May 17, 2019

Global Market Comments
May 17, 2019
Fiat Lux

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The Cost of an Aging World

Regular readers of this letter are well aware of my fascination with demographics as a market driver.

They go a long way towards explaining if asset prices are facing a long-term structural headwind or tailwind.

The great thing about the data is that you can get precise, high quality numbers 20, or even 50 years in advance. No matter how hard governments may try, you can?t change the number of people born 20 years ago.

Ignore them at your peril. Those who failed to anticipate the coming retirement of the baby boomer generation in 2006 all found themselves horribly long and wrong in the market crash that followed shortly.

The Moody?s rating agency (MCO) has published a report predicting that the number of ?super aged? countries, those with more than 7% of their population over the age of 65, will increase from three to 13 by 2020, and 34 in 2030.

Currently, only Japan (26.4%) (EWJ), Italy (21.7%) (EWI), and Germany (EWG) are so burdened with that number of old age pensioners. France (EWQ) (18.7%), Switzerland (EWL) (18.2%), and the UK (EWU) (18.1%) are about to join the club.

The implication is that the global demographic dividend the world has enjoyed over the last 40 years is about to turn into a tax, a big one. The consequence will be lower long-term growth, possibly by 0.5%-1.0% less than we are seeing today.

This is what the bond market may already be telling us with its unimaginably subterranean rates for its long term bonds (Japan at -0.13%! Germany at 0.14%! The US at 1.75%!).

Traveling around Europe last summer, I was struck by the number of retirees I ran into. It certainly has taken the bloom off those topless beaches (I once saw one great grandmother with a walker on the beach in Barcelona).

For the list of new entrants to the super aged club, see the table below.

This is all a big deal for long-term investors.

Countries with inverted population pyramids have lots of seniors saving money, spending very little, and drawing hugely on social services.

For example, in China, the number of working age adults per senior plunges from 6 in 2020, to 4.2 in 2030, to only 2.6 by 2050!

Financial assets do very poorly in such a hostile environment. Your money doesn?t want to be anywhere near a country where diaper sales to seniors exceed those to newborns.

You want to bet your money on countries with positive demographic pyramids. They have lots of young people who are eager to work and to spend on growing families, drawing on social services little, if at all.

Fewer seniors to support keeps tax and savings rates low. This is all great for business, and therefore, risk assets.

Be careful not to rely solely on demographics when making your investment decisions. If you did that, you would have sold all your American stocks in 2006, had two great years, but then missed the tripling in markets that followed.

According to my friend, noted demographer Harry S. Dent, Jr., the US will not see a demographic tailwind until 2022.

When building a secure retirement home for yourself, you need to use all the tools in your toolbox, and not rely just on one.

A demographic headwind does not permanently doom a country to investment perdition.

The US is a prime example, where a large number of women joining the labor force, high levels of immigration, later retirement ages, and lower social service payouts all help mitigate a demographic drag.

A hyper accelerating rate of technological innovation also provides a huge cushion.

Percentage of Population over 65

India 2010 PopulationYou Want to Invest in This Pyramid?


Japan Population 2010...Not This One



Lady - Raspberries

Three Cheers for Germany

I noticed last week that Angela Merkel, the Chancellor of Germany, was picked by the editors of Time Magazine as their ?Person of the Year.?

This is creating an outstanding investment opportunity, a real game changer. As a result, Germany?s economy could grow by an extra 1% a year. But more on that later.

She received the accolade for convincing her country to accept 1 million refugees from the Middle East. They will be plopped down in the middle of a population of 80.6 million, so it is a very big deal.

That is like the US taking in 4 million refugees with no notice. The most we took in after the collapse of Vietnam was 125,000.

In addition, she talked her electorate into bailing out Greece, not once, but twice.


History has really come full circle. After bearing the cross for the holocaust for seven decades, the country carries out one of the greatest humanitarian acts of all time.

I know the Germans well.

I lived in West Berlin during the 1960?s with a former Nazi family. Needless to say, the dinner conversations were interesting. But they loved Americans, for it was we who rescued them from the Russians and Bolshevism in 1945.

I spent my weekends smuggling western newspapers and US dollars into East Berlin to the underground across Checkpoint Charlie. I was too young and dumb to know any better.

When I got caught, I spent a night in a communist jail cell. To this day, the words ?Das ist Verboten? still send a chill down my back. The East German Volkspolizei were not very nice guys.

If you want to see a close approximation of that prison, go watch the just released Stephen Spielberg movie ?Bridge of Spies,? about the Gary Powers exchange. They really nailed the Cold War atmosphere of Berlin during the sixties.

