Just returned from nine days in Guatemala, and thought I’d jot down some observations and impressions of the place. Having no prior knowledge, I had few expectations although I will admit that I had some biases based on its location nestled beside Mexico.
I now understand why Central America generally and to some extent Guatemala is so popular with Americans and especially retirees. First, the climate is great and actually more accommodating than Florida, as its elevation above sea level provides a more temperate climate and less humidity, at least during its dry season. Second, the people are friendly and hard working. Third, the cost of living is inexpensive. Fourth, in the case of neighbors Belize, Costa Rica, and Panama, English is spoken everywhere (not true in Guatemala).
Among my biggest surprises (even though I knew Guatemala was a poor country) was the fact that the roads are horrendous, and the driving is even worse. Between the spectacular topography (owing to mountains formed eons ago by earthquakes and volcanoes) and the fact that the vast majority of roads are either cobblestone or dirt, travel around the country ain’t easy. And there is no railroad or mass transit of any kind, probably because of the topography, unless you count the thousands of “chicken buses” the locals take to get around. (Chicken buses are yellow school buses from the USA that have been artistically and uniquely painted and used to transport people and all types of cargo, including livestock, hence the name.) It was not surprising to learn that Guatemala ranks 116 in paved roads with a mere 4,700 kilometers (less than 3,000 miles) of paved roads, behind Western Sahara and before Tunisia.
Another big surprise, which I learned by inquiring about sending postcards was the fact that two years ago, the country abolished its national postal system, so if you want to send mail, you need either a private courier or DHL. Tooling around small villages I noticed most have no street signs, so you have to wonder how the mail every got delivered even when the post office existed. No street signs tell me that all activity in most of the country is very local where everyone knows everyone else.
Probably my biggest surprise was to learn that there is no system of public education in Guatemala, meaning children can only attend schools if their parents can pay to send them privately.
The most interesting bit of history I learned was about the relationship between Belize (formerly British Honduras) and Guatemala. According to our guide, centuries ago, England was granted permission to harvest wood (Mahogany) from Guatemala in return for promising to build roads in Guatemala, but apparently not only didn’t build roads, but occupied more land than their permission allowed, and kept it, which later became known as British Honduras. To avoid a confrontation, England granted that occupied territory its independence and it became known as Belize. Today Guatemala intends to appeal to the United Nations to either reacquire that territory or at least be compensated for its improper appropriation by England. Time will tell it they are able to prevail.
If you decide to go to Guatemala, be aware that travel there carries significant risks, so your trip should be supervised by a professional tour guide, at least in a group format, or more preferably, a private tour guide (as we did). There is no public transportation, there are few road and street signs, information about everything is scarce, and YOU MUST SPEAK SPANISH to get anywhere or do anything!
We visited four areas: Guatemala City (the Capital City since the 1700s and where the major airport resides), Tikal (where the most significant settlement of the ancient Mayan civilization resides), Antigua (the well preserved former capital of Guatemala back in the 1500s, when it was ruled by Spain, later moved to Guatemala City after being decimated by an earthquake) and Lake Atitlan (a magnificent venue formed in the valley of several volcanoes).
These areas provide you with a blend of Spanish (and Catholic) history in the country, history of the Mayan civilization and some spectacular sites of natural beauty. If you have time, visit Chichicastenango (no, that isn’t Pinky Tuscadero’s kid sister) when you are in the vicinity of Lake Atitlan, touted as the oldest and largest open air market in Central America.
Additionally, we enjoyed visiting a coffee plantation near Antigua. I was surprised to learn that Guatemalan coffee is considered the world’s third best quality, behind Ethiopian and Kenyan, although you would never know it as they produce it in relatively small quantities. By the way, the locals aren’t coffee drinkers. Their chocolate is also considered very high quality, even though chocolate’s origin is apparently Brazil. By the way, the food just about everywhere we visited was flavorful and freshly prepared. Lots of fresh fruit, including papaya, pineapple, watermelon, cantaloupe, berries, and veggies, and avocadoes are served practically at every meal. The staples of the Guatemalan diet include corn, rice and beans.
My advice is to focus your visit on the two main areas of Antigua (for culture and history) and Lake Atitlan (for natural beauty). Tikal is billed as a major attraction given its historical significance as the center of the ancient Mayan civilization, and its available sites are impressive. However, be aware that only about 20% of those artifacts and tombs have been disinterred as of this writing, so you won’t see most of what archeologists believe lies buried beneath the surface. That was a bit of a disappointment. Besides, visiting there will require a short flight or a long bus ride as Tikal is located well north and east of the other two major attractions mentioned. You will probably need to fly into Guatemala City, but know that it offers little attraction and my advice would be to spend as little time there as possible.
Whenever I leave the USA I always return with a great appreciation of many things we take for granted here: words like management, organization, efficiency, transparency, disclosure, communication all carry greater meaning for me now. The Guatemalans are hard working, skilled, and talented people, but given the dire state of its roadways and communications infrastructure and the fact that they have no public or free education system, suffice it to say they face a challenging future.
