Bubble
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John J. Xenakis
Stock market continues its huge bubble
Bitcoin isn't the only investment that's in a huge bubble that could implode at any time. There are $8 trillion globally in in corporate and government bonds with negative yields, which means that you invest $1,000, but only get $990 when you sell the bonds. In other words, you don't earn money by investing -- you pay money to invest. But people do it anyway, because they perceive these bonds to be safe havens in which to store their money, and they're willing to pay a price for that safety.
But low or negative interest rates on bonds means that the prices of the bonds are astronomically high, so bonds are also in a huge bubble. If the Fed and other central banks start raising interest rates, which they say they're going to do, then the values of these bonds could come crashing down.DYI: The Federal Reserve [it’s private & has no reserves] is a very powerful blunt monetary force. There is a universal force far greater than the combined weight and fury of the world’s central banks. Mr. Market! No doubt central banks are able to maintain sub atomically low or rates negative such as many European countries far longer than one can imagine but in the end Mr. Market will have his way and rates will be higher than their respective countries average.
Don’t expect some cataclysmic single day
event that “jacks up” interest rates but a year over year grinding higher
interrupted as recessions come and go – 2 or 3 steps forward and 1 step back
process. Have rates bottomed out as
measured by the 10 year T-bond at 1.50% in July of 2016? I have no idea and nor does anyone else. My best guess simply due to the fact we have
gone without a recession since 2009, this economy is long in the tooth making a
pervasive argument for even lower rates.
Be as that is why does DYI hold no long term bonds in my model
portfolio? Rates, again measured by 10
year T-bonds are now 100% higher than the historical Price to Interest (PI) average of 22 to 1 (1 /
4.58% = 22 PI rounded) as compared to current yield of 2.28% or 1 / 2.28 = 22
PI (rounded). Simple arithmetic (44 –
22) / 22 x 100 = 100%. DYI’s formula “kicks us out” entirely from long term
bonds due to their excessive high price from its average. So…We wait for rates to lift higher before
purchasing at the long end of the market and only proportionally to the long
term average – since 1871 – basis.
Watching CNBC this week, I learned that stock traders are unhappy because stock market volatility (measured by the VIX) has been extremely low. Traders love the chaos of high volatility, with stock prices jumping up and down, because they're good at making timed trades and making money from them. But with the markets so quiet and placid, traders are unable to make money.Therefore, traders are hoping for a geopolitical crisis, like a North Korea nuclear crisis or a major Mideast war, to increase volatility so that they can make money.
Many people are crediting the large stock market rise of 19% as a "Trump rally," but taking credit for a stock market rally is extremely dangerous; you get the blame when the stock market falls.
DYI:
So true…So true…Trump would serve himself best by distancing himself or
whenever possible not comment about the market at all. Only when he has no choice simply dismiss the
ups and downs of markets as a Wall Street phenomenon and quickly move on to
reporters next question. At these insane valuations a massive bear market is
just waiting to happen.
According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (October 13) was at an astronomically high 24.55. This is far above the historical average of 14, indicating that the stock market bubble is still growing, and 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.
There's actually been a lot of debate and discussion recently on whether a stock market crash is coming, much more discussion than I've heard in the past. One person comes on and talks about price/earnings ratios or other stock price measures to show that stocks are way overpriced. Then a kid comes on, who seems barely old enough to remember the financial crisis of 2008, and says that the American economy is resilient, and there are no signs of an impending crash, and no reason for one to occur at this time.
So I like to point out that no one has any idea why a stock market panic occurred on the particular day October 28, 1928, and why it didn't occur six months earlier or six months later. Even today, economists and analysts cannot give a reason why that was the day. Everyone understands that it had to occur because price/earnings ratios were astronomically high (as they are today). But whether it will occur tomorrow, next week, next month or next year is impossible to predict and, as in 1929, we may not even know why it happened.
DYI: Hang
onto your hats and your cash better values – higher future returns are ahead.
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