cycles - What We're Reading - StockBuz2024-03-28T14:56:47Zhttp://stockbuz.ning.com/articles/feed/tag/cyclesWhat is a Commodity Super Cycle?http://stockbuz.ning.com/articles/what-is-a-commodity-super-cycle2019-08-02T22:04:31.000Z2019-08-02T22:04:31.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a href="{{#staticFileLink}}3403549125,RESIZE_1200x{{/staticFileLink}}"><img class="align-full" src="{{#staticFileLink}}3403549125,RESIZE_710x{{/staticFileLink}}" width="710" alt="3403549125?profile=RESIZE_710x" /></a></p>
<p>Since the beginning of the Industrial Revolution, the world has seen its population and the need for natural resources boom.</p>
<p>As more people and wealth translate into the demand for global goods, the prices of commodities—such as energy, agriculture, livestock, and metals—have often followed in sync.</p>
<p>This cycle, which tends to coincide with extended periods of industrialization and modernization, helps in telling a story of human development.</p>
<h3>Why are Commodity Prices Cyclical?</h3>
<p>Commodity prices go through extended periods during which prices are well above or below their long-term price trend. There are two types of swings in commodity prices: upswings and downswings.</p>
<p>Many economists believe that the upswing phase in super cycles results from a lag between unexpected, persistent, and positive trends to support commodity demand with slow-moving supply, such as the building of a new mine or planting a new crop. Eventually, as adequate supply becomes available and demand growth slows, the cycle enters a downswing phase.</p>
<p>While individual commodity groups have their <a href="https://www.visualcapitalist.com/periodic-table-of-commodity-returns-2019/">own price patterns</a>, when charted together they form extended periods of price trends known as “Commodity Super Cycles” where there is a recognizable pattern across major commodity groups.</p>
<h3>How can a Commodity Super Cycle be Identified?</h3>
<p>Commodity super cycles are different from immediate supply disruptions; high or low prices persist over time.</p>
<p>In our above chart, we used data from the Bank of Canada, who leveraged a statistical technique called an asymmetric band pass filter. This is a calculation that can identify the patterns or frequencies of events in sets of data.</p>
<p>Economists at the Bank of Canada employed this technique using their <a href="https://www.bankofcanada.ca/rates/price-indexes/bcpi/">Commodity Price Index (BCPI)</a> to search for evidence of super cycles. This is an index of the spot or transaction prices in U.S. dollars of 26 commodities produced in Canada and sold to world markets.</p>
<ul><li>Energy: Coal, Oil, Natural Gas</li>
<li>Metals and Minerals: Gold, Silver, Nickel, Copper, Aluminum, Zinc, Potash, Lead, Iron</li>
<li>Forestry: Pulp, Lumber, Newsprint</li>
<li>Agriculture: Potatoes, Cattle, Hogs, Wheat, Barley, Canola, Corn</li>
<li>Fisheries: Finfish, Shellfish</li>
</ul><p>Using the band pass filter and the BCPI data, the chart indicates that there are four distinct commodity price super cycles since 1899.</p>
<ul><li><strong>1899-1932:</strong><br /> The first cycle coincides with the industrialization of the United States in the late 19th century.</li>
<li><strong>1933-1961:</strong><br /> The second began with the onset of global rearmament before the Second World War in the 1930s.</li>
<li><strong>1962-1995:</strong><br /> The third began with the reindustrialization of Europe and Japan in the late 1950s and early 1960s.</li>
<li><strong>1996 – Present:</strong><br /> The fourth began in the mid to late 1990s with the rapid industrialization of China</li>
</ul><h3>What Causes Commodity Cycles?</h3>
<p>The rapid industrialization and growth of a nation or region are the main drivers of these commodity super cycles.</p>
<p>From the rapid industrialization of America emerging as a world power at the beginning of the 20th century, to the ascent of China at the beginning of the 21st century, these historical periods of growth and industrialization drive new demand for commodities.</p>
<p>Because there is often a lag in supply coming online, prices have nowhere to go but above long-term trend lines. Then, prices cannot subside until supply is overshot, or growth slows down.</p>
<h3>Is This the Beginning of a New Super Cycle?</h3>
<p>The evidence suggests that human industrialization drives commodity prices into cycles. However, past growth was asymmetric around the world with different countries taking the lion’s share of commodities at different times.</p>