In case you wonder about the title of this essay, you should know that “Pinchazo” is a Spanish word that has many meanings, including flat (as in tire) and sharp pain (as in the kind one experiences after many hours of traveling on cobblestone roads). It seemed that every mile or so, traveling on the major highways we saw signs reading “Pinchazo.” Not surprising since the roads are so bad. Our guide told us that not only do they wash their cars daily there, but they have their breaks checked every couple of weeks!
Saturday, March 17, 2018
Monday, January 29, 2018
Stupid-To-Be-In-Cash Is Stupid Stock Market Advice
It’s bad enough that the daily financial news “cheerleads” (yes, that’s the right term) the stock market higher pointing to all sorts of fundamental and technical metrics but conveniently omits the elephant in the room: CONTINUING AND UNPRECEDENTED GLOBAL CENTRAL BANK MONEY PRINTING is the major reason for one of the longest and most dramatic bull markets in history!
Now, at this late date, some very savvy and successful investors have come forth with the audacious if not outlandish advice that investors may feel stupid if they hold cash, because markets will inexorably move higher. That advice evoked feelings of shock, disappointment, worry and even anger for many of us. All of a sudden, the prevalent view (for months if not years) that “there’s more risk to the downside, than the upside” was reversed for those observers.
What are possible motives for this about-face on the markets by some?
1. They actually believe what they say! It’s shocking if not frightening that such savvy observers, against a backdrop of contradictory evidence, should conclude that the market has more upside potential than downside risk, especially given how debt-burdened the global economy and how overvalued the stock market is by most measures. Let’s not forget this is the second longest bull market in history, second only to a bull market that occurred at the dawn of the internet age, arguably the most transformational technology of the last century!
2. They have been advised by the “powers that be” (you know who you are, even though we never will) that the “fix is in” and that nothing will be allowed to tank the market in the foreseeable future (however long that is). That may anger many of us because without knowing the details about those assurances (if they exist) we are unable to commit meaningful capital and invest confidently.
3. They have been advised by the “powers that be” that the only way to prevent a market collapse is to get as much dumb money (that’s us!) back in to prop up the markets. That’s both angering and worrisome for obvious reasons.
4. They are as oblivious as the rest of us to our financial future, but realize that their business models (read: hedge funds) rely on not only large amounts of borrowed money (which the government has provided at all-time low rates) but the leverage offered by cooperative dumb money that allows them to bid up prices and sell to us at all-time-highs, leaving us “holding the bag” when the market tanks. Make no mistake, this is a high-stakes game of musical chairs that will end with us standing when the music stops, i.e., when “they” (whoever they are) decide “the party is over.” Without notice and quickly the selling will begin in earnest and they will be out of the market long before we know what hit us! That’s not only disappointing, but rather worrisome and angering!
Investors should take little comfort in any of those scenarios. By the way, it’s not clear who can benefit from such savvy if contrary advice. The very wealthy who are rightfully more concerned with preserving capital than risking it for higher returns are not likely to buy into this strategy. Retiring baby boomers that barely have enough savings to live on and really can’t afford to risk losing their nest eggs at this late stage of their lives certainly can’t sign on to such foolishness. And Millennials struggling to earn a living wage and saddled with high student loan and consumer debt are unlikely candidates for such risk taking either. It would appear that only investors in the business of moving in and out of the market at opportune times (i.e., traders) are potentially able to capitalize on such advice.
Proponents of the “No Cash” strategy say history suggests that a long-sustaining melt-up is in the cards, but these are the same folks who have been telling us that historic metrics no longer apply and that a “new normal” precludes relying on old metrics to make forecasts. So what makes them so sure about a continuing market “melt up”? The question for investors is, will you feel dumber being in cash when the market rises or dumber being fully invested when the market tanks? For many who can still remember vividly the crash of 2008, the lesser of two evils in obvious.
Now, at this late date, some very savvy and successful investors have come forth with the audacious if not outlandish advice that investors may feel stupid if they hold cash, because markets will inexorably move higher. That advice evoked feelings of shock, disappointment, worry and even anger for many of us. All of a sudden, the prevalent view (for months if not years) that “there’s more risk to the downside, than the upside” was reversed for those observers.
What are possible motives for this about-face on the markets by some?
1. They actually believe what they say! It’s shocking if not frightening that such savvy observers, against a backdrop of contradictory evidence, should conclude that the market has more upside potential than downside risk, especially given how debt-burdened the global economy and how overvalued the stock market is by most measures. Let’s not forget this is the second longest bull market in history, second only to a bull market that occurred at the dawn of the internet age, arguably the most transformational technology of the last century!
2. They have been advised by the “powers that be” (you know who you are, even though we never will) that the “fix is in” and that nothing will be allowed to tank the market in the foreseeable future (however long that is). That may anger many of us because without knowing the details about those assurances (if they exist) we are unable to commit meaningful capital and invest confidently.
