Bubble

News

More likely, assuming that market valuations simply touch their run-of-the-mill historical norms in the future, 

passive investors should be braced for zero or negative total returns both in the S&P 500 and in a conventional 60/30/10 asset mix over the coming 10-12 year horizon.

John Hussman

Whatever They’re Doing, It’s Not “Investment”

At the market open of Friday, January 24, our estimate of likely 12-year nominal total returns for a conventional passive investment portfolio (60% S&P 500, 30% Treasury bonds, 10% Treasury bills) fell to just 0.04% annually, below even the previous record of 0.34% set in August 1929. This extreme reflects the combination of record equity market valuations and depressed interest rates. That’s not an “equilibrium” situation. It’s a combination that joins insult with injury, creating weak prospects for the future returns of passive, diversified buy-and-hold strategies, across the board. 

Understand this. The more glorious this bubble becomes in hindsight, the more dismal future investment returns become in foresight. The higher the price investors pay for a set of future cash flows, the lower the return they will enjoy over time. Whatever they’re doing, it’s not “investment.” 

Amidst an “everything bubble” that has touched every asset class, I don’t believe that investors should imagine that there is some broadly appropriate investment that promises a satisfactory return despite such broad extremes. Even international stocks tend to lose significant value when U.S. stocks decline, regardless of their valuations. Yes, there may be niches that could be useful for diversification, but the primary “alternative” that investors have here, in my view, is cash, patience, and hedged investment exposure.

 Thanks John

DYI

Bubble

News

‘Peak Greed’ Fuels Record Junk Bond Sales in Europe

High-yield borrowers are following in the footsteps of Europe’s investment-grade market, which has also seen a record-breaking flurry of bond issuance this year. For now though, syndicate bankers are still testing the waters in Europe’s high-yield market. Most of the deals so far have been from issuers with well-known capital structures, said Andrey Kuznetsov, senior credit portfolio Manager at Hermes Investment Management.

Germany Limiting the Ability to Anonymously Purchase Gold in an Attempt to Force People to Hold Euros

Two years ago people in Germany could anonymously purchase EUR 15,000 of gold, then the limit dropped to EUR 10,000, and now the limit will drop to only EUR 2,000 as of January 10. Anyone who purchases more than the EUR 2,000 limit will have to go through an intensive know your customer (KYC) process and a criminal background check.

Germany, which is the most powerful member of the European Union, is claiming that they are limiting anonymous gold purchases in order to prevent money laundering. However, the drastic reduction of anonymous gold purchase limits coincides with increasingly negative interest rates in the European Union.

Essentially, people who save money in banks are charged to hold their money, which is basically the opposite of savings. In order to avoid this people can buy gold, but now the European Union is clamping down on gold in order to force people to keep their money invested in Euros.

Basically, the European Union is taking away the freedom to divert money into safe haven assets, and increasingly forcing people to hold the Euro against their will. This may be an omen of what is to come as fiat currencies continue to lose value worldwide due to crashing Central Bank interest rates and mass money printing.

Head of U.S.’ largest bank says central banks are fueling a sovereign debt bubble, negative-rates won’t ‘end well’

Maturing junk debt hits record, posing elevated default risks, Moody’s says

Moody’s Investors Service warned Thursday that default risk is on the rise for the nearly $1.2 trillion of speculative-grade loans, bonds and various related instruments maturing from 2020-24. That total is a record for maturities coming due over a five-year period, up 14% from 2019.

While low interest rates have allowed spec-rated companies to continue to roll over all that paper, a slowdown in the economy or a reversal in Federal Reserve monetary policy could pose problems.

Bernie Sanders Hasn’t Quite Captured What Wall Street Does: 

It’s Actually a Fraud-Monetization System with aMoney-Printing Unit Called the New York Fed

Senator Bernie Sanders has come closer than anyone on the Presidential campaign trail in defining what Wall Street actually does. Sanders has repeatedly stated at his rallies that “the business model of Wall Street is fraud.”

