A Continued Undertone of Risk-Aversion

John P. Hussman, Ph.D.

Last week, the most historically reliable equity valuation measures we identify (having correlations of over 90% with actual subsequent 10-12 year S&P 500 total returns) advanced to more than double their reliable historical norms. When valuations have been near those historical norms, the S&P 500 has generally followed with average nominal total returns of about 10% annually. In contrast, current valuations are associated with expected 10-12 year total returns of about zero, with negative expected returns on both horizons after inflation.

Now, in the context of low interest rates, some investors may view the prospect of zero total returns on stocks over the coming decade as reasonable and competitive. That’s fine, but understand that through most of the period prior to the 1960’s, interest rates regularly visited levels similar to the present, yet these same measures of stock valuations typically resided at well below half of present levels. In my view, investors who view current valuations as “justified relative to interest rates” are really saying that a decade of zero total returns on stocks is perfectly adequate compensation for the risk of a 45-55% market loss over the completion of the current market cycle - a decline that would historically be merely run-of-the-mill given current valuations, and that certainly cannot be precluded by appealing to low interest rates.

As I emphasize nearly every week, the immediacy of both our market and economic concerns would be reduced in the event that market internals were to improve materially on our measures. Over the past month, we’ve observed what appears to be a typical “fast, furious, prone-to-failure” rebound from oversold levels, but not a shift that would allow us to infer a return to risk-seeking preferences among investors. That may change, and we’ll take the evidence as it arrives. Barring such a shift, I continue to believe that both vertical market losses and an imminent U.S. recession should be viewed as significant and probable risks.

 

DYI Comments:  Clearly American manufacturing is in recession if this continues it will not be long before almost all industries are in recession.  This will increase the possibility of a global recession as well.

Stocks and corporate bonds(especially junk bonds) are heavily correlated to prosperity take that away and prices come tumbling down.  With valuations being so high DYI anticipates a tumble of 45% to 60% and as John Hussman states: "A run of the mill decline!"
  
Stocks almost hit 2.5 times standard deviation from its mean...Wow!  Not as high as the year 2000 but as high as 1929(not shown on chart).  Don't be surprised at the bottom of this cycle stocks bought(or held) since the top year 2000 will have negative returns.  Assuming a best guess stocks bottom year 2017 negative returns for 18 years.  Hummm sounds a bit Japanese.  Depending on how low this cycle goes it may(most likely) take an addition full market cycle before the market completely mean inverts.
 
Current Shiller PE Ratio(3-7-16) 25.30
DYI's weighted averaging formula will begin buying once valuation become more favorable and increase proportionally greater as valuation go below their mean.  Most of the purchases will come from our gold mining shares commitment as they are propelled upwards as central banks around the globe attempt to reflate.  This will leave the bulk of our short term bond fund for when stocks become very favorable long term.  All of this will be "picked up" by DYI's averaging formulas.  Their not a secret, all you have to do is click onto the pages marked stocks, bonds, gold.  Simply put DYI is slowly moving into - or out of - our three asset categories based upon long term(since 1871) valuations.

  Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  3/1/16

Active Allocation Bands (excluding cash) 0% to 60%

87% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

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

 0% -Stocks- Total Stock Market Index - VTSAX

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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

DYI

9 charts showing Americans never recovered from the Great Recession: 

If you are wondering why people are so angry look no further.

DYI Comments:  The charts speak for themselves.  Either the stock and corporate bond market must fall or a massive turn around in this economy needs to happen pronto to justify the bubble prices. DYI is not seeing a turnaround as the world economy dances on the head of a pin between slow growth and recession.

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  3/1/16

Active Allocation Bands (excluding cash) 0% to 60%

87% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

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

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

DYI

Goldman Sachs: Get ready for labor to crush capital in the U.S.

DYI Comments:  DYI has been stating for years that the U.S. oscillates between pro capital and pro labor.  Currently we are in the turning phase to pro labor that will last for a few more years. There will be a seminal event moving the country to full blown pro labor.  The last major event moving to pro labor was The Treaty of Detroit(1950) between the UAW and General Motors.  Wages were increased at the expense of GM's profit margin however they received a longer term contract which ended the strikes.  From then on labor was on the move increasing unions with positive contracts for their employees.  Non union shops fell into line as well.  Like all movements they went too far making corporate America uncompetitive ending the pro labor cycle.  The pro capital event was marked by Ronald Reagan firing the Air Traffic Controllers(PATCO 1981) with unions and labor on the run since that time.  What will the seminal event marking pro labor?  I don't know but I'll know it when it occurs.

DYI   

AMERICAN EAGLE GOLD COIN SALES QUADRUPLE FROM A YEAR EARLIER

Yet U.S. bullion dealers noted that rising prices are actually prompting Americans to buy more in what is now seen as a “coin buying frenzy”; these people are betting on volatile currencies and global economic concerns lifting prices even higher. 

The U.S. Mint is a notable beneficiary of gold’s latest rally, with Newsmax reporting that the Mint sold 83,500 ounces of American Eagle gold coins in February alone. This means that gold coin sales quadrupled on a year-on-year basis. Likewise, American Eagle silver coin sales reached 4.78 million ounces in February, translating to a 58% increase compared to a year ago.

