Six years making back losses. Now what’s the plan?!

If you haven’t seen this excellent Frontline report (originally released in April 2013), there was an encore presentation of it this week. Critical issues for financial market participants to comprehend.

Retirement is big business in America, but is the system costing workers and retirees more than what they’re getting in return, asks FRONTLINE correspondent Martin Smith. Here is a direct video link.

And now that the Canadian market has this month finally reclaimed its bubble peak from June 2008–and the few who were able to hang on through 50%+ losses, have now spent 6 long years making back their losses–the question to ask all those confident financial advisers today is, “ok, so what’s the plan to avoid repeating that painful cycle all over again?” Remember we are all 6 years older now, 6 years less time to waste in a journey to financial security.
TSX 2005 to 2014

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Bob Shiller floats his ‘Titanic theory’ for why “Everything is pricey”

Robert Shiller, Yale University professor of economics, explains his “Titianic” economic theory for why the stock, bond and housing markets all look pricey today. Here is a direct video link.

He points out that historically “there are always special factors” to argue why ‘this time is different’ and price to earnings ratios should remain permanently higher than their 144 year average. (Until they mean revert way below average once more of course)

“Stocks, bonds, real estate. How can it be that everything is expensive?” QE-seats on the Titanic everyone? Your friendly broker/dealer/financial advisers are all just itching to help you pick your seat. Step on up! Maybe you can enjoy the ride a little longer before all the passengers plunge below the waves. PE in blue below, interest rates in grey.

Shiller CAPE since 1870

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More on the ties that continue to purchase politicial favour for bankers

Nomi Prins talked about her book, All the Presidents’ Bankers: The Hidden Alliances that Drive American Power, in which she explores the multi-generational marital and protégé relationships in the financial and political worlds that she argues are the basis of power and influence in the U.S. She spoke with “In Bed with Wall Street” author and blogger Larry Doyle.  Here is a direct video link.

The rest of us and our democracy itself, continue to pay a heavy cost for revering bankers and allowing them to operate above the Rule of Law.

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The grotesque bubble in US education costs

Suckled on the public purse through a decade of excessive government-backed student loans, education costs in America have formed a grotesque bubble. When your customers no longer have the means to purchase your service, fresh more affordable business models and solutions take over.

The cost of higher education has jumped more than 13-fold in records dating to 1978, illustrating bloated tuition costs even as enrollment slows and graduates struggle to land jobs.

The CHART OF THE DAY shows that tuition expenses have ballooned 1,225 percent in the 36-year period, compared with a 634 percent rise in medical costs and a 279 percent increase in the consumer price index.

…“Some schools are effectively limiting cost increases by bigger tuition discounting, but on the whole college presidents have not adjusted to a fundamental shift in attitudes toward the value of a high-cost education,” said Richard Vedder, director of the Center for College Affordability and Productivity in Washington. “Colleges are too slow to reinvent themselves,” particularly as enrollments are waning…”  See: College Tuition costs soar

Education cost inflation since 1978

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A crash course in how speculative markets break

As the most reckless players are today taking “genius” laps on the back of stock prices which have once more reclaimed the rare distinction of being the most most leveraged and over-valued in history next to 1929 and 2000, it is helpful to consider a little reminder on how speculative markets break: suddenly and all at once. Even the few participants today that feel confident that they have downside protection by using stop loss limits are likely to learn that once prices gap down, stops are often impotent.

This chart of the NASDAQ in its blow off top from October 1999 to March 2000, shows the incredible ramp and then rapid plunge that evaporated 60% of the prior ‘gains’ in 2 weeks (red box).
Nasdaq 1999

“…it is the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect the simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.”  –John Kenneth Galbraith, (1954) The Great Crash 1929

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Worthwhile video: Humans need not apply

Interesting reminder on some of the impacts of automated help. Here is a direct video link.

Time to watch The Matrix again… For me the broader question is always about health.  If humans no longer need to leave their house or physically exert themselves for their existence, how do we keep our bodies healthy enough to enjoy life?

Discussing these ideas with some friends on the weekend, I began to think that perhaps in a virtual world, where people do not need to actually eat a Big Mac, or drink alcohol or smoke a cigarette to feel like they are experiencing these things, perhaps our bodies will also benefit from not suffering the toxic impacts of ingesting.   Less clear to me is how inactive people are then to maintain their muscles and vascular systems.  Maybe we will become uploaded to a virtual conscience and out of a physical body altogether?