That analysis is correct but abbreviated. Sanders needs to go further. It’s not just Wall Street’s business model that has left the United States with the greatest wealth inequality since the Roaring Twenties (a time when Wall Street investment banks were also allowed to own deposit-taking banks). It’s how Wall Street is monetizing that fraud that poses an existential threat to the solvency of the United States and the impoverishment of millions of Americans.

As a sign of just how brazen and disastrously broken the U.S. financial system has become, with no hearings in Congress, with no blaring headlines on the front pages of newspapers, the New York Fed turned on its money spigot to Wall Street again on September 17, 2019. It was the first time this has happened since the financial crisis.

 For the past four months the New York Fed has been spewing hundreds of billions of dollars each week to Wall Street’s trading houses, pushing the Dow Jones Industrial Average up by 3,000 points, with no accountability to anyone or explanation as to why Wall Street needs or deserves this money.

DYI:

This is the most insane period of time for stocks and bonds on a world wide basis.  Central banks have lost their minds with all of this money printing jacking up securities prices to the heavens changing the landscape from investing to a gambling parlor.  This will not end well.  Of course the question is when??  I don’t know and no one does either.  At these levels sooner rather than later but to define sooner or later I’ll admit I’m stumped!  The U.S. market overvalued since 2012 and now has climbed to levels of absurdity.  The only two areas of reasonable value is cash [short term bills and notes] plus precious metals – gold and silver – and their respective mining companies. 

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/20

Active Allocation Bands (excluding cash) 0% to 50%

50% - Cash -Short Term Bond Index - VBIRX

50% -Gold- Global Capital Cycles Fund - VGPMX **

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are companies they believe will perform well during times of world wide stress or economic declines.  

 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.

DYI

Never

Forget

J. Paul Getty Quote!

Stock Market - "For as long as I can remember; veteran businessmen and investors - I among them - have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips.

The professional investor has no choice but to sit by quietly while the mob has its day, until enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. There are no safeguards that can protect the emotional investor from himself."

DYI: 

This blogger has been involved as an investor for 45 years – since the age of 20 – yep that’s right I’m 65 years old.  What we have today is an overblown stock market since 2012 when it achieved the 1966 valuations; around 2016 broke through the 1929 high and possibly will assault the 2000 valuation top!    

To be blunt this is a terrible time to invest in U.S. stocks! 

Take a look at the chart below highlighting previous market tops with their subsequent 10 year returns.     

Purchasing or holding stocks at these valuation levels should expect a negative return over the next 10 years.  What to expect for a 20 year holding period?  Let’s go to money chimp – [they do all the math] – placing in today’s Shiller PE of 32 along with our sub atomic low dividend yield of 1.75% your estimated average annual return before any expenses is…drum roll please…3.22%!  Hope does spring eternal for at least the return starting out is positive.  But alas most 401k’s have a 1% management fee throw in 0.50% for trading impact cost and of course our ever present inflation around 2%.  Add this all up equals 3.50% and lo and behold you are back to a negative return.

The bond rally of lifetime has played itself out.

There may remain speculative sauce furthering the bond rally of a lifetime as another recession is sure to arrive again.  However it does not take a genius to figure out with yields topping out at 15% in 1981 and trading under 2% today the bond rally of a lifetime has essentially played itself out.  After all of those pesky costs including inflation the real return over the next 10 or 20 years will highly likely be negative!

The Dow/Gold Ratio

Precious metals and their mining companies remain reasonably priced.

  

As of 1/17/20

Dow/Gold Ratio

19 to 1

  Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/20

Active Allocation Bands (excluding cash) 0% to 50%

50% - Cash -Short Term Bond Index - VBIRX

50% -Gold- Global Capital Cycles Fund - VGPMX **

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are companies they believe will perform well during times of world wide stress or economic declines.  

As J. Paul Getty stated so wisely stated stock and bond certificates are not betting slips; DYI is holding on to our cash and mining companies/ precious metals for the wild ride ahead since gold bottomed out late 2015! 

