inflation - What We're Reading - StockBuz2024-03-29T08:28:47Zhttp://stockbuz.ning.com/articles/feed/tag/inflationBull Case Thwarted By Bumpy Landinghttp://stockbuz.ning.com/articles/bull-case-thwarted-by-bumpy-landing2023-02-25T15:51:15.000Z2023-02-25T15:51:15.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a href="http://storage.ning.com/topology/rest/1.0/file/get/10972951660?profile=RESIZE_180x180" target="_blank"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/10972951660?profile=RESIZE_180x180" alt="10972951660?profile=RESIZE_180x180" /></a>Wall Street’s reaction to hotter-than-estimated inflation data suggested growing bets the Federal Reserve has a long ways to go in its aggressive tightening crusade, making the odds of a soft landing look slimmer.</p>
<p>After a lengthy period of subdued equity swings, volatility has been gaining traction. That doesn’t bode well for a market that’s gotten more expensive after an exuberant rally from its October lows. Stock gains have been dwindling by the day amid fears that a recession in the world’s largest economy could further hamper the prospects for Corporate America.</p>
<p>A slide in the S&P 500 Friday added to its worst weekly selloff since early December. The tech-heavy Nasdaq 100 tumbled about 2% as the Treasury two-year yield topped 4.8%, the highest since 2007. The dollar climbed. Swaps are now pricing in 25 basis-point hikes at the Fed’s next three meetings, and bets on the peak rate rose to about 5.4% by July. The benchmark sits in a 4.5%-4.75% range.</p>
<p>“There’s little room for upside in stocks right now given the inflation news, current market valuations after the January rally, and a weak Q4 earnings season,” Brian Overby, senior markets strategist at Ally. “The ‘no landing’ view is quickly becoming more of a ‘bumpy landing’ view with the concept of higher interest rates for longer settling in.”</p>
<p>The unexpected acceleration in the personal consumption expenditures gauge underscored the risks of persistently high inflation. Furthermore, resilient spending paired with the exceptional strength of the labor market will make it tougher for the Fed to get inflation to its 2% goal. Separate data showed US consumer sentiment rose to the highest in a year while new home sales topped forecasts.</p>
<p>Officials may need to raise rates as high as 6.5% to defeat inflation, according to new research that was critical of the central bank’s initially slow response to rising prices. In a paper presented Friday in New York, a quintet of Wall Street economists and academics argue that policymakers have an overly-optimistic outlook and will need to inflict some economic pain to get prices under control.</p>
<p>Read: Fed Officials Flag Risk of Sticky Inflation as PCE Comes in Hot</p>
<p>Mohamed El-Erian says financial markets are starting to doubt whether the Fed can bring inflation down to its target.</p>
<p>“We’re seeing actual and survey indicators heading the wrong way,” El-Erian, the chairman of Gramercy Funds and a Bloomberg Opinion columnist told Bloomberg Television.</p>
<p>Cleveland Fed President Loretta Mester said a bigger-than-expected rise in the central bank’s preferred inflation gauge shows the need to keep raising rates, but stopped short of suggesting this warranted a step-up to a half-point hike. The report is “just consistent with the fact that the Fed needs to do a little more on our policy rate to make sure that inflation is moving back down,” she added.</p>
<p>As investors position for the risk that the Fed persists with hawkish policy moves, they have been dumping equities and cash alike in favor of bonds, Bank of America Corp. strategists said.</p>
<p>Global equity funds lost $7 billion in outflows in the week through Feb. 22, while $3.8 billion left cash funds, according to a note from the bank, which cited EPFR Global data. At $4.9 billion, bonds drew additions for an eighth straight week in the longest such streak since November 2021, the team led by Michael Hartnett said.</p>
<p>David Donabedian, chief investment officer of CIBC Private Wealth US:</p>
<p>“So the bullish narrative that the market had coming into the year of slowing economy headed toward a soft landing and slowing inflation allowing the Fed to stop raising rates ASAP, that’s been blown up here by the data. My view is that the market rally that we’ve seen since October was a bear-market rally.”</p>
<p>Peter van Dooijeweert at Man Solutions:</p>
<p>“Today’s PCE data is a little bit more than the market wants to deal with. It’s fine to have rising rates off good economic data and avoiding a hard landing. It’s just not okay for the market to have to grapple with a return to rising inflation.”</p>
<p>Greg Wilensky, head of US fixed income at Janus Henderson:</p>
<p>“This was not the news the Fed or investors had been hoping for and, as such, we expect markets to adjust to the likelihood that the Fed will need to raise rates higher, and keep them higher for longer, than they had been pricing in previously. Viewing the hotter inflation data together with continued strength in the labor market and consumer spending implies that the Fed still has work to do. It appears investors will have to wait a little longer for the much-anticipated Fed pause.”</p>
<p>Krishna Guha, vice chairman at Evercore:</p>
<p>“The likelihood of achieving a soft landing dips, with the risk of no-landing potentially forcing the Fed to push rates higher and hold longer, with greater risk that this ultimately pushes the economy into a mild recession. So risk-off pure and simple. We still think the Fed is not likely to return to 50bp hikes, though that risk has nudged up with the latest data.”</p>
<p>Chris Zaccarelli, chief investment officer at Independent Advisor Alliance:</p>
<p>“It is much too soon for the Fed to say ‘mission accomplished.’ It is far too early to extend duration and buy the dips in bond prices, let alone trying to continue to buy the dips in the stock market. We have been exercising much more caution and have advised our clients to be careful and not aggressive at this point in the economic cycle.”</p>
<p>Peter Boockvar, author of the Boock Report:</p>
<p>“Bottom line, Treasury yields are moving higher in response to the higher than expected inflation stats and reminder that while the trend will still be down, it will still take time to get to some Fed comfort level. Either way, at least looking at the core PCE, we FINALLY have ZERO real interest rates. I know some are still trying to figure out how many hikes the Fed has left, but it’s not many and AGAIN, higher rates for a longer time frame should be the focus.”</p>
<p>Jeffrey Roach, chief economist at LPL Financial:</p>
<p>“The Fed may still decide to hike by 0.25% at the next meeting but this report means that the Fed will likely continue hiking into the summer. Markets will likely stay choppy during these months where higher rates have yet to materially cool consumer spending.”</p>
<p>Money managers are fortifying portfolios and hedging the risk of a prolonged inflation fight by sticking to credit maturing in just a few years.</p>
<p>Some funds are actively cutting so-called duration, a measure of sensitivity to interest rates, to limit the fallout if central banks keep hiking to tackle inflation. Others are simply focusing on short-dated notes as the additional yield they get from longer securities is too small to justify the risk of a slump when rates rise.</p>
<p>In corporate news, Boeing Co. sank after pausing deliveries of its 787 Dreamliner over a documentation issue with a fuselage component. Carvana Co. slumped on a much wider loss than Wall Street had expected for the used-car retailer. Beyond Meat Inc. surged on sales that exceeded expectations and the plant-based meat maker showed progress toward its goal of becoming profitable.</p>
<p>On the geopolitical front, the US will impose a 200% tariff on all imports of Russian-made aluminum, as well as aluminum products made with metal smelted or cast in the country, in a move that could ripple through global manufacturing supply chains.</p>
<p>Treasury Secretary Janet Yellen warned China and other nations against providing material support to Russia, saying any such actions would amount to an evasion of sanctions and would “provoke very serious consequences.”</p>
<p>Elsewhere, the yen retreated as Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment.</p>
<p>Courtesy of <a href="https://ca.finance.yahoo.com/news/asia-stocks-open-mixed-bumpy-224011362.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAC2KqAQpcrytYQPOJ4yCRcMbYMvwdiaPZX34n1bji-ZZ55RH7z70lgthb9ZvWMb8MZl4gOvrxQKxBRHCRMVqta-oComTXzSU2jZU0GhGpTGNySDOoed1G2MK71-5Rb7wGmKX5a1Z3-so7lHR2OD_VqeNN4C0wDmlapkxf7ys_4do" target="_blank">Bloomberg and Yahoo</a></p></div>U.S. Markets Face An Unprecedented Era Of Discomforthttp://stockbuz.ning.com/articles/u-s-markets-face-an-unprecedented-era-of-discomfort-that-many-co2022-03-06T21:09:48.000Z2022-03-06T21:09:48.000ZKoshttp://stockbuz.ning.com/members/Kos<div><h3 class="subtitle">Are we officially in the process of being caught off guard?</h3><div> </div><div class="available-content"><div class="body markup"><p>I wasn’t even going to write a note this morning, because it’s Sunday and I have a couple pieces planned for the week to come. But then I had an interesting set of realizations this morning while walking to get my coffee:</p><ol><li><p>Many young people on Wall Street nowadays have never experienced real volatility in markets</p></li><li><p>Russia’s invasion of Ukraine and inflation at 7.5% in the U.S. are two extremely different, complex and unmapped pieces of terrain that we are going to be forced to navigate</p></li></ol><p>In other words, we have a ton of inexperienced market participants that should be bracing for the economic shock of their lifetimes, but they’re not - they’re still at the stage where walking around Manhattan in Patagonia vests, drinking Starbucks and making dinner reservations at whatever douche-motel is trendy this week are among their top concerns.</p><p>This wasn’t a big deal <a href="https://quoththeraven.substack.com/p/why-we-could-be-staring-down-the?s=w">when I first pointed out in November</a> that I thought the NASDAQ could crash. We weren’t dealing with Russia <em>or </em>inflation <em>just 5 months ago</em>.</p><p>In that same short span of time, risks to markets have gone from non-existent, to potentially grave. 5 months is <em>nothing</em>; it’s a <em>split second</em> when gauged relative to the reaction times of 27 year old guys named Kyle who help draw up models to justify 45x P/Es on sell side reports.</p><p>And I think there’s a chance shit gets <em>real </em>for the Kyles, the Tylers <em>and </em>the Jordans working on Wall Street, in addition to a lot of other “investors” who got their financial education from 2AM Tik Tok videos, YouTube livestreams and Twitter spaces calls with AMC “apes”, very soon.</p><p>While market pullbacks over the last two decades have been akin to light breeze on a summer day, a coming supercycle of discomfort, where the U.S. dollar is challenged and our debt may actual come due, could be a Category 5 hurricane.</p><p>And nobody has even considered “evacuating” markets yet.</p><div><hr /></div><p>The housing crisis was almost <em>15 years ago </em>at this point. We’ve had the better part of <em>2 decades </em>of nothing but synthetic, Fed produced heroin, mainlined into our brokerage accounts since then.</p><div class="captioned-image-container"><a class="image-link image2" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F2ad66fdd-f4cd-4576-9d16-0c1c5c9def38_659x439.jpeg" target="_blank"><img class="sizing-normal" title="Lehman&amp;#39;s Collapse, on the Front Page - WSJ" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F2ad66fdd-f4cd-4576-9d16-0c1c5c9def38_659x439.jpeg" alt="Lehman&amp;#39;s Collapse, on the Front Page - WSJ" width="659" height="439" /></a></div><p>I have a long railed against what I have called this “arrogant” monetary policy: the idea that we can micromanage the economy in a way that is going to make everybody comfortable, all the time.</p><p>I have argued that the feeling of entitlement that comes with expecting to be comfortable all the time goes beyond being “arrogant”: it’s just plain unreasonable. The laws of nature - no matter what industry we’re talking about - all but guarantee some discomfort somewhere along the way.<br /> <br /> This is a lesson that I think we’re going to be learning the hard way this year, and potentially for years to come. Over the last 20 years, we have watched people make fortunes in the market simply by <em>guessing</em> a stock and pouring money into it while the Fed backstops markets from ever moving lower.</p><p>We have overdrawn ourselves at the bank, so to speak, <em>as much as humanly possible.</em> Not only have companies with terrible financials been bid up, they have been bid up to fever pitch valuations that – even in the best of financial circumstances - no company should really ever be afforded.</p><div class="captioned-image-container"><a class="image-link image2" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F760eeb01-4cc6-4687-ab9a-0be540bbaf0b_857x479.png" target="_blank"><img class="sizing-normal" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F760eeb01-4cc6-4687-ab9a-0be540bbaf0b_857x479.png" alt="" width="857" height="479" /></a></div><p>And in addition to discomfort, one of nature’s guarantees is often reversion to the mean. Reversion to the mean becomes far more painful the further off the path of normalcy you have drifted. Heading into 2022, after two years of unprecedented and basically unlimited quantitative easing, which was lopped on top of two decades of additional quantitative easing, we’ve gotten about as far off that path as possible.</p><div class="captioned-image-container"><a class="image-link image2" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F66dfacb4-b042-4a68-82a9-5b24f6d8c503_668x468.png" target="_blank"><img class="sizing-normal" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F66dfacb4-b042-4a68-82a9-5b24f6d8c503_668x468.png" alt="" width="668" height="468" /></a></div><p><br /> In addition to veering off course, the shock of running headfirst into two immoveable monoliths of volatility - the Fed attempting to curb unrelenting and blistering inflation and an unprovoked invasion of a sovereign nation in Europe - may have only just begun to be absorbed by markets. There’s a reason that the cycle of markets diagram, when swinging lower, starts with “anxiety” and “denial”.</p><p>We haven’t even begun to approach “fear” yet, because markets have sold off in orderly fashion. This was the <a href="https://quoththeraven.substack.com/p/its-still-starting-to-feel-like-time?s=w">cornerstone of my prediction</a> that we are still due for a limit down morning and real capitulation one of these days.</p><div class="captioned-image-container"><a class="image-link image2" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F451d9249-61a4-44b6-9140-5fac877c3642_600x500.png" target="_blank"><img class="sizing-normal" title="Riding the Emotional Wave of a Market Cycle | by Chris | Argent Crypto, Inc. | Medium" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F451d9249-61a4-44b6-9140-5fac877c3642_600x500.png" alt="Riding the Emotional Wave of a Market Cycle | by Chris | Argent Crypto, Inc. | Medium" width="600" height="500" /></a></div><p>The truth is that while many investors see this as simply another “BTFD” moment like we’ve had in years’ past, we haven’t even started to ponder the long-lasting effects of what could be coming down the pike for U.S. markets, the U.S. dollar and geopolitical tensions.</p><div><hr /></div><p><em>Today’s blog post has been published without a paywall because I believe the content to be far too important. <strong>However, if you have the means and would like to support my work by subscribing, I’d be happy to offer you 22% off to become a subscriber in 2022:</strong></em></p><p class="button-wrapper"><a href="https://quoththeraven.substack.com/subscribe?coupon=0ded1dfd">https://quoththeraven.substack.com/subscribe?coupon=0ded1dfd</a>","text":"Get 22% off forever","action":null,"class":null}"><a class="button primary" href="https://quoththeraven.substack.com/subscribe?coupon=0ded1dfd">Get 22% off forever</a></p><div><hr /></div><p>The Fed doesn’t have any other option but to hike, in my opinion - regardless of what happens in Ukraine.</p><p>Either the Fed will allow the American public to suffer through continued unprecedented inflation, which will have psychological and monetary effects on the American consumer the likes of which we’ve never seen, or they will be consistently hiking rates, which will start the countdown on a ticking time bomb of debt and malinvestment that has been gestating and growing since 1999. Given that the geopolitical conflict is making inflation <em>worse </em>than it was when CPI was 7.5%, the Fed is going to have to react - even if it’s just for show.</p><div class="captioned-image-container"><a class="image-link image2" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F4a3e6fc4-3307-4db9-8f85-eeabdb8ef276_699x348.png" target="_blank"><img class="sizing-normal" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F4a3e6fc4-3307-4db9-8f85-eeabdb8ef276_699x348.png" alt="" width="699" height="348" /></a></div><p>And Russia’s invasion of Ukraine is an all out wild card. Nobody knows what path it is going to go down or how it will end. Analysts have drawn up scenarios ranging from a cease-fire tomorrow to a full-on nuclear holocaust. And while there are hopes for a temporary cease-fire, which would at least stop the humanitarian crisis of killing of innocent civilians, the shockwaves on the global economic system and the geopolitical implications of Russia’s actions are likely to stick around for years to come.