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.

Posted in Main Page | Comments Off on Will Chairman Powell kowtow to the stock market too?

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.

Posted in Main Page | Comments Off on This because of that

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.

Posted in Main Page | Comments Off on Caregiver duties: ours to share

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.

Posted in Main Page | Comments Off on Danielle’s bi-weekly market update

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.

Posted in Main Page | Comments Off on Tesla helping Australia get smart on energy

Losses are all on savers, now more than ever

On the way back to academic pastures this week, outgoing FOMC Chair Janet Yellen got nearly candid to reporters about the asset prices which she and her colleagues have maniacally contrived to inflate over the past 8 years:

“Well, I don’t want to say too high. But I do want to say high.  Price-earnings ratios are near the high end of their historical ranges.  Commercial real estate prices are now quite high relative to rents.  Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some  concern that asset valuations are so high.” —CBS interview, February 4, 2018

‘Damn it Janet’, you well know that overvaluing assets and enabling reckless and illegal activities to enrich banks, has been the number one goal of central banks, all around the world, for years now.  That was the whole point.  Good job; except that now we have the longer term costs to deal with, and no one, least of all central bankers, are about to admit responsibility for what’s coming next.

Trillions in liquidity from central bank fire hoses has pooled into long-always products like mutual funds and Exchange Traded Funds (as charted beside)–all on a one way impossible bet for endlessly lower volatility and ever higher prices.

Mindlessly benchmarked to these same long-always indexes, pensions and so called ‘active managers’ have followed suit, indiscriminately funneling capital into risky assets hand over fist.  No one has been doing (or admitting?) math on longer-term risk-adjusted investment return prospects, that have been increasingly dismal, since 2012.

So called ‘hedge funds’ have been racing to keep up, terrified to miss out on any upside risk, for fear of losing clients and their fees.  Hedge funds?  What are you hedging when you’re 100% levered long?  Today these ‘hubris’ funds are even more risk-exposed than heading into the 2007 financial implosion (as shown here).

Smooth sailing doesn’t build good sailors and years of easy money has made inept financial managers.  Just like central bankers, the ‘high frequency traders’, beta takers and algorithm runners who have made off like bandits in recent years, have fallen in love with their genius and asleep at the switch.  While they, like politicians, take credit for gains on a rising tide, they blame the machines when liquidity inevitably evaporates and losses hit.  See this week: A down day on the markets?  Analysts say blame the machines.

Financial memories are suicidally short at the best of times.  But in a financial sector dominated by salespeople and commentators under the age of 40, who are paid to funnel money into markets–and have so far amassed little net worth of their own to lose–loss cycles are not an inkling.  They will say they had no idea this could happen, after the fall.  Is Wall Street’s untested millennial majority a risk? You bet:

“…most millennial investors have only worked in an era where central banks printed trillions of dollars to prop up their economies and markets. Since starting their careers, average interest rates in the developed world have barely nudged above 1 percent, inflation all but vanished, the S&P 500 Index more than doubled and bonds rallied so high that more than $7 trillion of debt is negative yielding.”

Followers and believers beware, protecting your life savings is all on you.

Posted in Main Page | Comments Off on Losses are all on savers, now more than ever