Tag Archives: Gainesville

The Stock Market Is Overvalued, No Matter How You Measure It

My Comments: Some of you will think I’m an alarmist. And perhaps I am. But the signals that have been present for some 18 months are getting louder, much louder.

I’ve not included all the charts that appeared with this article as there are too many of them and they are all negative. Here’s a link to the article itself: http://goo.gl/tIiQgQ  You should know I don’t have the talent to do this on my own.

Perhaps I’ll find some good news to share with all of you later this week. I hope so, because it’s on us to be prepared and avoid the inevitable mess.

• The US stock market remains overvalued relative to the broader economy.
• We have reached the limits of monetary policy, and it is now time for fiscal policy makers to act.
• Over indebtedness continues to be the problem and de-leveraging the solution.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” – Charles Mackay, Author, Extraordinary Popular Delusions and the Madness of Crowds

I believe investors would be wise to exert caution at this time in the economic cycle. We have seen the (NYSEARCA:SPY) market rally some 187.74% from the 2009 lows, and market levels are now overvalued by virtually every metric. In my previous piece “5 Themes for 2015″, I articulated the likelihood that indexers will be outperformed by stock pickers this year. This is because I believe the market is extremely overvalued on the whole, and investors need to be selective about what they own. There are parts of the market that remain undervalued as I have previously highlighted. But on the whole, stock indexes are overvalued when viewed using many different measurement methods as seen in the chart above:

Yes…This Is a Stock Market Bubble
Any who contends that we are not in the midst of a stock market bubble is ignoring the truth of the economic and historical financial data we have available. Many believe that the market can continue to push higher, and indeed we may see additional advancement in equity indexes, on account of capital coming in from overseas and investors continuing to search for yield in a low yield world. Ultimately, I believe this will only make the ending of this market cycle that much more severe.

I continue to believe that the macro-economic situation points investors to the Long-Term Zero Coupon U.S. Treasury market as a stable port in the deflationary storm. The marginal gains that may be had from any potential upside in equity markets pale in comparison to the enormous draw down that I believe will eventually occur.

It’s Different This Time
Investors continue to articulate the old adage “It’s different this time.” They are right, in the sense that we are in unknown waters with the Federal Reserve’s extraordinary monetary policy, but the lessons of financial history have a way of repeating themselves, and reminding us it is not, in fact, different this time.

The Federal Reserve has expanded the balance sheet to over $4 trillion, and yet we continue to see lack luster velocity and inflation below the Fed’s target rate, illustrating the strength of deflationary forces. The US is in danger of entering into a Japanese-style deflationary trap where there is no escape from QE, and higher GDP growth rates continue to elude us, necessitating more QE. This cycle in danger of continuing for some time, until we realize that debt is the problem and deleveraging is the only solution, painful as it may be.

Future stock market returns will likely be in the low single digits as a result of this QE influenced market rally, which we can see in the P/E 10 at 26.52. The Fed’s extraordinary monetary policy has proven disastrous to savers, and has created a stock market built primarily on financial engineering and excess liquidity in the banking system, demonstrating that economic policy and investment policy are not always aligned.

I believe that caution is warranted, as it is completely plausible to see a significant downward move in the market at a magnitude larger than any one sees coming. Most down trends come with little warning, and investors are left asking “What happened?” Current equity market valuations are not supported by the economic data. The US has only 2.5% GDP growth in the first three quarters of 2014, there is subdued wage growth, and bubbles in lending fueling consumer spending, and excess leverage, fueling stock speculation. With equity markets at all time highs and Main Street continuing to suffer, the bond market continues to predict the coming storm.

With No Wage Growth, Debt Takes the Place of Income
The United States economy has not shown a change in the real median household income for nearly twenty years.

The economy continues to show a lack of true wage growth. Feeling the lack of income growth, consumers are resorting to adding additional debt to their balance sheets, reversing a healthy period of deleveraging after the financial crisis. Consumption today, financed by debt, means lower consumption in the future. Positive economic growth cannot be fueled by mounting debt burdens.