<br /> <br /> In fact, <a href="https://quoththeraven.substack.com/p/fiat-currency-zero-hour-russia-and?s=w">I wrote a week ago</a> that I believe this invasion marks the beginning of Russia and China’s official war on the U.S. dollar as the global reserve currency. <br /> <br /> Both rate hikes and the geopolitical conflict will have effects, even in a best case scenario, that linger for years to come. The number of potential outcomes that can occur as a result of these effects that also end with the market moving to all time highs over the next few years, has dwindled. The outcomes that do result in new all-time highs - hyperinflation and QE - would have devastating consequences that would make the market’s move higher, in nominal terms, moot.</p><div><hr /></div><p>Perhaps over long periods of time, the market may move higher in real terms once again, but appear to clearly be entering a stagflationary period of discomfort that many “analysts” couldn’t have ever fathomed just <em>months </em>ago. <br /> <br /> And if analysts couldn’t have predicted it, markets - commodity markets, equity markets, debt markets, FX markets and otherwise – may only be pricing in the very, very beginning of this new era for the United States.</p><p>The “new era” of discomfort may not last weeks, months or years, but rather decades, especially if the U.S. dollar is finally called into question as the world’s reserve currency.<br /> <br /> This coming week, I’ll be publishing an article that asks about the opposite idea: is it possible for us to get through this and put it behind us relatively quickly? In fact, I’ll even urge my readers to think about whether or not the worst could be over. But this morning, I couldn’t help but feel that – even in a situation where the <em>volatility </em>dies down – the market’s discomfort could be long lasting.</p><p>If we are, in fact, approaching a new epoch of discomfort for investing in the U.S. (which, by the way I hate to say that we probably <em>deserve),</em> investors’ reactions in the public markets have still not reflected the size of the potential volatility going forward.</p><p>There’s a part of me that still believes markets need to move 30% or 40% lower just based on Fed rate hikes alone, as I predicted weeks ago. Throwing into the mix a new, uncharted geopolitical relationship with Russia and Putin as the “wild card”, I can’t help but feel that the odds of long lasting discomfort have spiked profoundly.</p><p><em>And remember: the next crisis, we may not be able to print our way out of anymore…</em></p><p><em>Courtesy of <a href="https://quoththeraven.substack.com/p/us-markets-face-an-unprecedented?s=w" target="_blank">quoththeraven</a></em></p></div></div></div>Everyone's Talking About MMT, But What Is It, And Will It Work?http://stockbuz.ning.com/articles/everyone-s-talking-about-mmt-but-what-is-it-and-will-it-work2019-03-08T01:28:23.000Z2019-03-08T01:28:23.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Maybe you've never heard of MMT (Modern Monetary Theory). But no doubt, as the 2020 election nears, you will. It's the latest contentious buzzword to hit Washington, D.C.</p>
<p>The idea, despite its name, is not new or "modern." But it has set off a heated political and economic debate, with Fed Chairman Jerome Powell telling Congress last week that Modern Monetary Policy is "just wrong."</p>
<p>Does Modern Monetary Theory, or MMT, represent a brave new future of ever-expanding government spending to meet Americans' vital needs? Or is it a dangerous idea that could lead to runaway inflation, financial disaster and, ultimately, collapse?</p>
<p>The theory, in a nutshell, says that because the U.S. can borrow in its own currency, it can simply print more money when it needs to pay off its debts. All the Fed has to do is keep interest rates low. Simple. It's an increasingly popular idea among left-leaning economis<em>ts.</em></p>
<p> </p>
<p><span style="font-size: 14pt;"><strong>Fed Chairman Powell: MMT Is 'Just Wrong'</strong></span></p>
<p>Not surprisingly, however, when Fed Chairman Powell testified before Congress on Tuesday, he pulled no punches on Modern Monetary Theory.</p>
<p>"The idea that <a href="https://www.bloomberg.com/news/articles/2019-02-26/jay-powell-is-no-fan-of-mmt-says-the-concept-is-just-wrong" target="_blank" rel="noopener">deficits don't matter for countries that can borrow in their own currency I think is just wrong</a>," Powell said, describing one of MMT's main pillars. "And to the extent that people are talking about using the Fed — our role is not to provide support for particular policies. Decisions about spending, and controlling spending and paying for it, are really for you (Congress.)"</p>
<div class="subscribe-widget"> </div>
<p>Mainstream economists — even on the left — don't like the MMT idea.</p>
<p>For one thing, it violates a widely-held tenet of conventional monetary theory: That the quantity of money matters, especially for inflation. MMT maintains if inflation becomes a problem, just raise taxes. And print money to pay your bills.</p>
<p>Critics also note that MMT would support politicians issuing massive amounts of new debt backed by the printing press. Spending and debt would soar, crowding out private investment by sucking up private savings.</p>
<p>In response, leading proponents argue that those who oppose MMT don't really get how it works.</p>
<p>"The MMT framework rejects this, since <a href="https://www.bloomberg.com/opinion/articles/2019-02-21/modern-monetary-theory-is-not-a-recipe-for-doom" target="_blank" rel="noopener">government deficits are shown to be a source (not a use!) of private savings</a>," writes Stephanie Kelton, a professor at Stony Brook and former economic advisor to Sen. Bernie Sanders' 2016 presidential campaign, in a recent Bloomberg piece. "Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank."</p>
<h2>MMT Used To Justify Federal Spending</h2>
<p>This is more than just another dorm-room debate with no consequences.</p>
<p>Democratic Party proposals like the Green New Deal, Medicare for All, and guaranteed incomes and jobs, will cost enormous sums. By at least one estimate, the 10-year tab for the progressive Democratic agenda now emerging from Congress <a href="https://www.investors.com/politics/editorials/green-new-deal-93-trillion-alexandria-ocasio-cortez/" target="_blank" rel="noopener">could total $93 <em>trillion</em></a>. Only MMT, proponents say, could pay for it all.</p>
<p>This idea, in particular, angers MMT's foes.</p>
<p>"It is intellectually fraudulent, though I suspect Stephanie (Kelton) is a true believer," economist Dan Mitchell, co-founder of the free-market <a href="http://freedomandprosperity.org/" target="_blank" rel="noopener">Center for Freedom and Prosperity</a>, told IBD. "In any event, it is the fiscal/monetary equivalent of a perpetual motion machine. Sort of turbocharged Keynesianism."</p>
<p>Other economists note Modern Monetary Theory is a decades-old idea that's been debated, and discarded, by mainstream economists. MMT has only recently re-emerged as a way to justify more spending.</p>
<p>"The theory does ... lend itself to use, if not to abuse, by big spending proponents," said George Selgin, director of the Cato Institute's Center for Monetary and Financial Alternatives. "They like to harp on its observation that governments' right to create money gives them practically unlimited spending capacity. That claim is true, if not banal. But it's also misleading: Governments may be able to spend without limit; but outside of recessions they can't do so to any great extent without having to make their citizens ultimately foot the bill, either by paying higher taxes or by having to endure inflation.</p>
<p>"When politicians promise something for nothing, people should be wary," he added. "There's nothing to MMT that should make them any less so."</p>
<h2>MMT: Inflation Threat?</h2>
<p>Even Paul Krugman, himself a liberal-left economist, finds MMT lacking. "When people expect inflation, they become reluctant to hold cash, which drives prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.," he wrote last month. "Do the math, and it becomes clear that any attempt to extract too much from seigniorage (printing money) — more than a few percent of GDP, probably — <a href="https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html" target="_blank" rel="noopener">leads to an infinite upward spiral in inflation</a>. In effect, the currency is destroyed."</p>
<p>The Congressional Budget Office now predicts $1 trillion annual federal deficits during the next decade. And the Treasury reports that total U.S. national debt now exceeds $22 trillion.</p>
<p>So a lot hangs on the key question posed by Modern Monetary Theory: Do federal deficits and debts matter at all? Supporters of MMT say not if the Fed holds rates below the growth of both GDP and debt. That would stabilize the debt-to-GDP ratio, and hold down inflation.</p>
<p>But others argue the inflation risks of MMT are huge. The Fed since 1990 has kept inflation at about 2% by targeting it. Its political independence gave it room to do so. Examples abound elsewhere of central banks running the printing presses to please politicians, resulting in hyperinflation and economic collapse — Venezuela, Zimbabwe and Argentina, for example.</p>
<p>Courtesy of <a href="https://www.investors.com/news/economy/modern-monetary-theory-mmt-inflation-spending/" target="_blank" rel="noopener">IBD</a></p>
</div>Macro And Credit - Bucklinghttp://stockbuz.ning.com/articles/macro-and-credit-buckling2018-03-17T16:15:03.000Z2018-03-17T16:15:03.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div style="text-align: justify;"><span style="font-family: inherit;">Watching with interest the slowly grind higher in US interest rates with some weakening signs coming from US economic data such as the US trade deficit in goods getting spanked with orders for larger domestic appliances and other durable goods falling by a cool 3.7% from the month before, led by a hard drop in vehicle demand, when it came to choosing our title analogy for this week's conversation we reminded ourselves of "buckling" being a mathematical instability that leads to a failure mode. When a structure is subjected to compressive stress, buckling may occur. Buckling is characterized by a sudden sideways deflection of a structural member. This may occur even though the stresses that develop in the structure are well below those needed to cause failure of the material of which the structure is composed. As an applied load is increased (US interest rate hikes) on a member, such as a column, it will ultimately become large enough to cause the member to become unstable and it is said to have buckled. Further loading will cause significant and somewhat unpredictable deformations, possibly leading to complete loss of the member's load-carrying capacity. If the deformations that occur after buckling do not cause the complete collapse of that member, the member will continue to support the load that caused it to buckle. If the buckled member is part of a larger assemblage of components such as a building, any load applied to the buckled part of the structure beyond that which caused the member to buckle will be redistributed within the structure. In a mathematical sense, buckling is a bifurcation in the solution to the equations of static equilibrium. At a certain point, under an increasing load, any further load is able to be sustained in one of two states of equilibrium: a purely compressed state (with no lateral deviation) or a laterally-deformed state. Obviously we thing that financial markets have reached a bifurcation point and we have yet to see how the buckle of rising interest rates will be redistributed within the complex structures without leading to some renewed avalanche in some parts of the markets.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;">
<div><span style="font-family: inherit;">In this week's conversation, we would like to look at the vulnerability of equities and credit markets to a more hawkish tone of the Fed which would lead to more aggressive rate hikes should the "Big Bad Wolf" aka inflation continue to rear its ugly head.  </span></div>
<div><span style="font-family: inherit;"> </span></div>
<div>
<div style="line-height: 20.8px;"><strong><u><span style="font-family: inherit;">Synopsis:</span></u></strong></div>
<ul style="line-height: 20.8px;">
<li style="line-height: 20.8px; text-align: justify;"><strong><em><span style="font-family: inherit;">Macro and Credit - Hike it till you break it</span></em></strong></li>
<li style="line-height: 20.8px; text-align: justify;"><em style="line-height: 20.8px;"><strong><span style="font-family: inherit;">Final chart - Afraid of buckling? Watch credit availability</span></strong></em></li>
</ul>
</div>
</div>
<div style="text-align: justify;"><span style="font-family: inherit;">In our March 2017 conversation entitled "<a href="http://macronomy.blogspot.com/2017/03/macro-and-credit-endless-summer.html">The Endless Summer</a>" we concluded our missive at the time asking ourselves how many hikes it would take before the Fed finally breaks something. Given the arrival of a new Fed "sheriff" in town one might wonder if the pace will be as gradual as it seems should the Fed feels it is falling behind the curves when it comes the "Big Bad Wolf" aka inflation and current loose financial conditions. As we pointed out in our recent conversations the recent uptick in inflation coincided with a sharp sell-off in equities. Sure, one would point out to us that correlation doesn't mean causation, but, it certainly felt like the very crowded short-volatility complex was looking for a match that triggered the explosion and for some their ultimate demise.  The U.S. Average Hourly Earnings<span style="text-align: left;"> triggered the "buckling" as it brought back the fear in the markets of the return of</span> the Big Bad Wolf aka "inflation".  For some it seems like us, it seems the "Big Bad Wolf" has already blown apart the "short vol" pig's house which was made of straw. If indeed the short-vol house was made of straw we wonder if the pig's equities markets house is made of sticks or and if the pig's credit markets house is made of bricks. The difficulty for the Fed in the current environment is the velocity of both the rates rise and inflation, because if indeed the Fed hike rates too quickly then it will trigger some other avalanches down the capital structure (short-vol complex being the equity tranche or first loss piece of the capital structure we think). If inflation and growth rise well above trend, then obviously the Fed will be under tremendous pressure to accelerate its normalization process. It is a very difficult balancing act.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">When it comes to the bounce back for equities following the short-vol avalanche, which could have been possibly triggered by the recent uptick of inflation, we read with interest Deutsche Bank's Asset Allocation note from the 23rd of February entitled "Inflation and Equities" with the long summary below:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>The recent uptick in inflation coincided with a sharp correction in equities</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">Whether this was cause and effect is debatable for a variety of reasons and around half the correction reversed quickly (Stretched Consensus Positioning, Jan 31 2018; An Update On The Unwind, Feb 12 2018). Nonetheless, late in the business cycle with a tight labor market, strong growth, a lower dollar, higher oil prices and a fading of one off factors, all point to inflation moving up. What does higher inflation mean for equities? We discuss five key questions.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>Is inflation bad for margins and earnings? Historically, higher inflation has been </strong><strong>associated with higher margins and strong earnings growth</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ Conceptually, higher inflation is ambiguous. From a pricing vs cost perspective, whether higher inflation leads to higher or lower margins depends on the relative strengths of price vs wage and other input cost inflation. It depends on the relative importance of variable vs fixed costs. And on the extent to which corporates can increase productivity in response to cost pressures. <strong><span style="color: red;">It is notable that while markets seem to have been surprised by the recent uptick in wage inflation, corporates have been noting it for at least a year</span></strong>. Finally, inflation does not occur in a vacuum. The drivers of higher inflation matter and when it reflects strong growth, it implies not only higher sales but operating leverage from fixed costs can raise margins and amplify the impact on earnings.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong>Historically, the empirical evidence is unambiguous</strong>. Higher inflation was clearly associated with higher margins and strong earnings growth.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><strong><span style="font-family: inherit;">Does higher inflation mean lower equity multiples? By how much? A 1 pp rise in inflation compresses equity multiples by 1 point or a decline in prices of around 5% from recent pre-correction levels</span></strong></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ The correlation between bond yields and equities depends on the driver: inflation (-) or real rates (+). Contrary to popular notions that higher bond yields mean lower equities, the historical relationship between bond yields and equities has been ambiguous (Long Cycles In The Bond-Equity Correlation, May 2014). Instead, the impact of higher yields on equities depends on whether they reflect higher inflation (-) which has always been negative for equities; or whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels (greater than 4%--seen only once during the Volcker disinflation) (Do Higher Rates Mean Lower Equity Multiples? Sep 2014).</span></blockquote>
