by phil - December 1st, 2015 8:31 am
Global Debt is up $147Tn in 20 years. That's $7Tn a year or about 10% of our Global Economy has been debt-driven. Meanwhile, the Global GDP grew $50Tn over the same 20 years, which is $2.5Tn per year or 5% so, in simple terms, our debt is growing twice as fast as our economy.
This is why there is a global push for 0% interest rates – 1% of $225Tn is $2.5Tn – that's 100% of our growth getting sucked up by interest payments. 2% would chop $2.5Tn off the growth, 3% rates would pull $5Tn out of the Global Economy, 4% $7.5Tn (10%), 5% $10Tn, 6% $12.5Tn… I know you can do the math but have you really thought about these numbers?
How can we ever go back to "normal" interest rates when just 3% would devastate the Global Economy? Just take a look at the energy patch, where the EIA is showing that US onshore oil producers' debt service is already taking up 85% of the cash flow – even at these incredibly low rates:
This is much worse than last December (70%) and December is the month in which lenders are to reassess E&P companies’ loans conditions based on their assets value in relation to the incurred debt. Also, oil was $100 a barrel in mid-2014, so the oil companies WERE still swimming with cash at the end of last year – not so much this year – especially for those who squandered it on buybacks or weak M&A deals.
How long will this charade continue? Actually, it can go on for quite a while as long as the Fed, the ECB, BOJ, BOE, PBOC, etc. are all willing to keep playing. The ECB meets Thursday and it's widely anticipated they will double down on even lower rates and even more Quantitative Easing, which will then open the door for another round of Global easing and rate reductions – game not over by a long shot.
by phil - November 30th, 2015 7:37 am
Those are the odds that Draghi will provide more stimulus in Europe this Thursday based on the recent speeches he's been making. That means, most likely, that it will be a "sell on the news" even at the rumor has already been bought – sending the DAX up 500 points (5%) in 5 days.
The ECB Deposit Rate has already been at -0.1% since June and is expected to go down to -0.3-0.4%, which is an actual penalty for banks who wish to store their cash with the ECB, rather than lending it out to the Private Sector. While this will, of course, be a boost for the Private Sector, keep in mind that the banks who have looked at their books and analyzed their prospects have to be FORCED to lend these businesses money.
As with many of our economic "solutions" since the 2008 crisis – this one simply masks one problem (businesses are not worth lending to) with another (forcing banks to make bad loans again) and now we can stagger forward for another few years until our banks need bailing out because they have too many bad loans – again.
The evidence from the eurozone, Switzerland and Scandinavia is mixed. The worst-case scenarios of cash-hoarding and broad-based asset bubbles, due to plowing money into investments such as real estate, haven’t materialized. But despite the negative rates, Switzerland’s central bank, which sees the franc’s exchange rate against the euro as key, still has a stronger currency than it would like. In the ECB’s case, any transmission to private-sector lending has been modest at best.
Still, ECB officials are convinced that negative rates and large-scale asset purchases are a powerful combo to boost activity and prices by increasing the incentive to lend to households and businesses rather than accepting tiny or negative returns on government bonds or deposits at the central bank.
Meanwhile, let's pretend the real economy matters and talk about Black Friday, Cyber Monday and the Holiday Shopping Outlook – just for fun!
by phil - November 27th, 2015 8:34 am
What an interesting year it has been.
On the whole, the markets have gone nowhere and it's up to December to either make or break a positive close for 2015. As you can see from Dave Fry's S&P 500 Chart, we had a big "W" pattern that seems to be leading into an "M" pattern that, on the whole will drag us back down to about 2,000 at some point.
That point, however, plus or minus 2 weeks, will make or break the markets in 2016. Brokers need to have a good finish to 2015 or their brochures for 2016 investing won't look attractive enough to get customers to pull their cash off the sidelines – especially in a rising rate environment. At the moment it's "sure bonds were only good for 3% last year but stocks were down" – that's NOT a good way to get baby boomers to cash in their bonds and open a new trading account, is it?