Some believe that this is part of Russia’s concentrated plan to undermine the U.S. dollar and the West in general. Prominent German newspaper Die Welt is one proponent of this theory, with the paper’s economists speculating that gold is being used to stand in the way of Western currencies, and going as far as to say that Russia’s acquisitions are a part of Putin’s plan for world domination. 

DYI Quick Comment:  Russia's plan for world domination?  Russia is attempting to bolster the sagging Ruble as their economy is mired in a steep recession due to low oil and gas prices.  Russia's problems are staggering; early death especially for Russian males due to massive alcoholism, birth rate significantly below replacement, an unbalanced economy tilted to natural resources.  The list is endless.  If Putin has plans for world domination it will only be a fantasy.

Deutsche Bank also mentioned holding costs as a reason to store value in gold. Even though it’s sometimes looked down upon as a non-yielding asset that costs money to store, the yellow metal is quickly becoming appreciated in a world of negative interest rates.    

DYI Comments:  With fractional lending banks loan money out of thin air which predominately goes into the private markets.  Currently world wide there has been an increase in bankruptcies causing this once bank money creation(debt) to disappear causing deflation.  Central banks are money printing in an attempt to reflate the system.  Short term they will fail as the forces currently are far stronger for deflation as private sector debt continues to implode.  As governments continue to deficit spend to fill the economic gap these borrowings will have to be paid.  Once the private sector is finished deflating governments will need to pay off their borrowings. They rarely go bankrupt as happens in the private sector they will raise taxes and the remainder will be inflated away.  I anticipate the 2020's being noted for high taxes, labor shortage(Boomers retiring) and HIGH INFLATION.

DYI    

Gold Snaps Back to Bull Market as Prices Surge on Haven Demand

Gold cruised to a bull market, heedless of rebounding stock markets, as traders expect central banks to curb yields on other investments in an effort to spur economic growth. 

The metal has climbed more than 20 percent from a December low, the common definition of a bull market. Gold futures advanced 1 percent to settle at $1,270.70 an ounce at 1:43 p.m. on Comex in New York. Prices rose after a U.S. report Friday showed average hourly earnings posted the first monthly drop in more than a year, even as employers added more workers in February than projected. 

“Although gold is very much driven by Fed policy, the impact of ECB policy decisions may become increasingly relevant for gold price action, as concerns about negative interest rates gain traction,” Joni Teves, a strategist at UBS Group AG, said in a note on Friday. “We think negative interest rates should be positive for gold.”

 

Vanguard Precious Metals & Mining Fund

DYI 

The War on Cash along with Negative Interest Rates are Coming to America....You can bet on it!

Bring Back The $1,000 Bill—-Cash Is The Currency Of Freedom

Of course, as CATO Institute analyst Daniel J. Mitchell writes, to our ruling class this isn’t a bug, but a feature. Governments want to get rid of cash for two reasons. First, it gives them more control over citizens: They justify it in the name of fighting terrorists and organized crime, but what they really care about is making sure that nobody escapes their scrutiny, for purposes of taxes, regulation and political finagling. Second, if you’re stuck putting your money in a bank, they can force you to spend it (and thus “stimulate” the economy) by subjecting you to negative interest rates, in which money that just sits in the bank shrinks away, providing an incentive to spend.

Cash has a lot of virtues. One of them is that it allows people to engage in voluntary transactions without the knowledge or permission of anyone else. Governments call this suspicious, but the rest of us call it something else: Freedom.

DYI

Currently today it is not the return ON your capital but the return OF your capital.

The economy continues to dance on the head of a pin between growth(what little there is) and possible recession.  Any misstep in the U.S. or world economy with an over inflated stock and bond market prices will come crashing down.

Expectation are for a 45% to 60% in stock price drop (S&P 500); this a run of the mill decline due to the absurd valuations.

The only two areas that have value are energy stocks and precious metals mining companies.  The remaining traditional stocks and bonds are way over valued.  Currently today it is not the return on your capital but the return OF your capital.

The Great Wait Continues.....

DYI

DYI Comments:  Gold the relic that Central bankers hate yet inspire to own is back on the move to the upside.  Since the year 2000 despite its latest cyclical bear market continues to be the leader above all other macro markets.  This run for gold is not over.  Admittedly, the days of "shooting fish in a barrel" have long since past(1998 -2002) when gold was on the "give away table!" However there does remain upside potential as we wait for financial assets to mean invert into bargain prices. 

3-1-15
Updated Monthly

Secular Market Top - Since January 2000

+  43.7% Dow       

+146.7% Transports 

+119.0% Utilities

+31.5%  S&P 500

+12.0%  Nasdaq

+59.6%  30yr Treasury Bond

+326.1% Gold

  +31.8% Oil
  +57.9% Swiss Franc's

    

From High to Low

+326.1% Gold

+146.7% Transports

+119.0% Utilities 

+  59.6% 30 Year Treasury
+  57.9% Swiss Franc's

+  43.7% Dow

+  31.8%  Oil
+  31.5% S&P 500

+  12.0% 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!). 

