Monty Pelerin's World

Economic, Financial and Political Analysis

Archives for stock

The Final Con

wizard-of-oz-dvdcoversting(2)The stock market has now been up for ten straight days. Many on Wall Street are singing “Happy Days Are Here Again.” For them, that is probably the case. They finally have something to sell that will bring the rubes back into the markets. We are not in Kansas anymore.

Fear is ebbing and greed is coming back. Those on the outside looking in are rounding up cash so that they don’t get left behind. The shills assist them with their pictures of economic recovery, new era crap and whatever other nonsense they can peddle successfully. So the cycle goes, as it has since the New York Stock Exchange came into existence. We are in another game of musical chairs where the music is playing joyfully. As in all such events, there are too few chairs to accomodate the participants when the music stops. And it always does!

There is no economic justification for the level of these markets, at least in the sense of improvements to the real economy. The economy is in worse shape than it was several years ago, made so via massive government interventions. Debt has been piled onto governments, corporations and individuals. It is not serviceable, certainly not at market-determined interest rates. Artificially low interest rates prolong the game, but do so by further corrupting economic decisions and the economy.

Michael Pento explains why markets have done so well recently:

When central bankers dedicate their existence to re-inflating asset bubbles, it shouldn’t at all be a surprise to investors that they eventually achieve success. Ben Bernanke has aggressively attempted to prop up the real estate and equity markets since 2008. His efforts to increase the broader money supply and create inflation have finally supported home prices, sent the Dow Jones Industrial average to a record nominal high and propelled the bond bubble to dizzying heights.

The same nonsense that got us into the mess — bubble-blowing — is the strategy for getting us out of the mess. That is all the Fed knows and it is all that is left for the government. This is not an economic strategy. No economist worth his salt would propose such a “solution.” This is a classic political solution — buy some time by making the problem appear to go away. Kicking the can is what politicians do best. Move the problem down the road and we’ll worry about it then (preferably after the next election). Never mind that the problem is made worse by doing so. Live for the now. Worry about tomorrow when tomorrow comes and then it will be today and repeat the same political fix.

Will this fix work? Of course not, at least on any basis but the short-term. The laws of economics cannot be repealed. Arrogant politicians may believe they can suppress them and they are correct, but only in the short-run. How will this turn out? Not well, according to Mr. Pento:

The ramifications for investors and the economy will be profound. Not only will the economy move gradually toward a pronounced condition of stagflation, but, more importantly, the bubbles being created by the Fed will be far greater and more devastating than any other in history. Equity and real estate prices are already stretched far beyond what their underlying fundamentals can support. But they are nothing compared with the distorted valuations being applied to U.S. sovereign debt. The bursting of the bond bubble will be exponential worse than the deflation brought on by the NASDAQ and real estate debacles. It is sad to conclude that the middle class is set up to get slaughtered even worse than they did when the previous two bubbles burst.

The economy is heading for unprecedented volatility between rampant inflation and deflation courtesy of Ben Bernanke’s sponsorship of the $7 trillion increase in new Federal debt since 2008. Investors need to plan now while they still have time before the economic chaos begins.

Better prepare! The tragedy that lies ahead is apt to make the Great Depression look like a walk in the park.

Hope and Crosby Never Went to Zimbabwe

Zim_Trill_2hopeandcrosbyBob Hope and Bing Crosby made a series of movies together entitled “Road to …”. The first, made in 1940, was “The Road to Singapore.” The series was successful and included destinations such as Bali, Zanzibar, Rio, and Morocco. In all, I believe seven different movies were made over about a twelve year period ending in the early 1950s.

Were Hope and Crosby still with us, it is doubtful they would make a “Road to Zimbabwe.” But we don’t need them because we have Hope and Change already working on it. Obama and Bernanke are our modern day clowns making their own version.

The Stock Market

For anyone who believes the stock market is doing just fine, take a look at the following chart and disabuse yourself of that notion:

monetary-v-dow

Elizabeth McDonald explains:

The chart here compares the Dow Jones Industrial Average with the St. Louis Federal Reserve Bank’s adjusted monetary base. It shows the effect of Fed purchases of mortgage-backed and Treasury securities from Fed dealers, whereby the Federal Reserve buys $85 billion total every month from the big banks, hastening the growth in the Fed’s balance sheet to more than $3 trillion.