<p>With more and more parts of the world experiencing growth simultaneously, demand for commodities is not isolated to a few nations.</p>
<p>Confined to Earth, we could possibly be entering an era where commodities could perpetually be scarce and valuable, breaking the cycles and giving power to nations with the greatest access to resources.</p>
<p>Each commodity has its own story, but together, they show the arc of human development.</p>
<p>Courtesy of <a href="https://www.visualcapitalist.com/what-is-a-commodity-super-cycle/" target="_blank">Infographic</a></p></div>The Big Picturehttp://stockbuz.ning.com/articles/the-big-picture2017-05-16T15:52:57.000Z2017-05-16T15:52:57.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="prose" itemprop="articleBody">
<p><em>First and foremost let me point out that Ray Dalio, <span id="dscexpitem_2042062067_12">founder of investment firm Bridgewater Associates</span>, has joined Twitter so I encourage you to <a href="https://twitter.com/RayDalio" target="_blank">follow him here</a>.  Secondly I suggest you grab a cup of coffee or maybe the entire pot as he gradually lays out what he sees ahead for the market.  Enjoy!<br /></em></p>
<p><strong>Big picture, the near term looks good and the longer term looks scary.</strong> That is because:</p>
<ol>
<li>The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,</li>
<li>There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,</li>
<li>Social and political conflicts are near their worst for the last number of decades, and</li>
<li>Conflicts get worse when economies worsen.</li>
</ol>
<p>So while we have no near-term economic worries for the economy as a whole, we worry about what these conflicts will become like when the economy has its next downturn.</p>
<p>The next few pages go through our picture of the world as a whole, followed by a look at each of the major economies. We recommend that you read the first part on the world picture and look at the others on individual countries if you’re so inclined.</p>
<p><strong>Where We Are Within Our Template</strong></p>
<p>To help clarify, we will repeat our template (see <a href="http://www.economicprinciples.org" target="_blank" rel="nofollow noopener">www.economicprinciples.org</a>) and put where we are within that context.</p>
<p>There are three big forces that drive economies: there’s the normal business/short-term debt cycle that typically takes 5 to 10 years, there’s the long-term debt cycle, and there’s productivity. There are two levers to control them: monetary policy and fiscal policy. And there are the risk premiums of assets that vary as a function of changes in monetary and fiscal policies to drive the wealth effect.</p>
<p>The major economies right now are in the middle of their short-term debt cycles, and growth rates are about average. In other words, the world economy is in the Goldilocks part of the cycle (i.e., neither too hot nor too cold). As a result, volatility is low now, as it typically is during such times. Regarding this cycle, we don’t see any classic storm clouds on the horizon. Unlike in 2007/08, we don’t now see big unsustainable debt flows or a lot of debts maturing that can’t be serviced, and we don’t see monetary policy as a threat. At most, there will be a little touching the brakes by the Fed to slow moderate growth a smidgen. So all looks good for the next year or two, barring some geopolitical shock.</p>
<p>At the same time, the longer-term picture is concerning because we have a lot of debt and a lot of non-debt obligations (pensions, healthcare entitlements, social security, etc.) coming due, which will increasingly create a “squeeze”; this squeeze will come gradually, not as a shock, and will hurt those who are now most in distress the hardest.</p>
<p>Central banks’ powers to rectify these problems are more limited than normal, which adds to the downside risks. Central banks’ powers to ease are less than normal because they have limited abilities to lower interest rates from where they are and because increased QE would be less effective than normal with risk premiums where they are. Similarly, effective fiscal policy help is more elusive because of political fragmentation.</p>
<p><strong>So we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists.</strong></p>
<p><strong>The “World” Picture in Charts</strong></p>
