Generational Dynamics

Monday was another dramatic day on Wall Street, as the day began with a 400+ point drop on the Dow Jones Industrial Average (DJIA), with oil prices falling once again below $30 per barrel. By the end of the day, the stock market recovered to "only" a 178 point loss. Analysts are mostly confused about why the stock market has been falling recently, and I frequently see them on tv scratching their heads wondering why such a "small economy" like China's is having such a big effect on Wall Street. 

As regular readers know, Generational Dynamics predicts that we're headed for a global financial panic and crisis. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (February 5) was at an astronomically high 21.41. This is far above the historical average of 14, indicating that the stock market is in a huge bubble that 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. 

 

If you compare stock price and P/E ratio changes in the last month, there are some interesting observations. Last week, on the morning of February 5, the Dow was at 16417 and the S&P 500 P/E ratio was at 21.40. 

A month ago, on the morning of January 8, stock prices were higher, but the P/E ratio was lower. Specifically, the Dow was at 16514, and the P/E ratio was 21.03. 

Now that should be impossible. The P/E ratio is, well, a ratio of stock prices to earnings, and so if stock prices fall, then the P/E ratio should fall as well. 

But of course, that's not always true, because the earnings may change as well. What's been happening is that fourth quarter (4Q2015) earnings have been coming out in the last month,In fact, 63% of S&P 500 companies reported results as of Friday morning, and Q4 earnings are on track to decline 4.1%. This is even worse than the 3.7% decline that analysts had been predicting at the beginning of January. 

The 4.1% decline in Q4 earnings would be the biggest drop in six years, and it follows a 0.8% decline in Q3. Revenue figures followed the same path, with revenue falling 3.5% in Q4, after falling 4.4% in Q3. 

And so, the reason that the P/E ratio increased in the last month, despite the fact that stock prices have fallen, is that earnings have fallen even more. 

If earnings decline two quarters in a row, then it's called an "earnings recession." We won't know for several months whether the GDP also fell for two quarters in a row, which would be the definition of an "economic recession." 

The stock market has been in a bubble for several years. Although analysts are always claiming that "this time it's different," the fact is that it's never different, and Generational Dynamics is predicting a stock market panic and crash, with the Dow falling to 3000 or lower.

DYI 

Disney IT workers allege conspiracy in layoffs, file lawsuits

The lawsuits represent what may be a new approach in the attack on the use of H-1B workers to replace U.S. workers. They allege violations of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO), claiming that the nature of the employment of the H-1B workers was misrepresented, and that Disney and the contractors knew the ultimate intent was to replace U.S. workers with lower paid H-1B workers.

DYI Quick Comment:  I work at a major hotel/resort which is flooded with H-1B interns to full fill their work experience from their respective schools.  The reality is a ready pool of high quality cheap labor living with 6 to 10 other interns (way beyond zoning laws) in houses owned by their employer(hotel).  

The lawsuits cite a form that H-1B employers fill out when placing a visa worker, the Labor Condition Application (LCA). 

In the LCA, an employer states the job location, salaries paid to the H-1B workers and also attests that U.S. workers will not be "adversely affected." 

The LCA requires employers to swear the visa workers "will not adversely affect working conditions" of existing employees, said Sara Blackwell, the Florida attorney who is bringing the case. "Obviously, if you have to train your replacement and then are fired, that is an adverse effect."

DYI Comments:  This is designed to accomplish two goals for the employer; one, cheap labor from the get go and two, depress the wages for the remaining American workers.

DYI

Study: Student loan debt threatens retirement savings

Asking the question, "Will the explosion of student debt widen the retirement security gap?," researchers with the Center for Retirement Research at Boston College found student loan debt chips away at the ability to prepare for a comfortable retirement. 

"The bottom line is that college costs should be included in broader policy discussions over how to improve financial security," researchers said. "If today's working-age households had the same level of student debt as those recently leaving college -- an additional 4.6 percent of households would be at risk of having inadequate income in retirement."

DYI Comment:  Additional 4.6%???  I don't have the exact numbers but "off the cuff" that number is way too low.  Something around 15% to 25% would seem more likely.  Student loans has significantly reduced household formation plus reduced their ability to save for retirement.  The fastest way to reduce College costs is by allowing bankruptcy for student loans.  No this is not a free lunch.  This would become a signature (no collateral) loan no different than any other loan such as credit cards. Universities easy days of credit would end and so would the cost of attending.  Within 5 years costs would go back to a part time job, a little help from parents and the student graduates debt free.

DYI      

Bloomberg Suggests Banning Young Minority Males from Gun Ownership

Speaking to the Aspen Institute on February 6, Michael Bloomberg said cities should ban young minority males from owning guns, both as an effort to reduce crime and to keep those minority males “alive.”

According to The Aspen Times, Bloomberg addressed a variety of topics, and after commenting on poverty and education, he discussed guns. The Times reported that he said, “Cities need to get guns out of [the] … hands” of persons who are “male, minority, and between the ages of 15 and 25.” 