<div style="text-align: justify;">
<blockquote class="tr_bq"><span style="font-family: inherit;">■ Why is higher inflation negative for equity valuations? When inflation moves up, the hurdle rate for all nominal investments moves up and in turn bond yields and earnings yields (inverse of the equity multiple) move up.</span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ A 1pp rise in inflation compresses multiples by 1 point. A majority (70%) of the historical variation in the S&P 500 multiple is explained by its drivers: earnings/normalized levels (-); payouts (+); rates broken up into inflation (-) and real rates (+); and macro vol (-). Our estimates imply that a 1pp rise in inflation lowers the equity multiple by 1 point or a 5% decline in prices from the recent peak. Our house view and the consensus sees a somewhat smaller rise in inflation over the next 2 years. These ranges of increases in inflation imply a modest pullback in equities that would put it within the bands of normal 3-5% pullbacks that have historically occurred every 2-3 months.</span></blockquote>
</div>
<div style="text-align: justify;">
<blockquote class="tr_bq"><span style="font-family: inherit;"><strong>Is the inflection in inflation a leading indicator of the end of the cycle? How long </strong><strong>is the lead? On average 3 years, but the Fed’s reaction is key</strong></span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">With an average correction in equities of 21% around recessions, the timing of the next one is obviously key. <strong><span style="color: red;">If the recent uptick marks the typical mid- to latecycle </span></strong><strong><span style="color: red;">inflection up in inflation, how long after did the next recession typically </span></strong><strong><span style="color: red;">occur? On average 3 years, which would put it in late 2020</span></strong>. But the timing is likely determined critically by the Fed’s reaction. <strong><span style="color: red;">Historically, a Fed rate-hiking </span></strong><strong><span style="color: red;">cycle preceded most recessions since World War II, with recessions occurring </span></strong><strong><span style="color: red;">only after the Fed moved rates into contractionary territory</span></strong>. Arguably the Fed did this only after it was convinced the economy was overheating and it continued hiking until the economy slowed sufficiently or went into recession. At the current juncture, core inflation has remained below the Fed’s target of 2% for the last 10 years and several Fed officials have argued for symmetry in inflation outcomes around the target, i.e., to tolerate inflation above 2%. It is thus likely that the Fed will welcome the rise in inflation for now and simply stick to its current guidance, possibly moving it up modestly.</span></blockquote>
<blockquote class="tr_bq"><strong><span style="font-family: inherit;">How high will inflation go? If inflation expectations remain range bound, core PCE inflation will stay within its narrow band of 1-2.3% in which it has been for the last 23 years</span></strong></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>Outside the Great Inflation of 1968-1995, core PCE inflation has </strong><strong>remained in a remarkably narrow band</strong> (Six Myths About Inflation, Oct 2017). The period since 1996 encompassed 3 business cycles that saw unemployment fluctuate between 3.8% and 10%; the dollar rise and fall by 40% more than once; oil prices rise 7-fold and almost completely reverse. Yet inflation remained in a narrow band unusual for an economic time series. Indeed, with a standard deviation of 35 bps, much of the range of variation in inflation since 1996 cannot be differentiated from the normal noise inherent in macro data.</span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>The stability of inflation across large business- dollar- and oil-cycles in our view reflects the stability of inflation expectations which are the </strong><strong>only driver of inflation over the long run.</strong> Inflation expectations have been stable since the mid-1990s, fluctuating for most of the last 23 years in a tight 50bps range and for most of it in an even narrower 30bps range. Following the dollar and oil shocks of 2014-2015, inflation expectations fell out of and are still 20bps below this range and 50bps below average. Absent large unexpected and persistent shocks, inflation expectations evolve slowly. It has in fact been difficult for policy makers to effect changes in inflation expectations as the recent experience of Japan and  the 10-year miss on the core PCE inflation target in the US illustrate (Six Myths About Inflation, Oct 2017).</span></blockquote>
<blockquote class="tr_bq"><strong><span style="font-family: inherit;">What about all the stimulus? The impact of the stimulus will follow a pickup in growth with long lags (1½ years)</span></strong></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>It is well known that inflation responds with long lags to growth, a tightening labor market and the dollar.</strong> Consider that the correlation between real GDP growth and core CPI inflation is a modest positive 5%. But when GDP growth is lagged by 6 quarters, the correlation jumps to a much stronger 80%. The lagged relationship implies that a sustained 1pp increase in GDP growth raises core inflation by 20bps after 1½ years. Our house forecast for GDP growth which is above consensus implies GDP growth of near 3% and core inflation peaking around 2.2% in 2020.</span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>Growth outcomes significantly above our house view would need to materialize and sustain to raise inflation above and outside the band of the last 23 years.</strong> Moreover there would be plenty of lead time with growth needing to sustain at high levels for a prolonged period (1½ years) before it moved inflation up."  - source Deutsche Bank</span></blockquote>
<span style="font-family: inherit;">As we repeated in numerous conversation, for a bear market to materialize you would need a significant pick-up in inflation for your "buckling" to occur and to lead to a significant repricing of risky asset prices such as equities and US High Yield. But what is very interesting to us is that the buildup in the trade war rhetoric coming from the US could be a harbinger for higher inflation down the line given that companies would most likely increase their prices with rising import prices that would be passed on already stretched consumers thanks to solid use of the credit cart (nonrevolving credit). </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">In our recent conversation "<a href="http://macronomy.blogspot.com/2018/01/macro-and-credit-bracket-creep.html">Bracket creep</a>", which describes the process by which inflation pushes wages and salaries into higher tax brackets, leading to a fiscal drag situation, we indicated that with declining productivity and quality with wages pressure building up, this could mean companies, in order to maintain their profit margins would need to increase their prices. To repeat ourselves "Protectionism", in our view, is inherently inflationary in nature. </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">To preserve corporate margins, output prices will need to rise, that simple, and it is already happening. This can have a significant impact on earnings particularly when the S&P 500 Net Income Margins LTM is at close to record levels as indicated in Deutsche Bank's note:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation and earnings</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>Is inflation bad for margins and earnings? Historically, higher inflation has </strong><strong>been associated with higher margins and strong earnings growth</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong>Conceptually, higher inflation is ambiguous</strong>. From a pricing vs cost perspective, whether higher inflation leads to higher or lower margins depends on the relative strengths of price vs wage and other input cost inflation. It depends on the relative importance of variable vs fixed costs. And on the extent to which corporates can increase productivity in response to cost pressures. It is notable that while markets seem to have been surprised by the recent uptick in wage inflation, corporates have been noting it for at least a year. Finally, inflation does not occur in a vacuum. The drivers of higher inflation matter and when it reflects strong growth, it implies not only higher sales but operating leverage from fixed costs can raise margins and amplify the impact on earnings.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong>Historically, the empirical evidence is unambiguous</strong>. Higher inflation was clearly associated with higher margins and strong earnings growth.</span></blockquote>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-ES9Ogr2hGTA/WpbK7HcoWCI/AAAAAAAATco/B6w0eGtg8R8Fph5VGfHDNmTYiM-A-5FAgCLcBGAs/s1600/DB%2B-%2BCorp%2Bprices%2Band%2Bwage%2Binflation.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-ES9Ogr2hGTA/WpbK7HcoWCI/AAAAAAAATco/B6w0eGtg8R8Fph5VGfHDNmTYiM-A-5FAgCLcBGAs/s320/DB%2B-%2BCorp%2Bprices%2Band%2Bwage%2Binflation.jpg" width="320" height="232" border="0" data-original-height="422" data-original-width="582" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-H6luUfQzHu8/WpbLLr7YIJI/AAAAAAAATcs/EfZWrRgYpEs75BXv3V7AqbQCHxEeX86xwCLcBGAs/s1600/DB%2B-%2BRising%2Bwage%2Binflation%2Bwas%2Bhistorically%2Bassociated%2Bwith%2Bhigher%2BSPX%2Bmargins.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-H6luUfQzHu8/WpbLLr7YIJI/AAAAAAAATcs/EfZWrRgYpEs75BXv3V7AqbQCHxEeX86xwCLcBGAs/s320/DB%2B-%2BRising%2Bwage%2Binflation%2Bwas%2Bhistorically%2Bassociated%2Bwith%2Bhigher%2BSPX%2Bmargins.jpg" width="320" height="224" border="0" data-original-height="411" data-original-width="586" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-ENBDQ-NAc9U/WpbLaDOGNmI/AAAAAAAATcw/46nSME5DV-s3mtHYFPvVMlDMN5GjjrFRwCLcBGAs/s1600/DB%2B-%2Brising%2Bcorporate%2Bprice%2Binflation.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-ENBDQ-NAc9U/WpbLaDOGNmI/AAAAAAAATcw/46nSME5DV-s3mtHYFPvVMlDMN5GjjrFRwCLcBGAs/s320/DB%2B-%2Brising%2Bcorporate%2Bprice%2Binflation.jpg" width="320" height="216" border="0" data-original-height="395" data-original-width="585" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-wl6uSoMJBhs/WpbLrSylFhI/AAAAAAAATc8/qT5A4AteM5krZ61jpqVNDTPELqPZo84ZACLcBGAs/s1600/DB%2B-%2BPricing%2Bplus%2Bproductivity%2Bincreases%2Band%2Bwage%2Binflation%2Bhave%2Bmoved%2Btogether%2Band%2Bare%2Bhighly%2Bcorrelated.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-wl6uSoMJBhs/WpbLrSylFhI/AAAAAAAATc8/qT5A4AteM5krZ61jpqVNDTPELqPZo84ZACLcBGAs/s320/DB%2B-%2BPricing%2Bplus%2Bproductivity%2Bincreases%2Band%2Bwage%2Binflation%2Bhave%2Bmoved%2Btogether%2Band%2Bare%2Bhighly%2Bcorrelated.jpg" width="320" height="222" border="0" data-original-height="407" data-original-width="585" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-kUhO8u6TAnc/WpbL8mCVXxI/AAAAAAAATdA/2b6_-svqcI0dpx4vBJZLJrWyEYSxmJAWQCLcBGAs/s1600/DB%2B-%2BBut%2Bover%2Bthe%2Blast%2B20%2Byears%252C%2Bcorporate%2Bpricing%2Bhas%2Brisen%2Bfaster%2Bthan%2Bunit%2Blabor%2Bcosts.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-kUhO8u6TAnc/WpbL8mCVXxI/AAAAAAAATdA/2b6_-svqcI0dpx4vBJZLJrWyEYSxmJAWQCLcBGAs/s320/DB%2B-%2BBut%2Bover%2Bthe%2Blast%2B20%2Byears%252C%2Bcorporate%2Bpricing%2Bhas%2Brisen%2Bfaster%2Bthan%2Bunit%2Blabor%2Bcosts.jpg" width="320" height="205" border="0" data-original-height="376" data-original-width="586" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-m4vrgYB1aFI/WpbMLYFaeTI/AAAAAAAATdE/ZgJXFMz8kcwhlqEiLxe5AHSJkbuuzcWbwCLcBGAs/s1600/DB%2B-%2BOver%2Bthe%2Blast%2B35%2Byears%252C%2Boperating%2Bleverage%2Bhas%2Bbeen%2Bvery%2Bhigh.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-m4vrgYB1aFI/WpbMLYFaeTI/AAAAAAAATdE/ZgJXFMz8kcwhlqEiLxe5AHSJkbuuzcWbwCLcBGAs/s320/DB%2B-%2BOver%2Bthe%2Blast%2B35%2Byears%252C%2Boperating%2Bleverage%2Bhas%2Bbeen%2Bvery%2Bhigh.jpg" width="320" height="225" border="0" data-original-height="413" data-original-width="587" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-j44XDPt8Sns/WpbMbKeZLfI/AAAAAAAATdI/Lcxu6mdGlk8ntihKTl0OfwAacsg0bkq3QCLcBGAs/s1600/DB%2B-%2BCompanies%2Bhave%2Bincreasingly%2Bbeen%2Bmentioning%2Brising%2Bwage%2Bcosts%2Band%2Btight%2Blabor%2Bmarkets%2Bover%2Bthe%2Blast%2Byear.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-j44XDPt8Sns/WpbMbKeZLfI/AAAAAAAATdI/Lcxu6mdGlk8ntihKTl0OfwAacsg0bkq3QCLcBGAs/s320/DB%2B-%2BCompanies%2Bhave%2Bincreasingly%2Bbeen%2Bmentioning%2Brising%2Bwage%2Bcosts%2Band%2Btight%2Blabor%2Bmarkets%2Bover%2Bthe%2Blast%2Byear.jpg" width="320" height="219" border="0" data-original-height="402" data-original-width="587" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-HhR9kwXJi0k/WpbMwTuP8JI/AAAAAAAATdQ/tzLV3MZOtQknniVNz9ZG9ckJ5W9UPkheACLcBGAs/s1600/DB%2B-%2BBoth%2Bwage%2Band%2Bmaterials%2Bcosts%2Bhave%2Bbeen%2Brising%2Band%2Bin%2Bresponse%2Bcompanies%2Bare%2Bnow%2Blooking%2Bto%2Braise%2Bprices%2Band%2Bat%2Bways%2Bto%2Bincrease%2Bproductivity.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-HhR9kwXJi0k/WpbMwTuP8JI/AAAAAAAATdQ/tzLV3MZOtQknniVNz9ZG9ckJ5W9UPkheACLcBGAs/s320/DB%2B-%2BBoth%2Bwage%2Band%2Bmaterials%2Bcosts%2Bhave%2Bbeen%2Brising%2Band%2Bin%2Bresponse%2Bcompanies%2Bare%2Bnow%2Blooking%2Bto%2Braise%2Bprices%2Band%2Bat%2Bways%2Bto%2Bincrease%2Bproductivity.jpg" width="320" height="237" border="0" data-original-height="433" data-original-width="584" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-xqXHxhLVebQ/WpbOLb0jHcI/AAAAAAAATdg/22Medf87yaU3orB1goxl14pT3Xmy8WjawCLcBGAs/s1600/DB%2B-%2BSurvey%2Bdata%2Bindicates%2Bthat%2Bcorporates%2Bsee%2Bboth%2Bthe%2Bcost%2Band%2Bquality%2Bof%2Blabor%2Bas%2Bproblem%2Bnear%2Bpast%2Bcyclical%2Bhighs.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-xqXHxhLVebQ/WpbOLb0jHcI/AAAAAAAATdg/22Medf87yaU3orB1goxl14pT3Xmy8WjawCLcBGAs/s320/DB%2B-%2BSurvey%2Bdata%2Bindicates%2Bthat%2Bcorporates%2Bsee%2Bboth%2Bthe%2Bcost%2Band%2Bquality%2Bof%2Blabor%2Bas%2Bproblem%2Bnear%2Bpast%2Bcyclical%2Bhighs.jpg" width="320" height="226" border="0" data-original-height="420" data-original-width="593" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-vKzdlCas5cQ/WpbOcNF8A-I/AAAAAAAATdk/eB26sUgzxI8SE19CYAnnToOCwCuSmfqGACLcBGAs/s1600/DB%2B-%2BCompanies%2Bhave%2Bbeen%2Braising%2Bwages%2Bat%2Ban%2Bincreasing%2Brate%2Bfor%2Bseveral%2Byears.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-vKzdlCas5cQ/WpbOcNF8A-I/AAAAAAAATdk/eB26sUgzxI8SE19CYAnnToOCwCuSmfqGACLcBGAs/s320/DB%2B-%2BCompanies%2Bhave%2Bbeen%2Braising%2Bwages%2Bat%2Ban%2Bincreasing%2Brate%2Bfor%2Bseveral%2Byears.jpg" width="320" height="228" border="0" data-original-height="423" data-original-width="593" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">With the S&P 500 Net Income Margins LTM close to record levels and with the recent rise in prices operated by companies recently, it remains to be seen how long can margin levels remain this elevated. Sure, the fiscal boost provided by the US government should provide additional support yet the big question for us is relative to the US consumer and its sensitivity to rising prices as we discussed in the final point of our conversation "<a href="http://macronomy.blogspot.com/2018/02/macro-and-credit-harmonic-tremor.html">Harmonic tremor</a>". Have we seen peak "Consumer confidence" and peak PMIs recently? One thing for certain is that Citigroup’s US Economic Surprise Index (CESIUSD Index) as an indicator of economic momentum has started to "buckle" recently. There is a clear relationship between the CITI's Economic Surprise Index and the Fed's monetary policy. When the Fed is in tightening mode, good news such as rising inflation expectations is generally seen as bad news. In spread terms, only high yield is sensitive to macro surprises. Moreover, the response of high yield spreads to macro surprises is "monotonic" in ratings: the lower the rating, the stronger the response. In our conversation "<a href="http://macronomy.blogspot.com/2018/02/macro-and-credit-shot-across-bows.html">A shot across the bows</a>", we indicated the following when it comes the Citi Economic Surprise Index (CESI). It could potentially indicate that economic fundamentals are trading ahead of themselves and could portend some credit spreads widening in the near future given there is a reasonably strong relationship between the inverse of Citigroup Economic Surprise Index and both the IG CDX and HY CDX. So all in all, you want to watch what the CESI does in the coming weeks and months. </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">But moving back to the impact of the "Big Bad Wolf" aka inflation on equity multiples, we read with interest as well the other part of Deutsche Bank's report on the impact inflation can have:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation and equity multiples</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><strong><span style="font-family: inherit;">Does higher inflation mean lower equity multiples? By how much? A 1 pp rise in inflation compresses equity multiples by 1 point or a decline in prices of around 5% from recent pre-correction levels</span></strong></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ The correlation between bond yields and equities depends on the driver: inflation (-) or real rates (+). Contrary to popular notions that higher bond yields mean lower equities, the historical relationship between bond yields and equities has been ambiguous (Long Cycles In The Bond-Equity Correlation, May 2014). Instead, the impact of higher yields on equities depends on whether they reflect higher inflation (-) which has always been negative for equities; or whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels (greater than 4%--seen only once during the Volcker disinflation) (Do Higher Rates Mean Lower Equity Multiples? Sep 2014).