There are a number of reactions one might have to this chart, including “… so what! Doesn’t everyone know the relationship between liquidity and stocks?” Most investors actually don’t, and are oblivious to what has driven this stock market “recovery.”

Foolishly many believe an economic recovery is underway and is responsible for the good stock market. The Administration and their crony PR machine, the mainstream media, repeat this propaganda virtually every day.  The stock market becomes their primary focus because there few claims to be made regarding the real economy that can withstand scrutiny.

Stock market performance is neither necessary nor sufficient to claim an economic recovery. Stocks, at least in the short-term, can go up or down regardless of what is happening in the economy. Richard Fisher. president of the Federal Reserve Bank of Dallas, admitted recently at Columbia University’s School of International and Public Affairs that there was no economic recovery.

Regarding the stock market, Mr. Fisher stated (Fisher quotes are from Ms. McDonald’s article):

Credit is super-abundant and stock market behavior is conditioned not so much by the fundamental performance of its underlying companies but by increasing doses of monetary Ritalin.

Naive investors may be fooled by this monetary game of smoke and mirrors, but sophisticated investors are not. Recent performance in the stock market is a reflection of liquidity not economic strength. The liquidity may feel good in the short term but it has negative effects long term, an example of which is discussed below.

Conditions in the economy are now so bad that the Fed must expand its Ponzi scheme regarding currency and abet the Ponzi scheme of the political grifters who desperately try to con the public into believing their insane economic policies are working. None of this should be surprising once you recognize that fraud is the normal modus operandi of the power class. History is replete with similar schemes. All are used to acquire wealth while currying favor and retaining power. “Bread and circuses” is a correct description.

Every major increase in the stock market has been accompanied or preceded by increases in credit. Increases in liquidity have to go somewhere, and financial markets are good places to seek shelter. The effect is to expand PE ratios. One might reasonably call this effect  ”an inflation of earnings,” as each dollar of earnings now costs more to purchase.

Usually liquidity also has an effect on earnings as well. When liquidity goes into the real economy, it stimulates demand and business. The unique aspect of this cycle is that has not happened (yet!). The Fed stimulus,  over a $2.3 Trillion expansion in their balance sheet which had the potential for increasing the money supply by around $23 Trillion has done little for economic activity. Fiscal deficits exceeding $1 Trillion per year for the last five years have also failed to stimulate. We still languish in a recession.

Mr. Fisher admitted as much:

… I am not surprised by the reaction of businesses. Operating in a highly uncertain environment, it is eminently sensible for them to defensively use their newly strengthened balance sheets to buy back shares and pay out dividends or employ them offensively in ways—say, in making acquisitions—that often lead to employee rationalization, not payroll expansion for U.S. workers. This is how businesses really think; this is the way people really are.

The Zimbabwe Experience

It should not be surprising that our stock market is going up while our economy languishes. One does not need theory to explain how this happens as there are many examples from history. The most recent, and perhaps the most dramatic, was that of Zimbabwe. As described by John Paul Koning in 2007:

Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000. Ever since President Mugabe’s disastrous land-reform campaign (an entire article in itself), the country’s farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.

Yet something odd is happening.

The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.

Even in the absence of a functioning economy, stocks can be driven up by liquidity.

 

 

 

All That Goes Up Is Not Real and Some Roads Lead To Nowhere

The Zimbabwe stock market performance was impressive when viewed in Zimbabwe dollars. But Zimbabwe dollars were readily available and the ample supply destroyed their purchasing power. The $100 Trillion Zimbabwe note show above is everywhere and is worthless. Kyle Bass, speaking on CNBC, put matters into perspective with one simple quote:

Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs.

Bass’ short interview follows:

Recent movements in our stock market seem more akin to liquidity effects than a change in underlying economic conditions. That was the same results in the early days of Zimbabwe experiment.

The Zimbabwe Gambit

ZimdollarWDvUSDchartThe US government is using the same policies as Zimbabwe did, as is much of the rest of the world. Currency debauchery is being used as a means to revive broken economies. These policies will not solve the underlying economic issues. But for politicians, appearance rather than reality is important. If these policies can fool enough of the people for a long enough time, then they are considered worthwhile. Putting any crisis off into the future is better than dealing with it today. Besides, some miracle could occur that produces and economic revival. Such is the economic sophistication (and cowardice) of modern day leaders.

