Economic Summary: Dohmen Update
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.