</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong><span style="color: red;">Why is higher inflation negative for equity valuations? When inflation moves up, the hurdle rate for all nominal investments moves up and in turn bond yields and earnings yields (inverse of the equity multiple) move up</span></strong>.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ A 1pp rise in inflation compresses multiples by 1 point. A majority (70%) of the historical variation in the S&P 500 multiple is explained by its drivers: earnings/normalized levels (-); payouts (+); rates broken up into inflation (-) and real rates (+); and macro vol (-). Our estimates imply that a 1pp rise in inflation lowers the equity multiple by 1 point or a 5% decline in prices from the recent peak. Our house view and the consensus sees a somewhat smaller rise in inflation over the next 2 years. These ranges of increases in inflation imply a modest pullback in equities that would put it within the bands of normal 3-5% pullbacks that have historically occurred every 2-3 months.</span></blockquote>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-D0HnXcxXFxs/WpbhtjumT0I/AAAAAAAATd4/yG0sJttR4hUm3URKi1daX9PUeZWb48uqQCLcBGAs/s1600/DB%2B-%2Bhigher%2Binflation%2Bsees%2Bhigher%2Bbond%2Byields.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-D0HnXcxXFxs/WpbhtjumT0I/AAAAAAAATd4/yG0sJttR4hUm3URKi1daX9PUeZWb48uqQCLcBGAs/s320/DB%2B-%2Bhigher%2Binflation%2Bsees%2Bhigher%2Bbond%2Byields.jpg" width="320" height="204" border="0" data-original-height="373" data-original-width="584" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-0V9vJElFsW4/Wpbh9hbEWdI/AAAAAAAATd8/pwZbk-r3EIY1O9VIOFJ4JxepqE6-bpKzwCLcBGAs/s1600/DB%2B-%2BThe%2Bsame%2Bis%2Btrue%2Bin%2Bequities%2Bfor%2Bearnings%2Byields.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-0V9vJElFsW4/Wpbh9hbEWdI/AAAAAAAATd8/pwZbk-r3EIY1O9VIOFJ4JxepqE6-bpKzwCLcBGAs/s320/DB%2B-%2BThe%2Bsame%2Bis%2Btrue%2Bin%2Bequities%2Bfor%2Bearnings%2Byields.jpg" width="320" height="191" border="0" data-original-height="350" data-original-width="584" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-q3IVF-hjqps/WpbiUWjKKZI/AAAAAAAATeE/LvKYdiIASBcVjVe36EnR_MkBXnAWYCfTwCLcBGAs/s1600/DB%2B-%2BInflation%2Bhas%2Bbeen%2Bconsistently%2Bnegative%2Bfor%2Bequity%2Bmultiples%2Bbut%2Bonly%2Bmodestly%2Bso%2Bwhen%2Bit%2Bhas%2Bbeen%2Blow%2Band%2Bstable%2Bas%2Bit%2Bhas%2Bfor%2Bthe%2Blast%2B20%2Byears.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-q3IVF-hjqps/WpbiUWjKKZI/AAAAAAAATeE/LvKYdiIASBcVjVe36EnR_MkBXnAWYCfTwCLcBGAs/s320/DB%2B-%2BInflation%2Bhas%2Bbeen%2Bconsistently%2Bnegative%2Bfor%2Bequity%2Bmultiples%2Bbut%2Bonly%2Bmodestly%2Bso%2Bwhen%2Bit%2Bhas%2Bbeen%2Blow%2Band%2Bstable%2Bas%2Bit%2Bhas%2Bfor%2Bthe%2Blast%2B20%2Byears.jpg" width="320" height="218" border="0" data-original-height="400" data-original-width="585" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-HY8kAcjrY3o/Wpbikol2HuI/AAAAAAAATeI/oS2a83YR3xQWpCPV3mbEU2-TYHTZiaHLgCLcBGAs/s1600/DB%2B-%2BHistorically%2Bequity%2Bmultiples%2Bhave%2Bbeen%2Bpositively%2Bcorrelated%2Bwith%2Breal%2Brates.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-HY8kAcjrY3o/Wpbikol2HuI/AAAAAAAATeI/oS2a83YR3xQWpCPV3mbEU2-TYHTZiaHLgCLcBGAs/s320/DB%2B-%2BHistorically%2Bequity%2Bmultiples%2Bhave%2Bbeen%2Bpositively%2Bcorrelated%2Bwith%2Breal%2Brates.jpg" width="320" height="223" border="0" data-original-height="412" data-original-width="589" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-9FnsZsa6bmE/Wpbi7dkUgtI/AAAAAAAATeU/yi5j6pjlmtscuSC2Z1DulT_hcUFRh5gAwCLcBGAs/s1600/DB%2B-%2BOur%2Bmodel%2Bof%2Bthe%2Bequity%2Bmultiple%2Bindicates%2Bthat%2Ba%2B1%2Bpercentage%2Bpoint%2Brise%2Bin%2Binflation%2Bshould%2Btake%2Boff%2B1%2Bmultiple%2Bpoint%2Bwhich%2Bis%2B-5pct%2Bin%2Bprices%2Bat%2Bthe%2Brecent%2Bpeak.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-9FnsZsa6bmE/Wpbi7dkUgtI/AAAAAAAATeU/yi5j6pjlmtscuSC2Z1DulT_hcUFRh5gAwCLcBGAs/s320/DB%2B-%2BOur%2Bmodel%2Bof%2Bthe%2Bequity%2Bmultiple%2Bindicates%2Bthat%2Ba%2B1%2Bpercentage%2Bpoint%2Brise%2Bin%2Binflation%2Bshould%2Btake%2Boff%2B1%2Bmultiple%2Bpoint%2Bwhich%2Bis%2B-5pct%2Bin%2Bprices%2Bat%2Bthe%2Brecent%2Bpeak.jpg" width="320" height="233" border="0" data-original-height="432" data-original-width="593" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">Obviously from a "buckling" perspective the big question is whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels, or, are they reflecting a higher inflation risk, in which case the repricing could be more severe as the Fed would probably step up on its hiking gear. For the positive momentum to hold and goldilocks environment to continue, you would need inflation and growth not running too hot, so that the Fed can gradually hike rather than stepping up its hiking pace. This is as well clearly highlighted by Charlie Bilello from Pension Partners in his blog post from the 15th of February entitled "<a href="https://pensionpartners.com/inflation-deflation-and-stock-market-returns/">Inflation, deflation and stock returns</a>".</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">Again, it is a matter of "velocity" in the movement. An exogenous factor such as a geopolitical event that would trigger a sudden and rapid rise in oil prices would of course upset the situation and be much more negative for equities as we saw with the huge rise in oil prices prior to the Great Financial Crisis (GFC) of 2008.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">One might therefore rightly ask if indeed inflation could be a leading indicator for recession. This is also a point which has been discussed in Deutsche Bank's very interesting note:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation as a leading indicator of recession</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>Is the inflection in inflation a leading indicator of the end of the cycle? How </strong><strong>long is the lead? On average 3 years, but the Fed’s reaction is key</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">With an average correction in equities of 21% around recessions, the timing of the next one is obviously key. <strong><span style="color: red;">If the recent uptick marks the typical mid- to latecycle inflection up in inflation, how long after did the next recession typically occur? On average 3 years, which would put it in late 2020</span></strong>. But the timing is likely determined critically by the Fed’s reaction. Historically, a Fed rate-hiking cycle preceded most recessions since World War II, with recessions occurring only after the Fed moved rates into contractionary territory. Arguably the Fed did this only after it was convinced the economy was overheating and it continued hiking until the economy slowed sufficiently or went into recession. At the current juncture, core inflation has remained below the Fed’s target of 2% for the last 10 years and several Fed officials have argued for symmetry in inflation outcomes around the target, i.e., to tolerate inflation above 2%. It is thus likely that the Fed will welcome the rise in inflation for now and simply stick to its current guidance, possibly moving it up modestly.</span></blockquote>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-9RBZVEyFGUw/Wpb6wVTwt8I/AAAAAAAATeo/8ojZ2KWrSGc-XTe3y8UBzDciXIY7LdYxQCLcBGAs/s1600/DB%2B-%2BA%2Bcyclical%2Bincrease%2Bin%2Binflation%2Bhas%2Bled%2Bprior%2Brecessions%2Bby%2Ban%2Baverage%2Bof%2B3%2Byears.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-9RBZVEyFGUw/Wpb6wVTwt8I/AAAAAAAATeo/8ojZ2KWrSGc-XTe3y8UBzDciXIY7LdYxQCLcBGAs/s320/DB%2B-%2BA%2Bcyclical%2Bincrease%2Bin%2Binflation%2Bhas%2Bled%2Bprior%2Brecessions%2Bby%2Ban%2Baverage%2Bof%2B3%2Byears.jpg" width="320" height="226" border="0" data-original-height="418" data-original-width="588" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-C3hnbAlhO9k/Wpb7Bxf5fOI/AAAAAAAATes/vAIML43z4Ecu9OfYvUezqNGRu0fTip2TwCLcBGAs/s1600/DB%2B-%2BThe%2BFed%2527s%2Breaction%2Bto%2Brising%2Binflation%2Bis%2Bkey.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-C3hnbAlhO9k/Wpb7Bxf5fOI/AAAAAAAATes/vAIML43z4Ecu9OfYvUezqNGRu0fTip2TwCLcBGAs/s320/DB%2B-%2BThe%2BFed%2527s%2Breaction%2Bto%2Brising%2Binflation%2Bis%2Bkey.jpg" width="320" height="242" border="0" data-original-height="444" data-original-width="586" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">It is most likely that the Fed's hiking process was due to its fear of not being behind the curve when it comes to rising inflation. Yet with a yield curve flattening and loose financial conditions in conjunction with renewed fear of a trade war that would entail pricing pressure and imported inflation with a bear market in the US dollar, there is indeed a big risk in having the Fed having to move at a more rapid pace than it would like to. The balancing act of the Fed is incredibly difficult but, it boast a first mover advantage other the likes of the ECB and the Bank of Japan. Volatility might have been repressed but in all honesty, it is in Europe where the repression has been the most acute as it can be seen in government bond yields.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">The big question surrounding the potential lethality of the "Big Bad Wolf" aka inflation lies in the velocity of inflation expectations. On that specific point, Deutsche Bank gives us additional food for thoughts in their lengthy note:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation and inflation expectations</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>How high will inflation go? If inflation expectations remain range bound, core </strong><strong>PCE inflation will stay within its narrow band of 1-2.3% in which it has been for </strong><strong>the last 23 years</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ Outside the Great Inflation of 1968-1995, core PCE inflation has remained in a remarkably narrow band (Six Myths About Inflation, Oct 2017). The period since 1996 encompassed 3 business cycles that saw unemployment fluctuate between 3.8% and 10%; the dollar rise and fall by 40% more than once; oil prices rise 7-fold and almost completely reverse. Yet inflation remained in a narrow band unusual for an economic time series. Indeed, with a standard deviation of 35 bps, much of the range of variation in inflation since 1996 cannot be differentiated from the normal noise inherent in macro data.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ The stability of inflation across large business- dollar- and oil-cycles in our view reflects the stability of inflation expectations which are the only driver of inflation over the long run. Inflation expectations have been stable since the mid-1990s, fluctuating for most of the last 23 years in a tight 50bps range and for most of it in an even narrower 30bps range. Following the dollar and oil shocks of 2014-2015, inflation expectations fell out of and are still 20bps below this range and 50bps below average. Absent large unexpected and persistent shocks, inflation expectations evolve slowly. It has in fact been difficult for policy makers to effect changes in inflation expectations as the recent experience of Japan and the 10-year miss on the core PCE inflation target in the US illustrate (Six Myths About Inflation, Oct 2017).</span></blockquote>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-Uxw5i0cj_0A/WpcL3kqeDqI/AAAAAAAATfA/iypf6AqDNTY3zWrDBt_JX8kmOvIz9y-OwCLcBGAs/s1600/DB%2B-%2BCore%2BInflation%2Bhas%2Bbeen%2Bremarkably%2Bsteady%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-Uxw5i0cj_0A/WpcL3kqeDqI/AAAAAAAATfA/iypf6AqDNTY3zWrDBt_JX8kmOvIz9y-OwCLcBGAs/s320/DB%2B-%2BCore%2BInflation%2Bhas%2Bbeen%2Bremarkably%2Bsteady%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg" width="320" height="210" border="0" data-original-height="388" data-original-width="589" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://4.bp.blogspot.com/-QBcNCmJpyk4/WpcMFGKsT3I/AAAAAAAATfE/YSMb1lEXZ_Aaql7_Jgnaii6uJZYohaQ9QCLcBGAs/s1600/DB%2B-%2Bmassive%2Bswings%2Bin%2Bunemployment.jpg"><span style="font-family: inherit;"><img src="https://4.bp.blogspot.com/-QBcNCmJpyk4/WpcMFGKsT3I/AAAAAAAATfE/YSMb1lEXZ_Aaql7_Jgnaii6uJZYohaQ9QCLcBGAs/s320/DB%2B-%2Bmassive%2Bswings%2Bin%2Bunemployment.jpg" width="320" height="212" border="0" data-original-height="388" data-original-width="584" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-sAdeVoZkr2o/WpcMRU_8ApI/AAAAAAAATfI/_qKr82__tSIsCQWtJIw55XO448GOiu98QCLcBGAs/s1600/DB%2B-%2B40pct%2Bappreciation%2Band%2Bdepreciation%2Bof%2Bthe%2Bdollar.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-sAdeVoZkr2o/WpcMRU_8ApI/AAAAAAAATfI/_qKr82__tSIsCQWtJIw55XO448GOiu98QCLcBGAs/s320/DB%2B-%2B40pct%2Bappreciation%2Band%2Bdepreciation%2Bof%2Bthe%2Bdollar.jpg" width="320" height="212" border="0" data-original-height="389" data-original-width="587" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-v-f5YUqmIGE/WpcMeaJB2xI/AAAAAAAATfM/IgtMHaVdn6MHeNp1-nzHHk_tW5VPfP0GwCLcBGAs/s1600/DB%2B-%2B7%2Bfold%2Bincrease%2Bin%2Boil%2Bpricesz%2Band%2Btheir%2Breversal.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-v-f5YUqmIGE/WpcMeaJB2xI/AAAAAAAATfM/IgtMHaVdn6MHeNp1-nzHHk_tW5VPfP0GwCLcBGAs/s320/DB%2B-%2B7%2Bfold%2Bincrease%2Bin%2Boil%2Bpricesz%2Band%2Btheir%2Breversal.jpg" width="320" height="211" border="0" data-original-height="387" data-original-width="586" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-51_fE0MEjdY/WpcMt8RQn5I/AAAAAAAATfU/SDdts3d8CC4RJY3C0CvfhdV7tiu0v1FcQCLcBGAs/s1600/DB%2B-%2Bstability%2Bin%2Bactual%2Binflation%2Breflects%2Bthat%2Bin%2Binflation%2Bexpectations.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-51_fE0MEjdY/WpcMt8RQn5I/AAAAAAAATfU/SDdts3d8CC4RJY3C0CvfhdV7tiu0v1FcQCLcBGAs/s320/DB%2B-%2Bstability%2Bin%2Bactual%2Binflation%2Breflects%2Bthat%2Bin%2Binflation%2Bexpectations.jpg" width="320" height="216" border="0" data-original-height="396" data-original-width="585" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-kNmZ2AGIBK8/WpcM7vaNfmI/AAAAAAAATfc/RsHj8dHXUswqahCv7haKeJyWGuetrNbgACLcBGAs/s1600/DB%2B-%2Binflation%2Bexpectations%2Bfluctuations%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-kNmZ2AGIBK8/WpcM7vaNfmI/AAAAAAAATfc/RsHj8dHXUswqahCv7haKeJyWGuetrNbgACLcBGAs/s320/DB%2B-%2Binflation%2Bexpectations%2Bfluctuations%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg" width="320" height="238" border="0" data-original-height="436" data-original-width="586" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">As long as growth and inflation doesn't run not too hot, the goldilocks environment could continue to hold for some months provided, as we mentioned above there is no exogenous factor from a geopolitical point of view coming into play which would trigger an acceleration in oil prices. Though, in similar fashion to volatility, the game can continue to be played provided "implicit inflation" or "inflation expectations" remain below "realized" inflation. In similar fashion to the demise of the short-vol trade, if there is a change in the 23 years narrative and suddenly "realized" inflation is above "expectations" then obviously this would be another grain of sand that could trigger some new avalanches in financial markets. We are not there yet we think.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">Finally in our final chart below, given the late stage of the credit game, we think it is becoming essential to track any changes in credit availability in the months ahead given our loose financial conditions have been and the flattening of the US yield curve.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;"> </span></div>
<div style="text-align: justify;">
<ul style="background-color: white; line-height: 20.8px;">
<li style="line-height: 20.8px; text-align: justify;"><span style="line-height: 20.8px;"><span style="font-family: inherit;">Final chart - Afraid of buckling? Watch credit availability</span></span></li>
</ul>
</div>
<div style="text-align: justify;"><span style="font-family: inherit;">We have long posited that "<span style="text-align: left;">Credit availability" is essential and a good predictor of upcoming defaults as far as US High Yield is concerned. T</span><span style="text-align: left;">he most predictive variable for default rates remains credit availability and if credit availability in US dollar terms vanishes, it could portend surging defaults down the line. The quarterly </span></span><span style="text-align: left;">Senior Loan Officer Opinion Surveys (SLOOs) published by the Fed are very important to track. T</span><span style="text-align: left;">he SLOOS report does a much better job of estimating defaults when they are being driven by a systemic factor, such as a turn in business cycle or an all-encompassing macro event. T</span>ightening in credit standards in conjunction with rate hikes will eventually weight on High Yield, and we are already seeing some fund outflows in the asset class (15th consecutive week). Our final chart comes from CITI Global Economics View note from the 23rd of February entitled "How Could Equity Sell-offs Affect Global Growth" and displays US Non-financial corporations Debt Outstanding as a percentage of GDP and AAA-BBB Effective Yield Spread for Industrial Corporate Bonds (1997-2017):</div>
<blockquote class="tr_bq" style="text-align: justify;">"<strong>What to watch?</strong>Given that a tightening in financial conditions poses a risk to the outlook, we would monitor:<br />
<ul>
<li>The durability of the sell-off: that’s rather obvious – a brief period of financial tightening is unlikely to have any material implications on the real economy.</li>
<li>Credit availability and credit spreads: given the stage of the business cycle, prospects for higher inflation, and lower monetary accommodation in advanced economies, we think credit availability and credit spreads amid high leverage across some sectors and economies are key indicators to assess whether financial conditions are starting to feed through to economic activity (Figure 6).</li>
