“An explosive critique about the investment industry: provocative and well worth reading.” –Financial Post
“Juggling Dynamite, #1 pick for best new books about money and markets.” –MoneySense
“Park manages to not only explain finances well for the
average person, she also manages to entertain and educate, while cutting through the clutter of information she knows every investor faces.” –Toronto Sun
The US lost 54,000 jobs in August, which is 46,000 less than the consensus had expected. The all important private sector added 67,000 new jobs (27K more than expected) and the "official" unemployment rate edged up to 9.6%. It is great that the private sector found a reason to hire 67,000 people. We should not lose sight however of the big picture here. Three years after the 2007 recession started, the US economy is still losing (not adding) jobs.
Job creation in this "recovery" is tragically low. In fact 1 in 6 Americans are now receiving some form of financial assistance from the government to exist:
Bond markets are closing early at 1pm today, and so far the jobs euphoria is putting the long bond on offer. In truth long bonds rallied so far so fast over the past couple of weeks, there is breathing room for a pull back here without breaking the bond uptrend
We suspect this week's relief rally in risk assets, based on a couple of less bad reports, may not yet be durable. Stay tuned. more»
For the past few years, we have noted that ballooning capital flows into commodities have caused a momentum unto itself frequently at odds with fundamental concepts of end use supply and demand. Hedge funds, commodity-based-exchange traded funds and institutions looking for alternative investments to under-performing equities the past 10 years have become a price force on to themselves. This can present real challenge to those of us who are trying to follow rational investment process. Investment-momentum-money is fickle, largely trend-following and often irrational. It typically buys just to buy and sells in panic.
This article on oil makes the point well: see Oil should be around $10 a barrel: Annalyst :
The price of a barrel of oil would be closer to $10 if the commodity wasn't traded as an investment instrument, given the record-high levels of U.S. oil inventories, Peter Beutel, president of Cameron Hanover, told CNBC Monday.
"I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn't be anywhere near where it is," Beutel said.
"We have so much oil right now, more than we've had in 27 years. Why is it 27 years? Because that's how far our records go back. It's probably the most in 50 or 100 years," he added.
Higher prices the past few years have encouraged the usual response: much higher exploration, innovation and production, ballooning world supply. Passionate arguments aside, the price of oil today makes no mathematical sense in the lower demand world of the post-credit-bubble economy. more»
This weekend the weather here was my idea of heaven. Canada at its breath-taking-best. In the evening after the sun went down our family celebrated a favourite summer tradition: watching movies on our deck. Under the stars: no bugs, no sweaters; just bliss and a cold drink. And the films we downloaded for the occasion were diverse and awesome:
and Stephen Hawking and the Theory of Everything. After an hour of this one, I was overwhelmed with the tiny scale of my thinking and went to bed. But I will tackle it again soon...Mind-boggling...The film is also available for free in 10 clips on YouTube.
Great piece in the Wall Street Journal today, on China's aging population, a trend exacerbated by the one-child policy. That means there will be a declining number of wage earners to support an increasing number of older people. See: Gray Matters in Booming China
"But China's demographic dividend is about to start fading, and that has implications for the country's economy. Along with moderating total-factor productivity, it is the main reason the World Bank expects China's annual growth rate to drop to 7.7% in 2015, and 6.7% by 2020. It was 8.7% in 2009. This could mean China soon loses its place as Asia's fastest-expanding large economy. Indeed, Morgan Stanley economists expect India's annual growth rate to surpass China's somewhere between 2013 and 2015. One reason: India's age-dependency ratio is heading in the opposite direction from China's, a trend that could last until 2040 at least."
Not stats we hear the China Perma-bulls touch on much. more»
All the hype and hope surrounding Bennie and the Fed's comments at Jackson Hole Friday, underline how much mainstream commentators and stock bulls want to paint the Federal Reserve as a super-hero who can magically solve the economy. Far from it, in my view. The past decade the Fed has been more an antagonist than saviour. They have increasingly lost legitimate purpose in favour of helping us to propagate economic demise.
This article asserts that, in dealing with the 2007-2009 financial crises, the Federal Reserve Bank (Fed) has placed its role as monetary agency and de facto steward of the market for U.S. Treasury debt ahead of its statutory responsibility for ensuring the soundness of the private banks. This is not to say that the Fed supplies whatever credit the government wants — at least not yet — but in terms of both the provision of credit to the private financial system and the price of this credit, the growing fiscal imbalances of the U.S. government seem to be playing an increasing role in Fed policy decisions.