And Americans are saving. After all – it's a Recession. Just because the Government doesn't want to call it a recession and the Corporate Media isn't even allowed to say the word – it doesn't mean it isn't happening and the consumer spending data clearly indicates recessionary behavior has certainly taken hold.
Very sadly, looking at this BLS chart of Consumer Spending, the average family spends more after-tax money than they earn and that really doesn't leave a lot of growth for economic expansion in a country where nearly 70% of our GDP is consumer spending. Savings is not even a category on this chart – for goodness sakes!
As we know, less money has gone to gasoline this year and it was hoped that the savings would flow to other spending but that has not been the case as the average 48 year-old consumer is, of course, a little concerned with all this campaign talk about cutting the Social Security checks they expect to begin collecting in 17 years.
by phil - November 25th, 2015 8:30 am
What do we have to be thankful for?
We should be very thankful that even a horrific terror attack on a major Western city becomes yet another reason to rally the markets. Oil prices shot up 5% yesterday but we rallied just as hard as we do when they fall – one is good for XOM, CVX and others and the other is good for consumers, whose confidence fell 10% between October and November and that was BEFORE the terrorist attacks we are not at all worried about.
Sure, what do consumers know? Their spending barely makes up 70% of our GDP so why pay attention to their mood when there are stocks to buy, right? Economic Confidence is also fading fast and confirms the poor consumer numbers but hey – we're only 50% lower than we were last December – I'm sure we'll be fine if we just ignore it…
Norway's Consumer Confidence is also fun to ignore:
Investors probably don't know anything either so we can also ignore State Street's Investor Confidence Index as it re-tests the year's lows.
See – isn't it fun to ignore things! Even Europe is ignoring things as their markets are fully recovering from yesterday's drop this morning. How silly of us to think that any market sell-off would be allowed to stand!
Clearly our leaders are too TERRIFIED to let the markets even have a normal correction for fear that we all melt-down like China, which has been struggling since October to get it's act together (we're short FXI at $41):
Nobel Prize-Winning Economist, Joe Stiglitz has agreed with my premise (see Friday's post) that Mario Draghi is full of crap and that his is merely "papering over the cracks that are caused by the faulty design of the currency bloc." According to Stiglitz (and myself), Draghi's assurances that he will do "whatever it takes" to boost the Euro-Zone's economy simply distracted…
by phil - November 24th, 2015 8:12 am
You can't draw any conclusions from these low-volume trading days but, in general, stocks have been in retreat and this morning the news of Turkey shooting down a Russian jet fighter did not help the mood one bit as European markets dove 1.5% and our Futures followed down half a point (so far).
I already sent out a News Alert to our Members and, if you follow us on Twitter, you already saw it – so I won't go over all the details and possible repercussions again. Needless to say World War III would be kind of a bummer so let's hope things don't escalate. Fortunately, Vladimir Putin is well known for his diplomatic restraint.
The US State Department has already issued a Global Travel Alert that's likely to put a damper on holiday cheer this year. Paris is already seeing a slump as airline bookings into the city are down 13% – enough to put a serious dent in the travel industry's bottom line. I was in NYC this weekend and my children got to see heavily armed police hanging out in Times Square and it was way too easy to get stand-by show tickets on Sunday (but we knew it would be, that's why we decided to go). Buffett's admonition to "be greedy when others are fearful" applies to more than just stocks…
Brussells has become a complete ghost town as the Government there is hunting for terrorists in the capital – not even the subways are running as the ECB must be protected at all costs, of course. It is in this environment, amazingly, that I have gotten tons of messages and comments in the past week telling me I'm too bearish and the markets will fly on the biggest Santa Claus Rally of all time. It really does scare me that so many investors believe in Santa Claus, not to mention the Fed.
I'm tired of explaining why I'm more comfortable being in CASH!!! into the end of 2015 but David Stockman isn't, so you can hear his interview where he makes the case that the Fed is very…
by phil - November 23rd, 2015 8:25 am
We have, essentially, a 3-day week this week and don't expect people to stick around on Wednesday either and Friday being a half-day is a joke as it's dead as a doornail on Thanksgiving Fridays. Overall trading with be thin, which means all market action should be taken with a grain of salt and, unfortunately, we get revised GDP tomorrow morning – which is very important.
