Tag Archives: investment advice

More Market Mayhem On Its’ Way

My Comments: History does typically repeat itself. Whether its human frailty or the laws of physics, the past is usually a glimpse into the future. Cries of ‘this time it’s different’ usually prove to be false. It’s not what happens that has a critical effect on your financial future, it’s how you manage the inevitable. I’ve been at this for almost 40 years now, and while I’m far from perfect, there are ways to mitigate the risk.

26 Sep 2015 Richard Dyson

Earthquakes and volcanoes rarely strike once only to vanish. A number of smaller episodes precede and follow the main event.

The same appears true of market routs, where a series of dramatic falls cluster within a period of several weeks, or more often months, sometimes signalling an entire change in the market’s direction.

Black vertical lines in the chart, above, show the number of days per month in which the FTSE 100 index has fallen by more than 3% – from opening to close – in the past 20 years.

While falls of that magnitude often capture front-page headlines, they are relatively uncommon.

If all such falls over the past two decades were spread out evenly, they would occur on average every 78 trading days, or once a quarter, according to broker AJ Bell which processed the data for Telegraph Money.

But they rarely occur in isolation.

On only 12 occasions since 1995 has there been just a single day within a calendar month where the market fell by more than 3%. Instead the bad days clump around wider market events, usually global in origin.

The first cluster of lines marks the crises in the late 1990s beginning in Thailand and spreading across Asia and from there to Western markets.

The two biggest concentrations of falls – including single months where there were six and seven days in which the FTSE fell by more than 3% – came in the desperate years of 2003 and 2009.

The first marked the final end of the protracted sell-off of the technology bubble. The 2009 cluster marked the trough at the end of the financial crisis.

By contrast the correction suffered since last month’s “Black Monday” (August 24) has been comparatively minor.

If the past patterns of the data are to be repeated, further days of sharp sell-offs are to be expected in coming weeks.

Russ Mould, investment director at AJ Bell, said: “If anything, the story here is the comparative absence of turmoil in the past 18 months up to August.”

He points out that downward market movements are more abrupt. This means days of 3% falls far outnumber those where the market gained 3% or more. “Markets tend to rise serenely and lose ground quickly, which again is what can make bear markets such a shock.”

Preparing for opportunities

With further falls likely, investors are eyeing sectors where the greatest value is likely to emerge – and building cash reserve in preparation.

Based on a number of measures of value including price to earnings ratio, yield, and “Cape” – the cyclically adjusted p/e – Telegraph Money identifies European and emerging markets as “prepare to buy” areas, with commercial property, bonds and gold as sectors to trim back as a way of raising cash ahead of future falls.

5 Reasons the Fed Shouldn’t Raise Rates

080519_USEconomy1My Comments: You’ve already read my comments about the significance of interest rates. They are going to start going up; when is the big unknown.

By Akin Oyedele, September 9, 2015

Larry Summers is convinced the Federal Reserve will make a huge mistake if it raises interest rates next week.

Two weeks ago, Summers wrote in the Financial Times that a rate hike risked “tipping some part of the financial system into crisis.”

And in a blog post on Wednesday, the economist, who withdrew as a candidate for chair of the Federal Reserve Board, a job now held by Janet Yellen, followed up on this thinking, giving five reasons his argument against a rate hike was even stronger than it used to be.

Summers’ main points are:

  • The stock market chaos two weeks ago tightened financial conditions and created the equivalent of 25 basis points of a hike (this is the amount by which most think the Fed will raise rates if it does this month).
  • Employment growth has slowed down, and commodity prices have fallen. The Atlanta Fed’s gross-domestic-product tracking model, which nailed first- and second-quarter growth, is forecasting only 1.5% growth in Q3.
  • The Fed has argued that low inflation is transitory. But inflation will most likely stay low, and the Fed’s preferred measure — personal consumption expenditures — is expected to be below the 2% target, according to market-based expectations.
  • It would be pointless, as some have suggested, for the Fed to raise its benchmark rate by 25 basis points and then say there will not be more hikes for some time. “If as some suggest a 25-BP increase won’t affect the economy much at all, what is the case for an increase?”
  • If the Fed does nothing, the “risks” are a rise in inflation and less volatility in markets. But there could be a “catastrophic error” if it tightens policy now. And according to Summers, the consensus views on the economy are understating its real risks.