3. They have been advised by the “powers that be” that the only way to prevent a market collapse is to get as much dumb money (that’s us!) back in to prop up the markets. That’s both angering and worrisome for obvious reasons.
4. They are as oblivious as the rest of us to our financial future, but realize that their business models (read: hedge funds) rely on not only large amounts of borrowed money (which the government has provided at all-time low rates) but the leverage offered by cooperative dumb money that allows them to bid up prices and sell to us at all-time-highs, leaving us “holding the bag” when the market tanks. Make no mistake, this is a high-stakes game of musical chairs that will end with us standing when the music stops, i.e., when “they” (whoever they are) decide “the party is over.” Without notice and quickly the selling will begin in earnest and they will be out of the market long before we know what hit us! That’s not only disappointing, but rather worrisome and angering!
Investors should take little comfort in any of those scenarios. By the way, it’s not clear who can benefit from such savvy if contrary advice. The very wealthy who are rightfully more concerned with preserving capital than risking it for higher returns are not likely to buy into this strategy. Retiring baby boomers that barely have enough savings to live on and really can’t afford to risk losing their nest eggs at this late stage of their lives certainly can’t sign on to such foolishness. And Millennials struggling to earn a living wage and saddled with high student loan and consumer debt are unlikely candidates for such risk taking either. It would appear that only investors in the business of moving in and out of the market at opportune times (i.e., traders) are potentially able to capitalize on such advice.
Proponents of the “No Cash” strategy say history suggests that a long-sustaining melt-up is in the cards, but these are the same folks who have been telling us that historic metrics no longer apply and that a “new normal” precludes relying on old metrics to make forecasts. So what makes them so sure about a continuing market “melt up”? The question for investors is, will you feel dumber being in cash when the market rises or dumber being fully invested when the market tanks? For many who can still remember vividly the crash of 2008, the lesser of two evils in obvious.
Thursday, August 3, 2017
This Bond Market Bubble Created The Mother-Of-All Stock Market Bubbles
The latest proclamation by some of the foremost market observers that the bond market, but not the stock market, is in a bubble has many of the rest of us casual observers scratching our heads.
One of the first things investors learn is the importance of bond interest rates in setting the context for all investing, and most (if not all) of the experts advising us to buy into the stock market now use low bond interest rates as the primary reason, pointing to the fact that with bond rates so low, stocks are the only choice for investors seeking income. So if the main pillar holding up the stock market right now is low bond interest rates, how is it possible that the bond market is in a bubble but the stock market is not? Moreover, if the bond bubble bursts and interest rates rise, won’t bonds become relatively more attractive and cause stock investors to flee the stock market. It would seem the stock and bond markets are inextricably linked right now, and both quite frothy.
The experts contend that history since 1980 indicates that bond yields (more specifically the 10-year Treasury bond) should be higher than the stock market’s equity yield (or more specifically the reciprocal of the S&P 500 Index Price/Earnings (P/E) Multiple). Today, that relationship is reversed with the equity yield higher (at approximately 4 percent) than the bond yield (at 2.25 percent). To those experts that means that either bond yields should be higher (meaning bond prices are in a bubble and need to fall) or stock prices are too low (and should rise higher), assuming that historical relationship should remain in tact.
However, that historical relationship may not be appropriate anymore. Most observers agree that markets and economies have changed rather dramatically since the 1980’s and that perhaps that long-standing relationship no longer applies. The last twenty years of the past century was characterized by high economic growth and moderate inflation, two conditions sorely lacking since the turn of this century. Perhaps going forward equity yields should be higher than bond yields, consistent with the longer term relationship that was actually the norm for the 85 year period from 1871-1956. (Dividend yields compared with bond yields during the past 150-year period provides a similar pattern as equity yields, namely that dividend yields were actually higher than bond yields for most of that time period.) Maybe that suggests stock yields should be higher than bond yields today too, and in fact the stock market as well as the bond market is in a bubble!
More compelling evidence suggests the stock market is unquestionably in bubble territory. Stock market values are driven by earnings and P/E multiples and the foregoing analysis shows how low bond interest rates directly propped up P/E multiples. Less obvious is that low bond yields have inflated company earnings too, if indirectly, in many ways. Low rates enable leveraged companies to borrow copiously while keeping interest expense to a minimum. Those same low rates have enabled companies to borrow an unprecedented amount of capital to buy-back their own stock shares, reducing shares outstanding, and thereby inflating their earnings per share. The low interest rate environment has also enabled margin buying to reach all time highs, from investors who borrow up to 50 percent of the capital they need to buy stock shares, thus fueling demand for stock and sending prices higher. Imagine how rising interest rates will adversely affect buy-backs and margin buying. If bond rates are too low, then stock prices built upon those low rates are clearly too high!
After factoring in all of that and the fact that earnings have been increasingly finagled and “engineered” through the use of Non-Generally Accepted Accounting Principles (Non-GAAP), which tend to inflate company earnings, it is obvious that the stock market has been pushed to an unnaturally high level.
