Economic Summary: Dohmen Update
Sean M.
Expect Very High Volatility for Now
Lately, we have seen a
rush of record-sized mergers as if there were a deadline to be met.
Well, there probably is; it’s the election. The latest is AT&T
buying Time Warner for $84 billion. As our valued subscribers know, we
are totally opposed to such big deals as it reduces competition and
seriously reduces the choices of consumers. These mergers always result
in worse service and much higher prices. No matter who wins the
election, such mergers might have trouble.
If HRC wins, Elizabeth Warren
and Bernie Sanders would correctly oppose these deals, and the
President might go along with that. However, she is very cozy with Wall
Street, which might persuade her to go along with it because of all the
fees Wall Street firms would make in such mergers. If Trump wins, as a
populist he would oppose them, just as a matter of policy and because he
doesn’t owe Wall Street anything. Therefore, the rush to merge. Mergers
provide cash for current shareholders, mostly the large institutions.
That money then has to be reinvested. Normally it would go into other
stocks, but with today’s very high valuation levels, perhaps a good part
of it would go into Treasuries. The usual short-term parking place--
money market funds (MMFs) -- is now no longer a good alternative for
institutions because of the change in regulations this month. Therefore,
the money will go into “government only” MMFs. Some analysts are
talking about a potential “VaR” event (value at risk), which refers to
an extraordinary unexpected plunge in a specific market. The Swiss franc
move when they cut the tie to the Euro currency was probably a VaR
event.
The next one could occur when all the algo-trading computers
trigger sell orders at the same time. Some analysts think this could
occur in the stock or bond markets. We think it is more likely to come
from the currency markets. But the source is not as important as the
result. There is also a paradox: everything might be sold by these
computer programs, including Treasuries, just to get liquid. However,
even if there is a brief decline in US Treasuries in sympathy with
stocks, the next reaction would be a wild rush to put money into
Treasuries as a flight to safety. Thus, we would have a situation where a
rush to the exits in everything including Treasuries, if it occurs,
would produce a rush to safety back into Treasuries. However, we might
not even get that brief decline in Treasuries. What could trigger it?
The election, or a Fed rate hike in December, or dumping of US
Treasuries by China as they are facing a tremendous outflow of capital,
or a currency devaluation in China. In today’s environment, the task of
‘predicting’ has become virtually impossible. One thing is more certain
in our opinion: stocks are ready for a shock to the downside. But what
happens after a shock to the downside? That is the big question and
could be a big surprise. We have discussed potential inflation after the
deflationary wave is over. Billionaire Carl Icahn, and other very smart
hedge fund managers, say the stock market is false and being propped up
by the Fed. That has been our view, but it now gives us some
discomfort. Now that all the “smartest guys in the room,” -- many of the
big hedge fund managers, and so many of our colleagues -- are worried
about a serious bear market, we have to consider an alternative. In the
past, when all these people got on the same side of the fence, they were
wrong, at least by their timing. It could be that -- in the case of a
Trump victory, which may happen -- the initial decline will be short
term. The bear market may be delayed until next year when it will become
evident that even the bestintended programs will not pass Congress. And
then hopes will be shattered. The Fed, and other central banks, are now
suggesting that their inflation goal might be reached next year. On
Oct. 17, the Consumer Price Index in Britain was reported to have risen
by 1.0% in the year to September. It was the biggest increase since
November 2014. In the US, some of the inflation numbers are also having a
hiccup upward. On Oct. 17, it was reported that U.S. consumer prices
rose 0.3%. For the 12 months ending in September, the CPI has been
rising at a 1.5% rate. That’s the highest since 2014. The increase was
attributed to rising rents and rising energy prices. On the other hand,
the “core CPI” which doesn’t include food and energy, gained only 0.1%.
That makes the year-over-year rise 2.2%, which hits the Fed’s target.