<p>The following section fleshes out what was previously said by showing where the “world economy” is as a whole. It is followed by a section that shows the same charts for each of the major economies. These charts go back to both 1970 and 1920 in order to provide you with ample perspective.</p>
<p><strong>1) Short-Term Debt/Economic Conditions Are Good</strong></p>
<p>As shown below, both the amount of slack in the world economy and the rate of growth in the world economy are as close as they get to normal levels. <strong>In other words, overall, the global economy is at equilibrium.</strong></p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxBAAAAJDAyOGMxM2Q0LWEzMDAtNGNlMS05YmJjLTM0ZGQzNjM2ZDc2NQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxBAAAAJDAyOGMxM2Q0LWEzMDAtNGNlMS05YmJjLTM0ZGQzNjM2ZDc2NQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxBAAAAJDAyOGMxM2Q0LWEzMDAtNGNlMS05YmJjLTM0ZGQzNjM2ZDc2NQ.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>2) Assets Are Pricing In About Average Risk Premiums (Returns Above Cash), Though They Will Provide Low Total Returns</strong></p>
<p>Liquidity is abundant. Real and nominal interest rates are low—as they should be given where we are in the longterm debt cycle. At the same time, risk premiums of assets (i.e., their expected returns above cash) are normal, and there are no debt crises on the horizon.</p>
<p>Since all investments compete with each other, all investment assets’ projected real and nominal returns are low, though not unusually low in relation to cash rates. The charts below show our expectations for asset returns (of a global 50/50 stock/bond portfolio). While those returns are low, they’re not low relative to cash rates.</p>
<p>Relative to cash, the ‘risk premiums’ of assets are about normal compared to the long-term average. So, both the short-term/business cycle and the pricing of assets look about right to us.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmTAAAAJGM1NjA4ZmZkLWVmYjYtNGIyNy1iNDVkLTFmM2JhNGZmOThkYQ.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmTAAAAJGM1NjA4ZmZkLWVmYjYtNGIyNy1iNDVkLTFmM2JhNGZmOThkYQ.jpg" /></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuBAAAAJDRlYjNhYzI3LWMyMTAtNDY0NS1hYWFlLTY4MWFkYTcwMzlmOA.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuBAAAAJDRlYjNhYzI3LWMyMTAtNDY0NS1hYWFlLTY4MWFkYTcwMzlmOA.jpg" /></div>
<p><strong>3) The Longer Term Debt Cycle Is a Negative</strong></p>
<p>Debt and non-debt obligations (e.g., for pensions, healthcare entitlements, social security, etc.) are high.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA1bAAAAJDFiZDNlMGFhLTk0YWQtNGQyYy1hMDRlLWEyMzcxYmViMDY3Mw.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA1bAAAAJDFiZDNlMGFhLTk0YWQtNGQyYy1hMDRlLWEyMzcxYmViMDY3Mw.jpg" /></div>
<p><strong>4) Productivity Growth Is Low</strong></p>
<p>Over the long term, what raises living standards is productivity—the amount that is produced per person—which increases from coming up with new ideas and implementing ways of producing efficiently. Productivity evolves slowly, so it doesn’t drive big economic and market moves, though it adds up to what matters most over the long run. Here are charts of productivity as measured by real GDP per capita.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0yAAAAJDM2NTE5ODI4LTE5MmQtNGM5NS1iN2M5LWQ3ZDBiYmU5ODM2YQ.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0yAAAAJDM2NTE5ODI4LTE5MmQtNGM5NS1iN2M5LWQ3ZDBiYmU5ODM2YQ.jpg" /></div>
<p><strong>5) Economic, Political, and Social Fragmentation Is Bad and Worsening</strong></p>
<p>There are big differences in wealth and opportunity that have led to social and political tensions that are significantly greater than normal, and are increasing. Since such tensions are normally correlated with overall economic conditions, it is unusual for social and political tensions to be so bad when overall economic and market conditions are so good. So we can’t help but worry what the social and political fragmentation will be like in the next downturn, which, by the way, we see no reason to happen over the next year or two.</p>
<p>Below we show a gauge maintained by the Federal Reserve Bank of Philadelphia that attempts to measure political conflict in the US by looking at the share of newspaper articles that cover political conflict from a few continuously running newspapers (NYT, WSJ, etc.). By this measure, conflict is now at highs and rising. The idea of conflicts getting even worse in a downturn is scary.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm2AAAAJDYwZGQzMGQyLTI3ODEtNDRhMC1iMjdhLTM1ZDRiN2UyZTg0OQ.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm2AAAAJDYwZGQzMGQyLTI3ODEtNDRhMC1iMjdhLTM1ZDRiN2UyZTg0OQ.jpg" /></div>