Certainly the experts know all this, so how can they possibly conclude that the bond market is in a bubble and the stock market is not? When those bubbles finally do burst, it is not hard to imagine that both markets, and in fact all financial markets, will suffer serious consequences.
One of the first things investors learn is the importance of bond interest rates in setting the context for all investing, and most (if not all) of the experts advising us to buy into the stock market now use low bond interest rates as the primary reason, pointing to the fact that with bond rates so low, stocks are the only choice for investors seeking income. So if the main pillar holding up the stock market right now is low bond interest rates, how is it possible that the bond market is in a bubble but the stock market is not? Moreover, if the bond bubble bursts and interest rates rise, won’t bonds become relatively more attractive and cause stock investors to flee the stock market. It would seem the stock and bond markets are inextricably linked right now, and both quite frothy.
The experts contend that history since 1980 indicates that bond yields (more specifically the 10-year Treasury bond) should be higher than the stock market’s equity yield (or more specifically the reciprocal of the S&P 500 Index Price/Earnings (P/E) Multiple). Today, that relationship is reversed with the equity yield higher (at approximately 4 percent) than the bond yield (at 2.25 percent). To those experts that means that either bond yields should be higher (meaning bond prices are in a bubble and need to fall) or stock prices are too low (and should rise higher), assuming that historical relationship should remain in tact.
However, that historical relationship may not be appropriate anymore. Most observers agree that markets and economies have changed rather dramatically since the 1980’s and that perhaps that long-standing relationship no longer applies. The last twenty years of the past century was characterized by high economic growth and moderate inflation, two conditions sorely lacking since the turn of this century. Perhaps going forward equity yields should be higher than bond yields, consistent with the longer term relationship that was actually the norm for the 85 year period from 1871-1956. (Dividend yields compared with bond yields during the past 150-year period provides a similar pattern as equity yields, namely that dividend yields were actually higher than bond yields for most of that time period.) Maybe that suggests stock yields should be higher than bond yields today too, and in fact the stock market as well as the bond market is in a bubble!
More compelling evidence suggests the stock market is unquestionably in bubble territory. Stock market values are driven by earnings and P/E multiples and the foregoing analysis shows how low bond interest rates directly propped up P/E multiples. Less obvious is that low bond yields have inflated company earnings too, if indirectly, in many ways. Low rates enable leveraged companies to borrow copiously while keeping interest expense to a minimum. Those same low rates have enabled companies to borrow an unprecedented amount of capital to buy-back their own stock shares, reducing shares outstanding, and thereby inflating their earnings per share. The low interest rate environment has also enabled margin buying to reach all time highs, from investors who borrow up to 50 percent of the capital they need to buy stock shares, thus fueling demand for stock and sending prices higher. Imagine how rising interest rates will adversely affect buy-backs and margin buying. If bond rates are too low, then stock prices built upon those low rates are clearly too high!
After factoring in all of that and the fact that earnings have been increasingly finagled and “engineered” through the use of Non-Generally Accepted Accounting Principles (Non-GAAP), which tend to inflate company earnings, it is obvious that the stock market has been pushed to an unnaturally high level.
Certainly the experts know all this, so how can they possibly conclude that the bond market is in a bubble and the stock market is not? When those bubbles finally do burst, it is not hard to imagine that both markets, and in fact all financial markets, will suffer serious consequences.
Tuesday, August 1, 2017
Can a Loss of Confidence in Digital Advertising Cause Financial Market Fallout?
What? Market observers have been sifting through the financial tea leaves for years looking for the next “black swan,” that most extraordinary and unlikely event that will cause the financial markets to tumble. Dozens of possibilities ranging in scope and scale are found all over the map, literally: Euro zone, China, Japan for their challenging economies; North Korea, Russia, Iran, Syria, Venezuela for their geopolitical implications; stock bubbles, bond bubbles, auto loan bubbles, student loan bubbles, municipal bond and pension bubbles, and so forth.
What about the bubble in digital/online internet advertising? Many recent and prospective fortunes are tied to the continued rapid rise in digital advertising, but bumps seem to be popping up along that otherwise clear path. Recent reports are that a significant share of “customer clicks” is the result of “bot traffic” (internet robots), not actual customers. Estimates are that businesses have lost more than $16 billion due to ad fraud this year alone. Even more significantly, it would appear that corporate America is beginning to question the effectiveness of digital ads as a marketing tool. Proctor and Gamble recently reported that notwithstanding its decision to reduce its online advertising budget by $100 million in the June 2017 quarter, the company saw no difference is sales. Those trends should be disturbing to stakeholders in the digital ad business.
So, what’s the big deal? The fact is that since the beginning of this century much of the robust economic growth of mature global economies in many industries has come from the growth of the internet, in one way or another. Much of the optimism about future economic growth stems from its continued expansion. The problem is that much of that activity is paid for with revenue from digital ads, and the fate of many of the fastest growing and most valuable companies on earth, like Google and Facebook, are tied to ad revenue growth.