Economic statistics, fabricated in Washington, also showed some better
numbers. That’s probably enough to allow the Fed to finally hike rates
again by a small amount. On Friday, both the Bank of England AND the US
Federal Reserve implied that they WANT inflation. The Bank of England is
prepared to tolerate higher inflation over the next few years and will
keep interest rates low to support economic growth, according to
Governor Mark Carney. Source: Telegraph , 14 October 2016.
In a further indication that the Federal Reserve will be inclined
to let inflation run hot for a while, Chair Janet Yellen on Friday said
it's useful to consider the benefits of a "high-pressure economy."
Source: CNBC, October 14, 2016
These two announcements came the same day. This was surely a
coordinated event. Folks, this is like the Central Bankers giving you a
big clue as to what to buy. Central Banks want inflation and have even
signaled that they’re willing to let it run ABOVE their targets. The
only question: will they be able to accomplish that in 2017? If so,
there will be some superb opportunities for investors. We have very
strong views on how to profit from this, if indeed we have inflation
next year. It will be very similar to the late 1970’s when we started
our business, and correctly forecast how to profit from the inflation we
expected at that time. We predicted a bull market in precious metals,
many stock sectors, and bear markets in others. No one thought our
forecasts would come true, but they did, and that launched our new firm
at that time. We will watch this very closely. The Short-Term View: The
DJI has had 9 consecutive days to the downside. Our charts show
continuous liquidation as money managers reduce exposure ahead of the
election. Here is an excerpt from our trading services of Friday, which
gives you our short term views. The major indices were higher for most
of the day, until the final two hours of trading when the sellers came
in. Today’s drop was led by declines in the energy and consumer staples
sectors. Energy stocks continued to stumble as oil prices fell for a 6th
straight trading session. The S&P 500 index declined for its 9th
consecutive day, which has not occurred in 36 years, since 1980. The
sectors within the S&P 500 were mixed, with Healthcare and Real
Estate reversing their downward course. The VIX volatility index
continued its phenomenal rise, gaining 1.9% today to close at a fresh
4-month high at 22.51. Today, advancing volume slightly edged out
declining volume on the NYSE but declining volume was 1.15% greater on
the NASDAQ. Overall volume was lower compared to the past two days. It
shows that the sellers are temporarily exhausted. A bounce is likely.
The S&P 500 index ETF (SPY) closed lower on Friday resting up
against critical support levels. A drop below and upward sloping trend
line, which coincides with the 200-day moving average, would be very
bearish for the market. However, a brief bounce is likely. Thereafter,
especially on a Trump win, the market should fall for a bit as Wall
Street loses their favorite and most easily “persuaded” supporter. The
next target support on the SPY is the horizontal trend line that
coincides with the June post-Brexit low in the 198 area.
The combination of the Presidential election, the potential for a
rate increase by the Federal Reserve and declining oil prices are all
weighing on equities. Anxiety continues to help buoy the VIX volatility
index, which soared 40.3% for the week. While a HRC victory will likely
be negative for healthcare stocks, a Trump victory will probably turn
this beaten down sector into a market leader. The Healthcare ETF, XLV,
snapped a 5-day slide, climbing .7% today on higher volume. It’s
interesting that Utilities and long-term Treasuries rallied today. This
is the “flight to safety” trade that we had predicted. It should go
further. The majority is bearish on these two sectors because of an
anticipated Fed rate hike. We have the opposite view. The October jobs
report today showed that Non-farm payrolls increased by 161K jobs, in
line with estimates. That was far less than expected. An upward revision
to September and October boosted the two months by 44K. There was a
decline in the unemployment rate from 5% to 4.9% but part of the decline
was accounted for by the slip in the participation rate, which dipped
to 62.8% from 62.9%. A much better employment, U6, which actually counts
unemployed instead of the fudged headline number, shows 9.5%
unemployment. Oil prices declined for a 6th straight day, closing at a
$44.07, down 9.5% for the week. Prices are poised to test the September
lows at $42.74. The alleged reason is the surge in inventories reported
this week by the EIA. While oil inventories generally rise in November
as refineries stock up ahead of winter, current stockpile levels are
well above the 5-year average range for this time of year, which is
bearish. October OPEC production rose by 300k barrels per day, to 33.5
million barrels per day. Iraq, Iran, Nigeria and Libya all increased
production. Oil volatility could continue to increase as OPEC attempts
to formulate an output agreement. Good luck with that. There is more
supply while demand should decline next year.