At next week’s meeting, the Federal Open Market Committee will decide whether to raise its benchmark rate for the first time in nine years. But markets think it’s a remote possibility and are pricing in a 30% chance that the Fed will hike.

Summers joins the World Bank, the International Monetary Fund, and others in calling on the Fed to not raise rates just yet.

Major Bond Warning

moneyMy Comments: A recent letter to the editor of the Gainesville Sun suggested there was a conspiracy afoot, run by the US Government, to whit “How was it possible for anyone to survive when banks were only paying 1% on Certificates of Deposit.” While the question itself is legitimate, the context implies a vast ignorance of how money works.

I’ve talked in this blog about how interest rates are due to start rising. I’ve talked about how the economy is doing well these days. I’ve talked about the need to position your money so it will have a chance to grow instead of shrink the next time we have a crash.

The following came from a newsletter to which I subscribe. It might or might not help if you have little knowledge about how money works. Here’s what the author said:

In May 2013, I (Porter) gave my first warning.

I told subscribers this was “the single greatest threat to your wealth you will ever face.” Longtime readers might recall I was warning about the bond markets. In particular, I was pointing to the part of the market that provides financing to smaller, faster-growing firms – bonds known as “high yield,” or “junk.”

I know most of my subscribers don’t buy bonds. Most don’t really understand how bonds work – at least, not in any real detail. And when most readers think about interest rates, they probably focus on mortgage interest rates or municipal-bond interest rates.

Here’s the thing, though: If you want to see the next bear market in stocks coming ahead of time, you ought to focus on the corporate-bond market. The corporate-bond market shows how much most companies pay for the capital needed to grow. For some industries, access to such financing is vital. Without a healthy corporate-bond market, some companies would drop to zero almost overnight. And that makes the cost of capital a crucial variable…

Another thing that most investors don’t understand about the bond markets: Interest rates (set by the bond markets) influence how stocks are priced relative to their earnings, their “valuations.” Starting in 2009, the Federal Reserve intervened in the bond markets, driving interest rates lower. That has pushed stock valuations higher, and it has been a powerful driver of this bull market. Higher interest rates, on the other hand, will drive valuations lower. I believe that’s likely to cause our next bear market.

Here’s what I wrote back in May 2013…

The U.S. bond market – particularly the junk-bond market – is going to crash. When this crash occurs, it will be the largest destruction of wealth in history. There has never been a bigger bubble in U.S. bonds. How do I know? It’s simple. Junk bonds (aka high-yield bonds issued by less creditworthy companies) have never yielded less than 5% annually. But they do today. Likewise, the difference between the yields on junk bonds and the yields on investment-grade bonds has almost never been smaller. That means credit is more available today than almost ever before for small, less-than-investment-grade firms. The last time credit was this widely available – and at such low costs – was in 2007. And you know how that turned out…

The coming collapse in the bond market will be far worse than it was last time, too. This time, the Federal Reserve’s actions have driven forward the huge bull market in bonds. The Fed is printing up almost $100 billion per month and buying bonds. That has forced the other buyers of bonds to buy riskier debt that, historically, offered much higher yields.

Today, those yields have been incredibly “compressed.” You can imagine the high-yield segment of the bond market to be like a spring whose coils have been driven together by the force of the Federal Reserve’s market manipulation. As soon as the Fed’s buying stops (and it must stop one day, or else it will trigger hyperinflation), the yields on those riskier bonds will soar again. As bond yields rise, the prices of bonds will fall sharply.

One of the best ways to follow the corporate high-yield bond market is to watch the leading exchange-traded funds that buy huge amounts of corporate bonds, like the iShares iBoxx High Yield Corporate Bond Fund (HYG).