As yet, no country has reached the extremes used by Zimbabwe. None are even close and hopefully none get there for reasons explained in Wikipedia:

During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe’s hyperinflation because the government of Zimbabwe stopped filing official inflation statistics.[1] However, Zimbabwe’s peak month of inflation is estimated at 6.5 sextillion percent in mid-November 2008.[1]

In 2009, Zimbabwe abandoned its currency. As of 2013, Zimbabwe still has no national currency; currencies from other countries are used.[2]

The price of $1USD cost $Z2,621,984,228[19] in October 2008.[20][21][22]

These numbers are incomprehensible, but the policies which led to them are not. They are exactly what real economists would have predicted. There is nothing but arithmetic that stands between developed economies and a Zimbabwe ending.

Will the US or other developed economies get as desperate as Zimbabwe? Probably not, but Zimbabwe never intended this ending. I am sure that Mr. Obama and Mr. Bernanke do not either. However good intentions pave the Road to Hell, or should I say, Zimbabwe. It is only the integrity of politicians that stands between us and Zimbabwe.

Now doesn’t that make you feel safe and secure?

Playing Financial Chicken In Your Golden Years

chicken playing (2)ad_armageddonMy generation, born during or near post World War II, has been quite fortunate. Those of us lucky to have been born in the US during this period hit a sweet spot of both place and history. The economy thrived, standards of living soared and many avoided the numerous wars that dominated the Twentieth Century.

Today, the future does not look so bright. Economies are stagnant, standards of living are declining and the threats of war increase. Younger generations will have more difficult lives than my generation.

Life has its own ways of ensuring that TANSTAAFL (“There ain’t no such thing as a free lunch”) is enforced. My twilight years now present major challenges. The rise of big government has changed  retirement prospects in ways that few imagined. Many are still oblivious to what is coming and its implications on lifestyles, wealth and security. Those who believed they were financially secure are correctly revisiting this assumption.

The underlying premise of Trading To Armageddon, a sister website to this one,  is that an economic and market debacle is unavoidable and likely to occur within the next several years. The timing of this event is impossible to predict. There are numerous potential triggers, some outside our borders. The crisis could happen as soon as this week, or it could take years to appear.

What Happened?

john_maynard_keynesIntervention, stimulus and liquidity propped up the US economy and markets beyond levels that are sustainable. Like policies have been used in other developed economies.

For the last half-century government has pretended that it can manage an economy. Any slowdown brings the same reflex-action – expand liquidity and increase government spending. This response, according to Austrian Economics, is the source of the boom-bust cycle that now characterizes modern economies.

Decades of Keynesian interventions to prevent the business cycle have succeeded in weakening economies around the world. Each intervention was an attempt to prevent distortions to prices and asset allocations from correcting. In the attempt to prevent the corrections, government action added more imbalances. Today, most developed economies are filled with distortions and unable to operate efficiently, grow or create wealth.

The political interventions have reached their limits, at least in terms of covering up economic weakness. Trillions of dollars have been thrown at the current economic downturn over the last five years. There has been no recovery, nor will there be until economies purge themselves of the distortions. Cosmetics no longer work. The world does not have enough lipstick to cover this economic pig.

What Will Happen?

Governments of the world will continue to try to hide the damage. While this action may buy more time for the political class, it will do so at the cost of making the economic correction worse. The tipping point that ensures another Great Depression has been passed. Continued interventions will only make matters worse. Economies, governments and perhaps societies are likely to fail if political meddling continues.

Our “Wizard of Oz” government has no intention of admitting their mistakes.They will continue to pretend that they are “fixing” matters as they pour more poison into the veins of economic activity. Whether they stop willingly or they are stopped by a market collapse, a Great Depression will ensue.

What About Investing?

Investing, at least as we knew it, is dead! It died when markets became dominated by political rather than economic events. Investing principles that worked for most of the last 150 years are irrelevant in today’s politicized world. Who, for example, still believes that a “buy and hold” strategy is viable? It is still sold by hucksters. The surest way to make a million dollars in this stock market is to invest $3 million using a “buy and hold” strategy.

