Embrace the bear to restore strong investment return prospects

Like it or not, believe or not, accept it or not, extreme asset valuations today mean that we are still mired in the secular bear (of high capital risk, low yields and poor future return prospects) that began in 2000.

To illuminate this point, Crestmont Research has updated its secular bull and bear market cycles charts on their website here.  As shown below, as in past secular bear periods,  the only thing that can finally end the one we are stuck in, and restore longer term return prospects to the risk-worth-taking zone, are much lower valuations including PE ratios 10 and under (green band below), versus 30+ today.  Until this mean reversion happens, present stock holders are just whistling past graveyards hoping for skill-less, blind luck to continue indefinitely.

However, the upside too rarely mentioned today, is that 18 years into this secular bear, we must be close to the end–the final mean reversion cycle that will finally restore attractive risk-return opportunities for our long-term savings once more.

For some important insight on this point, see Millennials, born under the sign of the bull, should embrace the bear:

The baby boomers entered the workforce from roughly 1966 to 1984. They couldn’t have timed it better because U.S. stocks were in an epic funk during those 19 years. The S&P 500 Index gained just 3.2 percent annually while inflation grew by 6.5 percent, which means the real value of U.S. stocks declined by a stunning 3.3 percent a year for nearly two decades…It also meant that by the time boomers entered their peak earnings years in the mid-1980s, the stage was set for the biggest market run-up on record…Millennials will soon enter their peak earnings years. They should root for recent market turmoil to turn into a long rout. And if their wish is granted, they should shovel as much money as possible into the market.

Note to boomers: we too can set ourselves up to take advantage of the next secular bull that will bring higher yields and help support us through our retirement years.  But first, we have to step off the long-always bus most are currently sleeping on, build up cash savings, and patiently wait for the low prices and valuations coming out of the next bear market.  Remember there can be no meaningful buying opportunity, unless we acted on a selling opportunity before it.

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Will Chairman Powell kowtow to the stock market too?

The bias of the financial sector is inherent:  Central banks, like most financial advisors, portfolio managers and media commentators, base most of their assessments on sell side research from investment banks.  This is financially destructive because as DiMartino explains below, the self-enriching sell side agenda is to“make sure that all of your clients are always 100% long”.  With a new chair heading the Fed this month, some say the central bank put backstopping financial markets is no longer assured.

The recent gut-wrenching drop in asset prices began on the first day of the job for new Federal Reserve Chairman Jerome Powell. How is Mr. Powell likely to react to a suddenly sick-looking market? Will he step in forcefully to reassure investors that there’s a “Powell put” in place as a backstop?

…Powell appears to be no large fan of continued quantitative easing, and has long been on the record as concerned about the eventual pain its unwind will cause. He very well may resist riding to the market’s rescue at this time, allowing natural market forces to finally have their way.   Here is a direct audio link.

Personally, I doubt that any central bank head will have the personal fortitude to withstand hysterical demands for ‘intervention’ when markets correct sharply. But the call for central banks to do something, anything! happens every downturn, and still vicious bear markets have been a recurring part of each cycle.  At some point misplaced confidence always fails, and repricing ensues, Fed notwithstanding.

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This because of that

Everyone wants to know what happened this week. Why is the stock market suddenly dropping like a stone? Is it machines selling?  Is it traders covering margin calls? Is it short volatility funds going under? Is it higher interest rates?  Is it Bitcoin crashing? The answer is yes, all of that.

But most of all, stocks are having their worst week in 9 years, because they have been hyped so irrationally high for so long now.  Truly, these markets have not been about investing for at least 5 years.

The same speculative, artificial and illegal interventions that worked to push valuations and risk-taking to the highest levels in history by January 2018, are now turning the other way.  It’s called mean reversion.  And as we’ve said many times, the aggressive risk-seeking behavior that increasingly drove indiscriminate buyers into dividend paying securities, funds and ETFs the past few years, is also hitting payback once more.