Globally, debt levels have reached unsustainable levels in both the public and private spheres. In a previous piece, I talked about the deleterious role over indebtedness can play in stifling economic growth. Moving forward, I see these trends playing out over a long time horizon that will likely leave the Fed on hold in raising rates, and will see the long-term US treasury yields continue to ratchet lower. Velocity continues to remain weak, as do wages, the PCE, and other measures of economic health. Perceived strength in the employment situation is really driven by decreases in the labor force participation rate. The economy is hardly healthy, despite the continued rise in equity prices to lofty levels.

The put created by excessive QE has driven margin debt to an all time high and created the same environment that was the catalyst for the financial crisis, over indebtedness.

The solutions to the challenges we face are not easy, and the responsibility does not rest solely with the Federal Reserve. I believe we have reached the limits of what can be achieved through monetary policy. The toxic effects of over indebtedness continue to plague real GDP growth, thus it is now time for fiscal policy makers to work together for the good of the country, and to put the nation on sound financial ground.

Given this reality and the case I made here, I continue to hold a portfolio predominantly composed of the US Dollar, (NYSEARCA:ZROZ) 30-Year Zero Coupon US Treasury Bonds and Swaps, and a focused group of select, undervalued equity securities. I believe this portfolio strategy can continue to outperform benchmarks in this slow-growth world that will characterize the global economy for some time.

House Price Rises Give Birth to Generational Inequality

real estateMy Comments: I’ve spoken before about how uncomfortable I get with the increasing divide between the haves and the have nots. That it is real is evidenced by a TV show that features this very idea.

What I had not thought about before this was another disturbance in the force between generations. In my generation, as I married and began to have children, there was a progression that seemed normal that pushed my wife and I into larger and by extension, more expensive homes.

Mindful that we were lucky and between us were able to earn enough to make it happen, we still pushed the envelope when it came to what we could afford. Looking now at my daughter and her family as it grows, what her mother and I did 35 years ago seems very daunting.

They have a growing family and would like to move into a somewhat larger home located in a safer neighborhood. They have their present house up for sale but at nowhere near enough to allow them the freedom we enjoyed in the 1970’s. I suspect the economic crash we experienced in 2008-09 will resonate over time much as did the Great Depression in the 1930’s. It may be a new normal but not nearly as satisfying.

John Kay / December 9, 2014

Two weeks ago, I described two ways of looking at the capital of a modern economy: we can measure the value of physical assets or the total of household wealth. These aggregates are similar but not identical. The widely cited work of Thomas Piketty relates primarily to the value of physical assets.

The quality of available data on the value of physical assets, even in the modern era, is not very high. We have good information about current investment in various categories of assets — plant and machinery, vehicles, offices, shops and warehouses, roads and cables — but not about their current value.

National accounts figures for these assets are mainly estimated using a “perpetual inventory” method, in which allowances are made each year for depreciation, while new investments are added to the existing total. The resulting figure forms the basis of the next year’s calculation. Think of the solera process, where Spanish wine producers draw off a portion of mature sherry from a cask, before replacing it with each year’s new wine.

The calculations are sensitive to the assumptions made about depreciation and the price of capital goods. More fundamentally, it is never clear what one is trying to measure when one asks: “What is the value of the London Underground?”

But with these caveats we can look, as Professor Piketty did, at the long-term development of the physical assets of countries, such as Britain and France, which have a well-documented economic history.

Two centuries ago, agricultural estates were the principal components of capital, and hereditary ownership of such estates the principal determinant of wealth (and its inequality). But agriculture today represents a much diminished share of total output, and farm values in Britain and France were reduced by the opening of territories in North America and other parts of the world. Stately homes are today liabilities, not assets, and modern dukes make ends meet by serving tea to visitors.

