'This is a bubble. A very big bubble. And it is going to end in tears'

The Canadian housing market just keeps getting hotter. 

Home prices in the Greater Vancouver area have surged 30% year-over-year in May, up from 15% at the end of 2015, according to the bank's June 2016 "Financial System Review." 

Meanwhile, prices in the Greater Toronto area are growing by 15% YoY, up from 10% half a year earlier. 

Plus, he pointed out that the gains in housing prices in these regions now "far exceed" those in the US at the peak of its housing bubble.

  

TD Bank expressed similar concerns, warning that these housing markets are "ripe for a correction" and that "the party will come to an end," according to CBC News. 

Of course, as with all bubbles, it's quite difficult to predict when exactly this will happen. By Ashworth's own admission, his team first warned about the bubble risk in early 2011. 

But, still, regardless of when this correction will happen, he did offer a somewhat ominous forecast for what might follow (emphasis added): 

When prices do begin to fall in Toronto and Vancouver, expectations of further declines could become just as self-fulfilling as the expectations of further price gains now. We have no idea exactly how far prices will fall. But we would stress that the link between price declines and mortgage defaults is not a linear one like the Bank of Canada seems to believe. If prices fall by 20% in the most overvalued markets, pushing recent home buyers deep into negative equity then there is a danger that the price decline / foreclosure rise feedback loop becomes self-perpetuating.

DYI Comments:  Oh Canada...Oh Canada!  Central bank madness, high oil and other commodities prices, plus the madness of crowds, ending with the dictum "Its different in Canada!"

Short version Canadian economics since 1998

Remember when Exxon was Exxon and Mobil was Mobil?  As the chart below depicts oil prices bottomed in December 1998 at an inflation corrected price of "drum roll please" $12.47 a barrel!   

 

The world at that time was awash with cheap and plentiful oil, gas, along with many other commodities such as gold, silver, tin, copper, timber, coal, grains, corn, etc.  Oil prices where so low Exxon and Mobil were fearful (and rightfully so) of having to cut their dividends significantly.  So they married on November 30, 1999 by consummating a $81 billion dollar merger.  This had a deflationary effect on Canada for their country is a commodity producing country.  To push deflationary forces further their manufacturing base was in the process of being gutted since the early 1990's in the rush to globalize(Mexico, China, etc.).  While the U.S. economically boomed in the 1990's Canada was feeling the effects of a declining manufacturing base and commodity based companies business plan for success was simply staying in business - dividends were a forgone conclusion.  This made for a backdrop of declining wages and cheap real estate prices.  Canadians back in those days were noted as very conservative in their personal finances.  Most Canadian homeowners would have their mortgages retired by their late 30's or early 40's at the latest.    

Central bank madness and the rise of China

After the high tech blow off(year 2000) and subsequent recession Alan Greenspan and his fellow board of governors dropped interest significantly.  This pushed down rates world wide in of itself along with the Bank of Canada (central bank) following America's lead.  At the same time China was moving into high gear soaking up all available commodities pushing prices higher and higher. Canadian oil/gas non edible and edible commodity companies went from a business plan of just staying in business to major expansion plans that included ramping up employment and pay.  This provided the Canadian provinces with tax revenues that went from too little to way too much.  What did their politicians do? Save the excess money for a rainy day?  Of course not!  They went on a massive spending/building boom!  Couple this with historically low interest rates(and rates kept going lower) and ever higher paid employment the good times were rolling in.  As you suspect the excess money the citizens went into an asset that is near and dear to all middle class folks. REAL ESTATE!

It's different here - The madness of crowds

The majority of their excess Canadian dollars went into real estate.  Some of course went into more traditional investments such as stock and bonds but the majority went into the middle class favorite their home.  Prices at first only rose off of their below average price rising to their average price to incomes.  However, China, Canada's biggest customer for commodities went on a rampant infrastructure spending for years.  After 5 years the psychology began its turn.  Real estate went   

a conservative investment along with stocks, bonds, basic savings to the asset of choice for wealth building.  After 10 years(2008)  real estate is now the battle cry for Canadians as the place to make money.  After the U.S. 2009 stock and bond(especially junk bonds) crash this further solidified Canadian thought process that the only safe and sure way to build wealth is real estate.  Also Canadian real estate only modestly dipped in price during 2009 American great recession only to pop back up in price.  Add on world wide sub atomic low rates pushing down Canadian rates as well the mind set is now set:  Canadian Real Estate is a GUARANTEED Money Maker!  And that my friends is the mind set of a MAJOR ONE ASSET BUBBLE.