Our initial estimate of Q3 GDP was 1.5% and most Economorons think it will be revised up to 2% and why not – if GDP is so inexact that it can move up or down 33% in less than a month – what's the difference what number they paint into a holiday weekend? It's Personal Income and Outlays that really matter on Wednesday – as that's a precursor to Christmas Shopping Season. Durable Goods (also Weds) were a disaster in September (-1.2%) so hard to be worse in October but run away if they are.
In faraway lands we'll also get Eurozone PMI Reports, which are looking up so far but enjoy it while you can as tomorrow we get Germany's GDP, which may make ours look good. The rest of the Eurozone reports their GDP Thursday and Friday – so that will be worth at least checking in for on Friday morning – especially if you are a Futures player looking for some fun!
Meanwhile, oil Futures look like this, so you'd have to be a maniac to play. We played on Friday, of course and our long plays on oil (/CL) and gasoline (/RB) each made over $1,000 per contract for our morning readers (you're welcome). For those who could not play the Futures, we also had a long play on UGA options that popped 44% on the day (and will be cheap again this morning) so again, it's not like we have to be heavily invested to make money every day – we can make a fortune with these quick in and out plays – over and over again.
Getting back to cash allows us to enjoy our Thanksgiving trips without worrying about what the market is doing while we're on a plane. As noted in our October…
by phil - November 23rd, 2015 6:13 am
One Million Dollars!
That's up 66% on our main, paired portflios as we approach our 2-year anniversary. 66% is our 3-year goal for the Long-Term and Short-Term Portfolio strategy so of course we decided to lock in our gains after having a rough ride in September, when the LTP balance fell as low as +26% on September's dip to S&P 1,870. That led us, in our last review, to add another $50,000 worth of downside protection in the STP and it worked perfectly, as the October dip barely touched us.
Well, not PERFECTLY, our net balance on the Long and Short-Term portfolios has dropped from $1,020,881.30 to $1,002,144.60 – down $18,736.70 (1.8%) for the month. As I noted in our Chat Room, we did add ABX, ARO, BHI, BRCM, COH, IRBT, RIG, UNG and YHOO trades since our last review so we're hardly sitting on our hands – just playing the market cautiously in the final quarter since we're so far ahead in the game.
Unfortunately, like all prevent defenses, you end up giving back a little ground in the interest of preserving the greater victory. Of course, that doesn't stop us from having plenty of other trade ideas – they just weren't added to our tracking portflios yet.
AAPL, for instance was featured as it dropped back below $115 and IBM was officially announced as our trade of the year as it plunged to $130 and it's already begun to recover. At our Butterfly Portfolio Seminar in Washington last week, we went over 20 stocks we'll be watching in 2016 but mostly AFTER we get through the holidays intact!
It can be hard to sit on the sidelines in cash – especially when we've had such fun increasing our cash piles all year long. However, as I mentioned above, we had a $115,000 swing in the LTP in Sept and, despite making some offsetting gains in the STP to compensate – that was a little more variation than I was comfortable with. We did, in fact, go on a buying spree at the Aug dip…
by phil - November 20th, 2015 8:55 am
I know – where's Mali? Who cares? Apparently, not too many of you do because the Futures have gained 0.5% since this happened early this morning, so let's just keep going and invest as if nothing bad is ever going to happen.
Today's market cheerleader was former Goldman Sachs Director, Mario Draghi, who said the ECB is prepared to deploy its full range of stimulus measures to fight low inflation, indicating that the Central Bank will apply additional easy money policies at its next meeting in December.
That sent the Euro down half a point and, so far, the Dollar is up 0.5% to match, which is pushing oil back down to $40 (the Dec contract, on it's last day) and giving us a nice buying opportunity into the weekend on both /CLF6 (the Jan contract, now $41.50) and /RBF6 (Jan Gasoline, now $1.275) into next week's holiday. For the Futures impaired – the Gasoline ETF (UGA) should be at $28.75 and that should put the Dec $29 calls under $1 – a fun way to pay for a tank of gas for next week's visit to Grandma's.