Here’s how HYG has performed since my warning in early May 2013…
15-08 HiYldBonds

As you can see, shortly after my warning, these bonds fell sharply. The funds’ shares dropped from $95 to $89 in a matter of days. They rallied back, though, and roughly a year later (June 2014), they nearly hit a new high. We repeated our warnings in several Digests in 2014 (on May 29, June 4, and June 12).

Here’s what we wrote in the May 29, 2014 Digest…

There’s probably no larger sign of the top than what’s currently happening in the high-yield (aka “junk”) bond market… Investors are lending money to the riskiest corporate credits for near-record-low interest rates – currently a little more than 5%. And these companies literally cannot meet the demand for their paper. According to the Wall Street Journal, of the 10 largest U.S. bond funds at the end of 2013, the four with the fastest growth in assets since 2008 held an average 20% of their portfolios in junk bonds.

That outlook led us to close our high-yield bond newsletter, True Income. There was nothing we wanted to recommend in the entire market.

Still, as interest rates raced for record lows and bond prices shot to record highs, investors decided they had to own junk bonds. While we were shuttering our high-yield bond research, the individual investor began buying junk bonds like never before… many for the first time ever. As former Digest editor Sean Goldsmith wisely noted, “Nobody ever heralded the individual investor for his timing.”

Today, high-yield bonds are trading near their lows of the last three years. HYG is trading around $88 a share. I still believe all the things I’ve written over the last two years: A collapse in the high-yield market will kill the current bull market and wipe out billions of dollars of investors’ savings.

It’s interesting to note that the rising defaults and distress in the bond market are causing the decline in bond prices today, not inflation. In particular, the two fastest-growing parts of the high-yield market for the last decade have been bonds tied to oil and gas companies (some of which have already filed for bankruptcy, many of which are now distressed) and bonds tied to subprime auto lending (which now makes up roughly 25% of all car loans).

I don’t need to tell you that oil and gas prices are way down. As a result, a lot of the investments made into the oil patch over the last decade aren’t going to produce anything like what was expected. As oil and gas companies’ “hedges” expire this year, revenues at most of America’s oil and gas companies are going to go way, way down. A lot of bonds will end up in default.

Likewise, the default rates on newly issued subprime auto loans have been setting new highs, rates much like those in 2008. Specifically, 8.4% of the subprime borrowers who bought a car in first-quarter 2014 missed at least one payment before the end of the year. The early default rate on subprime car loans last peaked in 2008 at 9%. Given that the job market remains strong, this suggest a huge problem in subprime auto underwriting and larger-than-expected losses in securitized auto loan bonds.

Now… consider this. Outside of student loans, auto lending is the only form of consumer lending to grow in the U.S. since 2009. And something like 30% of all the jobs that have been created in the U.S. since 2010 are tied directly to the oil and gas industry. Take the credit weakness in these industries as a significant warning sign. Perhaps all the cars they sold in 2014 (a record for U.S. car sales) can’t actually be paid for… And perhaps all of those oil wells they drilled can’t, either. If that’s the case… no matter how many bonds the Fed buys, defaults are likely going to rise… and bonds are going to fall.

What should you do about this? First and foremost, check your accounts and make sure you don’t own any high-yield bonds. As for other strategies… be aware that a bear market this fall is, in my opinion, likely. Watch your trailing stops. Consider shorting a stock or two as a hedge. And most of all, avoid companies that use large amounts of debt. Their costs are going up

Get Ready For A Bear Market

moneyMy Comments: This person may be right, or not. Yesterdays sell-off sure was ominous but you never “know” until it’s too late. One way to profit from the downturn is with alternative investments. Only very few investment managers use them as a matter of course when promoting their skill set to the public.

Those of you who know me may know about a company called Portfolio Strategies. My associate Alan Hagopian and I use them almost exclusively when positioning our clients money for the very same reasons described in this article from Axel Merk. We don’t try to hit any home runs, but being able to make money when everyone else is losing theirs is very helpful.

Axel Merk, Merk Investments Aug. 4, 2015

Increasingly concerned about the markets, I’ve taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I’m doing to try to profit from what may lie ahead.