Canadians are in hock up to their eyeballs!

The very first chart I put up is the comparison of U.S. to Canadian household debt to income.  The U.S. peaked around 130%.  Canada's latest stats is 165.4%!  At this rate this ratio will peak some where in the 170's% before rolling over.  

Canadian household debt soars to yet another record

The Globe and Mail

Published Friday, Mar. 11, 2016 8:49AM EST

Statistics Canada reported Friday that the ratio of household credit-market debt to disposable income, the key measure of the debt load, rose to 165.4 per cent in the final quarter of the year, eclipsing the upwardly revised previous record of 164.5 per cent in the third quarter. That means that at the end of the year, households held more than $1.65 in debt for every dollar of annual disposable income.

What will pop this bubble?

There are several possibilities.  Oil/gas prices dive down to the teenager level(under $20) and stay there for a protracted period of time.  China's infrastructure bubble bursts ending in a depression. World wide recession.  The Canadian house of cards real estate debt bubble collapses under its own weight.  This madness of crowds group think will end first with a bang of around 25% decline as one or more of the possibilities hits Canada or others that I haven't thought of.  Then the long term melt of declining prices based on an after inflation basis as the Canadian central bank will digitally print money like a madmen driving rates sub atomic and very possibly negative.

Mr. Market Returns

In the end all asset categories will regress back up or back down to their mean.  They also overshoot either on the high side or low side creating over time their mathematical mean.  Canadian real estate is no exception.  My guess is that residential stand alone houses will drop on an after inflationary basis of around 50%.  Condos around 70%, again inflation adjusted.  How long will the great housing melt last?  Most likely 10 to 15 years.

What should a Canadian homeowner do?

Sell your house yesterday.  Find an idiot who will pay these insane prices.  If it is an American don't feel bad he or she should know better.  Use the proceeds from the sale and get out of debt.  Pay it all off; credit cards, student loans, car loans etc.  Become debt free.  Invest the remainder in U.S. dollars. When this hits the Canadian central bank will look to drive the Loonie into the basement(devalue) in an effort to export their way out of the problem.

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

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

[See Disclaimer]

Find a place to rent.  Do to such high real estate prices your landlord is actually subsidizing your rent only he doesn't know it!  Thank him every day for allowing you to rent.  Keep on adding to the model portfolio and wait.  Superior values lie ahead for those who are patient. In the beginning you will look foolish(everyone knows Canadian RE is a guaranteed winner), in the end you will be seen as smart, lucky, or outright disdain.  Such is the life of a value player.

Best of Luck Canada!

DYI   

How negative interest rates are undermining the economy

As Larry Fink of BlackRock put it in a shareholder letter in April: “Not nearly enough attention has been paid to the toll these low rates – and now negative rates – are taking on the ability of investors to save and plan for the future.” 

However, the big players have been hit. And it’s instructive to see how they’re reacting. At an institutional level, banks across Europe are trying to work out what is the least expensive way to bury their cash in a big hole. 

As my colleague Merryn Somerset Webb pointed out this week on her blog, Commerzbank is looking at how practical it would be to rent vaults and store its own cash rather than be charged 0.4% a year to store it with the European Central Bank. Munich Re has been doing the same. 

This is the “zero-bound” problem. The point of turning interest rates negative is to force banks (and anyone else with cash) to lend it or spend it. But this only works if you can forcibly tax the cash. The easy way to avoid negative rates is simply to stick the cash under the mattress. 

And of course, this is why central banks are so keen to ban cash – if all money is digital, then you can’t avoid the negative interest rate tax. 

Negative interest rates imply that money has no value. You literally can’t give it away. You have to pay someone to take it off your hands. Want to lend money to the German government for a few years, because you deem it a safe bet? It’ll cost you. Want to lend to the Italian government for a couple of years (I don’t know why you might, but let’s say you do)? It’ll cost you. 