</ul>
</blockquote>
<p> </p>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-pGT2udVu_hQ/WpcXEnWGZwI/AAAAAAAATf0/O46qxsr74TUSZQJw1hslsZB2XBinBJ8oQCLcBGAs/s1600/CITI%2B-%2BUS%2Bnon%2Bfin%2Bas%2Bpct%2Bof%2BGDP%2BVS%2BEffective%2BYield%2BSpread%2Bfor%2BIndustrial%2BCorp%2BBonds%2B1997-2017.jpg"><img src="https://1.bp.blogspot.com/-pGT2udVu_hQ/WpcXEnWGZwI/AAAAAAAATf0/O46qxsr74TUSZQJw1hslsZB2XBinBJ8oQCLcBGAs/s1600/CITI%2B-%2BUS%2Bnon%2Bfin%2Bas%2Bpct%2Bof%2BGDP%2BVS%2BEffective%2BYield%2BSpread%2Bfor%2BIndustrial%2BCorp%2BBonds%2B1997-2017.jpg" border="0" data-original-height="303" data-original-width="269" /></a></div>
<blockquote class="tr_bq" style="text-align: justify;">
<ul>
<li>Sentiment measures: measures of household and business sentiment are at very high levels across most AEs. A decline in sentiment would probably be a precursor to some moderation in spending intentions, even though the relationship between consumer sentiment and real consumption appears to have declined in recent years." - source CITI</li>
</ul>
</blockquote>
<div style="text-align: justify;">If further loading of the credit mouse trap will eventually cause significant and somewhat unpredictable deformations, possibly leading to complete loss of the member's load-carrying capacity, low recoveries and significant losses for credit investors, when it comes to assessing a potential "buckling" in the credit markets, apart from the "Big Bad Wolf" aka inflation being the enemy of volatility and leverage, credit availability is an essential part of the credit cycle.</div>
<div style="text-align: justify;"> </div>
<div style="text-align: justify;"><em>Stay tuned!</em></div>
<div style="text-align: justify;"> </div>
<div style="text-align: justify;"> </div>
<div style="text-align: justify;"> </div>
<div style="text-align: justify;">Courtesy of <a href="https://macronomy.blogspot.com/2018/02/macro-and-credit-buckling.html" target="_blank" rel="noopener">Macronomy</a></div>
</div>S&P500 Highest Forward P/E Since 2004 But Oh, That Rule 20http://stockbuz.ning.com/articles/s-p500-highest-forward-p-e-since-2004-but-oh-that-rule-202017-02-19T17:10:57.000Z2017-02-19T17:10:57.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><em>I found this interesting (the rise) however I have my own reservations because of the possible change in rates and inflation in 2017.  When inflation rises, interest rates also normally rise to maintain real rates within an appropriate range. PE ratios need to decline to reflect the increase in the earnings discount rate. Another way to look at it is that equities then face more competition for money from fixed income instruments. The cost of equities must therefore decline to keep or attract investors.  Then there is the <a href="http://www.news-to-use.com/2010/11/the-rule-of-20-equity-valuation-method.html" target="_blank">Rule of 20</a> to consider.  <span id="hs_cos_wrapper_blog_comments" class="hs_cos_wrapper hs_cos_wrapper_widget hs_cos_wrapper_type_blog_comments" data-hs-cos-general-type="widget" data-hs-cos-type="blog_comments">Rule of 20 equals P/E + long term interest rates (average of 10 and 30 yr bond rates).  If at or below 20 minus inflation -- the market is a buy.  If above 20 minus inflation -- the market is a sell. Today we're at just about 20.  I think I'll keep my cautious side up.  Keep moving up my alerts and stick to only brief swings.  Something tells me it's going to be an interesting year.  All focus on the Fed and inflation.  </span></em></p>
<p>During the past week (on February 15), the value of the S&P 500 closed at yet another all-time high at 2349.25. As of today, the forward 12-month P/E ratio for the S&P 500 stands at 17.6, based on yesterday’s closing price (2347.22) and forward 12-month EPS estimate ($133.49). Given the high values driving the “P” in the P/E ratio, how does this 17.6 P/E ratio compare to historical averages? What is driving the increase in the P/E ratio?</p>
<p><img src="https://insight.factset.com/hs-fs/hubfs/Insight/2017/Insight_%20February/02.17.17_EI/Forward12MPERatio.png?t=1487358788613&width=640&name=Forward12MPERatio.png" title="Forward12MPERatio.png" style="width: 640px;" width="640" /></p>
<p>The current forward 12-month P/E ratio of 17.6 is now above the four most recent historical averages: five-year (15.2), 10-year (14.4), 15-year (15.2), and 20-year (17.2).</p>
<p>In fact, this week marked the first time the forward 12-month P/E has been equal to (or above) 17.6 since June 23, 2004. On that date, the closing price of the S&P 500 was 1144.06 and the forward 12-month EPS estimate was $65.14.</p>
<h2>The Drivers of Change</h2>
<p>Back on December 31, 2016, the forward 12-month P/E ratio was 16.9. Since this date, the price of the S&P 500 has increased by 4.8% (to 2349.45 from 2238.83), while the forward 12-month EPS estimate has increased by 0.5% (to $133.49 from $132.84). Thus, the increase in the “P” has been the main driver of the increase in the P/E ratio to 17.6 today from 16.9 at the start of the first quarter.</p>
<p>It is interesting to note that analysts are projecting record-level EPS for the S&P 500 for Q2 2017 through Q4 2017. If not, the forward 12-month P/E ratio would be even higher than 17.6.</p>
<p>Courtesy of <a href="https://insight.factset.com/earningsinsight_02.17.17?utm_source=hs_email&utm_medium=email&utm_content=42911507&_hsenc=p2ANqtz-8EXnN1Eg7NBv_e9YOjbBGVsr7nQPFCThNYn3mkUU4Oi4rIFhBJ8emW-qyt6MuC_0rI2HunkxbkAyswbGQviM0wIL-oZg&_hsmi=42911507" target="_blank">Factset</a></p>
</div>Is The Fed About To Experience A Repeat Of 2016?http://stockbuz.ning.com/articles/is-the-fed-about-to-experience-a-repeat-of-20162016-12-28T23:49:58.000Z2016-12-28T23:49:58.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="entry-body">
<p>In the most recent Summary of Economic Projections, Fed officials penciled in three 25bp rate hikes for 2017. The reality, however, could be very different. We all remember how “four” became “one” in 2016. The median dots are neither a promise nor an official forecast. As 2016 progressed, forecasts associated with a lower path of SEP “dots” evolved as the consensus view of policymakers. Will the same happen this year? I don’t think so; it is hard to see the Fed on pause for another twelve months.</p>
<p>As a starting point, I think it best to assume the US economy is near full-employment. But the US economy was near full-employment at this time last year as well. I think the key difference between then and now is that then the after-effect of the oil price slide and dollar surge placed a drag on the US economy sufficient to ease hiring pressure. At the same time, labor force participation perked up, setting the stage for a flat unemployment rate for most of the year. Inflationary pressures eased as well; the January inflation pop proved to be short-lived:</p>
<p><a class="asset-img-link" href="http://economistsview.typepad.com/.a/6a00d83451b33869e201b8d24ae9a9970c-popup" style="display: inline;"><img alt="PCE1116" class="asset asset-image at-xid-6a00d83451b33869e201b8d24ae9a9970c img-responsive" src="http://economistsview.typepad.com/.a/6a00d83451b33869e201b8d24ae9a9970c-500wi" style="display: block; margin-left: auto; margin-right: auto;" title="PCE1116" /></a>In effect, the US economy settled into a nice little equilibrium in 2016 that obviated the need for additional rate hikes. To expect a repeat scenario in 2017, one would need to assume that the US economy does not pick up speed and threaten that equilibrium by pushing past full employment.</p>
<p>Evidence, however, piles up suggesting that the slowdown of the past year is drawing to a close. ISM manufacturing and nonmanufacturing surveys are stronger, temporary help employment is heading up again, new manufacturing orders for nondefence, nonair capital goods have flattened out, and the broader inventory overhang is easing:</p>
<p><a class="asset-img-link" href="http://economistsview.typepad.com/.a/6a00d83451b33869e201bb09641387970d-popup" style="display: inline;"><img alt="ISRATIO1216" class="asset asset-image at-xid-6a00d83451b33869e201bb09641387970d img-responsive" src="http://economistsview.typepad.com/.a/6a00d83451b33869e201bb09641387970d-500wi" style="display: block; margin-left: auto; margin-right: auto;" title="ISRATIO1216" /></a>All of this occurs in the context of an unemployment rate that suddenly dipped toward the lower end of the Fed’s estimates of the natural rate of unemployment. And if the demographic forces reassert themselves, there is likely to be further downward pressure on the unemployment rate – job growth is well above estimates necessary to hold unemployment constant.</p>
<p>But would a total of 75bp of hikes be necessary to hold inflation in check? That depends in part the sensitivity of inflation to greater resource utilization. <a href="http://www.wsj.com/articles/trump-isnt-likely-to-rescue-the-global-economyor-wreck-it-either-1479317018">Greg Ip of the Wall Street Journal</a> noted last week:</p>
<blockquote>
<p>Unlike in 2009, this fiscal stimulus will be hitting when the economy is close to full employment with far less spare capacity. Yet it’s premature to assume inflation will therefore jump. In the last decade inflation, excluding swings due to energy, has proven surprisingly inertial, barely moving in response to high unemployment. The same is likely true if unemployment drops further below its “natural” level.</p>
</blockquote>
<p>It is true that inflation is fairly inertial, although some policymakers will dismiss the lack of response to high unemployment as a consequence of downward nominal wage rigidity. Moreover, others will claim the reason for inertial inflation is that the Fed has properly responds to weak or strong economic conditions to hold inflation and, importantly, inflation expectations, in check. In other words, you won’t see inflation if the Fed acts preemptively.</p>
<p>Still, the broader point remains true that while further declines in unemployment will pressure the Fed to hiking rates more aggressively, low inflation like seen in November will temper that response.</p>
<p>In addition, policy going forward depends on the relative tightness of financial markets in general, and the dollar in particular. And the dollar has been on a tear in recent weeks:</p>
<p><a class="asset-img-link" href="http://economistsview.typepad.com/.a/6a00d83451b33869e201b7c8c123ef970b-pi" style="display: inline;"><img alt="Dollar1216" class="asset asset-image at-xid-6a00d83451b33869e201b7c8c123ef970b img-responsive" src="http://economistsview.typepad.com/.a/6a00d83451b33869e201b7c8c123ef970b-500wi" style="display: block; margin-left: auto; margin-right: auto;" title="Dollar1216" /></a>The dollar serves as a break on the US economy. If activity expands as I anticipate, and the economy is near full employment as I believe, then some demand will be offshored as the rising dollar prompts the trade deficit to widen. Consequently, the Fed needs to be wary of feedback effects from the dollar as they tighten policy.</p>
<p>Bottom Line: The economic situation on the ground is very different from December of last year. Whereas the decision to raise rates at that time looked ill-advised, this latest action appears more appropriate given the likely medium-term path of the US economy. Assuming the US economy is near full employment, that path likely contains enough upward pressure on activity to justify more than one more rate increase in 2017. Three I think is more likely than one. That said, the change in administrations and the path of fiscal policy creates uncertainties in both directions.</p>
<p>Courtesy of <a href="http://economistsview.typepad.com/timduy/2016/12/is-the-fed-about-experience-a-repeat-of-2016.html" target="_blank">EconomistsView</a></p>
</div>
</div>It's Not What You Think. Market Myths Debunkedhttp://stockbuz.ning.com/articles/it-s-not-what-you-think-market-myths-debunked2016-12-26T23:55:40.000Z2016-12-26T23:55:40.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a href="http://www.angelo.edu/content/image/gid/228/width/600/height/268/18059_mythfact2.jpg" target="_blank"><img src="http://www.angelo.edu/content/image/gid/228/width/600/height/268/18059_mythfact2.jpg?width=400" style="padding: 10px;" class="align-left" width="400" /></a></p>
<blockquote class="quote" itemprop="citation">
<p><strong>"A lie told often enough becomes the truth" - Vladimir Lenin</strong></p>
</blockquote>
<p>Imagine for a minute you lived centuries ago when people believed the earth was flat, or the earth revolved around the sun, or that planets were Gods, or that disease was angry spirits or supernatural powers. You'd have an explanation for everything ... only it would be wrong. And that "wrongness" would stand in the way of true understanding and true progress until they were discarded as falsehoods.</p>
<p>And so it is with the Stock Market. Let me explain.</p>
<p><em>First, let me be perfectly clear. I'm a statistician so I'm not referring to philosophical or political or gut feelings or anything other than Statistical Misrepresentations. Fact, not opinion.</em></p>
<p>I can hardly go a day without reading an article or hearing a TV pundit or someone regurgitate misconceptions that are so integrated in our minds ... we believe them to be the truth.</p>
<p>These misconceptions cause us to make investing mistakes because we take them as axiomatic when they are fantasy.</p>
<p>I am constantly amazed how often misconceptions about really fundamental aspects of the market persist. Not just amongst lay investors, but pundits and professionals as well. It just seems, at times, that investors WANT to be misled. I guess it gives them some sort of comfort ... even if it is wrong.</p>
<p>So, let's see if we can correct some of these misconceptions.</p>
<p>Let me take the most prevalent ones one at a time.</p>
<p><span class="font-size-4"><strong>Average Market Returns</strong>:</span></p>
<p>I have to admit, I came across three articles today that made projections based upon Stock Market Average Returns. They all quote some historic average return over some historic period. In one particular article, the last 10 years was presented as an Average Annual Return of 9.05%.</p>
<p>The Stock Market Average Return <strong>is a meaningless metric</strong>. And here's why.</p>
<p><em>Average returns are relevant only if they are independent of each other</em><strong>.</strong> An example would help.</p>
<p>Let's say the market went <strong>up</strong> 15%, then <strong>down</strong> 15%, then <strong>up</strong> 15%, then <strong>down</strong> 15%. The average return is ZERO. But, let's do some math.</p>
<p>Start at $1,000.</p>
<p>1) In year one, the 15% goes to <em>$1,150</em>.</p>
<p>2) In year two, when it goes down 15%, it's down $173 to <em>$977</em>.</p>
<p>3) In year three, when it rises 15%, it goes up $147 to <em>$1,124</em>.</p>
<p>4) In year four, the 15% drop is $169 to <strong>$955</strong>.</p>
<p>The average is ZERO. The result is <em>negative 4.5%</em> ... or <em>negative 1.125%</em>/year. Reversing the up and down years renders the same result.</p>
<p><em>This results because Averages only work if the events are independent of each other</em>. <em>When one compares performance to averages it is an apples to oranges comparison</em>.</p>
<p>One must look, NOT at average returns but CAGR (compound average growth rate), which takes into account this interdependence of events.</p>
<p>Let's take a microscope to recent events and see how it works, in real-time, not in theory:</p>
<p>For dramatic effect, I'll use the three year period of 2008, 2009 and 2010.</p>
<p><span><span><span class="table-responsive">S&P Average vs. CAGR</span></span></span></p>
<table class="table table-bordered" style="width: 513px; height: 98px;" cellspacing="1" cellpadding="1" border="1" align="center">
<tbody>
<tr>
<td>2008</td>
<td>- 36.55%</td>
</tr>
<tr>
<td>2009</td>
<td>+ 25.94%</td>
</tr>
<tr>
<td>2010</td>
<td>+ 14.82%</td>
</tr>
<tr>
<td>Average Annual Return</td>
<td>+ 1.40%</td>
</tr>
<tr>
<td>CAGR</td>
<td>- 2.75%</td>
</tr>
</tbody>
</table>
<p>This differential represents a swing of over 4%. <em>No wonder investors have trouble understanding how they lose money when the average seems to make money.</em></p>
<p>Examining the last 10 years, the "average return" of the S&P 500 was 9.05%, but the CAGR of the market was only 7.25%.</p>
<p>In fact, if we look at slices of returns over the last 100 years, we will find that Average Returns overstates CAGR by about 2% per year. WOW.</p>
<p>Here's a chart that shows the pattern for the S&P 500:</p>
<p><span><span><span class="table-responsive">Average Returns vs. CAGR</span></span></span></p>
<table class="table table-bordered" style="width: 518px; height: 79px;" cellspacing="1" cellpadding="1" border="1">
<tbody>
<tr>
<td></td>
<td>Average Return</td>
<td>CAGR</td>
</tr>
<tr>
<td>1928-2015</td>
<td>11.40%</td>
<td>9.50%</td>
</tr>
<tr>
<td>1966-2015</td>
<td>11.01%</td>
<td>9.61%</td>
</tr>
<tr>
<td>2006-2015</td>
<td>9.03%</td>
<td>7.25%</td>
</tr>
</tbody>
</table>
<p><strong>Remedy</strong>: There is a very simple remedy to this misconception. Do not use Average Returns, look instead to CAGR (compounded annual growth rate). That is the only way to judge performance.</p>
<p><strong>Significance</strong>: This is a very significant distortion for a number of reasons. If we assume that long range historic returns are indicative of long range future results (I'm not saying they are ... that's for another article). If someone wants to project accumulation goals or withdrawals in retirement, they will severely overstate the results if they use Average Returns rather than CAGR. This is magnified as their projection will use compound interest on an overstated metric. Ye 'ole double whammy.</p>