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More on the full circle of the business and investment cycle

Basic rule to manage life by: no one gets it all their way all of the time. Especially true in business and financial matters.

The commodity exporters that benefited the most from the global credit boom: Australia, Brazil, Canada, Russia, will now feel the downside of that boom more than most. Credit brings forward future demand and spends it in the present, leaving less demand for the future: hence the saying, “comes full circle”. Wise managers save a large portion of the excess capital generated in the boom in order to supplement the slower growth phase that comes thereafter. Unfortunately, most people–and certainly most governments and financial sales folks–are not wise. The preferred strategy is to pretend that the gains from boom can all be banked without any give back period…and that record earnings can only get better. Those who are the least wise and the most risk-exposed the past couple of years, have been looking the brightest. This too shall come full circle.

Here is a direct video link.

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Burbank on the crash risk of illiquid, over-valued markets

Passport Capital Founder and Chief Investing Officer John Burbank discusses his outlook for the markets and his investemnt ideas. Here is a direct video link.

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Taleb and Kahneman, talking fast and slow

A little Friday fun…

Nassim Taleb and Daniel Kahneman discuss Anti-fragility at the New York Public Library on Feb 5, 2013. Here is a direct video link.

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Low yields move lower as slow growth gets slower

Global growth data this week has been disappointing for the bulls. Geo-political strife is only weakening prospects all the more. The US 10-year yield has today officially given up the ghost on the 2.40 level it broke above in the ‘tapper tantrum’ of May 2013…2.20 is the next downside test.
10 year Aug 15 2014

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The complex range of self-determination

Revelation this week that Robin Williams was suffering from early onset Parkinson’s disease and that this may have played a role in his decision to take his own life. For me this adds to an ongoing preoccupation with the complexity of suicide and euthanasia in all of its impacts and interpretations from tragic despair and cry for help to, in some cases, a considered choice for self-determination.

At the same time, this biographical documentary on Stephen Hawking’s remarkable life offers a look at one man’s fight to exist and continue working in the face of unimaginable physical adversity.

Hawking is the extraordinary story of the planet’s most famous living scientist, told for the first time in his own words and by those closest to him. Made with unique access to Hawking’s private life, this is an intimate and moving journey into Stephen’s world, both past and present. An inspirational portrait of an iconic figure, Hawking relates his incredible personal journey from boyhood under-achiever, to PhD genius, to being diagnosed with Motor Neuron Disease and given just two years to live. Despite the constant threat of death, Hawking manages to make many remarkable scientific discoveries and rises to fame and super-stardom. Hawking – a remarkable man, and a remarkable movie. Here is a direct video link.

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‘Super-aged’ societies slowing global growth

Even without all the debt hangover and excess capacity left from the credit bubble, the global economy was already slowing on demographics. Just another reason why bulls are over-estimating growth trends over the next few years.

‘Super-aged’ societies are coming and they are going to drag down economic growth.

According to research done by analysts at credit ratings agency Moody’s we need to start worrying about aging populations.

They have calculated there is going to be a dramatic increase in the number of “super-aged” countries – that is where more than one in five of the population is 65 or older.

Currently there are just three – Germany, Italy and Japan.

But by 2030 there will 34 such countries, with fewer workers to support the cost of retirees and less investment because saving rates will decline.

Between 2015 and 2030 growth in the number of people of working age is set to be only a little over half the growth seen during the previous 15 years.”   Here is a direct link to a video report.

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2007-2009 bear modest in historical context

Good historical perspective today from Eric Parnell as he dispels the notion that the bear market of 2009 was an unusual, once in a lifetime occurrence, not likely to be repeated.  Au contraire, in fact the loss cycle of 2007-2009 was actually modest in the context of previous secular bear declines.

See: A crisis less extraordinary and the following great charts, plotting the 2008 decline and duration against other secular bear declines in 2000, the 1970′s, 30′s and 20′s:

2008 vs 20002008 vs 1970s

2009 vs 19422008 vs 1929

“…the only thing that has been truly extraordinary this time around has been the policy response. And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

…investors should not be lulled into complacency with the thought that the financial crisis was a once in a lifetime event that is not doomed to repeat anytime soon. For in reality, the bear market associated with the financial crisis was not only comparable at worst from a returns perspective, but it lasted only a fraction of the time that other major bear market investors had to endure.