 DYI

Globalization’s

Sinking Ship 

Gold's $1,500 level is 'looking like the new 2020 floor' - Scotiabank

“$1450 was the new hard floor but gold is now firmly in a spot where the risk/reward in being directionally short is not favorable -- $1500 is increasingly looking like the new 2020 floor…,” wrote Scotiabank commodity strategist Nicky Shiels last week.

The Fed Can't Reverse

 The Decline of Financialization and Globalization

For two generations, globalization and financialization have been the two engines of global growth and soaring assets. Globalization can mean many things, but its beating heart is the arbitraging of the labor of the powerless, and commodity, environmental and tax costs by the powerful to increase their profits and wealth. 

In other words, globalization is the result of those at the top of the wealth-power pyramid shifting capital around the world to exploit lower costs of labor, commodities, environmental regulations and taxes. 

As a result, the global economy and financial system are both running on the last toxic fumes of financialization and globalization, the final extremes of exploitation and predation as the pack of predators has exploded in size and influence while the herd of prey has been decimated. 

The prey always seem limitless to the predators, but this illusion expires when suddenly there is no longer enough for the ravenous pack of financial predators. 

At that point, the predators turn on each other. 

That is the narrative that will come to the fore in 2020 and play out in the decade ahead.

 DYI:

When the predators begin to turn on each other through nasty mergers and acquisitions that in turn will fail fighting over the remaining scrapes of the hollowed out middle class gold and silver will move up in price to reflect this new decade long dislocation. Stocks and corporate bonds will fall in value in a multiple cyclical manner.  U.S. government bills, notes and bonds will decline as well in a long drawn out saw tooth manner as the Federal Reserve fights this inevitable decline.  There is a possible one last hurrah left for declining rates breaking the 10 year T-bond yield of 1.37% [July 8, 2016] when our next recession arrives.  However that is speculation as rates are now so low relative to their historical mean.

Market Sentiment

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

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

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

Smart Money Buys Aggressively!
Capitulation

DYI

1-3-20
Updated Monthly

Secular Market Top - Since January 2000

+149.1% Dow       

+266.5% Transports 

+206.6% Utilities

+120.2%  S&P 500

+121.7%  Nasdaq

+65.4%  30yr Treasury Bond

+436.0% Gold

+146.3% Oil
  +62.9% Swiss Franc's

    

From High to Low - Since Year 2000

+436.0% Gold

+266.5% Transports

+206.6% Utilities

+149.1% Dow
+146.3% Oil 

+121.7% Nasdaq

+120.2% S&P 500
+  65.4% 30yr Treasury Bonds

+  62.9% Swiss Franc's

December 1999 Shiller PE10 was 44.19               
August 2000 S&P 500 dividend yield was 1.11%  

Shiller PE10 1-3-20 is 31.02
S&P 500 dividend yield 1-3-20 is 1.77%
[Shiller PE10 & dividend yield is reported using data from the beginning of the month when I update.  It may or may not exactly be the first day.]

It is easily seen in the year 2000 the Nasdaq was horribly overvalued and gold was on the give away table, such lopsided returns 19 years later!

Also of interest the stodgy 30 year Treasury bond since the year 2000 outperformed the Dow, S&P 500 and Nasdaq until the Trump rally.  With valuations stretched to these lofty levels a value player such as DYI will once again place his monies in 30 year T-bonds or long term high quality corporate bonds out performing stocks over the next 10 to 15 years.  Please note due to the Fed's sub atomic low interest rates 30 year T-bonds or high quality long term corporate bonds will highly likely out perform stocks over the next 10 to 15 years with one big caveat; out performance will be losing far less money than stocks! Ouch!          

The Collapse of the Modern Western Empire. What Future for Humankind?

Bond

Bull Market Ended? 

Supposedly “risk free” assets 

are looking awfully risky

Looking at the financial landscape today, there are some signs of trouble: the stock market keeps going up, venture capital may also be over-valued, and firms are highly leveraged. But if one asset class stands out for its high prices and potential systemic risk, it’s supposedly low-risk bonds issued by governments in the US and Europe. 