<p>Downturns always come. When the next downturn comes, it’s probably going to be bad.</p>
<p>Below, we go through different countries/regions, one by one.</p>
<h3><strong>Looking at the Individual Economic Blocs</strong></h3>
<p><strong>United States</strong></p>
<p>As shown below, the US is around equilibrium in the mid-to-late stages of the short-term debt cycle (i.e., the “in between” years), and growth remains moderately strong. Secularly, the US is at the end of the long-term debt cycle. Debt levels are high and have leveled off after a period of deleveraging. The Fed has started to tighten gradually, but interest rates remain low, so the Fed has limited room to ease in the event of a downturn. And as we’ve covered in prior <em>Observations</em> (so won’t go into here), the US is in a period of exceptional politicaluncertainty as the new administration’s policies continue to take shape.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsJAAAAJDg2MDNjNTZlLTNjNDEtNGVkYy05ZmMxLTk0NDBjY2ZlNzI5YQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsJAAAAJDg2MDNjNTZlLTNjNDEtNGVkYy05ZmMxLTk0NDBjY2ZlNzI5YQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsJAAAAJDg2MDNjNTZlLTNjNDEtNGVkYy05ZmMxLTk0NDBjY2ZlNzI5YQ.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAyLAAAAJDk0YjQwNDk2LTlhOTAtNGI3YS1iMDQyLTg1OTI2YzIxMmMyYQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAyLAAAAJDk0YjQwNDk2LTlhOTAtNGI3YS1iMDQyLTg1OTI2YzIxMmMyYQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAyLAAAAJDk0YjQwNDk2LTlhOTAtNGI3YS1iMDQyLTg1OTI2YzIxMmMyYQ.png?width=750" class="align-full" width="750" /></a></div>
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<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsBAAAAJDgzMjg4ZDE3LTg3ZTktNGYxNi1iNzY0LTc1MTc4OTdmNjk4Mw.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsBAAAAJDgzMjg4ZDE3LTg3ZTktNGYxNi1iNzY0LTc1MTc4OTdmNjk4Mw.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsBAAAAJDgzMjg4ZDE3LTg3ZTktNGYxNi1iNzY0LTc1MTc4OTdmNjk4Mw.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>Eurozone</strong></p>
<p>While there are two Europes within Europe, we will talk about the Eurozone as a whole (as we have covered the different parts in other <em>Observations</em>). The region is around cyclical equilibrium, but this masks significant divergences between depressed periphery countries and Germany, where the economy is running hot. In response to ECB stimulation, growth has picked up a bit, but inflation is still very weak and below the ECB target. Secularly, Europe is also at the end of the long-term debt cycle. Debt levels are high and haven’t fallen much. Nominal interest rates on both the short and the long end are around zero and are priced to stay low for years. We won’t go into detail here, but Europe also faces one of the most challenging political backdrops due to the growing support for populism.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqaAAAAJDQxOWQwZmQzLTFjYzMtNDZhZS05MWRiLWFiNzJkYTA3Yjc5Nw.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqaAAAAJDQxOWQwZmQzLTFjYzMtNDZhZS05MWRiLWFiNzJkYTA3Yjc5Nw.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqaAAAAJDQxOWQwZmQzLTFjYzMtNDZhZS05MWRiLWFiNzJkYTA3Yjc5Nw.png?width=750" class="align-full" width="750" /></a></div>
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<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAvNAAAAJDVhZmJlMjQ3LWQ0NzEtNDA4NC1hNzA2LTcxMGRmNzFjYmE5Yg.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAvNAAAAJDVhZmJlMjQ3LWQ0NzEtNDA4NC1hNzA2LTcxMGRmNzFjYmE5Yg.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAvNAAAAJDVhZmJlMjQ3LWQ0NzEtNDA4NC1hNzA2LTcxMGRmNzFjYmE5Yg.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuaAAAAJDRhYzZhMmNmLWM5NWUtNGNkYi1hODAyLWNkZTkyZDkyY2ExMQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuaAAAAJDRhYzZhMmNmLWM5NWUtNGNkYi1hODAyLWNkZTkyZDkyY2ExMQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuaAAAAJDRhYzZhMmNmLWM5NWUtNGNkYi1hODAyLWNkZTkyZDkyY2ExMQ.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>Japan</strong></p>
<p>In Japan, policy makers are trying to reverse decades of ugly deflationary deleveraging and shift to a beautiful deleveraging. As shown below, over the last several years, the BoJ’s policies have produced a cyclical upswing and eased deflation. Japan is now around its cyclical equilibrium, growth rates have picked up a bit, and inflation is still very low but the economy is no longer in deflation. Secularly, Japan is at the end of the long-term debt cycle, with the highest debt levels in the developed world (which the BoJ is monetizing at the fastest rate). Debt is still rising, driven by government borrowing. Interest rates have been around zero for two decades and are priced to stay there.</p>