I started to get concerned about the markets in 2014, when I heard of a couple of investment advisers that increased their allocation to the stock market because they were losing clients for not keeping up with the averages.

Earlier this year, as the market kept marching upward, I decided that buying put options on equities wouldn’t give me the kind of protection I was looking for. So I liquidated most of my equity holdings. We also shut down our equity strategy for the firm.

Of late, I’ve taken it a step further, starting to build an outright short position on the market. In the long-run, this may be losing proposition, but right now, I am rather concerned about traditional asset allocation.

Fallacy of traditional asset allocation
The media has touted quotes of me saying things like, “Investors may want to allocate at least 20% of their portfolio to alternatives [to have a meaningful impact on their portfolio].” The context of this quote is that because many (certainly not all!) alternative investments have a lower volatility than equities, they won’t make much of a dent on investors’ portfolios unless they represent a substantial portion of one’s investment. Sure, I said that. And I believe in what I said. Yet, I’m also embarrassed by it. I’m embarrassed because while this is a perfectly fine statement in a normal market, it may be hogwash when a crash is looming. If you have a theoretical traditional “60/40” portfolio (60% stocks, 40% bonds), and we suppose stocks plunge 20% while bonds rise 2%, you have a theoretical return of -11.2%.

Now let’s suppose you add a 20% allocation of alternatives to the theoretical mix (48% stocks, 32% bonds, 20% alternatives) and let’s suppose alternatives rise by 5%: you reduce your losses to -7.96%. But what if you don’t really feel great about losing less than others; think the stock market will plunge by more than 20%; and that bonds won’t provide the refuge you are looking for? What about 100% alternatives? Part of the challenge is, of course, that alternatives provide no assurance of providing 5% return or any positive return when the market crashes; in fact, many alternative investments faired poorly in 2008, as low liquidity made it difficult for investors to execute some strategies.

Scholars and pundits alike say diversification pays off in the long-run, so why should one deviate from a traditional asset allocation. So why even suggest to deviate and look for alternatives? The reason is that modern portfolio theory, the theory traditional asset allocation is based on, relies on the fact that market prices reflect rational expectations. In the opinion of your humble observer, market prices have increasingly been reflecting the perceived next move of policy makers, most notably those of central bankers. And it’s one thing for central bankers to buy assets, in the process pushing prices higher; it’s an entirely different story for central bankers trying to extricate themselves from what they have created, which is what we believe they may be attempting. The common theme of central bank action around the world is that risk premia have been compressed, meaning risky assets don’t trade at much of a discount versus “risk-free” assets, notably:

Junk bonds and peripheral government bonds (bonds of Spain, Portugal, Italy, etc.) trade at a low discount versus US or German bonds; and
Stocks have been climbing relentlessly on the backdrop of low volatility.

When volatility is low and asset prices rise, buyers are attracted that don’t fully appreciate the underlying risks. Should volatility rise, these investors might flee their investments, saying they didn’t sign up for this. Differently said, central banks have fostered complacency, but fear may well be coming back. At least as importantly, these assets are still risky, but have not suddenly become safe. When investors realize this, they might react violently. This can be seen most easily when darlings on Wall Street miss earnings, but might also happen when central banks change course or any currently unforeseen event changes risk appetite in the market.

Stopping the Iran Nuclear Deal

Nixon+ChinaMy Comments: Readers of my daily posts know I agree with the proposed agreement. I disagree with the notion that the inevitable outcome of failing to approve the deal is war with Iran. But that’s not to say there won’t be some serious negative consequences. Switzerland, for example, has already lifted most of it’s sanctions against Iran.

Stephen Collins Aug. 11, 2015

The fate of the nuclear deal with Iran appears to be in some jeopardy. Key democrats in Congress – most notably New York Senator Chuck Schumer – have recently announced that they would vote to reject the agreement. So passage of the agreement is far from a done deal, with more than two dozen Senate Democrats remaining in the uncertain column.

Opponents regard the deal with disdain, characterizing the accord to curtail Iran’s nuclear program as counterproductive, naïve and reminiscent of England’s appeasement of Nazi Germany.