These visitors are the new owners of capital. In both Britain and France, more than half of the value of physical assets is represented by residential property.

About 60-70 per cent of houses are owner-occupied, and they have a higher proportion by value. Even after deducting outstanding mortgages — about one-third of property values — owner-occupied housing is the largest component of personal wealth.

Accordingly, the main factor behind the phenomenon that “capital is back” is the increased value of urban land. This is a very different explanation from Prof Piketty’s claim that the growth of capital, and the inequality of its distribution, is driven by an ineluctable historical tendency for the rate of return on capital to exceed the underlying rate of economic growth (leading to indefinite capital accumulation by the wealthiest).

Property wealth comes in two forms: the return from occupying a house one owns, and steadily rising property values. Far from being accumulated, the return from owner-occupation is consumed on an annual basis through the act of living in a house. The rise in house prices, however, has a significant effect on the distribution of wealth; in particular, on the transmission of inequality between generations.

The ability of young people today to benefit from future house price appreciation depends in large part on their parents’ capacity to pass on the benefits of past house price appreciation to them. But that injustice is different in nature and cause from the inequality that concerns Occupy Wall Street, or the purchasers of Prof Piketty’s book.

The growth of housing equity and the value of pension rights have done a lot to distribute wealth more broadly. Their impact on inequality is less laudable.

When The Stock Market Performs Best During A U.S. President’s 4-Year Term

profit-loss-riskMy Comments: Many of us are climbing a wall of worry about our investments over the next 12 months. I’m not worried if your time horizon is ten years or more, but if it’s less, then I believe you have reason to be worried.

Every week I’ve posted articles that justify the wall of worry. As soon as I’ve hit the “post” button, however, along comes something that seems legitimate to make me question my reasoning. Here’s another. And it’s not the only one.

Willow Street Investments, Nov. 18, 2014

• An average investor needs to know about the interrelationship between politics, economics, and the stock market to make more informed investment decisions.
• Incumbent presidents push for votes by proposing tax reductions, increasing spending on specific government programs and/or pushing for lower interest rates as an election draws near.
• The most favorable period for investing during a presidential cycle is from October 1 of the second year of a presidential term to December 31 of the fourth year.
• Barring a severe global and economic event, all major stock market declines have occurred during the first or second years of the four-year U.S. presidential cycle.
• Barring a severe global and economic event, no major declines occurred during the third or fourth years of a presidential cycle.

Investors in the stock market are always looking to past history to try and gain an edge for their investing strategy in the future. Frequently, gazing at stock market history in relation to political, economic and social events can provide investors with a window into the future of what may happen in the stock market. Other times, however, the weighted expectations of investors relying too much on history may alter what can be seen through the window to the future because an investors’ expectations of one scenario occurring may be altered by investors own behavior. Like the Farmer’s Almanac, that professes to be able to make long-term yearly weather forecasts for all across the U.S., stock market truisms such as “the January effect,” “Sell in May and Go Away,” and “the Santa Claus rally” are discussed one every year or so as predictive devices to aid in an investor’s investing strategy. Another stock market truism is looking at the 4-year U.S. presidential cycle and the behavior during such cycle.

Recently, we were reviewing an insightful article entitled The Four-Year U.S. Presidential Cycle and the Stock Market by Marshall Nickles and Nelson Granados. This article references a 2004 article, “Presidential Elections and Stock Market Cycles” written by Marshall Nickles. In Mr. Nickles’ earlier article, he noted that all of the major stock market declines occurred during the first or second years of the four-year U.S. presidential cycle. He also noted that no major declines occurred during the third or fourth years of a presidential cycle. In particular, from 1950 to 2004 (using the Standard and Poor’s 500 Index), the most favorable period (MFP) for investing was from October 1 of the second year of a presidential term to December 31 of the fourth year. The remaining period, from January 1 of the first year of the presidential term to September 30 of the second year, was the least favorable period (LFP) for stock market investors. The author concluded in their first article that “it appeared that politicians were anxious to exercise policies that were designed to pump up the economy just prior to a presidential election, which in turn had a positive affect on stock prices.”