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<p><strong>China</strong></p>
<p>We’ve previously described that China faces four big economic challenges (debt restructuring; economic restructuring; capital markets restructuring; and the balance of payments/currency issue) that are being well managed. We won’t go into these challenges here other than to emphasize that they are an important backdrop for the perspective shown below. Cyclically, overall levels of activity in China are neither too high nor too low; growth has accelerated and is now strong; and while inflation has picked up some, it remains modest. Debt levels are high and growing rapidly. Interest rates remain relatively low, though these have risen some recently. Under the hood, these aggregate conditions are the net of “two economies” that look very different: a slowing, heavily indebted “old economy” with pockets of excess capacity, and a steadily expanding “new economy” driven by higher-end industries and household consumption.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqvAAAAJGYxZjhhYTU3LTU1MDAtNDdkYy1hOWYzLTdkNGNjZGJiMThlOA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqvAAAAJGYxZjhhYTU3LTU1MDAtNDdkYy1hOWYzLTdkNGNjZGJiMThlOA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqvAAAAJGYxZjhhYTU3LTU1MDAtNDdkYy1hOWYzLTdkNGNjZGJiMThlOA.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxwAAAAJGIyODQ4NDgyLWY3MGQtNGU0Ni04NDEwLTU3ODdjNTU4ZGIzMA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxwAAAAJGIyODQ4NDgyLWY3MGQtNGU0Ni04NDEwLTU3ODdjNTU4ZGIzMA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxwAAAAJGIyODQ4NDgyLWY3MGQtNGU0Ni04NDEwLTU3ODdjNTU4ZGIzMA.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>Emerging Markets ex-China</strong></p>
<p>Obviously, this category aggregates many countries with many different sets of circumstances, which we won’t get into here. Overall, cyclical conditions in EM ex-China are a bit weaker than in the developed world, reflecting, that several of the largest countries (e.g., Brazil, Russia) are now recovering from balance of payments adjustments. But the longer-term picture is comparatively stronger. These EM countries haven’t yet seen much of a productivity slowdown akin to what the developed world has seen, and debt burdens remain low.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmsAAAAJDQzZTNmZWYxLWZmOWEtNDk3ZC1hMmJhLWU3ODA1YzViNWViMA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmsAAAAJDQzZTNmZWYxLWZmOWEtNDk3ZC1hMmJhLWU3ODA1YzViNWViMA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmsAAAAJDQzZTNmZWYxLWZmOWEtNDk3ZC1hMmJhLWU3ODA1YzViNWViMA.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0oAAAAJDQ5NzE3YTMwLWVhZGItNDRiMy1hZjliLTlhYWJhZjBiNGU5NQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0oAAAAJDQ5NzE3YTMwLWVhZGItNDRiMy1hZjliLTlhYWJhZjBiNGU5NQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0oAAAAJDQ5NzE3YTMwLWVhZGItNDRiMy1hZjliLTlhYWJhZjBiNGU5NQ.png?width=750" class="align-full" width="750" /></a></div>
<p>Courtesy of <a href="https://www.linkedin.com/pulse/big-picture-ray-dalio" target="_blank">Ray Dalio @ LinkedIn</a></p>
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</div>Remembering The Impetus Of Irrational Exuberancehttp://stockbuz.ning.com/articles/remembering-the-impetus-of-irrational-exuberance2016-10-22T18:45:50.000Z2016-10-22T18:45:50.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a href="http://storage.ning.com/topology/rest/1.0/file/get/1291328?profile=original" target="_self"><img src="http://storage.ning.com/topology/rest/1.0/file/get/1291328?profile=original" style="padding: 10px;" class="align-left" width="231" height="179"></a>In December of 1996, Greenspan was clearly beginning to worry about the economic fallout of a bursting asset bubble. Back then he had a front row seat and, in fact, a strong hand in creating the dotcom bubble, whether he admits it or not. He was so worried about the consequences of “irrational exuberance” that he declared these concerns “must be an integral part of the development of monetary policy.” And this was before he had even witnessed any of the actual economic consequences we have now lived with for two decades. Clearly, his worries were well founded but he wasn’t quite worried enough.</p>