U.S. Presidential election concerns continued to hamper the dollar.
If the Brexit vote is any guide to currency movements then a surprise
Trump victory would be negative for the greenback. A drop in the dollar
would pave the way for higher gold prices. Gold prices increased $1.9
today to $1,305.2. The above is our short-term, daily view. In this very
volatile environment, that brings subscribers the short-term
opportunities. This is no time for long-term “buy and hold” in our
opinion.
CONCLUSION: The indices suggest that the stock markets will have a
bounce. In our trading services we recommended on Thursday to close out
short positions on Friday. The news over this weekend was unknown at the
time. We are showing the inverse (short) ETFs now so that you have some
suggestions where to look for opportunities when the stock market
starts a more serious decline. In our (almost) daily trading services we
give very specific investment vehicles as suggestions. (We use
“suggestions” because of the lawyers). The news Sunday afternoon would
give the background impetus for the bounce.
GOLD According to the Business Insider: In July of this year, the
central bank of Russia added 200,000 ounces of gold to its reserves. The
one-month uptick in Russian gold reserves — 200,000 ounces — is
approximately equal to the entire annual output of Barrick Gold’s
Turquoise Ridge gold mine in Nevada. At that same rate — 200,000 ounces
per month — in a mere five months, Russia would add to state gold
reserves the equivalent of the entire annual output of Barrick’s massive
Goldstrike mine in Nevada. Byron King, The Daily Reckoning, October 4,
2016 China is also a large accumulator of gold. These are smart moves by
major countries. They are preparing for the time that money printing by
the central banks will go into hyper-mode. It may take years for
currency depreciation (i.e. price inflation) to really kick in, but in
our view, it is inevitable.
THE ECONOMIC “SQUEEZE” The Fed’s comments on the economy-- such as
“close to overheating”-- are absurd. It would even be worse if they
actually believe that. Cynically, we believe it is part of the election
agenda. Remember in 2015 when gasoline prices were plunging and
economists said this was great for the economy because people would
spend the savings? We disagreed and wrote that people would pay their
debts. Now we know from the retail recession that this is exactly what
happened. And the bear market in stocks hasn’t even started yet. Our
favorite economist, and there are not many, is John Williams. Here is
what he wrote on Oct. 27: The latest nonsense, however, comes from
research at Fed Chair Janet Yellen’s home base of the San Francisco
Federal Reserve Bank. The new story is that monthly jobs growth of
50,000 to 110,000 is adequate “to maintain a healthy labor market.”
ShadowStats examined the claims of the new research and found, to the
contrary, that the implied annual payroll growth rates, from the touted
50,000 to 110,000 monthly jobs-growth range, were common only to formal
post-World War II recessions and to the 1952 Steel Strike, never to a
healthy economy. As economist John Williams points out, that’s
statistically insignificant and could also be zero. In other words, it’s
within the margin of error of the statistics. Yet some of the FOMC
members talk about a potentially “overheated” labor market. What are
they smoking?
The latest GDP growth number released on 10-28-2016 showed 2.9%
growth. The bulls and economists cheered. But the GDP numbers don’t show
reality. There is a number that excludes ‘inventories’ and ‘trade”,
which shows the true economy. That was a meager 1.4% growth, half of the
publicized number.
Inventory accumulation was at a $12.6 billion annualized pace.