No, over-valued equities are not ‘defensive’, they’re capital destructive, as cyclical price declines routinely take back years worth of income in days and weeks.  The chart beside showing the declines in dividend focused sectors and funds over the past week, underlines the point.  (See:  Boring is no longer beautiful in stocks).

As we wrote in our January 31 client letter before this week’s sell-off, and demonstrated in the chart of the S&P 500 relative strength indicator since 1998 below:

“Indiscriminate buying has infected all sectors. This chart of the broad-based S&P 500 stock index—widely and thoughtlessly benchmarked by funds, pensions and conventional managers—confirms extreme capital risk warnings with a monthly RSI (‘relative strength indicator’ of price and time) today at an unprecedented 93, also far past the manic tops of both 2000 and 2007, when mean reversion next followed.”

We also showed the chart of Canada’s TSX stock index and noted that it would take a decline of just 5% to take Canada’s stock market back to the price level it first reached nearly a decade ago in June 2008. That has now been accomplished in one week.

From here, it will take just a mild bear market decline of 23% to return the Canadian stock market to where it was at the cycle top in September 2000- over 17 years ago. There is every reason to suspect that this will happen, it’s only a question of how quickly.

We say this not because we are clairvoyant; but because markets mean revert.  And when they have been mindlessly over-valued and over-bought for so long, equal and opposite in the other direction is due.

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Caregiver duties: ours to share

The childcare partner in our family was my cousin Ann, for 5 years.  Our family could not have been as successful in continuing two careers and raising happy, healthy children without her.  Quality, affordable childcare is not a need for women, it’s a need for all parents, and a necessary foundation for a productive society.  The fact that Elizabeth Warren describes how finding good childcare was her challenge, rather than a challenge shared with her then husband, is revealing of the larger social inequity that has traditionally been implicit between parents.  This costs us greatly.  We all have a vested interest in helping people to be productive workers and creative contributors while also caring well for our dependents.

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Danielle’s bi-weekly market update

Danielle was a guest with Jim Goddard on The Talk Digital Network, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

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Tesla helping Australia get smart on energy

South Australia has some of the highest electricity prices in the world as the country has long focused on coal as a primary power source for domestic consumption and exports to Asia.  Also mired in a massive debt bubble that has driven up shelter costs far beyond wage gains, Aussie households have been increasingly taxed to afford utility costs and other expenses.

As recently covered by 60 Minutes Australia, this led Tesla’s Elon Musk to offer to build the largest grid storage battery installation in South Australia last year, saying that they could build the entire facility in 100 days or it would be free. It was completed in 60 days, and since then it has delivered as promised.

Now, Tesla and the government of South Australia have announced a plan to install rooftop solar systems on 50,000 homes in the next 4 years and link them them together with grid storage facilities to create the largest virtual solar power plant in history. See  Tesla to construct virtual power plant using 50,000 homes in South Australia:

And here’s the kicker: The rooftop solar systems will be free.  The cost of the project will be recouped over time by selling the electricity generated to those who consume it. “We will use people’s homes as a way to generate energy for the South Australian grid, with participating households benefiting with significant savings in their energy bills,” says South Australia’s premier Jay Weatherill. “More renewable energy means cheaper power for all South Australians.”

The government hired consulting firm Frontier Economics to examine the plan. “The biggest saving for consumers is that they don’t have to pay for as much network cost to deliver power to them because they’re generating their own power,” says managing director Danny Price. “In principle, it’s quite simple technology. It just requires a smart computer system to stitch it all together.”

Price predicts utility bills for participating households will be slashed by 30%. …but virtual solar power plants have benefits that go far beyond mere financials. Every kilowatt-hour that comes from the sun means one kilowatt-hour that is not associated with carbon emissions, nuclear waste, ruptured pipelines, or the horrors of pumping hazardous waste deep underground to unlock shale gas.

…With more virtual power plants, weaning the world off its fossil fuel addiction can become a reality.

Share this story with your peer group and political leaders to help expand thinking on renewable energy in your community.

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