What raises the stakes even further in the current environment is that nearly all of the policy bullets to protect against a weakening economy and sharply correcting stock markets have already been deployed even before the next bear gets started. For unlike in March 2009 when the Fed and other global central banks had the luxury of cranking up the printing presses to flood the financial system with liquidity, such is not at all likely to be the outcome the next time around, as the market may be left to sort things out on its own. This, of course, would not necessarily be a bad thing, as this is how the market cleansing process can finally play itself out in bringing us to the dawn of the next great secular bull market. But investors that are fully allocated in advance of any such day of reckoning stand the risk of sustaining meaningful losses that may not be so easily recovered the next time around.”

Indeed I would argue that the unusually quick rebound in asset prices since 2009 has been counter-productive in several key ways. First, because it has served to quickly re-establish present conditions among the top three most over-valued and dangerous environments for capital since 1929 and 2000. Second, because it has bred extreme moral hazard and over-confidence among participants, reminiscent of the ‘near-miss’ psychological phenomenon described by Malcolm Gladwell where those who were nearly wiped out in the financial crisis, but then revived on central bank bailouts, have now become less fearless and more brazen in their risk-taking. Stay-tuned, this story is not yet finished…

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Reality getting the best of central bankers

We know that the US economy ‘officially’ contracted at an annual rate of 2.1% in Q1 before rebounding on inventory build(restocking not sales) in Q2.

We also now have official confirmation that as of Q2, Italy is back in recession, the Japanese and German economies contracted and France was stagnant with zero growth.

Portugal’s price index slumped 0.7% in July. Spain saw the steepest slide in consumer prices in five years.  See stagnation in the Eurozone here.  Brazil is struggling too, with revised 2014 consensus forecasts recently down to 1.44% versus the 3% forecast last summer.

In the first half of 2014, Russia’s growth slumped to an annualized rate of .85%, the slowest rate in five quarters, and is expected to weaken further in the second half of the year.  Together these economies represent more than 60% of global output as shown here.

World's largest economiesBulls peg hopes on a continuation of higher growth in the UK, China and India.  But with high household debt and weak wage growth in the UK as well as weak domestic demand in China and India, these countries are in need of stronger external demand to support their growth.  That is unlikely to materialize over at least the next year or so.

Despite the hype and hope of central bank monetary experiments, the global economy is slowing at a an accelerated pace coming into the second half of 2014. Economic bell weather copper concurs, having fallen more than 32% since 2011 and 7% year to date.  Government bond yields are also deflating with global growth:  the 10 year German bond yield today moved below 1% as the US 10 year yield is back at 2.4% down from 3% 7 months ago. And yet, US mortgage applications–normally expected to surge as rates fall–have not picked up, now at levels last seen in 2000 (shown below).  The golden goose of lower rates seems to have finally exhausted its ability to force increased consumption.

US mortgage rates and apps since 2000
Chart source:

All that remains is for the algo-driven S&P 500 to admit facts and fall back down to reconnect with sales growth here on planet earth. This chart showing the extreme overshoot of large cap North American stocks (here the S&P 500 in red) on QE hopes the past 2 years, as compared with other growth barometers like industrial metals and Chinese stocks, gives a sense of the price risk facing present stock holders. As well as the opportunity coming for those who can design themselves now to be ready.
SPY vs other indicators Aug 14 2014

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Gold: dead or merely pining?

Gold promoters keep promising a return to the golden days of 2011 every day now…but so far a break out in bullion remains illusive. With all the recent news about geopolitical strife and a faltering global recovery, the U$ has continued to strengthen, not collapse as the bugs had predicted.
Gold Aug 14 2014
With QE winding down over the next couple of months, it seems gold’s best hope for the foreseeable future is not likely to be a spike in inflation, but rather ongoing ‘secular stagnation’ in the global economy that might prompt yet another round of desperate ‘liquidity’ experiments out of Central Banks down the road.

But then again, markets would also have to believe that such policies will be successful in order to drive a break out in inflation and gold. So far, some of the other key voters: treasuries (moving up) and copper (moving down) remain unconvinced.

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