<p>It also distorts inter-market comparisons, say comparing S&P to DJI or Nasdaq or Small Cap or whatever. When we are presented a distortion of reality, this distortion, when and if, compared to another distortion, well, two distortions don't make a right.</p>
<p>Let me move on to the next myth.</p>
<p><span class="font-size-4"><strong>Inflation Rates</strong>:</span></p>
<p>No, I'm not going to argue about whether or not the metric used to determine the CPI or inflation rate is proper. I'm simply going to extend the argument I just made about Averages versus CAGR.</p>
<p>I'm going to save lots of typing by simply stating that when values are <em>substantially unidirectional</em> - that is they are mostly either up or down as opposed to up and down - an Average will <em>understate</em>, not <em>overstate</em> CAGR. Inasmuch as the last 60 years experienced only one year of negative inflation, it is certainly unidirectional.</p>
<p>We always hear about "some" Average Inflation Rate being XYZ. For instance, one Average Inflation Rate for the last 10 years was reported at 1.7%. However, that understated the CAGR when, using the exact same time period and rates would be closer to 1.9%.</p>
<p>Remember, this is statistical hocus-pocus which must be added to any hocus-pocus in the design of the metric, itself.</p>
<p>So, if anyone is wondering why they have trouble making financial progress it's very simple: returns for the market are statistically overstated and the inflation rate is statistically understated.</p>
<p>Moving on to the next myth.</p>
<p><span class="font-size-4"><strong>Mean Reversion</strong>:</span></p>
<p>This is mostly used as a fancy way to say "What goes up must go down". In that context, it's more of a mis-application than a mis-representation. However, the effect is just as devastating, as it influences behavior that is inconsistent with maximizing returns.</p>
<p>When the market rises, as it has now, we hear a lot about mean reversion. This seems to make sense and play into the basic investor fear of a retrenchment. To better understand why mean reversion has nothing to do with this, let me start with an analogy.</p>
<p>We see an Olympic 100 meter swimmer dive into the water for her race. As she uses her left hand for the first stroke, she pulls slightly to the left. Then comes the right hand and that stroke moves her slightly back to the center-line. So, what we observe, is constant forward motion that travels in a jagged, or zig-zag, pattern.</p>
<p>Now, if the swimmer mean reverted, she'd go out to the 40 meter line, reverse course, swim back to the 20 meter line, reverse again to the 30 meter, reverse again to the 25 and so on ... back and forth .... until she settled near the 25 meter line and sunk in exhaustion.</p>
<p>So, the swimmer clearly doesn't "mean revert". Or does she? She actually does, but the mean reversion applies to the zig-zag, not the forward motion of the swimmer. So, the swimmer moves on towards the finish line ... the mean reversion (zig-zag) does not cause her to fall back ... just takes a little longer to get where she's headed.</p>
<p>It is the same with the market. The market shows mean reversion, not in the price of the market, but in the <em>Growth Rate</em>.</p>
<p>Let me give an example.</p>
<p>Assume the historic annual growth rate of the market is 8% and it is trading at $2,200. It goes up 14% to $2,500. Mean reversion of price would mean it would drop to $1,900 so the average price was $2,200.</p>
<p>However, mean reversion of the growth rate would lower future growth until that "excess" 6% is absorbed. Now, this could happen by growing 1% less (7%), for the next six years or growing only 2% the next year.</p>
<p>So, if growth rate mean reverts the market can go higher. It just goes higher at a slower rate to compensate for the excess growth.</p>
<p>THIS IS EXACTLY WHAT WE OBSERVE.</p>
<p>Mean reversion does NOT mean "what goes up must come down".</p>
<p>But, you ask, we all know the market goes up and down, isn't that mean reversion? Absolutely NOT ... in the sense it is vernacularly applied ... which is to imply the market will drop. It is the same pattern we observe in the zig-zag of the swimmer. The market mean reverts to its <em>growth rate</em>, not its <em>price</em>.</p>
<p>If you think about it you'll understand why there's always a bounce-back on a drop. Sometimes the bounce-back comes quickly, sometimes it's dragged out.</p>
<p><span><strong>Significance</strong>: Yes</span>, the market will go up and down. No one denies that. However, it will not mean revert to some previous <em>price</em> ... it mean reverts to a <em>growth rate</em>. So, we can witness an ever increasing market that is mean reverting at the same time.</p>
<p>Now, many will try to time the zig-zag, knowing that it is just a temporary condition. This can be done very successfully. However, those that sell or stay out of the market, expecting the price to mean revert generally find themselves losers. I know several that sold out in June 2013 when the S&P 500 hit $1,600. It was an "all time high" and surely would mean revert. Now, with the market nearly 50% higher, they are still waiting. Hope you're not one of them.</p>
<p><strong>Summary</strong>: Many investors and even some professionals can be easily misled by what seems to be an accurate portrayal of market conditions. Very few actually have the training to understand the mechanics of the market. Most fall victim to "slogans" and misrepresentation.</p>
<p>This article illustrated how the market is systematically portrayed as being more robust than it really is ... that inflation portrayals use the same techniques to understate the true rate and that investors are wrongly influenced to sell when they should be holding or buying.</p>
<p>It is my hope, that through this article, I can challenge the reader to question even the most basic of "slogans" and accepted practice.</p>
<p><strong>Caveat</strong>: In this article I put forth the concept that the Market has a "fundamental" growth rate around which it mean reverts. This is the current thinking amongst most statisticians and market gurus. There is a tremendous amount of scholarly articles and studies indicating this to be so.</p>
<p>Personally, I disagree with the "field" on this. My personal opinion is that the growth rate, itself, mean reverts around some other fundamental value or values that are not easily and currently understood.</p>
<p>Since I promised just a factual presentation and not a philosophical or "gut" opinion, it was beyond the scope of this article.</p>
<p>Courtesy of <a href="http://seekingalpha.com/article/4032663-think-market-myths-debunked" target="_blank">SeekingAlpha</a></p>
</div>Bonds Haven't Even Begun To Price In Trumpflationhttp://stockbuz.ning.com/articles/bonds-haven-t-even-begun-to-price-in-trumpflation2016-11-27T20:17:59.000Z2016-11-27T20:17:59.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Since the election the financial markets have been trying to price in “<a href="http://www.investopedia.com/terms/t/trumpflation.asp">Trumpflation</a>.” This is the idea that the combination of infrastructure spending, tax cuts, rising deficits, immigration curbs and protectionist policies could reverse the disinflationary trends we have witnessed over the past few decades and more dramatically since the financial crisis. The selloff in the bond market amid surging interest rates might be the single most important piece of evidence in this regard.</p>
<p>Over the summer I noted we were likely witnessing the final blow-off stage of the bond bull market (see <a href="https://www.thefelderreport.com/2016/07/06/long-bonds-enter-the-blowoff-stage/">this</a> and <a href="https://www.thefelderreport.com/2016/07/08/a-few-more-thoughts-on-the-long-bond-blowoff/">this</a>). Since then the long bond has fallen nearly 15% leading many pundits to conclude it has already begun pricing in the prospect of Trumpflation. However, if you look at the data, it appears it’s just not pricing in as much deflation anymore. In fact, by some measures the yield 10-year treasury bond would still need to double in order to finish the job.</p>
<blockquote class="twitter-tweet" data-lang="en">
<p lang="en" dir="ltr" xml:lang="en">A simple model based on <a href="https://twitter.com/hashtag/inflation?src=hash">#inflation</a>, <a href="https://twitter.com/hashtag/ISM?src=hash">#ISM</a> and short-term rates suggests the 10-year US Treasury yield should be 4%! <a href="https://t.co/FooVkNvQTt">pic.twitter.com/FooVkNvQTt</a></p>
— jeroen blokland (@jsblokland) <a href="https://twitter.com/jsblokland/status/797377020535705600">November 12, 2016</a></blockquote>
<script async="" src="//platform.twitter.com/widgets.js" charset="utf-8" type="text/javascript">
</script>
<p>And if inflation were to actually increase from where it stands currently, yields would need to rise much further than that in order to properly price this in. Think of it this way: If inflation is running at 3-4% and rising how much of a premium to this number should an investor be paid for tying up his money for 10 years? 1%? 2%? More? Perhaps this is why “bond king” Jeff Gundlach recently suggested the 10-year yield could <a href="http://www.barrons.com/articles/gundlach-bond-yields-could-hit-6-in-five-years-1478929496">rise to 6%</a> after Trump’s first term in office.</p>
<p>This is a big deal not just for bonds but for asset classes of all kinds that have been priced in similar fashion over the better part of the last decade. Stocks now have more <a href="http://blogs.barrons.com/incomeinvesting/2016/11/17/watch-out-market-for-negative-yielding-bonds-could-dry-up/">interest rate risk</a> than they have had for many years, maybe ever. It might be wise to remember the 1994 bond market crash. Just like it has over the past few months, the long bond fell 15% back then before stocks took notice and fell a quick 10% of their own. Should bonds continue their current selloff, the parallels to 1987 might be more appropriate. The long bond fell 25% during that episode, the final phase of its decline coinciding with the stock market crash that fall.</p>
<p>Either way, the prospect of rising inflation is something the bond market is only beginning to grapple with. It may not even materialize. There’s a good chance Trump will run into a lot more resistance than most market participants currently believe when it comes to his dramatic policy shifts. But inflation does rear its ugly head again investors may be forced to reconsider the rampant enthusiasm for financial assets that has taken hold since the election.</p>
<p>Courtesy of <a href="https://www.thefelderreport.com/2016/11/25/bonds-havent-even-begun-pricing-in-trumpflation-yet/" target="_blank">TheFelderReport</a></p>
</div>Don't Be Fooled The Bond Rally Continueshttp://stockbuz.ning.com/articles/don-t-be-fooled-the-bond-rally-continues2016-08-11T01:08:59.000Z2016-08-11T01:08:59.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;"><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291344?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1291344?profile=RESIZE_480x480" width="450"></a>We’ve been bulls on 30-year Treasury bonds since 1981 when we stated, “We’re entering the bond rally of a lifetime.” It’s still under way, in our opinion. Their yields back then were 15.2%, but our forecast called for huge declines in inflation and, with it, a gigantic fall in bond yields to our then-target of 3%.</span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The Cause of Inflation</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ve argued that the root of inflation is excess demand, and historically it’s caused by huge government spending on top of a fully-employed economy. That happens during wars, and so inflation and wars always go together, going back to the French and Indian War, the Revolutionary War, the War of 1812, the Mexican War of 1846, the Civil War, the Spanish American War of 1898, World Wars I and II and the Korean War. In the late 1960s and 1970s, huge government spending, and the associated double-digit inflation (<em>Chart 1</em>), resulted from the Vietnam War on top's LBJ’s War on Poverty.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_1_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">By the late 1970s, however, the frustrations over military stalemate and loss of American lives in Vietnam as well as the failures of the War on Poverty and Great Society programs to propel lower-income folks led to a rejection of voters’ belief that government could aid Americans and solve major problems. The first clear manifestation of this switch in conviction was Proposition 13 in California, which limited residential real estate taxes. That was followed by the 1980 election of Ronald Reagan, who declared that government <em>was</em> the basic problem, not the solution to the nation’s woes.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">This belief convinced us that Washington’s involvement in the economy would atrophy and so would inflation. Given the close correlation between inflation and Treasury bond yields (Chart 1), we then forecast the unwinding of inflation—disinflation—and a related breathtaking decline in Treasury bond yields to 3%, as noted earlier. At that time, virtually no one believed our forecast since most thought that double-digit inflation would last indefinitely. </span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Lock Up For Infinity?</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Despite the high initial yields on “the long bond,” as the most-recently issued 30-year Treasury is called, our focus has always been on price appreciation as yields drop, not on yields, per se. A vivid example of this strategy occurred in March 2006—before the 2007–2009 Great Recession promoted the nosedive in stocks and leap in Treasury bond prices. I was invited by Professor Jeremy Siegel of Wharton for a public debate on stocks versus bonds. He, of course, favored stocks and I advocated Treasury bonds.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">At one point, he addressed the audience of about 500 and said, “I don’t know why anyone in their right mind would tie up their money for 30 years for a 4.75% yield [the then-yield on the 30-year Treasury].” When it came my turn to reply, I asked the audience, “What’s the maturity on stocks?” I got no answer, but pointed out that unless a company merges or goes bankrupt, the maturity on its stock is infinity—it has no maturity. My follow-up question was, “What is the yield on stocks?” to which someone correctly replied, “It’s 2% on the S&P 500 Index.” </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">So I continued, “I don’t know why anyone would tie up money for infinity for a 2% yield.” I was putting the query, apples to apples, in the same framework as Professor Siegel’s rhetorical question. “I've never, never, never bought Treasury bonds for yield, but for appreciation, the same reason that most people buy stocks. I couldn't care less what the yield is, as long as it's going down since, then, Treasury prices are rising.”</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Of course, Siegel isn’t the only one who hates bonds in general and Treasuries in particular. And because of that, Treasurys, unlike stocks, are seldom the subject of irrational exuberance. Their leap in price in the dark days in late 2008 (<em>Chart 2</em>) is a rare exception to a market that seldom gets giddy, despite the declining trend in yields and related decline in prices for almost three decades.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_2_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Treasury Haters</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Stockholders inherently hate Treasurys. They say they don’t understand them. But their quality is unquestioned, and Treasurys and the forces that move yields are well-defined—Fed policy and inflation or deflation (Chart 1) are among the few important factors. Stock prices, by contrast, depend on the business cycle, conditions in that particular industry, Congressional legislation, the quality of company management, merger and acquisition possibilities, corporate accounting, company pricing power, new and old product potentials, and myriad other variables.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Also, many others may see bonds—except for junk, which really are equities in disguise—as uniform and gray. It's a lot more interesting at a cocktail party to talk about the unlimited potential of a new online retailer that sells dog food to Alaskan dogsledders than to discuss the different trading characteristics of a Treasury of 20- compared to 30-year maturity. In addition, many brokers have traditionally refrained from recommending or even discussing bonds with clients. Commissions are much lower and turnover tends to be much slower than with stocks. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Stockholders also understand that Treasurys normally rally in weak economic conditions, which are negative for stock prices, so declining Treasury yields are a bad omen. It was only individual investors’ extreme distaste for stocks in 2009 after their bloodbath collapse that precipitated the rush into bond mutual funds that year. They plowed $69 billion into long-term municipal bond funds alone in 2009, up from only $8 billion in 2008 and $11 billion in 2007.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Another reason is that most of those promoting stocks prefer them to bonds is because they compare equities with short duration fixed-income securities that did not have long enough maturities to appreciate much as interest rates declined since the early 1980s.