In the second article by the authors they attempted to understand and explain the relationship between politics and stock market behavior. They focused on providing evidence of the relationship between economics, politics, and the four-year presidential cycle; and second, including an analysis of stock market performance during the 2008 period. They introduced a risk measurement for the stock market by arguing that the 2008 stock market crash should be considered an anomaly and concluded that the four year presidential stock market cycle is likely still intact. The goal of the article, according to the authors, was to provide evidence that risk may be reduced and returns may increase when an investor considers how economic policy influences stock market prices during the presidential election cycle.

The authors state what may seem obvious to even the most novice of stock market investors. They note that once a president takes office, they realize that to get reelected they must try to make the economy as healthy as possible four years later. Every president faces such circumstance and the authors note that “it is this consistency in the U.S. political process that also sets into motion fiscal policies that are frequently predictable and that often have a direct effect on the stock market.” In the discipline of economics, fiscal policy is defined as an increase or decrease of taxes and or government spending. The direction that fiscal policy takes can often be directly related to the state of the economy at the time a new president is elected.

The authors point out that it is not surprising to see incumbent presidents push for votes by proposing tax reductions and or increasing spending on specific government programs as an election draws near. In addition, an incumbent political party may also try to persuade the Federal Reserve to complement the administration’s efforts through monetary policy, by increasing the money supply and reducing interest rates. Such fiscal and monetary policies may be introduced as early as the end of the second year of the presidential four-year term. If the results are favorable and the economy responds positively, corporate profits will likely rise, and so will stock prices, just as the next presidential election is about to take place.

The authors also set forth the potential negative consequences of stimulating the economy by pointing out that the policies used to stimulate the economy and the stock market can also lead to inflation, which can be disconcerting to investors. If inflation occurs, a new president may be pressured to reverse the fiscal and monetary stimulus policies of the prior president, attempt to get inflation under control, and then hope to return to stimulus policies by midterm in preparation for the next election. Rising interest rates often lead to increased costs for businesses and consumers, which can slow spending and corporate profits, and pressure stock prices downward.

The articles point out and provide evidence that show the DJIA rises during the second half of the four-year presidential cycle. The authors point out the MFP within the four year presidential cycle. Such period begins on October 1 of the second year of the presidential term through December 31 of the fourth year. Such period performed significantly better than the unfavorable period, from January 1 in the first year of the presidential term through September 30 of the second year. The authors point out that the cycles of any type are not always perfectly aligned. Such alignment can be thrown off the authors point out when there are positive and negative macroeconomic events that can temporarily break a long standing the most favorable period cycle. They indicate that even with a history of positive market gains during such most favorable market periods from 1950 to 2004, the 2008 market collapse, precipitated by domestic and global economic events, was too powerful for the market to overcome. The authors conclude that while such economic 2008 market collapse was an isolated occurrence, they do not believe such event will be the only exception in the future. They believe that globalization and the Internet are at least two reasons for volatility and uncertainty in the years ahead. The authors sum up by stating, and we agree, the more the average investor knows about the interrelationship between politics, economics, and the stock market, the more informed they will be in making investment decisions.

Our conclusion

We believe that the authors provide powerful evidence and a detailed discussion of how politics influence the stock market. As the authors point out, what they label as a most favorable periods and least favorable periods typically hold true within each president’s four year term barring exceptions where stimulus activities cannot overcome severe global and economic negative circumstances. So what does the upcoming last year of President Obama’s presidency hold for the stock market? It is true that President Obama cannot run for a third term as president as he is barred from doing so (and whether the public wants him or not). So, President Obama is not worried about getting reelected. It is also likely true that, President Obama would like a fellow Democrat to be elected as President. So, it is likely his fiscal policies will likely continue to boost the economy and the stock market.