Yes, when I was 16, I used to listen to machine guns mow down fleeing refugees at night. Every time a guard hit someone, they were awarded a gold watch. I lived in Tiergarten, within easy earshot of the Berlin Wall at Brandenburg Gate. And you wonder why I?m such a tough guy.

Angela Merkel has always been an enigma to me. Those of us who know the old East Germany well, find it difficult to imagine anyone intelligent or useful coming from there. To see her leading an essentially conservative country is positively mind blowing.

She is clearly brilliant, with a PhD in physics. She is fluent in Russian, and is in close communication with Vladimir Putin on a regular basis in his own language. She entered politics as soon as the wall came down in 1989, signing up with the conservative Christian Democratic Union.

Today, she is widely considered the de facto leader of Europe. She is also regarded as the most powerful woman in history (at least for another year).

Full Disclosure: During my annual European sojourns, I always spend a day briefing Merkel?s staff in Berlin about the current state of the world. I also attempt to decode the American political scene, which Europeans find an indecipherable mystery, but which has enormous implications for them.

?The Person of the Year? can be a dubious honor, and is defined as the person who most influenced history that year. Aviation pioneer Charles Lindbergh, who first soloed the Atlantic Ocean, was originally picked by Time in 1927.

Adolph Hitler was named in 1938 for peacefully redrawing the map of Europe. The only other Germans so named were Konrad Adenauer in 1953, the country?s postwar leader, and Willy Brandt in 1970, noted for normalizing relations with the Soviet Union and Eastern Europe.

To say that Germany is overwhelmed by the immigrant crisis would be a severe understatement.

Almost every high school gym in the country has been converted to emergency housing. There are shortages of everything, from blankets to clothing and translators.

Medieval Afghan men are showing up with 13-year old brides. The backlash is that the Nazi party is experiencing a resurgence of popularity, not only in Germany, also in the Netherlands, France, and Sweden.

If it weren?t for the commitments of this newsletter, I would be back in Berlin in a heartbeat volunteering my services.

Needless to say, the bill for all of this will be enormous. Germany is really the only country that could afford dispensing so much aid.

One of the reasons it can do so is that it happens to have a spare country at hand. Much of the old East Germany is still empty, its cities depopulated. This is where the new immigrants will eventually be settled.

It is perhaps because Angela is a mathematician that she understands there is an enormous long-term dividend that the country will reap.

Look at the economic growth rates of the US and Europe for the past 50 years, and the continent has always lagged the US by 1% per annum. By opening up the gates to a flood of immigration, Germany can make up this difference. So can the rest of Europe.

The great thing for Germany is that these are not your ordinary political or economic refugees. Much of the Syrian middle class has decamped, bringing their educational and professional skills with them. For the Germans, it is a win-win.

This is not a long-term thing. German GDP growth recently and unexpectedly surged, from a 0.3% to a +1.5% annual rate. Some of this is no doubt due to the European Central Bank?s newly aggressive policy of monetary easing. Massive spending on social services has to also be a factor.

European stocks are already poised to outperform American ones by two to one in 2016, thanks to quantitative easing, the postponement of the Greek crisis, and a generation low in asset prices there. Immigrants could pour the economic gasoline to the fire.

Clearly German stocks are a prime target here, which you can buy through the iShares Germany Fund (EWG), as is Europe in general, with the Wisdom Tree European Hedged Equity Fund (HEDJ). But make sure you hedge out your European currency risk for the short term, as the (HEDJ) does.

A revival of the continental economy will also eventually engineer a recovery in the Euro (FXE), (EUO) against the dollar. Don?t press those shorts too aggressively down here.

The great irony here is that this is all unfolding in Germany while mosque burning and bombing are taking place across the US, and there is talk of closing its border on religious grounds.

It is the sort of thing that happened in Germany in 1938, as my former Berlin hosts would have reminded me.

History is coming full circle a second time.

HEDJ 12-11-15

EWG 12-11-15

Angela MerkelGood for You Angela

A Euro Collapse At Last!

European Central Bank president Mario Draghi pulled the rug out from under the Euro (FXE), (EUO) this morning, announcing a surprise cut in interest rate and substantially adding to its program of quantitative easing.

The action caused the beleaguered currency to immediately gap down two full cents against the dollar, the ETF hitting a 15 month low of $127.40.

Surprise, that is, to everyone except a handful of strategists, including myself. Apparently, I was one of 4 out of 47 economists polled who saw the move coming, beating on my drum out of the coming collapse of the euro for the past six months.

I put my money where my mouth was, slamming out Trade Alerts to sell the Euro short, and sometimes even running a double position.

Of course, it helps that I just spent two months on the continent splurging at 90% off sales, and afterwards feasting on $10 Big Macs and $20 ice cream cones. Europe was practically begging for a weaker currency. Shorting the Euro against the greenback appeared to be a no-brainer.