These bonds, in the lingo, are considered “risk-free.” By definition, then, they shouldn’t be risky. But prices for these assets have gotten very expensive. If their prices fall, meaning that yields rise, borrowers used to a long period of benign conditions will struggle to refinance their debts. And since many investors don’t hold bonds to maturity, the price of the asset matters more than the regular income payments it provides. 

The Bank of International Settlements and Morgan Stanley’s Ruchir Sharma worry that low rates make it easier for companies that should go out of business to get loans and continue to operate. These so-called “zombie” companies may not sound so harmful, but too many of them can cause instability over time. If yields go up, many of these firms will suddenly go out of business at the same time and displace many workers. In the meantime, they also keep people in unproductive jobs and divert capital from more productive investments. 

Odds are that eventually the risk-free rate will increase and it may be a gradual unwinding. Asian countries are slowly offering a viable alternative to Western assets and expanding the market for safe debt. Or, investors might rediscover their appetite for risk, reducing demand for safe assets. One way or another, rates will go back up some day. Until then, there is a high price to pay for removing risk from your portfolio.

 

As of 1/2/20

1.88%

• 1790-1902: erratic yield fluctuations and then a sustained decline in yields to below 3%.

• 1902-1920: the First Bear Bond Market, yields rise from 3% to 5-6%.

• 1920-1946: the Great Bull Bond Market, yields decline from 5-6% to below 2%.

• 1946-1981: the Second Bear Bond Market, yields soar from 2% to above 15% during 1981.

• 1981-2016: the Greatest Bull Bond Market, as yields tumble from 15% to 1.37% in 2016.

The Collapse of the Modern Western Empire. What Future for Humankind?

Alas, history never ends and, as I mentioned at the beginning of this essay, all empires carry inside themselves the seeds of their own destruction. Just a few decades have passed from the time when Fukuyama had claimed the end of history and the Pax Americana seems to be already over. The Western world dominance had been based first on coal, then on oil, now trying to switch to gas, but all these are finite resources becoming more and more expensive to produce. Just like Rome had followed the decline of its gold mines, the West is following follow the decline of the wells it controls. 

The dollar is losing its role of world currency and the Empire is under threat by a new commercial system. Just as the ancient silk road was a factor in the collapse of the Roman Empire, the nascent "road and belt initiative" that will connect Eurasia as a single commercial region may give the final blow to the Globalized dominance of the West. 

DYI:  The Silk Road that China and other countries are building out to enhance trade between them selves thereby over the long haul move away from the American dollar.  This grinding affair is taking place worldwide not just countries within the sphere of influence of China and Russia.  It would be logical to expect as America’s global currency free ride begins its demise will lift interest rates in a saw tooth manner higher.  This is why Presidents since Bush Jr. until today are placing sanctions on countries in an attempt to stop or at least slow down the demise of the American Empire [and the almighty buck].
   

To be sure, the Western Empire, although in its death throes, is not dead yet. It still has its wondrous propaganda machine working. The great machine has even been able to convince most people that the empire doesn't actually exist, that everything they see being done to them is done for their good and that foreigners are starved and bombed with the best of good intentions.

DYI:  Today's national main stream press is nothing more than the propaganda arm of the American government.  Simply go to 153news.net [videos] or Miles Mathis updates [written format] between those two will highlight America’s massive propaganda machine. 

 It is a remarkable feat that reminds something that a European poet, Baudelaire, said long ago: "the Devil's best trick consists in letting you believe he doesn't exist." It is typical of all structures to turn nasty during their decline, it happens even to human beings. So, we may be living in an "Empire of Lies" that's destroying itself by trying to build its own reality. Except that the real reality always wins.

