Global Market Comments
November 30, 2015
Fiat Lux
Featured Trade:
(DEFLATION IS ACCELERATING),
(USO), (CORN), ($BDI),
(THE WORST TRADE OF ALL TIME), (GLD), (GDX)
United States Oil (USO)
Teucrium Corn ETF (CORN)
Baltic Dry Index ($BDI)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
A number of friends have recently approached me asking the best way to refinance their home.
Should they be ultra conservative and lock in a historically low 3.9% conventional fixed rate 30-year loan? Or should they throw caution to the wind and be seduced by a 5/1 ARM (adjustable rate mortgage) available for half the monthly payment?
I tell them that the answer is obvious. All they have to do is closely watch the iron ore market for Chinese delivery.
Last week, the price of this principal raw material for steel fell to $43.5 per metric tonne, the lowest since the 2008 crash, off a gut churning 77% from its 2010 high.
I don?t think I?ll be singing ?Waltzing Matilda? in the shower anytime soon. That?s the national anthem of Australia, the world?s largest producer of the orange rocks.
If my answer puzzles them, I then direct them to the recent statement by the Saudi Oil Minister, Ali al-Naimi. He says his kingdom will continue its present record levels of oil production, even if the price plummets to $20 a barrel.
If they then appear perplexed, I point out to them that US ethanol production just surpassed a once unimaginable 1 million barrels a day, a new all time high. Corn prices have fallen so far that it is cheaper to burn food than to eat it.
At this point, the expression on my friends? faces is now one on complete befuddlement. They start checking their watch, their iPhone for any new text messages, look for new tweets, or updates to their Facebook account.
Then I move in for the kill.
I point out that the Baltic Freight Index ($BDX) has just hit an eight year low. This is the widely followed index for the cost of moving bulk raw materials, like coal, grain, and iron ore.
Now my friends are utterly clueless. Wasn?t this supposed to be a conversation about homes, loans, and interest rates.
If they still don?t get it, I then spell it out more clearly, with the appropriate soaring logic and literary flourishes.
The bottom line for all of these disparate data points is that deflation is accelerating.
The continuing collapsing cost of all commodities is still driving prices relentlessly downward. This year, I think only the price of coca has risen.
Adding fuel to the fire is the relentless march of technology, which replacing expensive humans with cheap machines, further lowering costs.
The offshoring of jobs, once a major driver of the ongoing price collapse, is barely a factor anymore. Rapidly rising wages are steadily pricing Chinese labor out of the market.
Sure, there has been some modest cost increases on the US wage front with the new minimum wage movement. Many cities like Seattle and San Francisco have already mandated wage hikes from $8 to $15 an hour.
But this will only bring higher prices for those who eat fast food cheeseburgers, tacos, and burritos, which my doctors have expressly forbidden me to consume.
What this means is that interest rates are going to remain far lower for longer than even the Federal Reserve can imagine.
Sure, we will get a 25 basis point rise in December, followed by a second one in March, or June. But that may be it.
As unbelievable as it may seem, we might go into the next recession WITH INTEREST RATES ALREADY CLOSE TO ZERO!
All of this makes my friends? choice about how to refinance their home a complete no-brainer. Take the 5/1 ARM, NOW!
Chances are that we will enter a recession sometime in the next five years, before the first five-year interest rate reset. Then they can refinance again, probably at an interest rate even lower than the subterranean one they are getting now.
They can also reconsider the 30-year fixed rate at that time, as I expect inflation to return with a vengeance sometime in the 2020?s.
More than a few homeowners have already figured out that the only way to afford sky-high housing prices in San Francisco and New York is to finance them with the ultra low giveaway cost of money.
The only pre-conditions for this plan to work is for them to keep their jobs, the payments on time, and their credit rating up.
At this stage, my friends thank me effusively and rush off to call their loan brokers.
People who have known me a long time are used to me to making incredible, spectacular, out of consensus long-term forecasts, which eventually come true.
Yes, gold is going from $34 to $1,000 an ounce (1972).
Of course the Nikkei Average is about to rise tenfold from Y3,500 to Y35,000 (1982).
Dow 10,000 by 2,000? You betcha (1992)!
Why can?t oil collapse from $100 to $50 if we make peace with Iran (2014)?
Consider it all part of being Mad.
So, Where?s the Inflation?
$20 Oil? No Problem!
Now that I see gold closing today at a new six year low today I am reminded of one of the worst calls I have seen in my 50 year trading career.
Of course, readers of this letter have been avoiding the barbarous relic like the plague since I called the top 4 ? years ago.
One of the great asset management blunders of all time has to be the European Community?s decision to sell its gold reserves in the wake of the launch of the Euro in 1998.
The decision led to the fairly rapid sale of 3,800 metric tonnes of the yellow metal at an average price of $280/ounce, reaping about $56 billion, according to the Financial Times.
Today with gold at $1,056/ounce, the stash would be worth $211 billion. On top of this, the Swiss National Bank is poorer by $60 billion, after offloading 1,550 tons of the barbaric relic.