Online advertising is here to stay, but what if the prospects of its growth are tarnished, diminished or, worse yet, more companies get the heretical idea to reduce their online advertising budgets? Digital ad spending is approximately $200 billion globally now and expected to grow more than 50 percent in the next three years. The mere hint of a slowdown in that inexorable rise in digital advertising could have severe ramifications for many companies, and by extension, economies and financial markets. Time will tell if such a heretofore unimaginable reversal of fortune and loss of optimism in that business can cause meaningful fallout in global economies and financial markets.
What about the bubble in digital/online internet advertising? Many recent and prospective fortunes are tied to the continued rapid rise in digital advertising, but bumps seem to be popping up along that otherwise clear path. Recent reports are that a significant share of “customer clicks” is the result of “bot traffic” (internet robots), not actual customers. Estimates are that businesses have lost more than $16 billion due to ad fraud this year alone. Even more significantly, it would appear that corporate America is beginning to question the effectiveness of digital ads as a marketing tool. Proctor and Gamble recently reported that notwithstanding its decision to reduce its online advertising budget by $100 million in the June 2017 quarter, the company saw no difference is sales. Those trends should be disturbing to stakeholders in the digital ad business.
So, what’s the big deal? The fact is that since the beginning of this century much of the robust economic growth of mature global economies in many industries has come from the growth of the internet, in one way or another. Much of the optimism about future economic growth stems from its continued expansion. The problem is that much of that activity is paid for with revenue from digital ads, and the fate of many of the fastest growing and most valuable companies on earth, like Google and Facebook, are tied to ad revenue growth.
Online advertising is here to stay, but what if the prospects of its growth are tarnished, diminished or, worse yet, more companies get the heretical idea to reduce their online advertising budgets? Digital ad spending is approximately $200 billion globally now and expected to grow more than 50 percent in the next three years. The mere hint of a slowdown in that inexorable rise in digital advertising could have severe ramifications for many companies, and by extension, economies and financial markets. Time will tell if such a heretofore unimaginable reversal of fortune and loss of optimism in that business can cause meaningful fallout in global economies and financial markets.
Wednesday, July 26, 2017
Three Reasons To Think Twice About Investing In The Stock Market Now
Reason #1. Global equities (stock) prices primarily reflect sustained economic growth trends over the long term, and there are few signs of sustained growth happening any time soon.
The long term stability and growth of the global economy cannot be sustained, so long as global debt is three times global gross domestic product (GDP), as it stands now. This is the result of decades of fiscal mismanagement, profligacy and just plain overspending on a global scale; it is also a problem that defies an easy or quick fix. In fact, notwithstanding the best intentions of the global economic order to grow out of and deleverage to reduce that outlandish debt/GDP ratio over the past eight years, the only discernable effect of global quantitative easing and low (even negative) interest rates has been to reduce private debt by making it public, i.e. government/sovereign, debt. That makes global governments today more vulnerable than ever to bankruptcy and many observers believe that the next financial crisis will be ignited by a sovereign debt crisis. High government debt levels and already historic low interest rates also means that if and when such a crisis should emerge, the same governments that bailed us out in 2008 will be hard pressed to repeat that effort.
In the meantime, all that debt is deflationary and weighs heavily against economic growth, and together with unfavorable demographics, continued globalization and disruptive technological change, it is likely that the USA and all the major economies of the world, including Europe, Japan and China, will face significant economic headwinds.
This predicament is so insidious and so entrenched it is unlikely that anything short of the emergence of a transformational technology, in the way that the widespread use of the internet was in the 1990s, will positively change that outlook for many years to come.
Reason #2. There has been so much deception in and manipulation of economies and the financial markets, it would appear no one really knows where reality begins and fantasy ends.
Stock prices are driven by earnings and price/earnings (P/E) multiples. Global central banks low interest rate policies have pushed P/E multiples to their upper limits causing markets to rally since 2009, but clearly interest rates can only rise from these levels, so markets will need earnings growth in order to rise to new highs.
Earnings appear to be growing again although it is difficult to assess real earnings growth from that created by the wonders of financial engineering. The low interest rate environment has allowed (even encouraged) corporations to borrow capital to buy back their own stock, which has managed to shrink their shares outstanding making shares scarce while simultaneously increasing earnings per share. Additionally, many corporations have opted to report earnings according to non-Generally Accepted Accounting Principles (non-GAAP) thereby allowing them flexibility to easily manipulate and inflate those earnings. Non-GAAP earnings have proven to be significantly higher than GAAP earnings.
Those initiatives combined with the willingness of governments and sovereign wealth funds to buy and hold equities seemingly into perpetuity has created an apparent scarcity in supply available in the open market, i.e., no sellers at any price, thereby distorting and raising prices. The widespread growth in Exchanged Traded Funds (ETFs) and other forms of passive investing is further distorting the fair market prices of individual equities.