Traditional investors should not be in these markets. If they must, they should not behave as traditional investors.

Change Your Outlook on Investing

Most of what we learned about investing should be forgotten, at least until governments, society and markets return to honesty. If that occurs, it will be a multi generational process, As a result, no one alive today should consider himself an investor.

Don’t confuse Warren Buffet and his ilk with investors. They may have been at one time, but are no longer. They are political operators who utilize politics and connections to their personal advantage. Unless you are very big, well-connected and willing to pay to play, you cannot play in their league. If you fit the aforementioned categories, you already have forgotten about investing and are playing a more sordid but profitable game.

So what is the little guy to do? Either get out of markets or trade in a way that you protect yourself against the coming debacle.

Why Not Just Get Out Of Markets?

Getting out of markets is an option, although probably not a very good one. Government dishonesty, particularly with respect to currency, is an important reason why. As governments continue to throw liquidity into the system, two effects occur:

  • The money must go somewhere and will drive up prices.
  • The value of the currency declines.

Recently, money has been going into financial assets. Government is driving up the price of bonds keeping interest rates down. That forces yield-starved investors further out the risk curve and into stocks. Financial assets have been affected more than consumer prices at this point (particularly if you believe government CPI statistics).

Not being in the stock market today subjects you to a potential double-whammy — the opportunity cost of missing a run-up in financial assets and the loss of purchasing power from holding cash or near-cash. If you believe that inflation will become a major issue (and it is hard not to when the Federal Reserve has quadrupled its balance sheet and continues its expansion), then holding cash is the equivalent to deciding to become poorer.

A Gigantic Game of Financial Chicken

Investors, whether they know it or not, have been forced into a gigantic game of financial chicken. For those unfamiliar with this terminology, Wikipedia offers this explanation: :

The name “chicken” has its origins in a game in which two drivers drive towards each other on a collision course: one must swerve, or both may die in the crash, but if one driver swerves and the other does not, the one who swerved will be called a “chicken,” meaning a coward; this terminology is most prevalent in political science and economics. The name “Hawk-Dove” refers to a situation in which there is a competition for a shared resource and the contestants can choose either conciliation or conflict; this terminology is most commonly used in biology andevolutionary game theory. From a game-theoretic point of view, “chicken” and “hawk-dove” are identical; the different names stem from parallel development of the basic principles in different research areas.[1] The game has also been used to describe the mutual assured destruction ofnuclear warfare, especially the sort of brinkmanship involved in the Cuban Missile Crisis.[2]

The analogy is imperfect in the sense that the opponent (the market) is not an acting being whose well-being is jeopardized by its actions or inactions.

We are all forced to play this game whether we consider ourselves investors or not. Staying in markets is taking risk, but so too is leaving markets. If a person believes that liquidity will continue to drive up financial assets (until it no longer does) and drive down the purchasing power of money, then his biggest payoff is to remain in markets up to the point of collapse. Leaving too early is costly, and leaving too late could be even costlier.

No one should be forced to play this game. Retirees and near-retirees especially should be living off the income from a life of savings, not playing chicken to survive. Unfortunately, the government policy of financial repression (low interest rates) forces them into such a situation. The further policy of counterfeiting money makes the situation even more difficult.

Whether individuals abandon markets or stay in them, they are playing with fire whether they realize it or not. 

Which Position is Riskier?

Assessing risk is always subjective. Expectations regarding inflation, market upside, market downside and adjustment speed(s) should guide your course of action. The following comments provide an idea of how these considerations affect decisions:

  • If you believe that future inflation will not be serious, then you should only be concerned about the opportunity cost of missing a rise in financial assets. If you could be assured that your funds would hold their purchasing power, you might be inclined to leave markets early, preserving your purchasing power rather than trying to grow it and risk major loss.
  • If you believe that inflation will be severe, you should be inclined to stay in markets longer than otherwise.
  • If you believe that markets have much further to rise as a result of liquidity, then the opportunity cost of getting out is greater and you should stay in longer.
  • If you believe the market collapse will not be that severe (say 25 – 30%), you will stay in longer than if you expect a drop of 50+%.
  • If you believe the market drop will be gradual rather than rapid, then you likely will stay in longer and truncate your positions when the pain becomes too great.