This rather undermines the whole concept of saving. As Fink points out, it makes the whole process of building up a pot of capital for future use far more fraught than it should be. 

The actions of central banks, he says, “are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less liquid asset classes and increased levels of risk.”

Bonds are clearly in a bubble – but when will it burst?

The bond bubble continues to swell

The thing is, if past bubbles are any guide, even as this reflation is happening, and the outlook is getting more and more grim for the sustainability of the bond bubble,

 investors will be dismissing signs of a turn and sticking to their guns.

 So even when inflation starts to return, don’t expect mainstream market commentary to recognize it.

You now have to pay money to lend to the German government over seven years. Lending to Japan will cost you money right out to ten years. And – stunning as it may seem – the Italian government is now able to charge anyone who lends to it for up to three years. 

Like most bubbles, this is obviously nuts. 

It didn’t make fundamental sense for a tiny stretch of central Tokyo to be worth more than the whole of California in the late 1980s. It didn’t make sense for companies that consisted of nothing more than a business plan and a rudimentary website to be worth billions in the late 1990s. And today, it doesn’t make sense that hugely indebted, economically fragile governments can literally charge people to lend them money. 

Does the ongoing strong performance of bonds mean we’re missing something, or that there’s no bubble here? Nope. It just highlights yet again, that bubbles last for an awful lot longer than they should (which makes sense – if market prices corrected reliably when the underlying assets moved out of line with the fundamentals, then bubbles would never form). 

As John Plender points out in the FT, past recoveries from similar crises offer a sobering lesson for bond investors. After the 1890s Latin American debt crisis, US bonds lost 1% a year from 1900 to 1910, in real (after-inflation) terms. 

Doesn’t sound too painful? Think again. From peak to trough, from 1900 to 1920, US bond investors lost half their money. The data, says Plender, is worse for the post-Great Depression period. And they’re worse again if you use UK rather than US bonds. 

The thing is, if past bubbles are any guide, even as this reflation is happening, and the outlook is getting more and more grim for the sustainability of the bond bubble, investors will be dismissing signs of a turn and sticking to their guns. 

So even when inflation starts to return, don’t expect mainstream market commentary to recognize it.

Remember – pretty much since the Alan Greenspan era, it’s paid off to bet on the Fed’s ongoing desire to keep money as cheap as is humanly possible. Yellen will take every excuse she gets to keep rates as low as she can until inflation figures force her to do otherwise. Stick with those weak dollar trades.

DYI Comments:  Over the next few years the higher probability event is a world wide recession causing a deflationary smash.  This scenario, if it happens would drop U.S. rates negative for maturities of 5 years of less.  Of course central bankers will react with digital money printing in overdrive seeding the future for inflation.  

The U.S. and many other first world governments have their demographic time bomb.  Worldwide Boomer's will be retiring in huge numbers taping their countries version of Social Security and Medicare.  Governments will increase taxes on these programs, alter and/or reduce benefits, whatever remaining costs their central bank along with the Federal Reserve will digitally print.

The 2020's will be known as the roaring 20's marked by high taxes, high inflation with increasing interest rates, AND A LABOR SHORTAGE!  Boomer's will exit the work force(but still consuming) in statistically significant numbers beginning in 2023 producing spot labor shortages and in the later 2020's an outright labor shortage causing wage push inflation.  Add on the Fed's digital printing to pay the remaining costs of our social programs inflation will be back and with a vengeance.  High inflation most likely peaking in the high teens.  The Fed's will be caught between the rock and a hard place in their desire to quell inflation to satiate Generation X and the Millennial's and at the same time appease the large high percentage voter block Boomers.  Boomers will win out.   However as they pass in statistically significant numbers beginning in the 2030's inflation will recede along with the labor shortage and our social programs will be in better balance.

Today long term bonds and the U.S. stock market are in bubble as illustrated by my sentiment indicators.
  

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   

Gold and the precious metals mining companies are currently the best bargain setting up for future profits as time moves closer to the 2020's.

DYI's model portfolio reflects this reality.

 Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

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

[See Disclaimer]

 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 Great Wait Continues 

DYI

Oil could shed more than half its value to $20, analyst says

Looking at the performance of West Texas Intermediate crude oil CLN6, +1.17%since 1870, Paul Jackson, head of research at exchange-traded-fund provider Source, predicted that prices will tank to $20 a barrel, or almost 60% from its current levels, and languish for a while, before recovering.

DYI Comments:  In my mind the only way oil could reach the $20 dollar level or lower is for all of the OPEC nations especially Saudi Arabia to pump at their maximum capacity and for the world economy to go into a tail spin(recession).  This is a possibility and the probability is greater than one would assume though not guaranteed.

Be a Boy Scout...Be Prepared

If oil becomes a teenager(below $20) this will place oil/gas/service companies on the give - away - table at once - in - a - lifetime prices.  If this occurs I'll be placing a portion of my portfolio into the Adams Natural Resource Fund symbol PEO.  Just something to keep in mind.

DYI    

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

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

[See Disclaimer]

DYI

$1.2 Trillion In US Student Loan - 

A Ticking Time Bomb

by Constantin Gurdgiev • June 12, 2016

U.S. student loans are, in very simple term, a ticking time bomb. The indebted generation is in the younger demographic with limited income prospects and the job markets that are longer-term characterised by greater income volatility and lower income trends. This means that repayment of these loans exerts greater pressure on household savings and investments exactly at the period of the household life-cycle when American workers benefit the greatest from the compounding effects of savings and investments on life-time income. In other words, the opportunity cost of this debt is the greatest.

More college grads move back home with mom and dad

Although graduates from the class of 2016 enjoy the best job market in years, the number of young adults postponing romantic partnerships and marriage has contributed to the growing share of those who are still living at home. The median marrying age has risen steadily for decades. It's now 27 for women and 29 for men, up from 20 for women and 23 for men in 1960, according to Pew. 

Then there are the hefty student loan bills from school, which are at an all-time high, putting a severe strain on most recent graduate's financial circumstances. Seven in 10 seniors graduate with debt, owing about $29,000 per borrower, according to the most recent data from the Institute for College Access & Success. 

From a financial perspective, moving back home can provide millennials with an opportunity to start paying back loans and build up an emergency fund with a goal of getting to independence.

DYI Comments:  Basic economics 101 will tell you if you have a third party payer(student loans) over time the cost of education will rise to the level of available loans. To combat that rise in college costs larger loans were allocated to the student only to have the cost of education increase once again to the level of the loans.  This vicious circle has created a 1.2 trillion college debt bubble that is bursting with massive delinquent payments creating a generation of debt slaves.

To lower the costs of college significantly is simple, do away with student loans.  Within five years cost will drop to the level that a student can reasonably afford.  Oh the universities and colleges will scream that it will be the end of the world or to put directly the end of their subsidies.  After five years costs will drop back to where a student can work a part time job and graduate debt free.  Just as it was before the student loan program began in 1965 with the Higher Education Act during Lyndon Johnson's great society program.  Another socialist's dream only to once again turn into a nightmare.

DYI  

Russia: We will respond to entry of U.S. naval vessel into Black Sea

The Russian Foreign ministry said Moscow would respond to a U.S. naval ship's entry into the Black Sea with unspecified measures, saying it and other deployments were designed to ratchet up tensions ahead of a NATO summit, the RIA news agency reported. 

Russian state media reported that the USS Porter, a U.S. naval destroyer, entered the Black Sea a few days ago on a routine deployment, a move it said raised hackles in Moscow because it had recently been fitted with a new missile system.

 

Above U.S. destroyer - USS Porter 

U.S. Navy officials told reporters on Wednesday the U.S. military would also have two aircraft carriers in the Mediterranean this month ahead of a July NATO summit in Warsaw as Washington sought to balance Russian military activities.

He also said the deployment of U.S. aircraft carriers in the Mediterranean was a show of force which in his view deepened a chill in ties between Moscow and Washington caused by Russia's actions in Ukraine and Syria.