The large scale, indiscriminate selling depressed gold prices in the early part of the last decade, and made the final bottom of a 20-year move down.
It is a classic example of what happens when bureaucrats take over the money management business, ditching the best performing investment on the eve of a long-term bull market. The funds raised were largely placed in poorly performing national Eurobonds.
Where did all that gold go? To hedge funds, gold bugs, and inflationistas of many stripes, despite the fact that long dreaded price hyperinflation never showed.
The good news for gold bugs is that these reserves are largely drawn down now, and future selling will trail off in the years ahead. The shrinking supply can only be positive for prices.
Someday.
?
Never Let a European Civil Servant Trade Your PortfolioGlobal Market Comments
November 27, 2015
Fiat Lux
Featured Trade:
(DECEMBER 2 GLOBAL STRATEGY WEBINAR),
(SURVIVING THANKSGIVING)
Investors have certainly been beating their brains out in 2015 trying to make money on stocks.
You either owned Amazon, or you didn?t, which is up an eye popping 124% since January 1. And to participate, you had to initially pay a nosebleed 1,000 X price earnings multiple for the shares.
It really was a leap of faith.
Of course you could have substituted Facebook (FB) (+37%), or Netflix (NFLX) (+161%), and done just as well, or better.
Suffice it to say that unless you were into discount online retailing, social media, or video streaming, you didn?t have much to show for your efforts as an equity investor this year.
This is a stock picker?s market with a turbocharger and a supercharger.
It?s not like we?ve had a lot to work with on the earnings front. While profits are up modestly, S&P 500 revenues are down 3% so far in 2015.
Yes, if you strip out the ongoing disaster on the energy front, the picture doesn?t look so bleak, which is why the big cap index recently rocketed up to a zero return this year. But it is nothing like an economic boom.
And here is the really amazing thing. Some 50% of the companies in the S&P 500 have their shares down 20% or more.
We really have been in a stealth bear market for the past year, when the Federal Reserve ended quantitative easing (click here for Bring Back QE! ).
Which brings us to the burning question of the hour, over which financial advisors and portfolio managers everywhere are tossing and turning in their sleep.
What is the big equity play of 2016? How are we going to earn our crust of bread in these pitiful markets?
That?s an easy one.
For a start, take the continuing strength of the US dollar as the principal driver of financial markets next year.
With the Federal Reserve about to start raising interest rates for the first time in nine years, while the rest of the world is cutting, there is no other possible outcome.
More than that, governments in Europe and Japan are doing everything they can to win the race to the bottom in the currency wars.
We may not see the 11.5% appreciation against the Euro (FXE) that the dollar has clocked since January, or the more modest 3.6% pick up against the Japanese yen (FXY), buy rise the greenback will.
You therefore already know what the script is for all other asset classes for the next 12 months. For now, I?ll focus on equities.
I have been pounding the table over one basic fact in your investment lives, and will continue to do so.
YOU WANT TO KEEP YOUR MONEY IN COUNTRIES THAT ARE INCREASING QUANTITATIVE EASING AND OUT OF COUNTRIES THAT ARE ENDING IT!
Why not take the free lunch when it is being offered?
With currencies weakening in export oriented Europe and Japan, the companies in those countries will gain a price advantage that will boost their bottom lines. In Germany alone exports account for a hefty 50% of GDP.
This is great news for the share prices and stock indexes in those countries. But the only way you should invest abroad is to hedge out your currency risk. If you don?t, you?ll end up putting your money in a pocket that has a giant hole at the bottom.
This is conveniently done for you by the Wisdom Tree Europe Hedged Equity ETF (HEDJ) and the Wisdom Tree Japan Hedged Equity ETF (DXJ). Falling currencies in these two regions bring an increase in the value of these two funds.
This is not a new trend.
In my 2015 Annual Asset Class Review posted in January (click here), I forecast that stock markets in Europe and Japan would substantially outperform those in the US.
So far, that is exactly how it has played out. The (HEDJ) is up by 15% in 2015, while the (DXJ) has added 19%. Expect more of the same in 2016.
Now that we have answered the most important question of the day, we can get on with the more important things in life, like what is going to happen in the next episodes of Homeland, Walking Dead, and Orange is the New Black.
Better Get Your Money Into Europe and Japan
?Brains are the new tonsils. Thanks to the Internet, you don?t have to know anything anymore,? said comedian Paul Riser.
Global Market Comments
November 24, 2015
Fiat Lux
Featured Trade:
(BRING BACK QE!),
(DXJ), (HEDJ), (UUP), (SPY), (TLT),
(FXY), (FXE), (GLD), (USO), (CU), (UNG)
(DECODING THE GREEBACK),
(WHAT ABOUT ASSET ALLOCATION?)
