Tuesday, May 3, 2016

Larry Elliot - The Guardian
Put your ear to the ground though, and it is possible to hear the blades whirring. Far away, preparations are being made for helicopter drops of money onto the global economy. With due honour to one of Humphrey Bogart’s many great lines from Casablanca: “Maybe not today, maybe not tomorrow but soon.” 
Don’t be fooled. China’s growth is the result of a surge in investment and the strongest credit growth in almost two years. There has been a return to a model that burdened the country with excess manufacturing capacity, a property bubble and a rising number of non-performing loans. The economy has been stabilised, but at a cost.
DYI Comment:  Like many others I've been saying for about 5 years China is a train wreck waiting to happen.  My contention is that their economy would experience a 1930's melt down due to all of their excessive(that's an understatement) debt. Of course with governments through their central bank are able to keep inflating lending blowing the bubble bigger and bigger till it pops.  This can and has gone on far longer than most of thought possible.  As Bogart said in Casablanca:  "Maybe not today, maybe not tomorrow but soon."    
The upward trend in oil prices also looks brittle. The fundamentals of the market - supply continues to exceed demand - have not changed.
DYI:  I don't see any changes in fundamentals as well.  Gary Shilling an economist and money manager continues with his $10 to $20 price per barrel call on oil.  This could very well occur as all of OPEC and Russian agreements have all fallen to the wayside.  It will be every man for himself or in this case every country vying for market share.  If the Saudis' decide to go to the mat in order to starve out fracking plus attempt to damage Iran's benefactor Russia oil prices at the teenage level(if held there long enough) would do the trick.  Russia would very likely default on their debt, a massive depression with Putin and his cronies kicked out of power, thus ending for many years the cozy relationship Iran has with Russia.
As I've stated many times before IF oil prices drop to the teenage level then lump summing into Adams Natural Resource Fund symbol PEO as these oil/gas/service companies will be on the give - away - table setting up for capital gains as oil prices and share prices recover.
Then there’s the US. Here there are two problems – one glaringly apparent, the other lurking in the shadows. The overt weakness is that real incomes continue to be squeezed, despite the fall in unemployment. Americans are finding that wages are barely keeping pace with prices, and that the amount left over for discretionary spending is being eaten into by higher rents and medical bills. 
For a while, consumer spending was kept going because rock-bottom interest rates allowed auto dealers to offer tempting terms to those of limited means wanting to buy a new car or truck. In an echo of the subprime real estate crisis, vehicle sales are now falling.
DYI:  No doubt sub prime is back this time with auto sales.  If you can fog up a mirror you qualify for a new car/truck.  For those of you who keep your finances in tip top shape when the bust comes bargains for new or used cars will be there for the picking.  This blogger picked up a new Honda Civic in early 2010 at a significant discount.  Just wait for the bust portion of the boom/bust cycle for your major purchases(house and cars) you will be way ahead.
As the Deutsche research makes clear, the most basic variant of helicopter money involves a central bank creating money so that it can be handed to the finance ministry to spend on tax cuts or higher public spending. There are two differences with QE. The cash goes directly to firms and individuals rather than being channeled through banks, and there is no intention of the central bank ever getting it back.
DYI:  Unfortunately "helicopter money" is coming.  Maybe the Fed's might hold off but Japan is on course for massive money printing that will create inflation(eventually) in Japan and export inflation world wide.  Currently today the velocity of money[(turnover)(chart below)] is at a snails pace here in the U.S. thus "helicopter money" would not be inflationary at least for a few years.
 
If the Fed's/political class go this route of direct money printing I fear they and the public will become hooked on what is perceived as free money setting up for massive inflation for the 2020's especially with the mammoth federal outlays for Social Security/Medicare as Boomer's retire. 
Instead, it would be a toss up between the Fed, which is normally prepared to experiment with something different if the situation is desperate enough, or the Bank of Japan, where – as the Deutsche research reminds us – helicopter money was used successfully in the 1930s to help the country escape the Great Depression with far less damage than to other western nations. So give it a few months then listen hard. The choppers are coming.
DYI:  How low will interest rates go?  If the U.S.(and the world economy) experiences a deflationary smash it would be very likely for the 30 year Treasury and 10 year Treasury to trade below 2% and 1% respectfully along with Treasury yields less than 5 years with negative rates.
10-year Yield (Log Scale)
Currently the economy is dancing on the head of a pin between slow growth and recession.  So far I don't see any outright indicators for recession.  What we do know is that bond yields are so far below their historical average our formula has "kick us out" of the bond market and rightfully so!  Rates could very well go lower and appears to be a growing possibility.  However, for us true long term value payers, before putting our hard earned dollars to work, demand a yield closer to the long term average(since 1871) giving us a bit more sauce for the goose.
Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 5/1/16

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]
Below are the numbers going back to the secular top of the year 2000.  Oil has moved up nicely in the ranks.  I mentioned many times to dollar cost average into your favorite oil/gas/service mutual fund.  Hope you did too!?
5-1-15
Updated Monthly
Secular Market Top - Since January 2000

+  54.6% Dow       
+164.4% Transports 
+131.0% Utilities

+40.6%  S&P 500
+17.4%  Nasdaq

+58.8%  30yr Treasury Bond

+345.6% Gold
  +79.9% Oil
  +64.6% Swiss Franc's
    
From High to Low

+345.6% Gold
+164.4% Transports
+131.0% Utilities 
+  79.4% Oil
+  64.6% Swiss Franc's
+  58.8% 30 year Treasury bond
+  54.6%  Dow
+  40.6% S&P 500
+  17.4% Nasdaq

It is easily seen that in the year 2000 the Nasdaq was horribly overvalued and gold was on the give away table, such lopsided returns 15 years later!

Also of interest the stodgy 30 year Treasury bond has outperformed the Dow, S&P 500, and Nasdaq since the year 2000.  The modern portfolio crowd back in the year 2000 would find this a very low probability outcome.  Value player's, due to extreme valuations, would have recognized this as the most likely outcome (close to a no-brainer!). 

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency
Max-Pessimism *Market Bottoms* Short Term Bonds
Depression MMF
Hope
Relief *Market returns to Mean* Gold

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional
Max-Optimism *Market Tops* Long Term Bonds
Denial of Problem U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation    

DYI

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