<p>The financial well-being of entire generations has been permanently damaged. Think of the Baby Boomers whose retirement dreams turned to nightmares through two stock market crashes in less than a decade. Think of the Generation Xers whose dreams were shattered by the housing bubble and the mortgage crisis. As a group these latter folks, even though they are now entering their peak earnings years, are flat broke almost a decade after it all began. And the major media outlets wonder openly why the average American has next to nothing in savings. He was explicitly encouraged by the single most powerful institution on the planet to put his savings into great peril, time and again.</p>
<p><a href="https://i1.wp.com/www.thefelderreport.com/wp-content/uploads/2016/10/Screen-Shot-2016-10-20-at-1.22.18-PM.png?ssl=1"><img class="alignright wp-image-11095" src="https://i1.wp.com/www.thefelderreport.com/wp-content/uploads/2016/10/Screen-Shot-2016-10-20-at-1.22.18-PM.png?resize=602%2C350&ssl=1" alt="screen-shot-2016-10-20-at-1-22-18-pm" width="602" height="350"></a>Now I should be clear that over the decade following this famous speech, while he remained Fed Chairman, he did nothing to incorporate these prescient concerns into Fed policy. Just the opposite. After the dotcom bubble burst he engineered the housing bubble to try to ameliorate the damage done by the first. It’s one thing to worry about the risks of financial bubbles you have a hand in creating; it’s something else to actually do something about them. So while we can admire his foresight we should not honor it by overlooking his cowardice in failing to do anything about it.</p>
<p>Since then, and with the benefit of witnessing the actual fallout of these epic busts, many at the Fed (and even more outside of it) have openly discussed this dilemma of directly addressing asset bubbles. Eric Rosengren, head of the Fed Bank of Boston, became the latest to openly echo Greenspan’s concerns regarding “irrational exuberance” in the financial markets. Robert Shiller won a Nobel Prize for work in this very area. Still, nothing has been done to actually address these massive economic risks. After 20 years and two bursting bubbles whose effects are still plaguing the economy it’s still nothing more than sporadic public hand wringing by the people with the power to do something about it.</p>
<p>In recent years the Fed has only doubled down on these policies by directly pursuing a “wealth effect.” Rather than give a boost to the broad economy, however, these central bankers have only accomplished an even greater and more pervasive financial asset perversion. Stocks, bonds and real estate have all become as overvalued as we have ever seen any one of them individually in this country. The end result of all of this money printing and interest rate manipulation is the worst economic expansion since the Great Depression and the greatest wealth inequality since that period, as well.</p>
<p>Someday, possibly soon, the public will finally decide it’s had enough of the escalating boom bust cycles the Fed has exacerbated, if not directly engineered, over the past couple of decades. Falling confidence in these technocrats and the resulting rising populism will serve as a clarion call for a new brand of Fed Chairman with the courage to finally address the glaring danger asset bubbles pose to financial stability and the long-term economic health of our nation. She will be the 21st century’s version of Paul Volcker. Rather than breaking the back of inflation in the traditional sense, she will break the cycle of unwarranted asset inflation at the direction of the Fed and all of its deleterious consequences. At least I hope it’s not irrational to believe so.</p>
<p>Courtesy of <a href="https://www.thefelderreport.com/2016/10/20/remembering-the-impetus-of-irrational-exuberance-as-we-approach-its-20th-anniversary/" target="_blank">TheFelderReport</a></p></div>Variant Warns: Profit Margins To Head Lowerhttp://stockbuz.ning.com/articles/variant-warns-profit-margins-to-head-lower2014-05-27T14:12:00.000Z2014-05-27T14:12:00.000ZKoshttp://stockbuz.ning.com/members/Kos<div><p><em>While the continual question remains, why are bonds holding up? Why isn't that money flowing into equities? We highly recommend recommend this piece from Variant Perceptions. These gusy have nailed it over and over again in the past and maybe, just maybe big investors are embracing something that the little guy doesn't wish to accept. That profit margins in our "new recovery" are unsustainable. We may crawl higher, but they wouldn't bet the bank it will last long. That's great! I'd prefer reverting to the mean and loading up on names..........at lower levels. Enjoy-</em></p><p>Profit margins in the US have hit modern-day record levels, and this has been used to help justify high equity valuations. Consensus estimates are for profit margins to remain steady, or even increase from current levels. We disagree for ironclad economic and accounting realities, and think margins will fall, taking equities down too.