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION

Active Allocation Bands (Excluding Cash) 0% to 60%

87% - Cash -Short Term Bond Index - VBIRX

13% -Gold- Precious Metals & Mining - VGPMX

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

 0% -Stocks-  Total Stock Market Index Fund - VTSAX

[See Disclaimer]

The Great Wait Continues...

DYI     

The new mind control

The internet has spawned subtle forms of influence that can flip elections and manipulate everything we say, think and do

We have also learned something very disturbing – that search engines are influencing far more than what people buy and whom they vote for. We now have evidence suggesting that on virtually all issues where people are initially undecided, search rankings are impacting almost every decision that people make. They are having an impact on the opinions, beliefs, attitudes and behaviours of internet users worldwide – entirely without people’s knowledge that this is occurring. This is happening with or without deliberate intervention by company officials; even so-called ‘organic’ search processes regularly generate search results that favour one point of view, and that in turn has the potential to tip the opinions of millions of people who are undecided on an issue. In one of our recent experiments, biased search results shifted people’s opinions about the value of fracking by 33.9 per cent.

 Looking ahead to the November 2016 US presidential election, I see clear signs that Google is backing Hillary Clinton. In April 2015, Clinton hired Stephanie Hannon away from Google to be her chief technology officer and, a few months ago, Eric Schmidt, chairman of the holding company that controls Google, set up a semi-secret company – The Groundwork – for the specific purpose of putting Clinton in office. The formation of The Groundwork prompted Julian Assange, founder of Wikileaks, to dub Google Clinton’s ‘secret weapon’ in her quest for the US presidency.

DYI 

Buffett’s Math Trumped by Gold

A part of me agrees with the graph and ascribes the first cycle from 1942 to 1971 as a classic post-war expansion fueled by healthy demographics, sound economic policies, normalized interest rates and the discovery and proliferation of conventional oil as a primary energy source. The second period from 1987 to 2001, in my view reflects the Greenspan era of targeting the gold price with the fed funds rate as he explains in his book “Age of Turbulence”. Though there were many unintended consequences brewing, market observers should agree that interest rates from the early 1980’s to 2001 incentivized savings and productive usage of capital. 

Today, we have neither. We don’t have a market rate that incentivizes savings, nor do we have healthy demographics or sound economic policies. Most millennials prefer to remain single and defer household formation. When they do form households, their fertility rates are far lower than their parents.

Though this graph resembles the prior graph, it’s important to observe carefully. The Gold adjusted Ex Gov Spending GDP per Capita figure shows less pronounced cycles than before. This is crucial as it indicates a longer-term asymptotic decline in peaks achieved by the US economy when excluding government spending. For market participants familiar with technical analysis, this resembles a “lower high” chart pattern. More importantly, the 2015 Gold adjusted Ex-Gov Spending GDP per Capita figure is $35,690 down 17.3% over 86 years vs. $43,157 which was the same figure for 1929.

DYI Comments:  Both charts above clearly showing our central bank secular booms and busts.  Real incomes have been crushed since the year 2000 with a bit of a bounce off the 2009 time period.  Real incomes could very well improve(for those who gainfully employed) despite a stock and bond sell off.  Currently today the largest four banks J.P. Morgan, Wells Fargo, Bank of America, and Citigroup hold 45% of America's deposit.  Take the top 25 banks(including these four) pushes the percentage of deposit to around 85% plus.

Too Big to Fail and Too Big to Bail Out

The possibility of a deflationary smash as these insanely over leveraged banks implode.  The Fed's which is nothing more than a banking cartel from day one with its real mandate of privatizing their profits and off loading their losses onto the American taxpayers a bail out this time will even be too large for the Federal government.  Today the top 20% of Americans pay almost 70% of all income based taxes.

   

This possibility will be unacceptable even for the elites with their vast wealth.

Bail Out... is Out; and Bail In...is In!

The Fed's will impose negative interest rates in order to recapitalize these banks.  This will spread the cost out among almost all depositors in the U.S.  Over the coming months you will hear talk of the war on cash.  In order for this bail in to work is to keep citizen and business' from hoarding(savings) cash.

What should been done during the 2008 -2009 downturn was to protect the depositors, allow the top 50 banks to go bankrupt breaking them into 2,500 new banks.  Of course the real solution is to end money creation and fractional lending.  In other words....End the Fed.  By the way this isn't our first central bank but our 4th.  Historically as a nation we've been to this rodeo before with the same horrible results.  Why do we never learn?

DYI    

Q1 2015 U.S. Banking Review: Total Deposits

One thing that stands out from the table above is the sheer size of the deposit base for these four banks. At the end of Q1 2015, these banks had more than $4.6 trillion in deposits among them – which is almost 45% of the total deposits for all U.S. commercial banks. The fact that the total size of deposits for the fifth largest commercial bank – U.S.Bancorp – is just $278 billion should give a clear idea of how large these financial institutions are.