The health of our economy is also being reported through a filter of false optimism, as government redefines macroeconomic metrics to portray more favorable results in economic growth, employment, inflation, and many other factors. By traditional measures, for example, economic growth has been negative (that is, recessionary) for the past eight years (not the 1-2% as reported)!
Just as the legacies of baseball star Barry Bonds, bicycle racing champ Lance Armstrong and others were tainted by the realization that their performances were “juiced” by the wonders of drugs, so too has the stock market’s performance in recent years been juiced by the wonders of free capital and financial engineering. But unlike their individual performances, whether legitimate or otherwise in the eyes of the public, no one can deny that Barry Bonds broke home run records or that Lance Armstrong won all those bicycle races. Only time will tell whether or not the superior market results produced by all that free money and engineering will be sustained once all that stimulation is gone.
Most disappointing is that market pundits and commentators rarely acknowledge these economic and market differences by making historical comparisons which are irrelevant if not disingenuous. In fact, with few exceptions, they comment on market movements as if they are moving freely and completely unencumbered by extreme global government intervention and manipulation.
Reason #3. The markets appear to be in the very late innings of a secular market rally in prices. By most traditional metrics markets are inflated if not approaching all time highs in many cases. (Using traditional metrics, they are at all-time highs!)
Historical analysis indicates that when market valuations are so stretched, very low returns can be expected in the following decade. That fact, combined with the fact that the US market has not sustained at least a 5% price pullback for nearly 9 months, the longest period since 1996, and longer than all but four periods occurring since the Great Depression, increases the odds that a price correction is coming. Consequently, one must assume that the downside risk from this point forward is potentially much more significant than is the upside potential.
Any one of these reasons should make investors pause, but all three taken together make a compelling case for investors to exercise extreme caution when considering making new investments in the equities market. In summary, the economic backdrop for investing is treacherous and likely to remain so for many years, market values are inflated by any measure, and with all the manipulation and misinformation it is difficult to assess exactly where investments stand at this juncture. This is not to suggest that investors sell all their holdings, as no one can know how long this charade can continue, and history has shown that markets can remain irrational longer than one might expect. However, prudent investors should consider harvesting some investment gains and trimming their current equity holdings, especially in areas that have sustained significant gains in recent years.
The long term stability and growth of the global economy cannot be sustained, so long as global debt is three times global gross domestic product (GDP), as it stands now. This is the result of decades of fiscal mismanagement, profligacy and just plain overspending on a global scale; it is also a problem that defies an easy or quick fix. In fact, notwithstanding the best intentions of the global economic order to grow out of and deleverage to reduce that outlandish debt/GDP ratio over the past eight years, the only discernable effect of global quantitative easing and low (even negative) interest rates has been to reduce private debt by making it public, i.e. government/sovereign, debt. That makes global governments today more vulnerable than ever to bankruptcy and many observers believe that the next financial crisis will be ignited by a sovereign debt crisis. High government debt levels and already historic low interest rates also means that if and when such a crisis should emerge, the same governments that bailed us out in 2008 will be hard pressed to repeat that effort.
In the meantime, all that debt is deflationary and weighs heavily against economic growth, and together with unfavorable demographics, continued globalization and disruptive technological change, it is likely that the USA and all the major economies of the world, including Europe, Japan and China, will face significant economic headwinds.
This predicament is so insidious and so entrenched it is unlikely that anything short of the emergence of a transformational technology, in the way that the widespread use of the internet was in the 1990s, will positively change that outlook for many years to come.
Reason #2. There has been so much deception in and manipulation of economies and the financial markets, it would appear no one really knows where reality begins and fantasy ends.
Stock prices are driven by earnings and price/earnings (P/E) multiples. Global central banks low interest rate policies have pushed P/E multiples to their upper limits causing markets to rally since 2009, but clearly interest rates can only rise from these levels, so markets will need earnings growth in order to rise to new highs.
Earnings appear to be growing again although it is difficult to assess real earnings growth from that created by the wonders of financial engineering. The low interest rate environment has allowed (even encouraged) corporations to borrow capital to buy back their own stock, which has managed to shrink their shares outstanding making shares scarce while simultaneously increasing earnings per share. Additionally, many corporations have opted to report earnings according to non-Generally Accepted Accounting Principles (non-GAAP) thereby allowing them flexibility to easily manipulate and inflate those earnings. Non-GAAP earnings have proven to be significantly higher than GAAP earnings.
Those initiatives combined with the willingness of governments and sovereign wealth funds to buy and hold equities seemingly into perpetuity has created an apparent scarcity in supply available in the open market, i.e., no sellers at any price, thereby distorting and raising prices. The widespread growth in Exchanged Traded Funds (ETFs) and other forms of passive investing is further distorting the fair market prices of individual equities.
The health of our economy is also being reported through a filter of false optimism, as government redefines macroeconomic metrics to portray more favorable results in economic growth, employment, inflation, and many other factors. By traditional measures, for example, economic growth has been negative (that is, recessionary) for the past eight years (not the 1-2% as reported)!