That’s a negative in our opinion as it shows the potential of an
inventory overhang if Christmas sales disappoint. Look at the downward
trend in GDP growth. And even that is faulty because it is after
subtracting inflation, which is an unrealistically low number, thus
boosting the advertised GDP number. If true inflation were deducted from
‘nominal’ growth, GDP would be negative. The only way businesses can
make money with 1% growth is to cut costs. And the easiest way to do
that is to cut employees. Add to that the horrendous health care
insurance increases next year, as well as the incentive to have fewer
than 50 employees, and we have a prescription for rising unemployment.
The general population is in a terrible squeeze as incomes have actually
declined the past 15 years while the cost of living, especially rents,
has soared. The real estate boom seems to be over in the hottest areas
of the past several years. Wolfstreet.com pointed out the following: In
San Francisco, the median house price – half of which sell for more,
half sell for less – is $1.37 million. According to Wolf Richter, The
median household income in San Francisco is $84,160, including
households with more than one earner. So a household of two teachers
with $130,000 in household income is doing pretty well, comparatively
speaking. The monthly mortgage payment for the median house in San
Francisco, after a 20% down payment and at the prevailing rock-bottom
mortgage rates, is $6,740 per month, or $80,900 per year! That’s a big
portion of take-home pay. (as of August 17, 2016)
People are getting squeezed, financially. This shows up in the
decline in rents because people can no longer afford the rent increases.
Wolf Richter writes this about the decline in rents nationwide, even in
the formerly ‘hot’ areas: On a month-to-month basis, median asking
rents of one-bedroom apartments fell in 10 of the top 12 rental markets
in August, according to the Zumper National Rent Report, which analyzes
rental data from over 1 million active rental listings in the US. And
compared to August last year, asking rents fell in 7 of the top 12
markets. In this table of the top 12 markets, listed in order of the
dizzying magnitude of their median asking rents for one-bedroom
apartments, San Francisco is in the glamorous Number One position,
though the median asking rent embarrassingly has declined 2.5%
year-over-year. Note the big year-over-year drop in Chicago (as of
9/2/2016): We hear from people in the major metro centers, like NY city,
SF, LA, that more than half of their takehome pay goes to rent. People
are unable to save.
THE WEAKENING ECONOMY: Look at these numbers instead of the fudged
numbers out of Washington. Year-to-date: 1. US railroads reported a
total volume decline of 6.9% from the same period last year, with car
loads down 10.4% and intermodal units down 3.3%. 2. Coal shipments, by
far the largest category accounting for about 30% of total carloads,
plunged 25%. 3. Petroleum and petroleum products shipments fell 22%,
forest products down 7.8%. We have two presidential candidates with
totally opposite plans for the economy. Don’t trust the media in
analyzing this, or in fact, anything else. All the stuff you hear on the
mainstream media is propaganda.
If you really want a good analysis, created by the team of Wilbur
Ross, a very successful, smart businessman and private equity investor,
and Dr. Peter Navarro, business professor at the University of
California-Irvine, now an economic consultant to Trump, read Trump’s
Economic Plan: Excerpt about manufacturing: Since the era of
globalization, manufacturing as a percent of the labor force has
steadily fallen from a peak of 22% in 1977 to about 8% today (in the
US). To those who would blame automation for the decline of
manufacturing, one need only look at two of the most technologically
advanced economies in the world, those of Germany and Japan, each of
which is a worldwide leader in robotics. Despite declines in recent
years, Germany still maintains almost 20% of its workforce in
manufacturing while Japan has almost 17%. See: 9/29/2016, p.10, Scoring the Trump Economic Plan. http://bit.ly/2fsYje9
The Clinton plan wants to make the US a “service economy”, moving all
manufacturing to other countries. Just as the exciting world of robotics
is starting to flourish, they want to give all our knowhow to other
countries, like China. Any foreign company doing business in China is
forced to give its intellectual property to China, FREE of charge. The
leaders of the Left are so naïve in everything. The current VP, Joe
Biden, just said he would like to take Trump behind the gym, suggesting a
fight. That’s the level of their intelligence. The Left promised to
demolish the US coal industry, and kept that promise. They promised to
use the EPA to demolish energy companies, and have tried very hard to
accomplish that with controls over exploration on Federal lands. The
Federal government owns 47% of the land in the western US. The land just
sits there, doing virtually nothing, except growing hay for which
ranchers pay. The Left promised to give us national health care, which
is called a “single payer system.” That is just around the corner. The
ACA (Affordable Care Act) plan is going bankrupt, probably as planned,
so that eventually the government will “have to come to the rescue” and
create the nationalized health care system, which HRC originally wanted
to implement when her husband was President. Remember that? The Left
never forgets its agenda.