A number of key economic indicators conspired to force Draghi?s hand this time around. August Eurozone inflation fell to a feeble 0.3%. France cut its 2014 GDP estimate at the knees, from 1.0% to 0.5%. Unemployment hovers at a gut wrenching 11.5%. To the continent?s leaders it all looked like a deflationary lost decade was unfolding, much like we saw in Japan.

Call the move an hour late, and a dollar short. Or more like 43,800 hours late and $4 trillion short. The US Federal Reserve started its own aggressive quantitative easing five years ago. The fruits of Ben Bernanke?s bold move are only just now being felt.

A major reason for the delay is that having a new currency, Europe lacks the breadth and depth of financial instruments in which it can maneuver. The Euro will soon be approaching its 15th birthday. Uncle Buck has been around since 1782.

The ECB?s move is bold when compared to its recent half hearted efforts to stimulate its economy. Its overnight lending rate has been cut from 0.15% to 0.05%, the lowest in history. Deposit rates have been pushed further into negative territory, from -0.10% to -0.20%. Yes, you have to pay banks to take your money! A QE program will lead to the purchase of 400 billion Euros worth of securities.

Am I selling more Euros here?


I covered the last of my shorts last week, after catching the move in the (FXE) from $136 down to $130. That?s a major reason why my model trading portfolio is up a blistering 30% so far this year.

At $127, we are bang on my intermediate downside target. But get me a nice two or three cent short covering rally, and I?ll be back in there in a heartbeat. My next downside targets are $120, $117, and eventually $100. My European vacations are getting cheaper by the day.

To review my recent posting on the coming collapse of the Euro, please click here ?The Euro Breaks Down, here ?Unloading More Euros? and here for ?The Time to Dump the Euro is Here?.

ECB's Interes Rate

Contracting Credit

FXE 9-4-14

EUO 9-4-14

UUP 9-4-14

EWG 9-4-14

Dollar CertificateIt?s All a Learning Process

Taking Profits on My Euro Shorts

It looks like the (FXE) gave us the double top at $133 which I predicted in my August 28 webinar, which very conveniently, was the lower strike of my Currency Shares Euro Trust (FXE) September, 2013 $133-$135 bear put spread. We have since backed off $3, and lower levels beckon.

I originally wrote this Trade Alert on July 18 while on the express train from Berlin to Frankfurt. I had to wait until we stopped at a station before I could send it on my iPhone. My friends in the German government had just painted a picture of the European economy which approximated Hieronymus Bosch?s vision of hell. My later discussions with European central bankers and CEO?s confirmed the worse.

Since then the Euro has appreciated against the dollar almost everyday, slowly draining profits from my model-trading portfolio. Lugging this position in the baggage of my summer vacation was no fun. That abruptly ended last week when traders returning from vacation, well rested and feeling their oats, decided collectively to take another run at the beleaguered European currency.

As of this morning, the market priced our spread at $1.92, just eight cents short of its maximum potential profit. That leaves 77% of the profit for us. So I am going to take the money and run. This reduces our risk for the month of September, when we are threatened by Syria and the regional contagion that will follow, the debt ceiling crisis, the taper, the identity of Ben Bernanke?s replacement, and a giant asteroid destroying the earth.

Since I sold short the Euro, almost every continental economic data point has been positive. Just this morning, we learned that the August Eurozone PMI Index rose from 50.5 to 51.5, a two year high. The UK August Business Activities Index leapt from 60.2 to 60.5, a six and a half year peak, no doubt in part due to the wad of money I dropped there a few weeks ago. The trend is your friend here, and like a giant supertanker slowly turning, the information flow is gradually turning from red to green.

If anything, I am now inclined to start examining European equity markets, which may bounce back stronger than those in the US. On the short list will be Germany (EWG), which is already in a solid uptrend, and Italy (EWI) for a turnaround play. Greece (GREK) has already made its move, nearly tripling off the bottom.

On to the next trade.

FXI 9-4-13

EWG 9-4-13

EWI 9-4-13

GREK 9-4-13

Picture-Strange Things Weren?t So Bad After All

The Race to the Bottom for Currencies Means a Race to the Top for Stocks

Even the Old Hands, like myself, are somewhat amazed by the strength of the global equity markets this month. The S&P 500 has risen 11 out of the last 12 trading days, and is up almost every day this month. It has been the best January in 18 years.

The first week saw the biggest inflows to equity mutual funds in 10 years. Yet, the market went up so fast, most of the largest investors were left at the starting gate, with the bulk of their new money yet to go into the market. If you weren?t as fast on the trigger as I was, you were left to read about it in the Wall Street Journal, and on your way to the Tombstone career cemetery. Hint to market strategists: that money is still out there trying to get in.