On the other hand, it would be difficult to maintain that Westerners are more evil than people belonging to other cultures. If history tells us something, it is that people tend to become evil when they have a chance to do so. The West created many good things, from polyphonic music to modern science and, during this last phase of its history, it is leading the struggle to keep the Earth alive -- a girl such as Greta Thunberg is a typical example of the "good West" as opposed to the "evil West." 

DYI:  Greta Thunberg is one of the worst “crises actors” to come along pumping out their endless claptrap climate scare all for the purpose to raid numerous countries treasuries.

Overall, all empires in history are more or less the same. They are like waves crashing on a beach: some are large, some small, some do damage, some just leave traces on the sand. The Western Empire did more damage than others because it was larger, but it was not different. We have to accept that the universe works in a certain way: never smoothly, always going up and down and, often, going through abrupt collapses, as the ancient Roman philosopher Lucius Seneca had noted long ago. Being the current empire so large, the transition to whatever will come after us needs to be more abrupt and more dramatic than anything seen in history before. But, just like it was the case for ancient Rome, the future may well be a gentler and saner age than the current one. And the universe will go on as it has always done.

DYI:  The bond market rally of a lifetime is essentially finished.  With an upcoming recession that I'm anticipating will be relatively mild with rates moving lower with the 30 year T-bond possibly breaking below two percent.  Be as that may be DYI is holding with zero percentage in long term bonds as we are in uncharted historical waters.  Rates one day will begin their movement upwards unfortunately no one knows when that will happen.

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/20

Active Allocation Bands (excluding cash) 0% to 50%

50% - Cash -Short Term Bond Index - VBIRX

50% -Gold- Global Capital Cycles Fund - VGPMX **

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are companies they believe will perform well during times of world wide stress or economic declines.  

 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.

  DYI

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/20

Active Allocation Bands (excluding cash) 0% to 50%

50% - Cash -Short Term Bond Index - VBIRX

50% -Gold- Global Capital Cycles Fund - VGPMX **

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are companies they believe will perform well during times of world wide stress or economic declines.  

 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.

%
Stock & Bonds

Allocation Formula

1-1-20
Updated Monthly

% Allocation = 100 – [100 x (Current PE10 – Avg. PE10 / 4)  /  (Avg.PE10 x 2 – Avg. PE10 / 2)]

Current PE10.....31.10

Avg. PE10......... 16.68

% Stock Allocation    0% (rounded)
% Bond Allocation 100% (rounded) 

Logic behind this approach:

--As the stock market becomes more expensive, a conservative investor's stock allocation should go down. The rationale recognizes the reduced expected future returns for stocks, and the increasing risk. 

--The formula acknowledges the increased likelihood of the market falling from current levels based on historical valuation levels and regression to the mean, rather than from volatility. Many agree this is the key to value investing.  

Please note there is controversy regarding the divisor (Avg. PE10).  The average since 1881 as reported by Multpl.com is 16.70.  However, Larry Swedroe and others believe that using a revised Shiller P/E mean of 19.6 , the number since 1960 ( a 53-year period), reflects more modern accounting procedures.

DYI adheres to the long view where over time the legacy (prior 1959) values will be absorbed into the average.  Also it can be said with just as much vigor the last 25 years corporate America has been noted for accounting irregularities.  So....If you use the higher or lower number, or average them, you'll be within the guide posts of value.

Please note:  I changed the formula when the Shiller PE10 is trading at it's mean stocks and bonds will be at 50% - 50% representing Ben Graham's Defensive investor starting point; only deviating from that norm as valuations rise or fall.        

  

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.

The Formula.

A value based allocation strategy

February 19, 2010 by John Kingham

Margin of Safety!

Central Concept of Investment for the purchase of Common Stocks.

"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:

Earnings Yield Coverage Ratio - [EYC Ratio]

EYC Ratio = 1/PE10 x 100 x 1.1 / Bond Rate

1.75 plus: Safe for large lump sums & DCA

1.30 plus: Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - Purchase Bonds

Current EYC Ratio: 1.19(rounded)

As of  1-1-20
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.

PE10  ..........31.10
Bond Rate...2.97%

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham