Tag Archives: investment advice

Forecasting the Next Recession

My Comments: I may have retired from providing investment advice but I’ve not yet left the building. What happens in the world of money still interests me both professionally and personally.

Attached to this post, by way of a link to a 12 page, downloadable report, is a projection from Guggenheim that says we’ll experience a recession roughly 24 months from now.

Whether they are right or wrong, the next one is somewhere on the horizon. Knowing in advance when it might happen will help manage the financial resources you have that pay for your retirement.

Just don’t confuse the timing of a recession with the timing of market corrections of 10% or more. While there is some correlation, it is far from 100%. Also keep in mind the stock markets price things based on what people THINK will happen, not what actually does happen.

Here’s the link to download a copy of the report: Forecasting the Next Recession.

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The Perfect Storm (Of The Coming Market Crisis)

My Comments: We do not live in a perfect world. Flaws are all around us. As responsible adults, we always try to make good decisions, and mostly we succeed. Until we don’t.

If you expect to live another 20 or 30 years, the money you’ll need to pay your bills has to come from somewhere. If you’ve already turned off the ‘work for money’ switch and retired, you’re dependent on work credits and saved resources. Maybe you have a pension that sends you money every month. Good for you.

If you are still working, you’re probably setting aside some of what you earn so you can someday retire and get on with the rest of your life without financial stress. At least that should be your plan.

This article from Lance Roberts, a professional money manager, needs to be read and understood. I’m not going to copy everything he says, but I do encourage you to follow the link I’ve put below. Make an effort to understand what he’s telling us. Your financial life may depend on it.

Know also there are ways to shift the risk of loss to a third party. For a fee, you get to enjoy the upside and avoid the downside. If you do live for another 20 – 30 years, where is your money going to come from?

Lance Roberts published this today, November 28th, and it can be found HERE.

A Stock Market Crash In 2018?

My Comments: Last Monday, I posted comments from three people who said with conviction there was no reason to expect a market correction any time soon.

Today I have someone with no discernable name who says, also with conviction, that we’ll have one next year.

Here’s my take on this: if you are 60 years old or more, prepare for a correction. If you are less than 60 years of age, ignore all this, put your money to work and don’t worry about it.

Now, do you feel better?

November 7, 2017 from GoldSilverWorlds.com

The U.S. stock market is in amazing shape. Every day new all-time highs are set. This must be bullish, and investors should go all-in, right? Well, not that fast, at least not in our opinion. We see many signs that this rally is getting overextended, from an historical perspective. While we clearly said a year ago that we were bullish for this year, we did not see any stock market crash coming (a year ago). Right now, we are now on record with a forecast of a stock market crash in 2018, and it could take place as early as the first weeks / months of 2018.

So far, in all openness and transparency, our warning signals for a mini-stock market crash in November were invalidated. We were horribly wrong in terms of timing. However, we still believe there is a huge risk brewing for a mini-crash. The stronger the current rally, the stronger the fallback.

Yes, we do expect a strong mini-crash in the stock market in 2018, starting early 2018. Central banks will likely step in to avoid a similar chaos as in 2008/2009, so we don’t forecast the end of the financial system.

We do, however, believe a very stiff correction will take place, which potentially could bring a buying opportunity (to be confirmed at that point in time based on intermarket dynamics). More likely, however, we believe that money will rotate out of U.S. stocks into emerging markets. That is why we are very bullish emerging markets in 2018.

The first warning signs of a stock market crash

We published the following warning signs starting in August:
• Is Volatility Making A Higher Low Here?
• Volatility On The Rise As Expected. What’s Next For Stocks?
• Ignore This Series Of Volatility Warning Signs At Your Own Peril
• Volatility Hit Historic Lows This Week. Maximum Complacency Is Bearish!

But the number of concerning indicators is accumulating now. Yes, it may sound as foolish as it can be that right during a strong bull market rally InvestingHaven’s research team talks about concerning indicators. But let’s first deep-dive before you come to a conclusion.

The Dow Jones Industrials chart is one of those concerning charts. The area indicated with “0” shows that the index has risen with more than 30% in 12 months without any meaningful correction. This rally may be amazing, but it is reaching a level never seen before in the past 12 years (including the 2007 rally and major top). All other instances of a 30% rise in 12 months are indicated on this chart (from 1 till 5):
• The 2013 rally (“5”) was as powerful as the current one, but resulted in a mini-crash just 3 months later.
• All other rallies (“1” till “4”) resulted in a strong correction or mini-crash within or right after the 12-month rally.

The current U.S. stock market sentiment shows extreme greed, according to the CNN Money fear & greed index.

In the past 3 years, the Fear & Greed index reached similar levels of bullishness only twice. This bull run is overextended on the short-term time frame for sure.

The stock market breadth, an indicator of strength of market internals, is suggesting that this rally is driven by a minority of stocks. As the broad indexes move higher, there are fewer stocks participating in the rally. Not a good sign.

4 charts suggesting a stock market crash in 2018 based on historical data

Let’s put the current stock bull market in historical context. As the charts speak for themselves, we believe they suggest a stock market crash is brewing, and it could start as early as the first days or weeks of 2018.
The first chart shows the strongest bull markets in the last 80 years. Visibly, the current bull market, which started in 2009, is now close to being the strongest ever. The current strong rally, which comes after an 8-year bull run, is a concerning factor, according to us.

Note from TK: To see these four charts and read the short accompanying text, GO HERE:

How this Bull Market Will End

My Comments: Once again, our assumptions about the future of the current bull market are challenged. I want these writers to be right, and that too is a challenge for me. I share it with you here in hopes it gives you a better idea about what to do with your money.

By Krishna Memani, Brian Levitt & Drew Thornton | August 15, 2017

This secular bull market—the least loved in memory—is now more than 100 months old, and up by 265% from its bottom on March 9, 2009. It is also the second longest bull market on record (after the 1990s’ dot-com boom) and fourth largest in terms of market advance.

For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing:

• Global growth is sufficiently modest. The “accidental” synchronized global expansion (so-called accidental because it was more of a coincidence than a coordinated effort by global policymakers) is already fading, but slowing growth in the United States and China does not foretell a crisis.

• The United States, nine years into this market cycle, has not exhibited the excesses that are indicative of typical economic downturns.

• For its part, China’s high leverage poses a threat to its financial stability, but government actions are likely to be gradual to ensure a phased pace of deleveraging while maintaining growth stability.

• We believe that low inflation globally will provide cover for policymakers to be more accommodative than many expect.

We are optimistic that this cycle will ultimately be the longest on record, though we do not believe our view is Pollyannaish. We will continue looking out for telltale signs indicating the end of the current cycle, even as we believe that none of them are forthcoming:

1. U.S. and/or European inflation increases more rapidly: If inflation picks up meaningfully in the developed world and tighter policy commences, then the cycle will likely be curtailed.

2. High-yield credit spreads widen: The bond market is usually a good indicator of the end of a cycle. Cycles end with the yield curve inverting and high-yield credit spreads blowing out. An equity market sell-off typically follows soon thereafter.

3. The 10-Year U.S. Treasury rate falls and the yield curve flattens: The 10-Year Treasury rate will reflect the real growth and inflation expectations of bond market participants. A flattening yield curve driven by the decline of long-term rates would be an ominous sign for the U.S. and global economy.

4. The U.S. dollar strengthens versus emerging market currencies: A flight of capital from emerging markets to the United States would slow growth among the former—which are major drivers of economic activity—and potentially cause another earnings recession for U.S. multinational companies.

Note: There is a white paper published by Oppenheimer Funds with 18 charts in support of the authors argument that the current bull market will not end soon. You can find it HERE.

One Of The Most Overbought Markets In History

My Comments: As someone with presumed knowledge about investing money, my record over these past 24 months has been pathetic. I’ve been defensive, expecting the markets to experience a significant correction “soon”…

I lived through the crash of 1987, the crash in 2000, and then the Great Recession crash in 2008-09. I saw first hand the pain and chaos from seeing one’s hard earned financial reserves decimated almost overnight.

Only the crash hasn’t happened. But every month there are new signals that one is imminent. And still it doesn’t happen.

I’ll leave it to you to decide if what Mr. Bilello says makes any sense. I’m not sure it does.

by Charlie Bilello, October 22, 2017

The Dow is trading at one of its most overbought levels in history. At 87.61, its 14-day RSI is higher than 99.999% of historical readings going back to 1900.

(Note: Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings, and centerline crossovers. RSI can also be used to identify the general trend. TK)

Sell everything?

If only it were that simple. Going back to 1900, the evidence suggests that such extreme overbought conditions (>99th percentile) are actually bullish in the near term, on average.

Come again? In the year following extreme overbought readings, the Dow has actually been higher roughly 70% of the time with an average price return of 14.2%. From 5 days forward through 1-year forward, the average returns and odds of positive returns are higher than any random day. While the 3-year and 5-year forward returns are below average, they are still positive.

Does that mean we’ll continue higher today? No, these are just probabilities, and 30% of the time the Dow is lower looking ahead one year.

What it does mean is that one cannot predict a market decline based solely on extreme overbought conditions. Declines can happen at any point in time and “overbought” is neither a predictor nor a precondition of a bear market to come.

If one is going to predict anything based on extreme overbought conditions (and I would advise against doing so), it would be further gains. I realize that doesn’t conform to the conventional narrative of “overbought = bearish,” but the truth in markets rarely does.

The Middle-Class Squeeze Isn’t Made Up

My Comments: Are you a middle-class American? I used to be and may still be, but those like me are a dying breed. The economic devastation now engulfing a huge portion of Texas is going to reverbrate across the nation. Apart from the humanitarian crisis, it will add to the unseen crisis affecting middle class America.

Economic inequality led to the downfall of the Democratic Party last November. It’s manifest by the lower economic expectations of those who live in rural America, by those whose education is no longer enough to get ahead, and still pervasive social discrimination against those not white enough. To Trumps credit, he saw the problem and built a movement, even if he is likely to waste the opportunity.

Like many ‘economic’ essays, this may be hard for you to get through. But to the extent you want to preserve the underlying goodness of this nation, and protect yourself along the way, you would benefit from a better understanding of the problem.

By Barry Ritholtz / Feb 15, 2017

Benjamin Disraeli is reputed to have said “There are three type of lies: lies, damn lies and statistics.”

Today let’s address the third component of Disraeli’s formulation in the context of a recent National Review article with the headline, “The Myth of the Stagnating Middle Class.” The article observes that “more Americans have easier lives today than in years past.”

To regular readers, this is a variant of the assertion that “common folk live better today than royalty did in earlier times,” a claim we debunked two years ago. The current argument is more nuanced in that it: a) relies on a few statistical twists; b) contains statements that are true but don’t support the main claim; and c) is an argument against Donald Trump’s populism from the political right. It all has the general appearance of plausibility until you start digging.

This is where we come in.

Let’s begin with the claim that more Americans have easier lives today than in years past. This is true and almost always has been. Progress is humanity’s default setting ever since our ancestors climbed down from the trees and began walking upright on the African savanna.

Thus, it should come as no surprise that the standard of living for all Americans has been rising for many years, mainly because of technological advances. However, the main issue under discussion is actually about how the economic benefits of the U.S. economy get apportioned across the populace.

In other words, how the wealth is distributed. The National Review engages in a statistical sleight of hand that distracts from this.

For further insight I spoke with Salil Mehta, who teaches at Columbia and Georgetown, and is perhaps best known for his role as the top numbers-cruncher in the federal government’s $700 billion TARP bank bailout plan in the financial crisis.

Mehta made short work of the article:
The article is a peculiar mixture of motivating facts and fantasy logic, which is what makes cherry-picking statistics unsafe for policy conversation. The main issue with the piece is that that it continuously mixes and matches data to fit a fated narrative.

Mehta further observed that the National Review argument included in some cases various classes of Americans (such as minorities and immigrants), while excluding them at other times in statistics. This kind of data cherry-picking is always a red flag.

Consider for a moment how the Pew Research Center did its big research report, “The American Middle Class Is Losing Ground”: The report, which actually figures in the National Review article, analyzed the Current Population Survey from 1971 to 2015. It used data drawn from the Bureau of Labor Statistics, which has well-established standards for managing data and making empirical comparisons.

Maybe it’s best to make the point with two of the more telling charts in the report. Here’s the first one, showing that income growth for the middle class has trailed that of the upper class:

The second chart (below) shows that the wealth gap between the upper and middle classes also widened significantly (even after the losses from the financial crisis):

Best practice in these circumstances is to go to the original data source, cite it and analyze it in a way that is consistent, regardless of whether the outcome supports your conclusion.

As I’ve said before, there are many reasons to dislike this economic recovery: it has been lumpy and unevenly distributed by geography, by industry and by level of educational attainment. Much of that has harmed people who were once considered middle class. Add to this the decades-long impact of automation, globalization and the decline in labor’s bargaining power, and it adds up to economic stagnation for the middle class.

But wage and wealth stagnation alone don’t account for the full measure of middle-class angst. Inflation and its components also play a part. Prices for things we want have been deflating, while the cost of things we need have been going up. Mobile phones, computers and flat-panel TV are better and dollar-for-dollar cheaper than ever. The same is true for cars, which in a few years will likely be self-driving.

But those are mostly wants. When it comes to needs, it’s a different story. Housing, even after the 2008-09 crack-up, is expensive. Rentals have gone straight up as home ownership has fallen. The costs of education have skyrocketed and show no signs of slowing. Medical and health-insurance costs are among the fastest-rising of all consumer expenses.

The National Review article concludes by saying, “Government can’t fix that problem, because that problem doesn’t really exist.”

Wishing that a problem doesn’t exist doesn’t make it vanish. But it does offer some insight into why the Republican Party was blindsided by the rise of Donald Trump and his populist appeal. It isn’t that the party elite was myopic, but that it actively fabricated a bubble into which no contrary information was allowed entry. The troubling thing is that the GOP is still at it.

Middle-class anxiety has been building for more than a decade and it mixed in the last election with a general sense of frustration with America’s leadership class. No wonder the middle class feels squeezed — because it is.

U.S. Stock Valuations haven’t been this Extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”