Just as the legacies of baseball star Barry Bonds, bicycle racing champ Lance Armstrong and others were tainted by the realization that their performances were “juiced” by the wonders of drugs, so too has the stock market’s performance in recent years been juiced by the wonders of free capital and financial engineering. But unlike their individual performances, whether legitimate or otherwise in the eyes of the public, no one can deny that Barry Bonds broke home run records or that Lance Armstrong won all those bicycle races. Only time will tell whether or not the superior market results produced by all that free money and engineering will be sustained once all that stimulation is gone.
Most disappointing is that market pundits and commentators rarely acknowledge these economic and market differences by making historical comparisons which are irrelevant if not disingenuous. In fact, with few exceptions, they comment on market movements as if they are moving freely and completely unencumbered by extreme global government intervention and manipulation.
Reason #3. The markets appear to be in the very late innings of a secular market rally in prices. By most traditional metrics markets are inflated if not approaching all time highs in many cases. (Using traditional metrics, they are at all-time highs!)
Historical analysis indicates that when market valuations are so stretched, very low returns can be expected in the following decade. That fact, combined with the fact that the US market has not sustained at least a 5% price pullback for nearly 9 months, the longest period since 1996, and longer than all but four periods occurring since the Great Depression, increases the odds that a price correction is coming. Consequently, one must assume that the downside risk from this point forward is potentially much more significant than is the upside potential.
Any one of these reasons should make investors pause, but all three taken together make a compelling case for investors to exercise extreme caution when considering making new investments in the equities market. In summary, the economic backdrop for investing is treacherous and likely to remain so for many years, market values are inflated by any measure, and with all the manipulation and misinformation it is difficult to assess exactly where investments stand at this juncture. This is not to suggest that investors sell all their holdings, as no one can know how long this charade can continue, and history has shown that markets can remain irrational longer than one might expect. However, prudent investors should consider harvesting some investment gains and trimming their current equity holdings, especially in areas that have sustained significant gains in recent years.
Saturday, July 15, 2017
Interest Rate Conundrum Seems Well Beyond the Fed’s Pay Grade
In recent months the Federal Reserve (the Fed) started a marketing (if not real) campaign to raise interest rate levels to more “normal” levels, ostensibly because the US and global economy has shown meaningful signs of “recovery and stability.” The real reason is more likely to bail out the global financial system, including banks, insurance companies and pension funds that need higher rates to insure their continuing solvency and stability. Another more plausible reason is to give the Fed breathing room to lower rates again when the economy starts rolling into a long-overdue recession.
The most compelling evidence for an economic recovery has been the meteoric rise of the US stock market since 2009, and that, for most realistic observers, is the direct result of a relentless campaign of historically low interest rates and unprecedented money printing by global central banks including the Fed. Going forward, many experts believe that the continued rise of the stock market will require leadership from financial sector equities, which need higher interest rates to propel their profitability. Therein lies the problem: the real economy and the broader financial markets need low interest rates for stability and improvement, but the financial sector needs higher rates.
Even the financial sector itself is caught in a love-hate relationship with low/high interest rates. Its profitability requires strong and steady loan growth, which requires strong economic growth, which requires low interest rates. Loan profitability, however, requires, greater profit margins, i.e., a greater difference between long and short interest rates (aka spreads), which require a steeper yield curve resulting from higher interest rates.
As if that situation isn’t bad enough, the Fed has been walking an interest rate tightrope for years because of their effect on the US dollar. Higher interest rates and a stronger dollar have the potential to throw us into a recession as it makes our exports less price competitive in the global market, has the potential to crash commodity prices (which are already near all time lows), and could cause a debt debacle in the emerging markets that loaded up on $9 Trillion in dollar-denominated debt after the financial crisis! A stronger dollar makes that debt more expensive to repay.
On the other hand, keeping interest rates low poses an existential threat to the Fed and global central banks (i.e., the keepers of global fiat/paper currencies) and low interest rates could cause them to lose control of the financial markets as participants begin to favor gold and other precious metals (for which they have minimal control) over paper currencies (which is their exclusive domain).
Three large banks, JP Morgan Chase, Citigroup, and Wells Fargo, recently reported decent Q2 financial results, but it would seem the market was disappointed and unimpressed and responded with a modest sell-off in financial equities.
What’s the correct next step? Does the Fed continue its charade of talking up interest rates in the hope of propelling the financial sector even at the risk of tanking the global economy? What to do? What to do? Clearly no one, least of all the Fed, seems to have a clue!
The most compelling evidence for an economic recovery has been the meteoric rise of the US stock market since 2009, and that, for most realistic observers, is the direct result of a relentless campaign of historically low interest rates and unprecedented money printing by global central banks including the Fed. Going forward, many experts believe that the continued rise of the stock market will require leadership from financial sector equities, which need higher interest rates to propel their profitability. Therein lies the problem: the real economy and the broader financial markets need low interest rates for stability and improvement, but the financial sector needs higher rates.
