Buy this fund after a market smash for a lump sum or you can dollar cost average.
Foreign markets, oil/gas, or precious metals mining companies all come under the umbrella of our Dow to Gold Ratio weighted formula. Currently this ratio has reverted back to the mean which places our commitment at 20%.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/16
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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