DYI Comments:  The U.S./U.K./NATO/EU alliance continues to pressure Russia to end their dominance of the Black Sea.  The alliance intermediate goal of bringing in Ukraine into NATO has so far been thwarted by aggressive political pressure and low level military intervention by Russia.  The alliance goal is the seizure(bringing into NATO) the Crimea and most importantly the port of Sevastopol.  This is why they call it geopolitics, geography and politics combined.  Geography does matter - control the port of Sevastopol - then the Black Sea is yours to dominate.

The alliance using NATO as its sword is in the process of surrounding 3/4 of the Black Sea. So far Turkey, Bulgaria, and Romania are in NATO.  NATO as stated before has been thwarted the Ukraine from entering NATO by the Russians, however Georgia are pro west/alliance who are openly courting NATO for membership so much so they have just recently ended joint military exercises with U.S. and U.K. forces.

Resource Wars - Oil and Gas

The major reason (for better or for worse) Americans and British are in the middle east to secure future supplies of hydrocarbons.  Terrorism has become an unfortunate side effect and now has become the excuse to remain, maintaining their(alliance) control.  Below is a chart for crude oil prices inflation adjusted updated to January of this year(2016). Currently 

oil has been dancing around $50 dollars a barrel up from its bottom in December of 1998. Remember these are inflation corrected and is an apple to apple comparison.  Since 1998 oil prices are up 300%.  Any wonder why the U.S. economy is in slow growth mode or the U.S. stock market made its secular top only two years later after oil prices bottomed in 1998?  The predominate driver of an economy is oil and gas which is double for the car/truck dependent U.S.    

The alliance is allowing Turkey, Russia's historical arch enemy to ramp up their military even to the degree of building and deploying an aircraft carrier in the Black Sea.  This forces Russia to be tied down in the Caucasus' leaving Azerbaijan a major oil/gas producer in the region vulnerable to the alliance overtures for inclusion to NATO(see map below).  

  

Also note the U.S. has remained in Afghanistan with their proximity to other oil/gas nations. Positive overtures to Iran, Turkmenistan, Uzbekistan, and Kazakhstan all oil/gas producing nations.  Simply put:  RUSSIA IS IN THE WAY OF THE ALLIANCE'S GOAL OF SECURING OIL AND GAS TO POWER THEIR ECONOMIES!

The End Game

The alliance end game since the end of WWII to have Russia reduced in size by having the Turk's bring into their sphere of influence/control the Caucasus' all the way up to Volgograd with Kazakhstan as a NATO member as well.  The loss of the Lapland's far north and east of St. Petersburg AND the grand prize Russia's political sub division east of the Ural Mountains forming new countries to be brought under control of the alliance's major oil/gas companies.

DYI

Germany has now been added to the club for countries with 10 year treasury bonds with negative rates!

DYI Comments:  Germany is added to the list of countries 10 year Treasury maturities that have gone negative.  Japan was the first to go negative then Switzerland, now Germany.  Who is next? What I do know done the line these long term bonds will be the short of a decade.  Just as the knowing investors since 1981 bought long bonds especially 30 year Treasuries and every two years bought a fresh 30 year T-bond trouncing the return on stocks by a wide margin.  Or for those who were very clever bought long dated Treasury zero coupon bonds trounced stock returns just as pigs go slaughter.     

Of course that was then....today, as they say, is today.  As Europe's economic, financial, and political problems continue to compound yields will be sent into a downward tail spin pushing more and more countries into negative territory.  Investors will be seeking positive yields(who wouldn't) the U.S. has positive rates and the U.S. Dollar is the best looking horse in the glue factory.  So.....Expect heavy buying from Europe along with continued buying by the Japanese.  THIS WILL PUSH DOWN RATES.  Add on a recession - a flight to quality -  government bonds yields will drop precipitously. How low?  I would not be surprised in that scenario 30 yr T-Bonds under 2% and 10 yr T-bonds less than 1%.

Why then has DYI's formula "kicked us out" of long dated bond market?

Yields are now so low they have passed our threshold of 100% below the mean as measured by price to interest(PI) using the 10 year T-Bond as our proxy.  The average or mean is 4.60%(22 to 1 PI) and as of 6-13-16 1.62%(62 to 1 PI).  Simple arithmetic (62 - 22) / 22 x 100 = 182% below the average! THIS IS INSANITY!  