If one follows the data presented by the authors of the above articles, 2015 will be a good year for the stock market unless a severe global or economic event occurs. And what about the much discussed interest rate increases that may start to occur in 2015?  Well, such interest rate increases, however moderate they may be, will have a lagging effect on the market that would most likely occur in 2016 after the presidential election has occurred. If the overall market indexes gain next year, do not expect the markets to go straight up but experience volatility along the way. It is during such volatility on the downside that investors should consider establishing new positions.

Post #1000 !!!

Three and a half years ago I decided it was time for me to assert myself and take advantage of a little knowledge about social media and a desire to write. I decided to start my own blog.

What you are reading, if WordPress metrics are to be believed, is post number 1000. How I got to this point I have no idea. How many people ever read what I post is also a mystery.

But it’s now part of my dayly weekday routine to make sure something gets posted. In the grand scheme of things I want it to provide value for someone other than myself. Clearly most of the posts have to do with what I know professionally about money, the management of it, and its relationship to economics, government, politics and a host of other forces that determine the outcome.

I’ve long known that my ability with the written word far exceeds my ability with the spoken word. As these 1000 or so ideas have flowed from my fingertips with indispensable help from other writers, I hope I’ve been useful to those of you who have either run across me somewhere or know me and find these ideas useful from time to time.

There seems to be an almost inexhaustable supply of material from which to choose. Some of it’s pure blather but a lot of it is worth repeating, which means a lot to me as my creative juices run dry on a weekly basis.

One thing I have failed to do over these past many months is to pose an important question to each of you: “What do YOU want to know more about?” I’ve made a vow to focus more of my energies on your answers, so going forward, my thoughts will hopefully be more about you than about me.

Assuming you choose to make a comment about this, I’m going to report back in another post what you collectively said. If there’s a collective silence, so be it; I’ll just keep on keeping on.

Lastly, I came across a group recently that helps people create online courses. The idea is that many of us have the ability to teach others something of value. They provide a step by step process to make that happen.

Look for me to soon announce an online course. My guess right now is it will be about investing money. The idea is to help anyone with the ability to think into the future, to arrive there with a pile of money. There will be no promises, but I’m convinced anyone’s journey into the future will be helped by a better understanding of the dynamics involved when it comes to money.

Thanks so very much for listening.TK signature

The World Is Marching Back From Globalisation

question-markMy Comments: Those of you who know me well do not consider me a pessimist. But this is Monday. And while I can feel optimistic about the chances for a return to good times from Florida football, the rest of the news is essentially gloom and despair. I’d much rather bring you something uplifting and motivating. But as a very tiny piece of a very big wheel, I’m powerless to do more than share this with you, hoping one of you will lift me off the floor.

My life has been shaped by how the world changed for the better following World War II. Notwithstanding the conflicts in Korea, Viet Nam and the middle east, it felt like there was a steady progression across the planet in terms of rising standards of living, health, and happiness. My family today is a reflection of that.

According to this author, the crash of 2008 has stopped that flow. The maniacs in Iraq are not fundamental to this reversal, though it will help us all if they are simply put down, like one would do with a deranged dog. I expect civilization will survive and once again move in the direction I spoke of a minute ago, but for now, and perhaps for the rest of my life, there are likely to be more questions than there are answers.

As we move toward the elections in 2016, we need to find leaders who don’t need to blow smoke and promote their own egos at our expense.

By Philip Stephens September 4, 2014

There is a mood abroad that says history will record that sanctions against Russia marked the start of an epochal retreat from globalisation. I heard a high-ranking German official broach the thought the other day at the German Marshall Fund’s Stockholm China Forum. It was an interesting point, but it missed a bigger one. The sanctions are more symptom than cause. The rollback began long before Vladimir Putin, Russia’s president, began his war against Ukraine.