Keep in mind that Draghi is a guy who thinks Bankers should run the World, the quote in this picture comes from his actual interview in Der Spiegel in 2012 and, since then, he's simply moving his agenda forward, in a subtle(ish), diplomatic fashion:
"It is not that we want to replace the national supervisory authorities; on the contrary, we want to work closely with them. However, they need to be independent of their governments in their assessment of the problems. In the past, problems in the banking sector have been hushed up time and again.
"I am not going to mention any names. However, I am certain that we will be able to act more independently and quickly if Frankfurt is at the heart of the decision-making."
On our side of the pond, the NY Fed's Bill Dudley (former Goldman Chief Economist) was heard saying, in his opening remarks at a regulation conference: "If we begin to raise interest rates, that’s a good thing. That’s…
by phil - November 19th, 2015 8:44 am
Gobbledygook, I say! What other word could describe the 4 paragraphs of economic nonsense that led off yesterday's Fed minutes (highlighted text here) which said (and I sadly quote): "A number of participants indicated that they expected short-run r* to rise as the economic expansion continued, but probably only gradually. Moreover, it was noted that the longer-run downward trend in real interest rates suggested that short-run r* would likely remain below levels that were normal during previous business cycle expansions, and that the longer-run normal level to which the nominal federal funds rate might be expected to converge in the absence of further shocks to the economy…" It just goes on and on like that.
"r*" is, of course, the "neutral" or "natural" real interest rate. Well, I say "of course" because the Fed made it up and now that's what it is and soon you'll hear all sorts of blowhards on TV pontificating on what r* is at the moment – it's our new distracting talking point! The Nattering Naybob summed it up quite nicely in our Live Member Chat Room, saying:
As for their inept discussion of R, as in rates: The pace of economic activity has slowed due to inappropriate monetary policy. A lack of thin-air or ex nihilo credit growth in the NB's and CB's is a symptom, not a cause. Ceteris Paribus, the cost or price of money is represented by various price indices. Interest is NOT the cost of money, it is the cost of loan funds. Supply and demand for loan funds determines interest rates and bond prices. Demand at zero bound is present, it is SUPPLY due to NIM compression and former lending institution disintermediation that is NOT forthcoming. The 300 Phd's on staff at the Fed, who spoon feed the appointed idiots from Goldman Sachs banksters that are running it, and who have never predicted a recession in advance, don't know money from mud, much less their ass from a hole in the ground.
by phil - November 18th, 2015 8:37 am
Woah, we're half way there – Woah, living on a prayer.
We're waiting on the Fed minutes today (2pm) and, hopefully, more indications that bad news is good news and yesterday's -0.2% Industrial Production and falling Housing Index and weak CPI and poor Redbook Sales were actually good news because the Fed will or won't tighten or whatever the narrative is at the moment – who even cares anymore, it's almost Christmas!
So far, this "rally" of the last few days has erased 30 points of the 90-point drop from S&P 2,010 back to 2,020 and now 2,050 again. Those of you who follow our fabulous 5% Rule™ know that, when we have a 90-point dip we expect at least a weak 18-point bounce (2,038) and a strong 36-point bounce (2,056) before we even begin to consider making bullish bets again. PS – the bounce needs to hold for 2 closes so we are, indeed, not even halfway there.
But we are, in fact, living on a prayer in the hopes that St. Janet and the Immaculate Fed will… oops, what is it we want them to do now? Seriously, I have lost track of the narrative as now we are, for some reason, rallying into the tightening or is it that the recent data is so bad that the Fed would not dare tighten at their next meeting (12/16) – just 7 shopping days before Christmas?
Seriously, I pay more attention to this stuff than pretty much anyone on the planet and I can tell you with absolute certainty that I have no idea what it is traders are now looking for. There is nothing but confusion in the marketplace – which is why we moved to the sidelines.
And we're not alone, by the way. Since we went to mainly cash back in July (the S&Ps previous trip to 2,100), Institutional Investors have been flying out of the market and hedge funds have been lightening up as well. Of course, some of them are our Premium Members over at PSW but we can't be responsible for ALL of the cashing out in the market, can we? No, I…