The Fed's and other 1st world central banks with sub atomic/negative rates has distorted or as Austrian economic thinkers - malinvestment.  Major corporations are emitting debt for all practical purposes at zero cost.  In turn pushes businessmen into non-economic transactions due to the heavy hand of world wide central banks.  This consolidation of public and private firms reduces employment all based upon speculative bets due to seductive sub atomic /negative rates.

At a backdrop of 2% GDP growth if the central banks would step aside and allow market rates long term 10 yr T-bond rates would settle in around 5% or 6% with short rates oscillating 3% to 4% depending on flow of growth for GDP.

DON'T TAKE THE BAIT!

Many investors have bonds along with stocks to reduce market fluctuations.  In their frustration to obtain yield they have moved to long dated bonds exposing their portfolio to additional risk.  In their attempt to reduce risk they have unknowingly increased risk.  

Mr. Market in the end will set rates!   

When?  How's this for honesty....I don't know.  But it will happen.  There will come a time when central bankers will lose control of their price fixing of interest rates.  They will fight it but Mr. Market will begin his journey of raising rates.

So hang onto your head while everyone else is losing theirs! 

     Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

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

[See Disclaimer]

DYI

June 13, 2016

Like Water Out of a Sponge

John P. Hussman, Ph.D.

Last week, the 10-year Treasury yield dropped to just 1.6%. Technician Walter Murphy noted that his index of global 10-year yields also plunged to an all-time low. The overall structure of global bond yields is undoubtedly the outcome of years of aggressive monetary easing, though the break to fresh lows among European bank stocks may convey some additional information content. Of course, the compression of prospective investment returns isn’t limited to bonds. On the basis of the valuation measures best correlated with actual subsequent S&P 500 total returns across history, prospective 10-12 year S&P 500 nominal total returns have declined to just 0-2% by our estimates, with negative real expected returns on both horizons.

DYI Quick Comment:  Exactly what I've been saying for months on end, expect negative returns after all expenses.  Those cost are management fees, commissions, trading impact costs, taxes, and of course inflation.  The Fed's are hell bent to achieve their 2% annualized inflation which we all know when that occurs it will be closer to 3% or 3.5%.  Real returns will be in the area of 0% to -2% at best and -2% to -5% at worst.  To achieve a real return of 0% with high probability, a holding period of 15 years at a minimum. 

The chart below presents our best estimate of prospective 12-year total returns on a conventional portfolio mix of 60% stocks, 30% Treasury bonds, and 10% Treasury bills. The 12-year horizon is used because that’s the point where the autocorrelation profile of valuations reaches zero (see Valuations Not Only Mean-Revert; They Mean-Invert). The chart below uses the ratio of nonfinancial market capitalization to corporate gross value added to estimate prospective S&P 500 total returns. This measure has a 93% correlation with subsequent market returns at this horizon, significantly exceeding that of the Fed Model, price/forward operating earnings, the Shiller P/E, Tobin’s Q, and apples-and-oranges measures such as the ratio of the S&P 500 to scaled profits from the National Income and Products Accounts (NIPA). Conventional investment portfolios - meaning most of those held by reasonably long-horizon, growth-focused investors - are presently likely to return just 1.6% annually over the coming 12-year period. [DYI you will need to click on Hussman's web site for his chart]

 This is ONLY Hussman's 12 year S&P 500 index NOT 60% - 30% - 10% portfolio as mentioned you will need to click on Hussman's web site.

Chart above current(6-10-16) Treasury yield is 1.64% 

Current Shiller PE Ratio 6-10-16 is 26.15

The Pension Bubble: How The Defaults Will Occur - Peter Diekmeyer

June 10, 2016

Experts worry about stock, bond and real estate market excesses. But a bubble is forming that dwarfs them all: in pension plans. Millions of Americans and Canadians who are counting on pension benefits to fund their retirements risk being severely disappointed. 

The hard money community has, of course, been aware of this for some time. However in recent years, even the elites have been taking notice.