The case for calling a halt to business as usual with Moscow is self-evident to anyone who considers that international security demands nations do not invade their neighbours. The valid criticism of the west is that it has been too slow to react. At every step, the Russian president has ruthlessly exploited US hesitation and European divisions.

He will do so until Nato restores deterrence to the core of European security. Mr Putin’s irredentism demands tough diplomacy stiffened by hard power. He will stop when he understands that aggression will invite unacceptable retaliation. To make deterrence credible, the alliance must put boots on the ground on its eastern flank. The Baltics have replaced Berlin as the litmus test of western resolve.

Some, particularly though not exclusively in the rising world, have seen sanctions through a different prism. By punishing Russia economically, the US and Europe are undermining the open international system. Economics, this cast of mind says, must be held apart from the vicissitudes of political quarrels. Why should new powers sign up to a level international playing field if the US and Europe scatter it with rocks in pursuit of narrow interests?

These critics are right to say an integrated global economy needs a co-operative political architecture. Sanctions against Ukraine, though, fit a bigger picture of the unravelling of globalisation since the financial crash of 2008. They testify to a profound reversal in US attitudes. Washington’s steady retreat from global engagement reaches beyond Barack Obama’s ordinance that the US stop doing “stupid stuff”.

The architect of the present era of globalisation is no longer willing to be its guarantor. The US does not see a vital national interest in upholding an order that redistributes power to rivals. Much as they might cavil at this, China, India and the rest are unwilling to step up as guardians of multilateralism. Without a champion, globalisation cannot but fall into disrepair.

Not so long ago, finance and the internet were at once the most powerful channels, and visible symbols, of the interconnected world. Footloose capital and digital communications had no respect for national borders. Financial innovation (and downright chicanery) recycled the huge surpluses of the rising world to penurious homebuyers in Middle America and dodgy speculators on the Costa del Sol. The masters of the banking universe spun their roulette wheels in the name of something called the Washington consensus.

Then came the crash. Finance has been renationalised. Banks have retreated in the face of new regulatory controls. European financial integration has gone into reverse. Global capital flows are still only about half their pre-crisis peak.

As for the digitalised world, the idea that everyone, everywhere should have access to the same information has fallen foul of authoritarian politics and concerns about privacy. China, Russia, Turkey and others have thrown roadblocks across the digital highway to stifle dissent. Europeans want to protect themselves from US intelligence agencies and the monopoly capitalism of the digital giants. The web is heading for Balkanisation.

The open trading system is fragmenting. The collapse of the Doha round spoke to the demise of global free-trade agreements. The advanced economies are looking instead to regional coalitions and deals – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact. The emerging economies are building south-south relationships. Frustrated by a failure to rebalance the International Monetary Fund, the Brics nations are setting up their own financial institutions.

Domestic politics, north and south, reinforces these trends. If western leaders have grown wary of globalisation, many of their electorates have turned positively hostile. Globalisation was sold in the US and Europe as an exercise in enlightened self-interest – everyone would be a winner in a world that pulled down national frontiers. It scarcely seems like that to the squeezed middle classes, as the top 1 per cent scoop up the gains of economic integration.

Much as the south has prospered within the old rules – China’s admission to the World Trade Organisation has been the biggest geopolitical event so far of the present century – yet the new powers show scant enthusiasm for multilateralism. The old order is widely seen as an instrument of US hegemony. India scuppered the latest attempt to reinvigorate the WTO.

Globalisation needs an enforcer – a hegemon, a concert of powers or global governance arrangements sufficient to make sure the rules are fairly applied. Without a political architecture that locates national interests in mutual endeavours, the economic framework is destined to fracture and fragment.

Narrow nationalisms elbow aside global commitments. Sanctions are part of this story, but Russia’s contempt for the international order is a bigger one. Sad to say, we learnt in 1914 that economic interdependence is a feeble bulwark against great power rivalry.