Even the financial sector itself is caught in a love-hate relationship with low/high interest rates. Its profitability requires strong and steady loan growth, which requires strong economic growth, which requires low interest rates. Loan profitability, however, requires, greater profit margins, i.e., a greater difference between long and short interest rates (aka spreads), which require a steeper yield curve resulting from higher interest rates.
As if that situation isn’t bad enough, the Fed has been walking an interest rate tightrope for years because of their effect on the US dollar. Higher interest rates and a stronger dollar have the potential to throw us into a recession as it makes our exports less price competitive in the global market, has the potential to crash commodity prices (which are already near all time lows), and could cause a debt debacle in the emerging markets that loaded up on $9 Trillion in dollar-denominated debt after the financial crisis! A stronger dollar makes that debt more expensive to repay.
On the other hand, keeping interest rates low poses an existential threat to the Fed and global central banks (i.e., the keepers of global fiat/paper currencies) and low interest rates could cause them to lose control of the financial markets as participants begin to favor gold and other precious metals (for which they have minimal control) over paper currencies (which is their exclusive domain).
Three large banks, JP Morgan Chase, Citigroup, and Wells Fargo, recently reported decent Q2 financial results, but it would seem the market was disappointed and unimpressed and responded with a modest sell-off in financial equities.
What’s the correct next step? Does the Fed continue its charade of talking up interest rates in the hope of propelling the financial sector even at the risk of tanking the global economy? What to do? What to do? Clearly no one, least of all the Fed, seems to have a clue!
Saturday, February 4, 2017
Silicon Valley Should Practice What It Preaches
Does anybody else see the irony in the great technologists of Silicon Valley railing against the Trump Administration for hampering the economic prosperity of our youth, restricting immigration and diversity, and fostering income inequality. Their own companies employ sophisticated technologies to ensure that they can employ as few as possible, which allows them to pay their employees outlandish sums of money. The products and services they sell allow other companies to do the same. Over the decades those companies have done their best to reduce or even eliminate the world’s “blue collar jobs” and are now with their so-called Artificial Intelligence attempting to do the same to global “white collar” jobs. In fact, it is likely that the Trump administration will be unable to keep its promise to return the millions of manufacturing jobs that have moved offshore during the past 40 years, because many of those jobs have been replaced by computer operated machines.
How does any of that help today’s youth make their economic way in the world, or help middle class incomes keep pace with inflation or help immigrants assimilate into American culture? Additionally, if Silicon Valley gets it way, all jobs paying a living wage will require employees to possess sophisticated skills in some aspect of building and/or operating computer systems. That also hampers economic diversity if not ethnic diversity in today’s workforce. That may be progress, but it is not very “progressive.”
No one is arguing that improving technology is not a boon for the global economy or humanity at large; a favorite example is how Microsoft Windows transformed tasks that took me weeks to perform down to days and sometimes mere hours. And companies like Google, Amazon and many others continue to enhance and improve our lives daily. But many of the recent additions, like the Facebooks and Twitters of the world, one can easily argue have not only made our lives less productive and less secure, but have in some ways contributed to the “dumbing down” and social ineptitude, if not delinquency, of our children and young adults. The constant preoccupation with the internet, mobile gadgets, and “virtual reality” is leading many among us to opt out of “real world” reality. This “ear bud generation” seems less interested and aware of the mounting challenges of the increasingly dangerous world in which we live.
Today’s technologists would be well advised to reflect on their own complicity with what’s wrong with our world and think about “high tech” solutions for addressing those problems before opting for “low brow” criticism and cheap shots for those currently charged with meeting and overcoming the challenges that await us.
How does any of that help today’s youth make their economic way in the world, or help middle class incomes keep pace with inflation or help immigrants assimilate into American culture? Additionally, if Silicon Valley gets it way, all jobs paying a living wage will require employees to possess sophisticated skills in some aspect of building and/or operating computer systems. That also hampers economic diversity if not ethnic diversity in today’s workforce. That may be progress, but it is not very “progressive.”
No one is arguing that improving technology is not a boon for the global economy or humanity at large; a favorite example is how Microsoft Windows transformed tasks that took me weeks to perform down to days and sometimes mere hours. And companies like Google, Amazon and many others continue to enhance and improve our lives daily. But many of the recent additions, like the Facebooks and Twitters of the world, one can easily argue have not only made our lives less productive and less secure, but have in some ways contributed to the “dumbing down” and social ineptitude, if not delinquency, of our children and young adults. The constant preoccupation with the internet, mobile gadgets, and “virtual reality” is leading many among us to opt out of “real world” reality. This “ear bud generation” seems less interested and aware of the mounting challenges of the increasingly dangerous world in which we live.
Today’s technologists would be well advised to reflect on their own complicity with what’s wrong with our world and think about “high tech” solutions for addressing those problems before opting for “low brow” criticism and cheap shots for those currently charged with meeting and overcoming the challenges that await us.
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