Critics of the Joint Comprehensive Plan of Action (JCPOA) are right to be skeptical of Iran’s commitment to multilateral accords. The International Atomic Energy Agency reported on several occasions – including in 2005, 2008 and 2011 – that Iran had violated important articles of the Nuclear Nonproliferation Treaty. But even given Iran’s lackluster record, I’d argue that a move by Congress to block the accord would result in a less favorable security outcome for the US and its allies.

The benefits of the deal for Iran are substantial. They include extensive sanctions relief that would allow Iran to resume oil export sales and gain access to frozen assets, estimated at US$55 billion. That would give the regime an enormous incentive to abide by the terms of the accord. In return for sanctions relief, Tehran has agreed to relinquish 98% of its supply of enriched uranium, limit its centrifuge operations and restrict enrichment to 3.67%. These actions would significantly lengthen Iran’s “breakout period,” or the time needed to create a nuclear weapon.

Additionally, the JCPOA also includes a carefully crafted verification protocol that permits intrusive and technically savvy inspections of known and suspected nuclear facilities.

Critics want to coerce Iran into complete capitulation so that it would cease all nuclear activities in perpetuity and allow “anywhere, anytime inspections.” Barring that, they advocate starving the regime so that it would be unable to afford nuclear, militant or terrorist activities.

But this sort of result was unfeasible. Short of Iran actually testing a nuclear device, the P5+1 – the US, Germany, China, UK, Russia and France – were never willing to support a marked increase in economic pressure.

What if the deal fails? A blocked deal would lead to several alarming consequences.

A no-deal Iran would have 33,000 pounds of enriched uranium instead of just 660 pounds. It would be able to produce enough fuel for a nuclear weapon in a few weeks instead of a full year.

If Tehran does aspire to build a nuclear weapon, as critics maintain, the dissolution of the deal would, in fact, facilitate their goal. The regime has publicly stated that it would speed up enrichment if the deal was blocked. Iran would also possess additional paths to a bomb without the deal’s prohibition on Iran reprocessing its plutonium.

What is more, the collapse of the plan would scuttle the enhanced transparency that the international community would have gained about Iran’s nuclear program as a result of inspections.

In the wake of a blocked deal, the solidarity underpinning the present multilateral, UN-backed sanctions program would dissipate. That would leave the US standing alone or with few allies. The historical record shows that without multilateral sanctions, the US lacks leverage to make Iran capitulate.

Additionally, China and Russia are likely to benefit by exploiting American obstinacy as an excuse to strike trade deals with Iran. That would bolster China’s economic and Russian’s strategic positions.

But the most dangerous diplomatic setback would be the effect a botched deal could have on America’s transatlantic alliances. America’s allies strongly back the deal. Blocking the JCPOA would quite likely result in a deep rift between the United States and its NATO allies, crippling support for future collaboration.

And then there is the question of how the sinking of the pact would complicate nonproliferation objectives far beyond the Middle East. America’s perceived unwillingness to negotiate on nuclear diplomacy would further marginalize any pro-diplomacy voices inside North Korea, arguably the more significant nuclear threat. Blocking the accord would ossify Pyongyang’s distrust of the US and give greater momentum to North Korea’s nuclear buildup.

Critics of the deal emphasize the danger presented by the windfall of unfrozen money Tehran will acquire. They predict that money will flow to Iran’s military and its investment in militant foreign activities, including sponsorship of terrorist organizations.

They’re not wrong – funding will probably flow in this direction. Still, the danger presented by this for the US and its regional allies is far less than the threat posed by the robust nuclear program that will likely emerge in the deal’s absence.

Moreover, the amount of funds freed up by the end of sanctions that will be devoted to military ends is probably much less than critics suggest.

Iran has pressing economic matters it must deal with immediately. The regime will have to invest between $100 billion and $200 billion in its oil and gas industries simply to reestablish past production levels. To satisfy the rising expectations of the public regarding the economic bounty it expects to materialize after the deal, the government will also have to invest in the domestic economy.

If the bulk of the unfrozen money does indeed flow to the military, the US and its allies might even benefit from a better financed Iranian military, which could use the new funds to step up its military operations against the Islamic State.

Still, simply signing a deal with Iran does not automatically make this episode of diplomacy a success. The devil is indeed in the details – implementation and verification.

The international community must prove its resolve to Iran. Iran must be shown that it will be held accountable and that automatic “snapback” provisions of the deal will be reimposed in response to a significant and unresolved violation.

The deal indeed fails to achieve all that the US could have hoped for. Still, the accord offers a credible path to a peaceful resolution of the crisis, and therefore it would be far too risky to turn it down.

Read the original @ http://www.businessinsider.com/there-are-alarming-consequences-to-stopping-the-iran-nuclear-deal-2015-8#ixzz3icvmd6U8

Obama’s Long, Hot Iranian Summer

My Comments: To deal or not to deal, that is the question. Most people are focused on the political implications of the agreement, and whether it’s a good deal for us or not. I’m very concerned about the economic implications as well. My blog post tomorrow talks about the high probability that Saudi Arabia will completely exhaust its currency reserves by the end of this decade. This has the potential to completely rearrange the balance of power in  the Middle East, and if Iran is free to resume building a nuclear weapon, we’re all in trouble.

The net effect of these two seemingly unrelated circumstances could lead to a conflict of biblical proportions in the Middle East. We are now involved with Turkey in attempting to reverse the gains made by ISIS. Couple that with the financial relationship we have with Saudi Arabia, to name just one country, the chances of a dramatic shift in the balance of power if we cannot contain the nuclear ambitions of Iran increases dramatically.

Granted, the agreement cannot ultimately guarantee that Iran does not get a nuclear weapon. But it does realistically allow some time for counter measures to get put in place. If the outcome is the removal of the Saudi government in its present form, all bets are off. Never mind the lives to be lost in a conflict between the US and Iran, imagine the cost to us and the rest of the free world if the oil now flowing to Europe, Russia, China, India, etc. from Saudi Arabia stops. Talk about a global economic crisis. And all because few people in Congress are willing to look beyond their hatred of Obama. Dumb, and you and I will pay for it, again.

Edward Luce, August 2, 2015

A US rejection of the deal would give Tehran a green light to revive their nuclear agenda

Six years ago, Barack Obama’s big domestic reform almost went up in flames during an August of town hall protests. He was accused of trying to set up death panels for the elderly. This time his big foreign policy deal is under fire — though the allegation has not changed.

The Iran nuclear deal will apparently create a death panel just for Israel. The difference in 2015 is that Mr Obama is already lobbying Congress. His legacy, and the future of the Middle East, hinges on whether the deal survives next month’s vote on Capitol Hill.

The noisiest protest will take place on Thursday when the top 10 Republican candidates appear on Fox News for their first presidential debate. Among them will be Mike Huckabee, the former Arkansas governor, who believes the deal “will take the Israelis and march them to the door of the oven”. Ted Cruz, the Texas senator, says: “Hundreds of billions [sic] of dollars will flow to Iran that they will use to fund radical Islamic terrorism to murder Americans.” Donald Trump says Mr Obama has been taken “to the cleaners”. Only Jeb Bush has risked nuance. He has been pilloried for saying Republicans should be more “mature and thoughtful” about it. Yet he, too, says the deal should be binned.

Will it survive the onslaught? That depends on Mr Obama’s own party. To a person, Republican lawmakers oppose the deal, some apocalyptically. Even former isolationists, such as Rand Paul, who will also appear on the Fox podium, are now hawkish on the Islamic Republic. Much like Obamacare, the Iran deal will rely solely on Democratic votes on Capitol Hill. Many are wavering. To salvage the deal, Mr Obama must use his veto to override an all but certain majority vote against it. He will need a third of either chamber to do so. That means either 34 of the 46 Senate Democrats or 145 of the 188 House Democrats.