He claimed that “95 percent of all murders fall into this category” and that taking guns away from them will not only reduce crime, but will “keep them alive.” 

Bloomberg said male minorities from the ages of 15 to 25 do not have a good outlook on life and “think they’re going to get killed anyway because all their friends are getting killed.” He also said having a gun “is a joke” for them, that “it’s a joke to pull the trigger.”

DYI Comments:  Mayor Bloomberg I hope you are having a major "brain fart" in denying 2nd Amendment rights to young people who live in a high crime area who are Black and Latino.  Let's go and disarm the few law abiding citizens to be the "easy pickings" for the criminal class who don't give a crap whether guns are legal or not!  Mickey you are worst type of racists, the type who has no idea that they are.  And you are having flirtations with running for President?  If elected another Woodrow Wilson.

DYI 

Japan’s power producers scour forests in search of wood to burn

With almost 70 percent of its land covered by forests, Japan is leading a drive to return to wood as a source of cleaner energy.

While projects in the U.K. and the U.S. are experimenting with biomass, Japan is giving favorable tariffs to power producers who burn leftover wood as a way to cut the country’s dependence on imported fossil fuels.

DYI Comments:  Has Japan lost their minds???  A program such as this will strip their forest areas bald...What total nonsense!

DYI

Mass Layoffs To Return With A Vengeance

Remember the mass layoffs of 2008-2009? The US economy shed millions of jobs quickly and relentlessly, as companies died and the rest fought for survival. 

Then the Fed and the US government flooded the banks and the corporate sector with bailouts and handouts. With those giga-tons of liquidity sloshing around, as well as taking on massive amounts of new cheap debt, companies were able to finance their working capital needs, hire workers back, and even buy-back their sharesen mass to make themselves look deceptively profitable. The nightmare of 2008 soon became a golden era of 'recovery'. 

Well, 2016 is showing us that that era is over. And as stock prices cease to rise, and in fact fall within many industries, layoffs are beginning to make a return as companies jettison costs in attempt to reduce losses. 

Since January 1st, here is a but of subset of the headlines we've seen:

• Johnson & Johnson to slash 3,000 jobs
• Wal-Mart pulls plug on smallest store format, shuts 269 stores
• GE plans to cut 6,500 jobs in Europe
• BP to slash thousands more jobs in face of oil downturn
• Macy's to cut 3,000 jobs, close 36 stores
• Sprint cutting 2,500 and closing call centers to cut costs
• Canadian Pacific Railway plans to cut 1,000 positions
• Brazil economy shed 1.5 million payroll jobs in 2015
• Pearson to cut 4,000 jobs in latest restructuring
• Barclays to slash about 1,000 investment bank jobs worldwide
• Southwestern Energy to lay off 1,100 workers amid oil slump
• Major banks are making cuts: Bank of America, Citi Group and JPMorgan Chase are trimming jobs and branches.
• Autodesk to cut 10 pct of workforce
• Caterpillar closing 5 plants, cutting 670 jobs
• VMware posts higher-than-expected revenue, announces job cuts
• AIG to cut jobs in sweeping overhaul
• Monsanto to slash 1,000 more jobs, total planned cuts at 3,600
• Instacart layoffs may be a sign of things to come
• EMC plans layoffs as it cuts annual costs by $850M
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DYI Comments:  Oil prices are way down in price along with the share prices for Vanguard's Energy Fund of around 50%.  The time is now to dollar cost average while prices on on sale.

DYI

When Stocks Crash and Easy Money Doesn't Help

John P. Hussman, Ph.D.

With regard to the stock market, I suspect that the first event in the completion of the current market cycle may be a vertical loss that would put the S&P 500 in the mid-1500’s in short order.

That area is a widely-recognized “role-reversal” support level matching the 2000 and 2007 market peaks, and would at least bring our estimates of prospective 10-year S&P 500 nominal total returns to about 5%, which seems a reasonable place for value-conscious investors to halt the initial leg down.

 DYI Comments:  Stocks dropping to that level DYI's weighted formula will be buying some stocks.  However at a reduced amount as stocks expressed by dividend yield will be less than its average.  Improved valuations along with an improved forward return but not enough for a large commitment.

I’ve often noted the historical signature of market crashes: a sustained period of overvalued, overbought, overbullish conditions that is then coupled with a clear deterioration in market internals and hostile yield trends, particularly in the form of widening credit spreads. See my comments from the 2000 and2007 market peaks about the identical syndrome at those points. Historically, what we know as “crashes” have followed only after a compressed, initial market loss on the order of about 14%, a recovery that retraces 1/3 to 2/3 of the initial decline; and finally a break below that initial low. That threshold is currently best delineated by the 1800-1820 level on the S&P 500.

 In the fixed income market, we wouldn’t touch low-grade credit at present.