The Euro Is In Greater Peril Today Than At The Height Of The Crisis

My Comments: Here in the US we tend to think of Europe as a mis-directed older sibling, someone who can’t quite make it, by our standards. We forget that most of our laws and even the language we speak came from Europe. And those foundations were forged in a melting pot as violent and as culturally diverse as the chaos we see today in the Middle East. Talk about tribal warfare!

The European Union is an effort to eventually federalize the countries of Europe that emerged and existed following World War II. A common currency was thought to be a mechanism that echoed what we have here in the US among all 50 states. It’s in our best interest as a global peacemaker and economic engine of the future that we help Europe evolve and thrive.

Wolfgang Münchau / November 9, 2014 / The Financial Times

The eurozone has no mechanism to defend itself against a drawn-out depression.

If there is one thing European policy makers agree on, it is that the survival of the euro is no longer in doubt. The economy is not doing great, but at least the crisis is over.

I would challenge that consensus. European policy makers tend to judge danger in terms of the number of late-night meetings in the Justus Lipsius building in Brussels. There are definitely fewer of those. But that is a bad metric.

I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat.

Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.

As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements.

In France, Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President François Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms Le Pen and Mr Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias.

The question for voters in the crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favourable as the economy sinks deeper into depression.

Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s “stimulus programme”, announced last week, is as good as it gets: 0.1 per cent of gross domestic product in extra spending, not starting until 2016. Enjoy!

What about monetary policy? Mario Draghi said he expected the balance sheet of the European Central Bank to increase by about €1tn. The president of the ECB did not set this number as a formal target, but as an expectation – whatever that means. The most optimistic interpretation is that this implies a small programme of quantitative easing (purchases of government debt). A more pessimistic view is that nothing will happen and that the ECB will miss the €1tn just as it keeps on missing its inflation target. My expectation is that the ECB will meet the number – and that it will not make much difference.

And what about structural reforms? We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another.

Two months ago Mr Draghi suggested the eurozone fire in three directions simultaneously – looser monetary policies, an increase in public sector investments and structural reforms. I called this the economic equivalent of carpet-bombing. The response looks more like an economic equivalent of the Charge of the Light Brigade.

These serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure.

‘Risk On’ for Now

financial freedomMy Comments: Continuing with the theme that if you have exposure to the markets you need to be very careful, here is another metric from someone who knows how to read the tea leaves.

I’m reluctant to continually use fear to motivate people to act. But if you are not now in cash, then you need to be able to move to cash quickly. As an added benefit, if you also have the ability to move further and make money while others are losing theirs, you just may come out the other side as a happy camper. At least that’s the plan.

November 07, 2014 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer – Guggenheim Investments

Last week’s investment roller coaster was something we had been expecting—U.S. stocks delivered their usual bout of seasonal volatility right on cue. For now, recent spread widening in high-yield bonds and leveraged bank loans seems to be over, and it also appears that equities have regained their footing after a turbulent week.

With the anticipated seasonal pattern of higher volatility in September and October now largely fulfilled, we anticipate more positive seasonal factors over the next two months. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent in November and 1.8 percent in December.

The current dark cloud that hangs over Europe is a serious threat and something that investors should closely monitor. If the anticipated seasonal strength—which is typically driven by an influx of cash into pension funds that their managers are keen to put to work—is not forthcoming, investors should seriously question how much further the current bull market can run. As of now, we remain cautiously optimistic as we await some crucial economic data.

Chart of the Week

Can U.S. Equities Sustain this Rally?

Despite the Dow Jones Industrial Average high made on Nov. 6, the New York Stock Exchange Cumulative Advance/Decline line remains 1.1 percent lower than its peak on Aug. 29. Historically, a persistent divergence between the DJIA and the Advance/Decline line usually leads to a major correction in equities. Whether or not the Advance/Decline line can catch up with the increase in equity prices over the next few weeks will determine whether the current rally is sustainable.