"Far from being an objective and fair prudential regulator, over the past several decades the Fed has shown a willingness to bend the rules or even launch into new, speculative areas of public policy, all in the name of appeasing the short-term political agenda of the Congress and the largest U.S. financial institutions. Maintaining access to cheap credit for the private sector as well as the stability of the largest banks, which include several of the most significant underwriters and dealers in government securities, may be seen as a means to larger ends, namely: (1) maintaining the appearance of positive levels of economic output and (2) preserving the ability of the Treasury to refinance existing debt and also issue debt.'
This film by academy award nominated filmmaker Charles Ferguson, narrated by Matt Damon looks insightful; coming soon to a theatre near you. The fact that so many people now understand what happened and yet many of the players are still "advising" the government on financial policy is sad and outrageous all at once.
Ms. Park was a guest this morning at 8:50am est on BNN with Michael Kane, discussing the significance of recent price action in bonds and equities as well as key macro trends and how investors can protect themselves from the mounting risk of further capital losses. A clip of the interview is available here on the BNN web site. more»
The risk trade is coming off with a vengeance today. Equities, commodities and the C$ are all selling off on significant volume. As referenced here last week the 10-year Treasury yield that breached 2.60 last week this morning cut through 2.50 like butter.
The last cycle yield low of 2.07 in November 2008 is now back within sight. The ramifications of this are many. An important point is that the 10-year treasury yield tends to bottom about 2-4 months in advance of the stock market. The last yield bottom in November '08 preceded the stock market bottom in March 2009 by 3 months. The second issue evident here is the extreme rapidity of market moves in this environment. Trends that traditionally take many months to play out today move in a matter of days and weeks. This is what makes this climate so dangerous for passive allocations and traditional (read antiquated, unenlightened, arguably reckless) concepts of portfolio management.
The technical breakdowns across risk assets since April are significant and are ignored at great risk of peril. Even after the year to date declines, stock markets are today at nose-bleed premiums to where they bounced in March 2009 and even November 2008. The downside risk is looming large for capital left to drift here. The next test area for the S&P 500 on a closing daily basis is 1010 which would be 17% below the April 2010 high.
If it doesn't hold there (and we fear it won't based on the downside momentum presently in the semi-conductor index among many other leading indicators), then the next test will be 950. Look out below.
more»
Economist Gary Shilling has been correctly predicting deflation and a rally in long bonds. In this recent talk with Tech Ticker he updates on what he sees still coming in these trends. He also rightly underlines the ridiculous comments some make about long bonds being riskier than stocks. The key point is that neither is a "buy and hold" type of investment. Once bond yields bottom out long bonds will need to be sold to protect price gains. This goes without saying. You can't passively and perpetually hold stocks or bonds if you intend to make gains and keep them.
Good discussion here of the arguments for and against letting the bush tax cuts expire in January:
The answers to digging out of debt are the same for governments as they are for individuals: cut spending and increase revenue. Dean's point about higher income earners being able to pay more tax dollars without curtailing their consumption spending is valid. Meanwhile those on the lower end of the income scale will actually pay somewhat lower taxes under the new regime. This CNN.money article explains the math... more»
Trulia Real Estate Search has published their most recent survey of consumer attitudes to home ownership completed in July. More than 90% of those surveyed said that their ideal home size today is less than 3200 square feet and one third say it is less than 2000 square feet. It seems that Americans are increasingly seeing less (mortgage, taxes, maintenance, utilities) as more (peace and cash flow). The era of the McMansion (where the foyer is usually larger than the living room) is over. Long live the comfortable, humbler, greener, less-indebted abode.
The era of the 'cash-out mortgage' where people saw their houses as ATM's has given way at last to the era of the 'cash-in mortgage' where people are focused on paying down their mortgage with accelerated payments and lump sums where ever possible. See Cash-in refis soar.
What the housing market really needs to clear excess supply is lower prices so that real people can afford to buy them at regular, healthy-economy, interest rates. Trying to backstop and rescue this market from its necessary correction has impeded the recovery, not helped it. Governments, for the love of Pete, STOP trying to "fix" housing! more»
Here is an epiphany for those still clamoring to stimulate consumer spending: people who are over-extended on credit and under-employed, or unemployed, do not do a lot of shopping.