OBAMACARE (ACA): the ACA has caused a big rise in health insurance
costs instead of the large declines that were forecast to get it passed.
The biggest insurers are now pulling back from the healthcare exchanges
because of the big losses they are incurring. Aetna will only be left
in four states. It is reducing its exposure to this sector by 70%. Other
major health insurers have also pulled back very substantially. This
huge program has failed. All the critics of 7 years ago were right. The
Veterans Healthcare Program gives you an indication of how such a
governmental program works, or doesn’t work. You will wait 6 months or
more for an urgent operation. Washington will deny that this could
happen for the nation. But they also promised “you can keep your own
doctor” (unless he retires because of the regulations), or the average
household will save over $2000 per year on their health insurance;
actually costs have risen significantly around $4000 with much higher
deductibles. This type of health care has been the favorite of candidate
Hillary since the first term of her husband. It has nothing to do with
healthcare but everything to do with “control” over the life of every
American. If your political view determines your place in line when you
need an operation, the government has extreme power over you.
OIL GLUT AHEAD Freight rates for oil plunge: The rates for shipping
a tanker-load of crude oil by Very Large Crude Carriers (VLCC) from
Rotterdam to Singapore, have dropped another $200,000 to $2.25 million,
according to S&P Global Platts. Rotterdam is Europe’s largest port
for the throughput and storage of crude oil. Singapore is the world’s
largest crude oil transshipment center. It’s the lowest rates for that
route since Platts started tracking VLCC data in 2006. That’s down from
$6.4 million in January – a 64% plunge in eight months! This is amazing.
Lower oil prices is one thing, but the much lower freight prices may be
due to declining consumption, at least in part. The other part is that
24 new VLCCs have already been delivered in 2016, and 13 more are
expected to be delivered during the remainder of the year, for a total
of 37. Next year, an additional 39 VLCCs are expected to be delivered.
That is a glut of tanker space. In the future, they will be handy as
storage bins for oil when oil is literally coming out of the ears of
producers. Here is a description of the size of these tankers. The
VLCC’s have a capacity of over 200,000 DWT (deadweight tonnage) and up
to 320,000 DWT. Larger is an Ultra Large Crude Carrier (ULCC). One VLCC
can carry over 2 million barrels of oil. Let’s look at consumption: US
net imports of crude oil and petroleum products is less than 5 million
barrels per day – two tankers. So 70 additional tankers of this size
means an enormous overcapacity as it comes on top of the current
oversupply.