It will boil down to whether he, or Benjamin Netanyahu, the Israeli prime minister, holds more sway with undecided Democrats. Chief among them is Chuck Schumer, the New York senator, and probable next leader of the Senate Democrats. Mr Netanyahu has said Israel’s survival as a nation is at stake. In fact, it is his own job security as the country’s leader that is in the balance. He has built his career on hyping the existential threat from Iran. His coalition controls just 61 of 120 Knesset seats. He broke all rules in March by speaking to the US Congress against a president’s set piece initiative. Never before has a foreign ally done anything this egregious. Having breached the limits once, he has nothing to lose. The American Israel Public Affairs Committee and its allies plan to spend up to $40m lobbying against the deal. Much of it will be targeted at Mr Schumer. Mr Netanyahu will be working the phones as furiously as Mr Obama.

It is easy to forget that America’s legislature is supposed to be evaluating what is in America’s national interests. But Mr Obama’s real task is to convince fellow Democrats it will be good for Israel’s security. On paper, this ought to be straightforward. Though undeclared, Israel has an estimated 80 nuclear warheads. It also has “triad” capabilities – it can launch missiles from sea, air and land. Opponents of the deal say it will unleash a Middle East arms race. But as Bruce Riedel, a former senior official at the Central Intelligence Agency, put it: “A nuclear arms race has been underway in the Middle East for 65 years. Israel won it.” For the next 15 years at least, Mr Obama’s Iran deal cements Israel’s status as the Middle East’s sole nuclear weapons state.

Mr Netanyahu’s allies say the deal will unfreeze $150bn for Iran to spend on terrorism. This is absurd on multiple levels. First, the US Treasury says just $55bn in assets will be repatriated. Much will remain frozen under sanctions unrelated to Iran’s nuclear programme.

Second, Iran already spends what it wants on its regional proxies: unlike nuclear weapons, terrorism is a cheap business. With at least $3bn in annual US military aid — and more promised by Mr Obama — Israel has more than enough ability to keep defeating Hizbollah and Hamas on the battlefield.

Third, Iran suffers from an estimated $500bn in infrastructure backlog, of which up to $200bn is needed to reboot its oil industry. Iran’s government was elected on the promise of restoring economic growth. It will lose office if it wastes too much of the proceeds on foreign adventurism.

Would a rejection by Congress lead to a better deal? This is critics’ most frequent line. It is a fantasy. Rather than bringing Iran back to the table, America’s unilateral rejection of a deal it negotiated will push its own partners away. The horse has already bolted. Countries such as China, Russia and India have made it clear that they will resume trading ties with Iran regardless of what Congress does. Even the European three — the UK, France and Germany — are likely to press on. Moreover, a US rejection would give Iran’s hardliners a green light to revive their nuclear agenda. Instead of waiting a decade or more, Tehran could develop a warhead within months, according to the International Atomic Energy Agency.

Facts, as they say, are stubborn things. But perception matters more. The chances are that Mr Obama can scrape together enough support to uphold this deal. But it will be close. Either he or Mr Netanyahu will end this summer victorious.

Is it 1929, 1987 or Something Else?

money mazeMy Comments: Those of us with money we plan to use in retirement have to pay attention to what is happening to the stock and bond market. If nothing else it helps us decide if we want to manage it ourselves or get someone to help us.

I think we’re due for a correction. I’ve alluded to this several times over the past many months and here, once again, are comments from someone far more in touch with reality than am I. Regardless of your circumstances, if you are expecting to live a while, you will need money. If any of it is coming from investments, then this might help maintain your sanity. Or not.

July 31, 2015 by Scott Minerd

Having spent the summer ruminating over the macro events in Europe, my focus has now turned to the U.S. stock market crashes of 1929 and 1987. Why, you might ask? The answer lies in China, where policy interventions in the face of a steep selloff are quickly becoming the first blemish on Xi Jinping’s leadership record.

Whether the current period becomes known as China’s version of 1929’s Black Thursday in the United States or a much healthier scenario analogous to 1987’s Black Monday, now depends very much on the strategy its policymakers adopt over the next few months. For China’s sake, I hope it is the latter, but at this point investors should take note that the world’s second-largest economy could just as likely find itself at the epicenter of this century’s greatest equity market correction.