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Investment strategists cite numbers like a 6.7% annual return for Treasury bond mutual funds for the decade of the 1990s while the S&P 500 total annual return, including dividends, was 18.1%. But those government bond funds have average maturities and durations far shorter than on 30-year coupon and zero-coupon Treasurys that we favor and which have way, way outperformed equities since the early 1980s</span></span>.</p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Media Bias</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The media also hates Treasury bonds, as their extremely biased statements reveal. The June 10 edition of <em>The Wall Street Journal</em> stated: “The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates. And with yields so low, buyers aren’t getting much income to compensate for that risk.” Since then, the 30-year Treasury yield has dropped from 2.48% to 2.21% as the price has risen by 8.3%.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Then, the July 1 <em>Journal</em> wrote: “Analysts have warned that piling into government debt, especially long-term securities at these slim yields, leaves bondholders vulnerable to the potential of large capital losses if yields march higher.” Since then, the price of the 30-year Treasury has climbed 1.7%. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">While soft-pedaling the tremendous appreciation in long-term sovereigns this year, <em>Wall Street Journal</em> columnist James MacKintosh worries about the reverse. On July 28, he wrote, “Investors are taking a very big risk with these long-dated assets....Japan's 40-year bond would fall 15% in price if the yield rose by just half a percentage point, taking it back to where it stood in March. If yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration. The 30-year Treasury would lose 14% of its value, while Japan's 40-year would lose a quarter of its value.” </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The July 11 edition of the <em>Journal</em> said, “Changes in monetary policy could also trigger potential losses across the sovereign bond world. Even a small increase in interest rates could inflict hefty losses on investors.” </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">But in response to Brexit, the Bank of England has already eased, not tightened, credit, with more likely to follow. The European Central Bank is also likely to pump out more money as is the Bank of Japan as part of a new $268 billion stimulus package. Meanwhile, even though Fed Chairwoman Yellen has talked about raising interest rates later this year, we continue to believe that the next Fed move will be to reduce them.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Major central banks have already driven their reference rates to essentially zero and now negative in Japan and Europe (<em>Chart 3</em>) while quantitative easing exploded their assets (<em>Chart 4</em>). The Bank of England immediately after Brexit moved to increase the funds available for lending by U.K. banks by $200 billion. Earlier, on June 30, BOE chief Mark Carney said that the central bank would need to cut rates “over the summer” and hinted at a revival of QE that the BOE ended in July 2012.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 359px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_3_20160810_OTB.jpg"></p>
<p align="center"><img alt="" style="width: 550px; height: 359px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_4_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Lonely Bulls</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ve been pretty lonely as Treasury bond bulls for 35 years, but we’re comfortable being in the minority and tend to make more money in that position than by running with the herd. Incidentally, we continue to favor the 30-year bond over the 10-year note, which became the benchmark after the Treasury in 2001 stopped issuing the “long bond.” At that time, the Treasury was retiring debt because of the short-lived federal government surpluses caused by the post–Cold War decline in defense spending and big capital gains and other tax collections associated with the Internet stock bubble.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">But after the federal budget returned to deficits as usual, the Treasury resumed long bond issues in 2006. In addition, after stock losses in the 2000–2002 bear market, many pension funds wanted longer-maturity Treasurys to match against the pension benefit liability that stretched further into the future as people live longer, and they still do.</span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Maturity Matters</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We also prefer the long bond because maturity matters to appreciation when rates decline. Because of compound interest, a 30-year bond increases in value much more for each percentage point decline in interest rates than does a shorter maturity bond (<em>Chart 5</em>).</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_5a_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Note (<em>Chart 6</em>) that at recent interest rates, a one percentage point fall in rates increases the price of a 5-year Treasury note by about 4.8%, a 10-year note by around 9.5%, but a 30-year bond by around 24.2%. Unfortunately, this works both ways, so if interest rates go up, you’ll lose much more on the bond than the notes if rates rise the same for both.</span></span></p>
<p align="center"><img alt="" style="width: 403px; height: 278px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_6_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">If you really believe, as we have for 35 years, that interest rates are going down, you want to own the longest-maturity bond possible. This is true even if short-term rates were to fall twice as much as 30-year bond yields. Many investors don’t understand this and want only to buy a longer-maturity bond if its yield is higher.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Others only buy fixed-income securities that mature when they need the money back. Or they'll buy a ladder of bonds that mature in a series of future dates. This strikes us as odd, especially for Treasurys that trade hundreds of billions of dollars’ worth each day and can be easily bought and sold without disturbing the market price. Of course, when you need the cash, interest rates may have risen and you’ll sell at a loss, whereas if you hold a bond until it matures, you’ll get the full par value unless it defaults in the meanwhile. But what about stocks? They have no maturity so you’re never sure you’ll get back what you pay for them.</span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Three Sterling Qualities</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ve also always liked Treasury coupon and zero-coupon bonds because of their three sterling qualities. First, they have gigantic liquidity with hundreds of billions of dollars’ worth trading each day, as noted earlier. So all but the few largest investors can buy or sell without disturbing the market.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Second, in most cases, they can’t be called before maturity. This is an annoying feature of corporate and municipal bonds. When interest rates are declining and you’d like longer maturities to get more appreciation per given fall in yields, issuers can call the bonds at fixed prices, limiting your appreciation. Even if they aren’t called, callable bonds don’t often rise over the call price because of that threat. But when rates rise and you prefer shorter maturities, you’re stuck with the bonds until maturity because issuers have no interest in calling them. It’s a game of heads the issuer wins, tails the investor loses.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Third, Treasurys are generally considered the best-quality issues in the world. This was clear in 2008 when 30-year Treasurys returned 42%, but global corporate bonds fell 8%, emerging market bonds lost 10%, junk bonds dropped 27%, and even investment-grade municipal bonds fell 4% in price.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Slowing global economic growth and the growing prospects of deflation are favorable for lower Treasury yields. So is the likelihood of further ease by central banks, including even a rate cut by the Fed, as noted earlier. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Along with the dollar (<em>Chart 7</em>), Treasurys are at the top of the list of investment safe havens as domestic and foreign investors, who own about half of outstanding Treasurys, clamor for them.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 358px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_7_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Sovereign Shortages</span></span></h3>
<p><span style="font-family: times new roman,times,serif;">Furthermore, the recent drop in the federal deficit has reduced government funding needs so the Treasury has reduced the issuance of bonds in recent years. In addition, tighter regulators force U.S. financial institutions to hold more Treasurys. </span></p>
<p><span style="font-family: times new roman,times,serif;">Also, central bank QE has vacuumed up highly-rated sovereigns, creating shortages among private institutional and individual buyers. The Fed stopped buying securities in late 2014, but the European Central Bank and the Bank of Japan, which already owns 34% of outstanding Japanese government securities, are plunging ahead. The resulting shortages of sovereigns abroad and the declining interest rates drive foreign investors to U.S. Treasurys.</span></p>
<p><span style="font-family: times new roman,times,serif;">Also, as we’ve pointed out repeatedly over the past two years, low as Treasury yields are, they’re higher than almost all other developed country sovereigns, some of which are negative (<em>Chart 8</em>). So an overseas investor can get a better return in Treasurys than his own sovereigns. And if the dollar continues to rise against his home country currency, he gets a currency translation gain to boot.</span></p>
<p align="center"><img alt="" style="width: 550px; height: 358px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_8_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">"The Bond Rally of a Lifetime"</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We believe, then, that what we dubbed “the bond rally of a lifetime” 35 years ago in 1981 when 30-year Treasurys yielded 15.2% is still intact. This rally has been tremendous, as shown in <em>Chart 9</em>, and we happily participated in it as forecasters, money managers and personal investors.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_9_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Chart 9 uses 25-year zero-coupon bonds because of data availability but the returns on 30-year zeros were even greater. Even still, $100 invested in that 25-year zero-coupon Treasury in October 1981 at the height in yield and low in price and rolled over each year maintains its maturity or duration to avoid the declining interest rate sensitivity of a bond as its maturity shortens with the passing years. It was worth $31,688 in June of this year, for an 18.1% annual gain. In contrast, $100 invested in the S&P 500 index at its low in July 1982 is now worth $4,620 with reinvested dividends. So the Treasurys have outperformed stocks by 7.0 <em>times</em> since the early 1980s.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">So far this year, 30-year zero-coupon Treasurys have returned 26% compared to 3.8% for the S&P 500. And we believe there’s more to go. Over a year ago, we forecast a 2.0% yield for the 30-year bond and 1.0% for the 10-year note. If yields fall to those levels by the end of the year from the current 2.21% and 1.5%, respectively, the total return on the 30-year coupon bond will be 5.7% and 5.6% on the 10-year note. The returns on zero-coupon Treasurys with the same rate declines will be 6.4% and 5.1% (<em>Chart 10</em>).</span></span></p>
<p align="center"><img alt="" style="width: 400px; height: 307px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_10_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Besides Treasurys, sovereign bonds of other major countries have been rallying this year as yields fell (<em>Chart 11</em>) and investors have stampeded into safe corrals after Brexit.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_11_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Finally Facing Reality</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Interestingly, some in the media are finally facing the reality of this superior performance of Treasury bonds and backpedaling on their 35-year assertions that it can’t last. The July 12 <em>Wall Street Journal</em> stated: “Bonds are churning out returns many equity investors would envy. Remarkably, more than 80% of returns on U.S., German, Japanese and U.K. bonds are attributable to gains in price, Barclays index data show. Bondholders are no longer patient coupon-clippers accruing steady income.”</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The July 14 <em>Journal</em> said, “Ultra low interest rates are here to stay,” and credited not only central bank buying of sovereigns but also slow global growth. Another <em>Journal</em> article from that same day noted that central banks can make interest rates even more negative and, if so, “even bonds bought at today’s low rates could go up in price.” And in the July 16 <em>Journal</em>, columnist Jason Zweig wrote, “The generation-long bull market in bonds is probably drawing to a close. But high quality bonds are still the safest way to counteract the risk of holding stocks, as this year’s returns for both assets has shown. Even at today’s emaciated yields, bonds still are worth owning.” What a diametric change from earlier pessimism on bonds!</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The July 11 <em>Journal</em> said, “Recently, the extra yield investors demand to hold the 10-year relative to the two-year Treasury note hit its lowest level since November 2007 (<em>Chart 12</em>). In the past, investors have taken this narrowing spread as a warning sign that growth momentum may soon slow because the Fed is about to raise interest rates—a move that would cause shorter-dated bond yields to rise faster than longer-dated ones. Now, like much else, it is largely being blamed on investors’ quest for yield.” Note (Chart 12) that when the spread went negative, with 2-year yields exceeding those on 10-year Treasury notes, a recession always followed. But that was because the Fed's attempts to cool off what it saw as an overheating economy with higher rates was overdone, precipitating a business downturn. That's not li kely in today's continuing weak global economy.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_12_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Persistent Stock Bulls</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Nevertheless, many stock bulls haven’t given up their persistent love of equities compared to Treasurys. Their new argument is that Treasury bonds may be providing superior appreciation, but stocks should be owned for dividend yield. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">That, of course, is the exact opposite of the historical view, but in line with recent results. The 2.1% dividend yield on the S&P 500 exceeds the 1.50% yield on the 10-year Treasury note and is close to the 2.21% yield on the 30-year bond. Recently, the stocks that have performed the best have included those with above average dividend yields such as telecom, utilities and consumer staples (<em>Chart 13</em>).</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 358px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_13_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Then there is the contention by stock bulls that low interest rates make stocks cheap even through the S&P 500 price-to-earnings ratio, averaged over the last 10 years to iron out cyclical fluctuations, now is 26 compared to the long-term average of 16.7(<em>Chart 14</em>). This makes stocks 36% overvalued, assuming that the long run P/E average is still valid. And note that since the P/E has run above the long-term average for over a decade, it will fall below it for a number of future years—if the statistical mean is still relevant.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 362px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_14_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Instead, stock bulls points to the high earnings yield, the inverse of the P/E, in relation to the 10-year Treasury note yield. They believe that low interest rates make stocks cheap. Maybe so, and we’re not at all sure what low and negative nominal interest rates are telling us.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ll know for sure in a year or two. It may turn out to be the result of aggressive central banks and investors hungry for yield with few alternatives. Or low rates may foretell global economic weakness, chronic deflation and even more aggressive central bank largess in response. We’re guessing the latter is the more likely explanation.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Courtesy of <a href="http://www.agaryshilling.com/insight/" target="_blank">A.GaryShilllingsInsight</a></span></span></p></div>Five Reasons To Fear Deflationhttp://stockbuz.ning.com/articles/five-reasons-to-fear-deflation2014-10-24T18:56:34.000Z2014-10-24T18:56:34.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="article-detail section" itemprop="articleBody">
<div class="lede">
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290958?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290958?profile=original" height="396" width="404"></a>The <a href="http://online.wsj.com/articles/risk-of-deflation-feeds-global-fears-1413419211">deflation scare is back</a>, as Jon Hilsenrath and Brian Blackstone report on the front page of <em>The Wall Street Journal</em>. It’s worth taking a moment to contemplate why deflation is such a bad thing. After all, <a href="http://online.wsj.com/articles/eu-inflation-falls-to-five-year-low-in-september-1413451402">falling prices</a> sound appealing to consumers, especially compared with the alternative of higher prices.</p>