THE “JAPAN SYNDROME” Byron Wien, who is now the Vice Chairman of
Blackstone (a large private equity firm), has been on Wall Street for
decades. He said: “We don’t have the tools to deal with a recession
anymore. But I don’t think we have the all the prerequisites for a
recession either.” (2-25-16, Barrons) He amplified on that. He said he
recently took a trip through many European countries recently. Everyone
in the financial industry he met with said we can’t find any stocks to
buy. We hear the same thing from US money managers who dare say what
they think. This reminds me of a trip to Hong Kong in 1997, just a few
months before the turnover to China. It was a conference of the Bank
Credit Analysts. One of the speakers was the top economist of a major
Japanese brokerage firm. Japan’s economy was just showing positive
growth after about 7 years of contraction. He and almost all analysts
were bullish on Japan. I looked at the planned consumer tax hikes
planned for Japan, and concluded that Japan’s rebound would soon turn to
recession again. It did. Japan has been oscillating between mild growth
and contraction for 25 years. All the fiscal stimulus -- such as
building bridges to nowhere and highways -- didn’t produce long term
growth. And all the money printing (QE) of the past two years only
caused more distortions in the financial system. We believe that what we
call the “Japan syndrome” may infect the entire globe over the long
term. The positive part is that the major central banks, working in
concert, may be able to prevent a significant market crash in the major
investment markets. The negative part is that an increasing number of
people will join the roles of the unemployed. We believe that behind the
scenes, this is being recognized. And that is why we see trial balloons
being floated about UBI, Universal Basic Income. (i want this!)The
central banks would give monthly allowances to households directly
instead of giving it to the banks. That would become the new safety net.
People would still get poorer, except for the establishment elite, but
wouldn’t starve or become homeless. That would keep them from rioting in
the streets.
Money would increasingly lose purchasing power. People would go
increasingly to gold and silver related assets as the money creation by
the central banks assures value destruction of paper money. However, big
government is coercive. If the precious metals rise too much, taxes on
the profits of precious metals investments would soar in order to
discourage this. People must stay informed. Knowledge is power and
allows people to survive. When I was a little boy in Hitler’s Germany,
my father always said, “they can take away all material things, but they
can’t take away what you have up here” pointing to his head. He was a
well-known artist, having done 10 story high frescoes, huge mosaics, and
stained glass windows in public buildings. He was eventually
blacklisted by the Nazi government because he had turned down their
“invitation” to join the party and be used for publicity. Being
blacklisted meant no more contracts for art in government buildings.
JAPAN’S DEBT FINANCING "Perpetual bonds" are zero-coupon debt with
no maturity… In other words, they're bonds that pay no interest and
essentially will never return principal. Japan could issue new perpetual
debt (the next best thing to firing up the printing press without all
the negative connotations) or – according to Jefferies Chief Global
Strategist Sean Darby – swap them for existing debt. Because 90% of
Japanese government debt already yields 0% or less, the government could
potentially convert some of this existing debt into perpetual bonds…
transforming it into debt that would never have to be paid back. This
would give the government a "clean slate" to increase spending further.
Two weeks ago, the iShares iBoxx Investment-Grade Corporate Bond Fund
(LQD) took in $1.1 billion of new funds in a single day. According to
Bloomberg, this is LQD's "biggest daily inflow ever and the largest ever
recorded for a corporate bond fund." Last week, high-yield (or "junk")
bond funds took in more than $2.1 billion in a single day… including
more than $1.1 billion in high-yield ETFs like the iShares iBoxx
High-Yield Corporate Bond Fund (HYG). This too was the largest one-day
inflow into high-yield bond funds on record, and last week set a new
all-time record for inflows into U.S. corporate debt. In total,
yield-hungry investors have poured a mind-boggling $124 billion into
bond ETFs so far this year, according to the Financial Times. New data
show high-yield bond defaults are still increasing. Credit-ratings
agency Moody's says U.S. speculative-grade defaults spiked to 5.1% in
the second quarter, the highest level since the financial crisis. The
chart of high yield bonds is starting to turn down after the recent
rally. We should see the bear market return to this sector in August.
POLLUTION “The 15 largest cargo ships in the world pollute more
than all the cars in the world,” said Shervin Pishevar, CEO of
Hyperloop. (IBT, David Gilbert, 11/4/2015) The company is now developing
the innovative Hyperloop, first for transporting goods. They are
working with Dubai, which has one of the largest ports in the world.
Transporting goods in “tubes” of Hyperloop running at perhaps 500 mph,
would be so much more efficient than ships. The world is changing.