DYI Comments:  I've been saying the same thing for months junk bonds are going to be decimated with a spread measured from Treasury bonds of 12% to 15% or more!

Once credit spreads widen sharply, the default cycle tends to kick in several quarters later. The present situation is much like what we observed in early 2008, when we argued that it was impossible for financial companies to simply “come clean” about bad debts, because then as now, the bulk of the defaults were still to come (see How Canst Thou Know Thy Counterparty When Thou Knowest Not Thine Self?).

As economic conditions have weakened, Treasury debt has been a safe-haven. Last week, the 10-year Treasury yield dropped to about 1.8%. My view is that a U.S. recession remains likely (see From Risk to Guarded Expectation of Recession and An Imminent Likelihood of Recession).

DYI Comments:  No doubt this economy is long in the tooth and is now "over due" for a downturn. Do what degree of severity is anyone's guess but no doubt there will be some level of layoffs and corporate bankruptcies on the horizon.

Coupled with widening credit spreads, that supports the expectation for even lower yields.

DYI Comments:  Yields will most likely go lower however for DYI bond yields are so low our weighted formula has "kick us out" of the market and rightfully so.  At these sub atomic low rates as far as this blogger is concerned, rates are at a secular low, not the time for purchases of long term bonds for the long term investor.

But as yields become compressed, Treasuries bonds often become vulnerable to short-term yield spikes that can easily wipe out a year or two of prospective income in a few days. For that reason, our view on bonds remains constructive but not aggressive, and our inclination would be to reduce duration exposure as yields fall and extend it in the event of those spikes. 

That brings us to precious metals. As I noted in the 1990’s, the strongest performance from gold stocks is generally associated with periods when 1) the year-over-year CPI inflation rate is higher than 6 months earlier; 2) Treasury yields are lower than 6 months earlier; 3) the ratio of spot gold to the XAU is greater than 4.0, and; 4) the ISM Purchasing Managers Index is below 50. All of those conditions have been present for the past couple of months, and gold stocks have staged a slightly delayed spike higher.

DYI Comments:  Gold shares have been decimated a bargain far greater than physical gold and/or other precious metals as well.  Now is the time to dollar cost average into your favorite precious metals mining mutual fund.

 Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  2/1/16

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

83% - Cash -Short Term Bond Index - VBIRX

17% -Gold- Precious Metals & Mining - VGPMX

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

 0% -Stocks- Total Stock Market Index - VTSAX

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DYI

David Stockman Interview: Retail Investors Heading For The Slaughter One More Time

Former Reagan White House Budget Director David Stockman says retail investors are going to take, yet, another very big hit. Stockman explains, “The retail investor waded in again. The sheep lined up and, unfortunately, are heading for the slaughter one more time. I think it is very hard to see how this Baby Boom generation, with 10,000 of them retiring a day, can afford one more devastating crash in their stock holdings. That is, unfortunately, what we are heading for. That’s why I say it’s dangerous. When the bubble breaks, it will spill and flow throughout the Main Street economy.”

DYI

2017 Defense Budget: Will The Next War Be In Europe? $3.4B Request Highlights Russian Threat

Russia’s ominous moves in Eastern Europe since the annexation of Crimea in March 2014 and the ensuing war in eastern Ukraine that's left more than 9,000 people dead has forced the Pentagon to refocus on Europe, with funding for the European Reassurance Initiative quadrupling from $789 million to $3.4 billion. The initiative was launched in 2014 with the stated goal to “reassure allies of our solemn commitment to their security and territorial integrity as members of the NATO alliance.” 

After Carter’s remarks Tuesday, Russian state-sponsored media outlets were quick to point out the amount of military equipment the U.S. and its allies have in Europe. The U.S. budget is expected to upset the Kremlin, as Russian President Vladimir Putin has in the past accused NATO of encroaching on his sphere of influence.

DYI Comments:   Putin is correct NATO is encroaching on Russian influence with the ultimate goal of breaking the mother land apart.  The U.S./U.K./NATO/ EU alliance is systematically chipping away of Russia's influence as recently illustrated by bringing in a former ally Montenegro into NATO.

One of the secondary goals is to chase the Russian navy out of the Black Sea by tying up human and material assets for their army and air forces defending their immediate borders.  This leaves very little for force projection which is the realm of navies which is reserved for the U.S. and staunch ally England.

The ultimate goal since the end of WWII is for Russia to lose the Caucasus, the Laplands to the north and the natural resource prize all lands east of the Urals.

 

These new countries will need the technological assistance to develop their natural resources. Companies such as Total, BP, Royal Dutch Shell, ExxonMobil, Chevron, all under the control of the U.S. alliance.  Since 1945 the Soviets were contained, then finally collapsed in 1991, with NATO growing eastward ever since.  Will the alliance be successful?  Yes.  May take another 20 to 30 years but in the end Russia will be a much smaller country and who knows they could become a NATO member as well.

DYI