America's job market stats provide the catalyst for a secular shift down in retail sales:
-- Over 8 million jobs have been lost since the recession "officially" began in December 2007.
-- 14.6 million Americans are out of work. It will take several years to replace the jobs that are now missing.
-- 6.6 million Americans have been out of work six months or longer.
-- The "real" unemployment rate is 16.5%.
-- 26% of American workers are "under-employed".
This behavioral change comes just as the world is awash in mini-malls and endless supply of retail realty space. Look around your neighbourhood at all the "For lease" signs that are cropping up. And still there are many new retail projects still underway that will bring even more redundant space to market. Gifts from the credit bubble... Developers should take note and start figuring out useful things to do with these properties. How about urban gardens and retraining centers.
more»
Today we discussed the health of Canada's domestic economy and what the future looks like in the new 'post-credit-bubble' normal of slower world demand, as well as key demographic and investor behaviours that continue to move capital into bonds and away from equities and real estate. You can listen to the 16 minute audio segment here.more»
After falling to 2.67 on Friday, the 10 year US Treasury bond yield yesterday continued its dramatic decline breaking below 2.60 to close at 2.58.
The 5-year TIPS yield officially went negative last week. The bond market is pricing in a recession. Whether one prefers to see this as a new recession or a continuation of the 2007 recession, it really doesn't matter. The economic landscape is looking pretty tough over the next few months. Falling bond yields typically lead the stock market lower. The consensus view today is that there will be no renewed period of negative growth ahead because "double-dips are extremely rare". But what the consensus view overlooks is that we have been through very extreme financial conditions in the world the past few years. Statistically "rare" events have become our common occurrences.
Meanwhile economist Paul Krugman was speaking to the Canadian Bar Association this week and (apparently in preparation research for the appearance) became one of the latest American financial commentators to finally notice that Canadians are up to our ucksters in debt today:
"In preparation, I did some homework; and to be honest, I came away a little less sanguine about Canada than I started. Everything I and others have said about the Canadian banking system and its virtues is true. But in other respects, there do seem to be some worrying signs. First of all, Canadians borrow and spend like, well, Americans":
Read his article about it in the NY Times yesterday, Uh-Oh Canada? As one who has been trying to bang this gong for a couple of years now in my home land, I am happy that an influential American commentator is finally noticing we are not a miraculous "decoupled" island unto ourselves up here. (We hear this oblivious drivel mostly everywhere else).
In a slowing global economy where the world is awash in excess supply of most things, Canada is unfortunately over-levered and over-exposed to the consumption down cycle now in process around the globe. Our leaders have been as short-sighted here as everywhere else. We have not squirreled away our nuts for winter days. We have spent pretty much every cent and more. This means we are not now prepared for slower demand, slower growth. Reduce, reuse, and recycle means less sales for Canada's resource dependent economy. And I believe that post-credit bubble this is not just a cyclical shift but a secular move down in world demand that will last for several years to come. Compounding all of this is the aging demographics in most parts of the developed world (including China and Japan) where boomers are learning to live on less. See WSJ: Boomers cutting back.
Ultimately less consumption is better for the planet, but only those that can see and adjust to this new normal will be able to prosper in it. It is time to invest in people, technology and infastructure, not more non-productive things.
more»
First, guys at perpetually long equity firms (the vast majority of commentators) are constantly married to an optimistic hope for the stock market. No one should ever be mislead or encouraged by their bullish take; they can only sing the one tune.
Second, we are not in a typical post-war recession cycle, we have not been for 10 years. Analysts that keep tossing out comparisons to the last two recessions are not useful. We are perhaps just half way through a deleveraging cycle that will continue to suppress credit, growth, earnings and stock prices over the next 5-10 years. On top of that real estate is also in the midst of a secular down trend where we will move from the present over-supply to a market of tight supply eventually over the next few years. Boomers are in the process of realizing that they own too much house and too little cash and savings. Interest rates have been reduced in efforts to rescue debtors but in the process this has thrown savers into a dire need for more capital to produce subsistence income.