Fueled by demand from Chinese retail investors, the Shanghai Composite Index soared by more than 150 percent from mid-2014 and early June 2015. In the same period, the Shenzhen Composite Index rose by more than 200 percent. Such exuberance has come to a violent end, with indices down almost a third from their June 12 peak of more than $10 trillion in market capitalization.

Despite the recent selloff, the Chinese stock market is still grossly overvalued, with the median price-to-earnings (P/E) ratio* for the Shanghai Composite Index hovering around 40, more than double the median P/E ratio of the S&P 500. By another valuation measurement, the market-capitalization-to-gross-domestic product (GDP) ratio for China is currently above 60 percent, well above its average of 40 percent over the past 10 years.

From here, the best case for Chinese equity markets may be a scenario similar to what happened in 1987 in the United States, when, after a huge selloff in October, the market retraced, then reversed, but ultimately established a base that began a rally that lasted until 1989.

The alternative scenario to 1987 is 1929, the course upon which China currently seems set.

Chinese policymakers’ unorthodox attempts to bridle the runaway market resemble the policy response of the United States in 1929, which basically relied on investor groups to purchase large blocks of stock in the hope of propping up equity markets. As in 1929, this type of market intervention will do nothing to solve the fundamental problem in China’s equity markets today. The unresolved issue is that prices have detached from fundamental value due to a wave of debt-fueled retail investor mania.

This too is analogous with 1929. China’s sky-high margin-debt-to-total-market-capitalization ratio is estimated to be near 10 percent. In reality, it is likely even higher when you factor in margin lending by China’s shadow banking system. By comparison, U.S. margin debt is currently less than 3 percent of total market cap, but in 1929, margin debt in the United States reached a high of 12 percent of total market capitalization prior to the stock market’s collapse.

The clear answer at this point is not for China to endeavor to apply splints to its broken market, but instead for the People’s Bank of China (PBOC) to flush the system with cash and allow the renminbi (RMB) to depreciate significantly. Unfortunately, this may not be palatable. Chinese policymakers will do anything they can to avoid devaluation ahead of the International Monetary Fund’s November decision on the RMB’s special drawing rights (SDR) status. China may not have that long to act if it is to avoid a full-blown disaster. In the meantime, my best estimate is that the PBOC will be forced to increase sales of Treasury securities to prop up the RMB as more capital flows out of China. I would expect up to $300–500 million of Treasury liquidation may be necessary to hold the line on RMB depreciation in the coming months.

If China’s crisis does turn into a 1929 scenario—which would be devastating for China and would have broad implications for the rest of the world—one takeaway for investors is that the United States is likely to remain at least somewhat insulated. A Chinese slowdown will put energy and commodity prices under pressure, which will benefit U.S. consumers and U.S. manufacturers as input prices fall, and should help support earnings in the near term.

The transitory period that lies ahead, however, promises to be rocky for all global markets. Consider how much Greece’s $300 billion debt crisis roiled investors (a figure dwarfed by the $3 trillion lost by Chinese equities markets since June). Under any circumstances investors should expect to see increased market volatility with a growing safe-haven bid for Treasury securities, which I expect will push the U.S. 10-year note to 2 percent or lower in the near term. Renewed downward pressure on interest rates will increase market volatility and is likely to adversely affect credit spreads. On a positive note, lower interest rates, along with declining energy prices, should spur U.S. housing activity, and assuage any lingering concern caused by last week’s disappointing new home sales data, which fell 6.8 percent to 482,000 homes sold in June.

For China, the outcome to this crisis is still far from a foregone conclusion. There is still time for its policymakers to refocus. The best path would be to further loosen monetary policy and inject as much liquidity as possible into its markets—even if this forces the party to relax its control of the RMB and put some strategic political objectives on the back burner. If it doesn’t adopt this strategy, China may learn the painful and lasting lessons taught by the calamitous market collapse in the United States in 1929.