In an honest world (where currency had integrity), I would be out of markets. But that is not the world we must deal with. As the great economist Frank Knight once observed:

We have to adapt and overcome, that’s all we can do. 

In Knight’s sense, we are mere pawns in some greater game. We must play the hand we are dealt.

The fact that currency is being depreciated around the world has implications that should not be ignored. The risk of high inflation, perhaps hyperinflation, can destroy anyone on fixed income or who stands pat believing his savings is enough.

At the same time, the potential for an economic apocalypse has never seemed greater. There have already been two 50% drops in stock market averages in the first decade of this century.

Because I believe that high inflation and a market collapse are real possibilities, I (and millions of others who believe similarly) am forced into playing the wildly dangerous game of financial chicken. When we should be enjoying our retirement and grandchildren, government has forced us to take risks that even wild teenagers likely would avoid. 

Look Out For Falling Stocks

cartooneconomy9lMarkets make no sense. They literally have lost touch with reality. Divergences between fundamentals, confidence and the valuation of markets are large. These divergences cannot last for long. A convergence will occur. The question is how this convergence occurs and how quickly?

My opinion is that there will be little improvement in confidence and fundamentals. If true, then that means that markets must drop. I fully expect that to happen.

If so, how does this correction occur? Is it a rapid and massive drop like 1987? Is it a drop like the dot-com bust? Is it a collapse like 2008 – 2009? Or is it a period of stagnation where market valuations drift down over a decade or so while confidence and fundamentals slowly improve?

The least likely route, in my opinion, is the last one of stagnation. Our economic condition is terrible, regardless of what government and their media pets tell us. Reality cannot be withheld much longer from the people. Their living standards are shrinking and will continue to do so. Confidence does not return when people are becoming worse off.

Markets overvalued tend to adjust very quickly to the downside. We had two massive drops in the first decade of this century. Both were in the 50& range. No other decade save the 1930s had comparable stock market performance. I suspect that we will see similar price action in this decade.

These are not markets where you can afford to be aggressive. Defense and preservation of capital should be your strategy. The deterioration in the dollar (and other currencies) will likely continue meaning that even if you are fortunate enough to hold your own in nominal wealth, you will become poorer.

To understand current conditions and risks, I urge you to view the following presentation from Gordon T. Long:

 :

URL: http://www.youtube.com/watch?v=JGcUTIV-97E

​Today was the kind of day we might see more of if the correction is to come quickly — Dow off over 200 points.

Happy Days Are Gone Again

Zim_Trill_2The joy of Friday's Dow close over 14,000 should be taken with a grain of salt and huge amounts of caution. Peter Schiff can always be counted on to rain on Washington's parades and also Wall Street's.

Here is Mr. Schiff's take on why you should not be impressed with Dow 14,000 and why you should be concerned:

The media excitement at the beginning of the month was focused on the Dow surpassing 14,000 for the first time since 2007, less than 200 points shy of its record of 14,164 set on Oct. 9th of that year. Few notice that when priced in gold, the Dow has actually fallen from 19 ounces to 8 ounces over that same time period. It seems a dollar just ain't what it used to be.

zim_dollar_signAs Bernanke moves deeper into his Zimbabwe stance, dollar comparisons over different time periods become increasingly meaningless. Do not be fooled by nominal dollars. To the right is an image of a $100 Trillion Zimbabwe note that is virtually worthless. The dollar is nowhere near this point — yet! — but it is certainly headed in that direction.

If gold were a perfect measure of the purchasing power of the dollar (it isn't, but it is likely better than the manipulated government statistics that purport to be), then all this rejoicing would be happening when the stock market is still down 58%.

With Bernanke continuing to print, the Dow may reach 20,000 soon. But what will that mean in real terms? Even in a Depression our stock market could go to 20,000 if the dollar continues to be debauched. At that level, it might only buy one ounce of gold. This is not a prediction, merely a caution regarding using numeraires that have no intrinsic value to measure the value of real things. 

 

Page 1 of 9:1 2 3 4 »Last »