As the penny drops for boomers, one by one, their rational response is to look to reduce their stock and real estate holdings. The challenge is that the population behind the boomers is much smaller, poorer and more pessimistic. They are not feeling confident, wealthy or self-indulgent enough to snap up highly priced assets. Prices will need to work down and population will need to expand to soak up the supply. This will take years not months. Dealing with the facts at hand and calibrating our approach to the conditions in which we exist is the only response that makes any sense. Trying to drive on with an idea of how conditions used to be (when we were in the secular leveraging period) is akin to financial suicide.
more»
A great piece on China this morning from copper market analyst Simon Hunt courtesy of John Mauldin's Thoughts from the Frontline. The article is worth reading and cites some sobering stats on demographic and resource hurdles (especially water) facing the country.
Rarely have I heard market hyperbole and salesmanship more fully in bloom than on the topic of China the past few years. Many people have had a vested interest in selling the “insatiable growth” story and so we have heard plenty of it. Hunt's latest report confirms that China has now entered into a period of significant trial and tribulation. Domestically he cites the following list of issues now threatening political and social stability:
• Home affordability
• Leadership instability
• A potential if not actual housing bubble
• The rising income and wealth differential between those who have made it and those who have not
• The country’s continued dependence on exports as its principal driver of growth
• Cheap credit, which punishes savings and encourages investment/speculation
• The misallocation of capital that springs from the previous factor
• Local/provincial government indebtedness
• A new assertiveness and arrogance at all levels
• Policy making that focuses on short-termism without addressing structural and longer-term issues, etc.
• Impact of rising wages
• Energy intensity
• Role of foreign companies
• Resource dependability – water, raw materials, etc.
This list reads of course, like a hit list of the classic human behaviour that has plagued not just China, but the entire developed and developing world the past decade.
Ultimately I suspect a revolution of the Chinese people will be needed to redress incredible systemic imbalances and realign the interests of the elite few with the needs of the many. And in the western world, what will our revolution look like?
For starters individuals are gradually pulling off the energy-sucking credit machine which has crippled our society for many years now... more»
Friday the stock markets staged a late day recovery on the notion that the North American economy is in such poor condition its governments will be under pressure to search for more 'magical' ways to inject tax-payer capital into the financial system. We live in perverse times. The trillions in stimulus spent in the world since 2009 have not stopped the inevitable economic contraction from continuing. Negative economic evidence continues to mount and presents increasingly serious price risk for equity and commodity markets still desperately thrashing around manic levels. Technically stock markets remain in contraction mode at the weekly close. The jobs data in North America was horrific.
US job losses came in at -131,000 versus the consensus estimate of -65,000 (private payrolls rose 71,000 but below the 90,000 increase that was expected). Net revisions for the prior two months were -97,000, so overall the level of employment was 153,000 lower than economists had predicted. Even more alarming, the labour force continues to shrink as discouraged workers drop out an alarming rate— 181,000 in July and down 1.2 million in the past three months. More than 40 million Americans were living on food stamps in May. This is not a jobless recovery. It is not a recovery.
Canadian bulls had a rude awakening too as Canadian job losses surged as well. All the full-time jobs that had been reported with great celebration in Canada the past three months were deleted in this one report. Meanwhile the Globe runs with a good update on the Canadian housing and credit bubble this morning which reminds us Canadians are precariously levered going into this renewed period of economic weakness with debt now at a nose-bleed 141% of disposable income. Good luck.
My suggestion is consider what you have to lose. Pull in, pay down any leverage, shore up cash, wait for it... more»
Summer volumes do tend to be low, but this July was especially anemic compared to the past 3 years of the Canadian TSX 60 Index (see blue lines in boxed areas at the chart bottom below):
Bulls will need to talk more capital into this market if it is going to break out in a meaningful way...otherwise so far, the bias is still to the downside. more»
One of the hardest things for shallow-thinkers to grasp is that price in asset markets is not the only metric of import. As David Rosenberg says, most mainstream commentators (CNBC hosts) and investors "live only in the moment". Sadly that approach is a sure way to suffer great capital losses repeatedly over time. Volume is one of the rare technical gauges that can actually help us get ahead of the curve a bit. This is why seasoned market analysts always want to look at volume as one of the most important barometers. It is worthwhile to note that volume in the stock rally off the March 2009 lows began to wane a few months in and by last June was showing more selling pressure on up days than buying pressure. Only on down days did volume pick up. Interestingly while markets rebounded from June 2010 losses in July, the volume of buyers hit a fresh low. Lasting gains need a steady stream of new buyers and believers to sustain. Thinly traded markets are notorious for sharp, shocking losses in short periods of time. It's just the way it is...