DYI:  World wide Central banks with their Banana Republic policies operation twist, QE whatever number we left off, ramming down rates to sub atomic low levels or negative in Europe. Why?  So the fat-cat bankers in New York or London don't have to face reality:  THEY ARE BANKRUPT! They all made bad bets along with massive fraud.  Too big to fail then too big to exist. Time to trust bust.  The top 25 banks need to be busted up into 5,000 possibly 7,500 new banks.  After that do away with the Fed AND audit from tip to tail exposing all of their shenanigans since their beginning.

The hard money community is honest money.  The Fed's state their concern regarding inflation yet the results since 1913 is a failure.

    

[Continuing with the article] 

Bonds, which form a major part of most plans’ holdings, earn next to nothing in interest. 

Stocks, which are trading at record levels, despite falling corporate earnings, look to have more downside risk than upside potential. 

Worse, if bond returns average 2%, balanced portfolios projecting 7% to 8% annual returns have to earn 12% to 14% on equities investments to make up the difference. That’s unlikely to happen. [DYI: Unlikely? Not a chance!]

At least private sector plans have some money in them – public sector plans are in even in worse shape. 

Governments have almost nothing put aside to fund future retirees – and they don’t even fully list their debts. 

That process of “cooking the books” ramped up in a major way during Bill Clinton’s administration, whom Hillary Clinton, the current Democratic Presidential nominee, has promised to “put in charge of the economy.”

DYI:  I was hoping the author would have gone into further detail regarding Bill Clinton's administration "cooking the books" not that I would be surprised.

The upshot is that most Americans and Canadians have no clue how far in debt their countries are. Researchers such as Laurence Kotlikoff , a professor at Boston University and a write-in candidate for President in 2016, suggest that unfunded pension and other liabilities run into the tens of trillions of dollars in the United States. The Fraser Institute has shown that Canada isn’t much better. 

A likely model will be Canada, where, in 2012, the late Jim Flaherty, a political master, camouflaged the Harper Government’s raising the eligibility requirements for Old Age Security from 65 to 67 by delaying implementation for ten years. 

DYI:  I've been expecting such a move for Social Security over the past 7 years.  As each year passes more and more articles are written expressing advancing the benefit date any where from 65 to as high as 71.  Of course the U.S. has far better birth rate 2.01 than the Canadians 1.59 making this Boomer's demographic imbalance a possible one time affair.  Of course the replacement rate[along with LEGAL emigration of young people] must be maintained or Social Security goes off the rails needing changes to put it back into balance.   

Flaherty further deflected media attention from the default by simultaneously banning the penny. Canadian journalists fell for the bait and spent the next week writing stories about the penny, never for a second realizing that Flaherty had slipped one by them.

Outright defaultsSeniors vote – and there are a lot of them. So outright defaults on pension obligations will be a last resort of politicians and private sector plan managers. 

However, it is starting to happen. 

The ongoing saga of the US Central States Pension Fund, whose 400,000 beneficiaries were recently offered cuts of up to 60% in the amounts they receive, provides an excellent warning. 

Amazingly the Central States Pension Fund, which manages funds for retirees from a number of companies in 37 states, actually has $18 billion in funds. Managers from those companies simply over-promised workers how much money they would get. 

Pensioners in a variety of public plans including Detroit’s - which went bankrupt – and Illinois – which is insolvent - haven’t been much luckier. Many more will suffer the same fate. 

Governments still have some time to manage the fallout. So do taxpayers who are counting on those plans to fund their retirements. 

For them, the time to plan is now.

*********************** 

DYI:

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

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

[See Disclaimer]

By making the stock market the only game in town, the Powers That Be can no longer afford to let it decline for any reason.

Market technicians have long observed that the holes in charts left when markets gap up or down at the open of trading almost inevitably get filled later on. When the market gaps down, it will eventually rise to fill that gap. When the market gaps up, it will eventually decline to fill that open gap.

Those open gaps around 2,080 and 2,050--ignore them.

That open gap around 1,870--forget it. It will still be open a century from now.

DYI Comments:  I'm not sure if the author is being serious or tongue in cheek. Here at DYI no doubt those gaps will be filled and look for the market to decline further. No doubt the powers that be at our central bank will fight the decline when it comes but when sentiment changes direction no amount of QE will change until the market plays itself out.

Here is a quote from J. Paul Getty that sums up the current market conditions.

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."

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

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

[See Disclaimer]

 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