It appears that the race to the bottom for currencies is the race to the top for equities. The reality is that in such a competition, everyone wins. Since the mid November low, the (SPX) has risen by 12%. But Germany (EWG), which has had to carry the dead weight of an appreciating Euro, is up 29%. Japan, where the yen has plunged 16%, has seen the currency hedged equity ETF (DWJ) soar by 31%. My own Trade Alert Service tacked on 21%. For investors, this is a ?heads I win, tails you lose? market.

Certainly, the data flow has been there in abundance to justify such ebullience. Everywhere I look, I see improving PMI?s, increasing orders, rising real estate prices. Some 70% of American companies have, so far, beat earnings expectations.

In the US, business is running on all 12 cylinders (or all 80 kw of lithium ion battery power in my world), with the housing, energy, and auto industries all kicking in at once. Yesterday, weekly jobless claims hit a five year low at 335,000, and this morning the HKSB private Chinese PMI rose to a healthy 51.9.

The new Japanese stimulus efforts are so Godzilla like in proportions that the country?s GDP growth could flip from -3.5% to +3% in a mere two quarters. Do I hear the words ?global synchronized expansion?, anyone? Yikes. It makes the (SPX) at 1,500, and the (IWM) at $89 look positively cheap. Even the Federal Reserve?s own dividend discount valuation model says that the (SPX) should be worth 1,750 here.

Hedge funds are getting creamed, as usual, because their shorts are rising much faster than their longs. Look no further than Netflix (NFLX), which had a jaw dropping open short interest of 45%, but soared by a staggering 71% in two days after their earnings announcement. The pain trade is on. That?s why I have been going commando, without any shorts at all, save in the Japanese yen. Thank goodness I?m not in that business anymore. It is sooo last year?s game.

It is, in fact, a one stock market. But this time, there is only a single stock going down, Apple (AAPL), while everything else rises. A close friend whose market timing I respect told me on Tuesday, when the stock traded at $514, that it would hit a final bottom at $438 in three months. Three days later, and here we are at $437.

When the company announced an increase in cash on the balance sheet of $23 billion, the market took $100 billion off its market capitalization, depriving it of its vaunted ?largest company in the world? status. Go figure. This is truly a classic falling knife scenario, which is better observed from afar.

If you had asked me in September, when Apple was trading at $700, where would the (SPX) be if it fell to $437, I would have answered 1,000. Yet, here we are at 1,500. Here?s an intriguing thought, what if my friend is at least partly right, and Apple goes up from here? My own target of the (SPX) at 1,600 becomes a chip shot, possibly by March. Hey, if Ben Bernanke wants me to pile into risk assets, who am I to argue? I?ve always been a team player.

I think I?ll buy more stocks (SPY), (IWM), sell more yen (FXY), (YCS), and drive the Tesla around the mountain one more time. Maybe I can get the clock up to 500 miles.

FXE 1-25-13

DXJ 1-25-13

EWG 1-25-13

SPX 1-25-13

Clint EastwoodIn this Market, You are Either Very Fast, or Very Dead.

The Weekly Jobless Claims Blockbuster

Traders were taken aback this morning when the Department of Labor announced a 50,000 drop in weekly jobless claims to 352,000. The street had been expecting a decline of only 19,000. It was the lowest report in almost three years, and the sharpest weekly decline in seven years.

I tell people that, if stranded on a desert island, this is the one weekly report I would want to call the direction of the economy. So I am up every Thursday morning at 5:30 am PST like an eager beaver awaiting the announcement with baited breath.

The impact will not be as great as the headline number suggests. Nearly half of the figure represents a take back of the 24,000 increase in claims for the previous week. But there is no doubt that it represents an upside surprise for the economy. And you have to put this in the context of a long steady stream of modestly positive economic data that has been printing since the summer.

The release was only able to elicit a small double digit response from the stock market. That?s because we are now up nine out of eleven days, taking the S&P 500 up 4.5% on the year, a far more blistering performance than many expected. That takes us right up to the level of 1,312, which many analysts predicted would be the high for the year.

Break this on substantial volume, and we could reach my own upside limit of 1,370. If you believe that we are trading to the top of a 300 point range from 1,070 to 1,370, as I do, then there is not a lot you want to do here when you are 81% into that move, unless you want to day trade.

At this point, I would like to refer you to my October 30, 2011 piece, ?The Stock Market?s Dream Scenario? by clicking here. Since then, two of my three predicted ?black swans? have occurred, progress on the European sovereign debt problem and the first interest rate cut by the People?s Bank of China in three years. The third, a multi trillion dollars budget and tax compromise in Washington, was dead on arrival. But hey, calling two out of three black swans is not bad!







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