Excellent interview clip with famed money manager Felix Zulauf. His career journey was incredibly similar to my own it turns out: learned what not to do with money by working at large institutions, realized the conventional wisdom about portfolio management was farcical, founded his own independent management firm to have needed flexibility, starved in the beginning(with two young kids) before he could attract good clients (yikes, I still have post-traumatic stress disorder from this time, my husband and I both quit our bank jobs to start our company, we had no net income for more than 2 years ), he avoids leverage at all cost, realized that understanding and tracking business and market cycles is essential to capturing and keeping returns...all his experience has made him very risk averse, he would rather earn less than lose money...
Interesting to me is that he grew into running mutual funds before realizing it was a bad approach, then cashed out and went full-circle back to managing individual accounts out of a small boutique again...He explains the calls that made him successful along the way, importantly in part 2 Barry gets him to talk about some of the inevitable mistakes he made over the years. Discussing our mistakes is always painful, but generous and helpful to others.
Stocks are feeling wildly optimistic this morning. The ISM reported its manufacturing gauge fell to 55.5 in July from 56.2 in June, but that came in 1.5 better than the 54 level that economists had expected. The trend is clearly for weaker levels ahead as explained by TD securities this morning:
"New orders, which drives activity in related and downstream manufacturing efforts was weaker than expected falling to 53.5, the lowest level since mid-2009. Production was also down falling for the third straight month and while a reading of 57.0 is still pretty good, more downside is expected. The area of strength that cushioned the decline in July may have been unintentional. Inventories produced a tidy gain rising from a depressed level of 45 to just over 50, but like the Q2 GDP report, the jump in inventories is likely not intentional given the paucity of real final sales. As the ratio of new orders to inventories gets compressed, it suggests that production will continue to weaken with a lag, as will most other components. This is reinforced by orders backlog which also is moving lower, falling to 54.5 from 57.0. With orders being worked off and new orders becoming sluggish, inventories will be pared down and real demand will edge lower. We expect this to be reflected in Q3 GDP which should come in close to 1.6%."
It is important to note that the ECRI leading indicator index which most recently reported a -10.9% weekly growth rate typically leads the ISM PMI by 13 weeks and 13 weeks ago the ECRI WLI was still a positive 12.7. This trend suggests that we could see the ISM PMI data fall officially into contraction mode this fall. This would be bad news for a stock market that is presently pricing in robust earnings growth.
For a series of very illuminating charts on the quality of this economic "recovery", see Bill Hester's article today Subpar recovery gets premium market valuation at Hussman Funds:
"For investors, what's important is the extent to which expected growth in the economy and earnings is priced, or possibly overpriced, into the market. The current subpar recovery should probably warrant a below-average level of valuation compared with prior recoveries. Unfortunately, the opposite is true. To put the current level of valuation into perspective, the table below shows Robert Shiller's Cyclically Adjusted P/E Ratio (CAPE), which normalizes earnings by averaging the prior decade's results. The table shows that there have only been two other periods where the economy was recovering from a recession and the level of valuation was higher. One was in November 2002, a year following the end of the 2001 recession. The S&P 500 has achieved a total return of just 4.2% annually in the 8 years since then. The other instance was in February 1962, a year after the 1961 recession ended, when the CAPE was at 21.45 (the S&P 500 quickly lost a quarter of its value over the next few months). The average CAPE level for the periods shown is 16, versus the current level over 20".
Seriously, these pictures cut through the spin of a thousand bullish commentators…well worth a look... more»
“Dear Ms. Park, I watched your appearance on BNN today, and I just have to leave you a message saying 'Thank you' for giving viewers your very frank opinions about how things are going and certain industry practices. I
appreciated you trying to give as much information as you could during that (too) short segment. Thank you for what you are doing for all investors!”
—blog reader, April 30, 2008
“Each time I see Danielle Park on BNN, I am impressed with her comments and insights. Other than Rick Santelli on CNBC, she is the only commentator that I feel is completely honest and trustworthy.” —M. Scher, Toronto