WisdomTree Japan Hedged Equity ETF (DXJ)
WisdomTree Europe Hedged Equity ETF (HEDJ)
PowerShares DB US Dollar Bullish ETF (UUP)
SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
CurrencyShares Japanese Yen ETF (FXY)
CurrencyShares Euro ETF (FXE)
SPDR Gold Shares (GLD)
United States Oil (USO)
First Trust ISE Global Copper ETF (CU)
United States Natural Gas (UNG)
You wanted clarity in understanding the current state of play in the global financial markets? Here?s your #$%&*#!! clarity.
You should expect nothing less for this ridiculously expensive service of mine.
But maybe that is the cabin fever talking, now that I have been cooped up in my Tahoe lakefront estate for a week, engaging in deep research and grinding out the Trade Alerts, devoid of any human contact whatsoever.
Or, maybe it?s the high altitude.
I did have one visitor.
A black bear broke into my trash cans last light and spread garbage all over the back yard. He then left his calling card, a giant poop, in my parking space.
Judging by the size of the turds, I would say he was at least 600 pounds. This is why you never take out the trash at night in the High Sierras.
Ah, the delights of Mother Nature!
We certainly live in a confusing, topsy-turvy, tear your hair out world this year. Good news is bad news, bad news worse, and no news the worst of all.
The biggest under performing week of the year for stocks is then followed by the best. Net net, we are absolutely at a zero movement, and lots of clients complaining about poor returns on their investment.
I tallied the year-on-year performance of every major assets class and this is what I found.
+16% - Hedged Japanese Stocks (DXJ)
+15% - Hedged European stocks (HEDJ)
+13% - US dollar basket (UUP)
+10% - My house
0% - Stocks (SPY)
0% -? bonds (TLT)
-5% - Japanese Yen (FXY)
-11% - Euro (FXE)
-12% - Gold (GLD)
-18% -? Oil (USO)
-27% -? Commodities (CU)
-27% - Natural Gas (UNG)
There are some sobering conclusions to be drawn from these numbers.
There were very few opportunities to make money this year. If you were short energy, commodities, and foreign currencies, you did very well.
Followers of the Mad hedge Fund Trader can?t help but know and love these ticker symbols. They?ll notice that our long plays were found among the asset classes with the best performance, while our short bets populated the losers.
The problem with that is most financial advisors are not permitted to place client funds in the sort of inverse or leveraged ETF?s that most benefit from these kinds of moves (like the (YCS), (EUO), and (DUG)).
That left them reading about the success of others in the newspapers, even when they knew these trends were unfolding (through reading this letter).
How frustrating is that?
What was one of my best investments of 2015?
My San Francisco home, which has the additional benefit in that I get to live in it, have a place to stash all my junk, and claim big tax deductions (depreciated home office space, business use of phone, blah, blah, blah).
Of course, I do have the advantage of living in the middle of one of the greatest technology and IPO booms of all time. Every time one of these ?sharing? companies goes public, the value of my home rises by a few hundred grand.
The real problem here is that investing since the end of the Federal Reserve?s quantitative easing program ended a year ago has become a real uphill battle.
While the government was adding $3.9 trillion in funds to the economy we traders enjoyed one of the greatest free lunches of all time. It made us all look like freakin? geniuses!
Just maintaining their present $3.9 trillion balance sheet, not adding to it, has left almost every asset class dead in the water.
Heaven help us if they ever try to unwind some of that debt!
Janet has promised me that she isn?t going to engage in such monetary suicide.
The Fed is continuing with Ben Bernanke?s plan to run all of their Treasury bond holdings into expiration, even if it takes a decade to achieve this. And with deflation accelerating (see charts below), the need for such a desperate action is remote.
Still, one has to ponder the potential implications.
It all kind of makes my own 43% Trade Alert gain in 2015 look pretty good. But I don?t want to boast too much. That tends to invite bad luck and losses, which I would much rather avoid.
What! No QE?
Asset allocation is the one question that I get every day, which I absolutely cannot answer.
The reason is simple: no two investors are alike. The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, in the top or the bottom tax bracket, and so on.
This is something you should ask your financial advisor, if you haven?t fired him already, which you probably should.
Having said all that, there is one old hard and fast rule, which you should probably dump. It used to be prudent to own your age in bonds. So if you were 70, you should have had 70% of your assets in fixed income instruments and 30% in equities.
Given the extreme over valuation of all bonds today, and that we are probably on the eave of a 30-year bear market, I would completely ignore this rule and own no bonds.
Instead you should substitute high dividend paying stocks for bonds. You can get 4% a year or more in yields these days, and get a great inflation hedge, to boot. You will also own what everyone else in the world is trying to buy right now, high yield US stocks.
Allocation: Are You Him?
Or Him?Global Market Comments
November 23, 2015
Fiat Lux
Featured Trade:
(THE ?INTRODUCTION TO RISK MANAGEMENT? TRAINING VIDEO IS POSTED),
(THERE ARE NO GURUS),
(THE FUSION IN YOUR FUTURE),
(TESTIMONIAL)