</p><p>Profit margins have, at least until now, exhibited mean-reversion like behaviour. There has been a contention that we have reached a structural break, and profit margins will stay well above their long-term average. We disagree.</p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img1-300x183.png"><img class="align-left" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img1-300x183.png?width=300" width="300"/></a></p><p>Profit margins are high compared to their long-term average, and this is still true (but less so) if you just consider domestic profits, and non-financial profits.</p><p>The Kalecki Equation attempts to explain the drivers of profits. It is derived from the flow of funds concept and accounting identities. We’ll just state the equation here – it’s fairly intuitive – but we encourage readers to look up the derivation and the background. The equation is:</p><p>Profits = Investment – Household Savings – Government Savings – Savings from Abroad + Dividends</p><p>So profits are driven by different sectors of the economy. The following chart, from James Montier at GMO, shows the decomposition of profits over the last 60 years (click on image to enlarge).</p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img2-300x174.png"><img class="align-right" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img2-300x174.png?width=300" width="300"/></a></p><p>The blue part of the diagram – investment spending – has been the largest contributor to profit margins for most of the last six decades. But most lately, government spending has been the main driver of US profits.</p><p>However, the US government has been reining in its spending (ie its dissaving), so it is unlikely this will continue to be a major source of company profits in the coming years. The budget deficit has come in from 10% of GDP to less than 3%, and in cash terms has made back half the slump it saw during the financial crisis.</p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img3-300x205.png"><img class="align-left" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img3-300x205.png?width=300" width="300"/></a></p><p>Investment spending has been declining in a world on the hunt for income while rates remain at historic lows. It is unlikely this source of profits bounces back soon. Similarly, we don’t expect to see the household sector ramp up its spending when the household balance sheet remains impaired. Dividends have increased, but are unlikely to increase more, by enough to take the up slack from the fall in the government deficit. Finally, we are not expecting the US to start running a current account surplus any time soon.</p><p>So, what are the implications for long-term equity returns if profit margins fall? John Hussman of Hussman funds notes that profit margins on their own are a poor predictor of long-term US equity returns. So are price/earnings multiples. But the two together have a 90% correlation with the subsequent 10 year total return of the S&P, with equal importance.</p><p>So then the question remains, are we likely to see more multiple expansion driving long-term equity returns? Given the bulk of the last two years’ equity returns came from multiple expansion, we think it will be difficult for this to help push equities much higher before they return to fair value.</p><p></p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img4-300x164.png"><img class="align-right" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img4-300x164.png?width=300" width="300"/></a>From where we are in the cycle, it is difficult to see what will keep profit margins at current levels that are above long-term averages. If this is the case, then it is difficult to see what will drive equities much higher. The prognosis over the longer term for US equities is thus poor.<br/><br/></p><p>Courtesy of <a rel="nofollow" href="http://variantperceptions.com" target="_blank">VariantPerceptions</a></p></div>