</div>
<p>So why worry?<a target="_blank" href="http://normandyresearch.com/icon-mcabby-reveals-steamy-investment-taboos-crb-dbc/"><img class="align-right" src="http://normandyresearch.com/wp-content/uploads/2014/09/cci.png?width=268" width="268"></a></p>
<p>Here are five reasons:</p>
<p><strong>1.</strong> <strong>Deflation is a generalized decline in prices and, sometimes, wages</strong>. Sure, if you’re lucky enough to get a raise, your paycheck goes further–but those whose wages decline or who are laid off or work fewer hours are not going to enjoy a falling price index.</p>
<p><strong>2. It can be hard (though, as we’ve seen, not impossible) for employers to cut nominal wages when conditions warrant</strong>; it’s easier to give raises that are less than the inflation rate, which is what economists call a real wage cut. And if wages are, as economists say, marked by “downward nominal rigidity,” then employers will hire fewer people.</p>
<p>As Paul Krugman put it in 2010: “<a href="http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/">in a deflationary economy, wages as well as prices often have to fall</a>–and it’s a fact of life that it’s very hard to cut nominal wages. … What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines. See Estonia and Latvia, cases of.”</p>
<p><strong>3. As economic textbooks teach, the prospect that things will cost less tomorrow than they do today encourages people to put off buying.</strong> If enough people do that, then businesses are less likely to hire and invest, and that makes everything worse.<a target="_blank" href="http://si.wsj.net/public/resources/images/NA-CD128_DEFLAT_G_20141016115411.jpg"><img class="align-right" src="http://si.wsj.net/public/resources/images/NA-CD128_DEFLAT_G_20141016115411.jpg?width=277" height="340" width="398"></a></p>
<p><strong>4. Deflation is terrible for debtors.</strong> Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher <a href="https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf">wrote decades ago</a>, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.)</p>
<p><strong>5. Cutting interest rates below zero is very hard.</strong> Yes, one way that central bank magic works is that the Federal Reserve and the European Central Bank cut inflation-adjusted interest rates below zero when times are bad, hoping to spur borrowing, spending and investment. But it’s almost impossible for them to cut rates below zero. (Sure, there are some examples of negative interest rates, but they’re not very negative.)</p>
<p>If there’s 4% inflation, a zero interest rate works out to a -4% real (or inflation-adjusted) rate. At no inflation, a zero interest rate is, well, zero. And with deflation, a zero interest rate is a positive real rate. Deflation just makes all this harder to do. When short-term rates hit zero the Fed turned to buying all those long-term bonds in what’s known as “quantitative easing,” or QE. But there is a lingering debate about how well QE works, and its side effects, and as the ECB demonstrates, there are political obstacles to launching QE that don’t apply to simply cutting interest rates.</p>
<p>Once upon a time, the U.S. and other economies seemed so prone to inflation that even low rates of inflation didn’t provoke fears of deflation. “<a href="http://www.brookings.edu/%7E/media/projects/bpea/spring%201999/1999a_bpea_delong.pdf">Today that belief in an inflationary bias is gone, or at least greatly attenuated</a>,” Berkeley’s Brad DeLong observed in 1999. There are still some people fretting that, given all the money the Fed has pumped into the economy in quantitative easing, inflation is just around the corner. But today, the bigger fear–especially in Europe–is just the opposite.</p>
<p>Courtesy of <a href="http://www.brookings.edu/research/opinions/2014/10/16-reasons-worry-about-deflation-wessel?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=14565091&_hsenc=p2ANqtz-_fR6AAxdtuimyutSpFpR-JEkRLFxBOBEnkqLHB1l86l50uJ-couReTEzczXbgIMjeBkogBSm1VUnmbTHWg4CTok82wSw&_hsmi=14565091" target="_blank">Brookings</a></p>
</div></div>Consumers Are Spending More......But It's On Food And Gashttp://stockbuz.ning.com/articles/consumers-are-spending-more-but-it-s-on-food-and-gas2014-07-12T23:16:14.000Z2014-07-12T23:16:14.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://media-cache-ec0.pinimg.com/736x/17/31/20/173120ac643884fb82dedc93275326e3.jpg"><img class="align-right" src="http://media-cache-ec0.pinimg.com/736x/17/31/20/173120ac643884fb82dedc93275326e3.jpg?width=300" width="300" /></a>Pretty much as I had expected.  Consumers are tapped out and you can blame <span style="text-decoration: line-through;">inflation the Fed says doesn't exist</span> the necessities, food and gasoline.  Certainly the packages have become small to mask the cost but we all know it's there, lurking.  We're getting less and less for our hard earned buck and $20 just doesn't buy what it used to....leaving less for dining out, electronics, clothing, vacations, etc.  </p>
<p>Retailers beginning to feel the pinch may shift to more coupons, clearance sales, preferred customer discounts.  Others will continue to tighten the belt internally moving more to cloud, temp agencies for personnel (a huge cost savings) and other cost-cutting measures.  Insurers for example have discovered that making <a href="http://912communique.ning.com/forum/topics/obamacare-doctors-face-another-blow-lump-sum-payments" target="_blank">lump sum payments</a> to Doctors for Cancer patients saves them over 30%.</p>
<p>It won't take much, however, for overseas tensions to cause a spike in oil/gas prices and then what?  We're teetering on the spending cliff in my opinion and something has to give.........</p>
<p>From <a href="http://www.gallup.com/poll/172532/consumers-spending-not-things.aspx" target="_blank">Gallup</a>:</p>
<p>Slightly less than half of all Americans (45%) report spending more than they did a year ago, while 18% report spending less. A closer look at these numbers reveals Americans' increased spending is on household essentials, such as groceries, gasoline, utilities, and healthcare, rather than on discretionary purchases.</p>
<p style="text-align: center;"><img alt="The Items Americans Spend Money on, Summer 2014" src="http://content.gallup.com/origin/gallupinc/GallupSpaces/Production/Cms/POLL/ily1g_4hmkcxp7qfguzgeg.png" /></p>
<p>At the other end of the spectrum, roughly one-third of Americans report spending less on discretionary items such as travel (38%), dining out (38%), leisure activities (31%), consumer electronics (31%), and clothing (30%). More than half of Americans say they are spending about the same for rent or mortgage, household goods, telephone, automobile expenses other than fuel, personal care products, and the Internet.</p>
<p>All of this suggests that the increasing cost of essential items is further constraining family budgets already hit hard by the Great Recession and still reeling from a stagnant economy. This is the first time Gallup has measured household spending in this way, so it is unclear whether the current patterns are typical, or if the results on discretionary spending are better now than during the recession. <a href="http://www.gallup.com/poll/151151/Consumer-Spending-Monthly.aspx">Gallup's daily measure of consumer spending</a> has been significantly higher the last two years than in 2009 through 2011 -- although this could be partly the result of higher spending on essentials.</p>
<p><strong>Americans Traveling More This Summer, Especially Since Recession</strong></p>
<p>Americans' summer travel plans clearly demonstrate the tension between increased spending on essentials and reduced spending on discretionary items. While substantially more Americans say they are traveling this summer (69%) than said so in 2009 during the Great Recession (52%), over one-third of travelers plan to travel less (36%) than last year. This is roughly comparable to Gallup's findings in the summers of 2010 and 2011 (33% and 35%, respectively).</p>
<p style="text-align: center;"><img alt="Americans' Summer Travel Plans" src="http://content.gallup.com/origin/gallupinc/GallupSpaces/Production/Cms/POLL/pff-et8xl0qxdnvdwqfrbg.png" /></p>
<p>Also, many travelers plan to stay close to home: More than two-thirds of those traveling this summer intend to take a trip longer than an overnight trip. Among those, most will travel by car (81%), whereas slightly less than half will take at least one trip by air (47%). Less than 10% intend to travel by bus or train this summer. Slightly more than half expect both transportation and non-transport expenses for their summer trips to cost more this year than last.</p>
<p style="text-align: center;"><img alt="In U.S., Methods of Summer Trips or Vacations, Summer 2014" src="http://content.gallup.com/origin/gallupinc/GallupSpaces/Production/Cms/POLL/o2evmyxpkugg2bpruuqqza.png" /></p>
<p><strong>Implications</strong></p>
<p>These results paint a picture of consumers straining against rising prices on daily essentials to afford summer travel, dining out, and discretionary household purchases -- the kinds of purchases that ordinarily keep an economy humming. And while the two-thirds of Americans who plan to travel this summer is the highest level Gallup has measured since 2006, nearly one-third plan to spend just one night or less away from home, meaning it is not much of a vacation.</p>
<p>Those who do intend to travel this summer expect to spend more in all travel categories -- transportation, food, lodging, and entertainment -- than last year, further pressuring their already-strained budgets. Most will take their own cars despite relatively high gas prices. If there was any doubt that the U.S. economy is still struggling to get back on its feet, the results of this poll reinforce that reality. Because consumer spending is the lifeblood of a healthy economy, these findings suggest that discretionary spending still has a ways to go before it will fuel the kind of economic growth Americans have been hoping for.</p>
</div>Because Demand Is What Drives Price, Sure........http://stockbuz.ning.com/articles/because-demand-is-what-drives-price-sure2014-06-25T15:32:54.000Z2014-06-25T15:32:54.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Filling up at the pump yesterday, paying $3.79 for <span style="text-decoration: underline;">low</span> grade made me wonder. Aren't you supposed to be kissed before you get screwed over? Captain Obvious over the last few years is the disconnect between gasoline demand/usage in the U.S. vs. price when it comes to the stinky stuff and that price chart certainly looks like a large, bull flag which should make your head spin at the potential increase ahead unless something changes. Surely the gentleman next to me would have to sell a body part or small child to fill up his enormous SUV. Fool with that huge tank but he thinks he looks slick. The powers that be decided they wanted us to become accustomed to $3/gal and it seems that we have unfortunately but I have to keep saying it, the demand just does not justify the price of oil without a supply disruption or military crisis in the Middle East. As much as I hate to say it, the Prius is beginning to look good. Maybe a scooter? It worked well for Larry Crowne. Someone save me.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290777?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1290777?profile=RESIZE_1024x1024" width="750"></a></p>
<p></p></div>The Market Will Always Come Back? Do They?http://stockbuz.ning.com/articles/the-market-will-always-come-back-do-they2014-06-03T16:52:43.000Z2014-06-03T16:52:43.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Your hear the reassuring echos all of the time.  <em>"Don't worry! The market will always come back.</em>"  But do they?  What about dividend reinvesting and adjusted for inflation?  Given the data, one can easily <span class="cometchat_chatboxmessagecontent">see why smart money continues to invest in bonds,</span> <span class="cometchat_chatboxmessagecontent">annuities, universal life, etc.  Merely my .02 cents but remember, charts don't lie - people do.<br /></span></p>
<p>Consider these two overlays — one with the nominal price, excluding dividends, and the other with the price adjusted for inflation based on the Consumer Price Index for Urban Consumers (which I usually just refer to as the CPI). The charts below have been updated through today's close.</p>
<p></p>
<div class="contentMediaBox inlineblock" id="img_in_0"><a><img src="http://c3352932.r32.cf0.rackcdn.com/content/pic2b20c2fa1a568286f530f251df7c3668.gif" alt="The Big Three" title="The Big Three" align="bottom" border="0" width="474" /></a>
<div class="contentMediaBoxBottom defaultFont middle"><span class="inlineblock middle imgCaptionText">The Big Three</span></div>
</div>
<p></p>
<div class="contentMediaBox inlineblock" id="img_in_1"><a><img src="http://c3352932.r32.cf0.rackcdn.com/content/pic5307c4cbaf50aee69fdb93039d1a4261.png" alt="The 'Real' Big Three" title="The 'Real' Big Three" width="474" /></a>
<div class="contentMediaBoxBottom defaultFont middle"><span class="inlineblock middle imgCaptionText">The 'Real' Big Three</span></div>
</div>
<div class="contentMediaBox inlineblock" id="img_in_2"><img src="http://c3352932.r32.cf0.rackcdn.com/content/pic25f07080e22bf63d34ef1d0110c2bddc.gif" alt="Price Change" title="Price Change" align="bottom" border="0" width="321" />
<div class="contentMediaBoxBottom defaultFont middle"><span>Price Change</span></div>
</div>
<p><br />
The charts require little explanation. So far the 21st Century has not been especially kind to equity investors. Yes, markets usually do bounce back, but often in time frames that defy optimistic expectations.</p>
<p>The charts above are based on price only. But what about dividends? Would the inclusion of dividends make a significant difference? I'll close this post with a reprint of my latest chart update of the S&P 500 total return on a $1,000 investment at the 2000 high.</p>
<p></p>
<div class="contentMediaBox inlineblock" id="img_in_3"><a target="_blank" href="http://c3352932.r32.cf0.rackcdn.com/content/pic3d34bc726d5e53a53c7b126dc1561552.gif"><img class="align-left" src="http://c3352932.r32.cf0.rackcdn.com/content/pic3d34bc726d5e53a53c7b126dc1561552.gif?width=474" width="474" /></a>
<div class="contentMediaBoxBottom defaultFont middle"><span class="inlineblock middle imgCaptionText">Total/Real return On $1k Investment</span></div>
</div>
<p>Total return, including reinvested dividends, certainly looks better, but the real (inflation-adjusted) purchasing power of that $1,000 is currently, over 14 years later, only 191 dollars above break-even. That equates to a 1.24% annualized real return.</p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p>(hat tip member GT)Data courtesy of <a href="http://www.investing.com/analysis/the-big-3-since-their-2000-highs-214864" target="_blank">Investing.com</a></p>
</div>When You Can't Even Afford To Renthttp://stockbuz.ning.com/articles/when-you-can-t-even-afford-to-rent2014-05-03T19:40:34.000Z2014-05-03T19:40:34.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://houseofdebt.org/wp-content/uploads/houseofdebt_20140428_1.png"><img class="align-left" src="http://houseofdebt.org/wp-content/uploads/houseofdebt_20140428_1.png?width=559" width="559" /></a>Numerous articles have noted a sharp rise in the price of renting an apartment or house across the U.S.  Many have also argued that the rise in rents disproportionately affects lower and middle class renters.</p>
<p>I know in my own situation, my rent increased 9% in 2013 and 10% in 2014.  Did our <span style="text-decoration: underline;"><strong><em>incomes</em></strong></span> increase by as much?  I wish.</p>
<p><a href="http://houseofdebt.org/2014/04/29/where-is-the-rent-too-damn-high.html" target="_blank">Houseofdebt.org</a> decided to take look by examining the great data available on rents from Zillow.</p>
<p>The chart shows general inflation (measured with PCE headline inflation) versus the increase in rents. Both series are indexed to be 100 as of November 2010 (the first month the Zillow data are available).</p>
<p><strong>The pattern is undeniable: rents are rising much more rapidly than other consumer prices.</strong></p>
<p>The Fed may be emphatic that we're not experiencing inflation but when it comes to housing, there's no denying the facts.  Gas at the pump has doubled since 2008 (isn't it convenient they exclude food and energy), food prices have crept higher but <strong>portions and package size</strong> have shrunk (remember when a 24pk of Coke was $4 or a 2-liter was .99 cents.  Now a one liter is .99 cents) and now rents continue to surge.  More and more young adults are living with Mom, Dad and Grandma......and even apartments are now becoming too expensive to the lower classes. </p>
<p>Good thing the stock market and Corporate profits are at all time highs.  The rest of the U.S. is drowning.  The income gap continues and the winners are clear. </p>
</div>Turnaround Tuesday Readshttp://stockbuz.ning.com/articles/turnaround-tuesday-reads-22014-04-22T13:53:28.000Z2014-04-22T13:53:28.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><ul>
<li>Saving down, lending up and tapering combine in a perfect storm. One of our favorite bloggers<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290571?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290571?profile=RESIZE_480x480" width="375"></a> <a href="http://scottgrannis.blogspot.com/2014/04/tracking-perfect-storm.html" target="_blank">CalifiaBeachPundit</a></li>
<li>More <a href="http://techcrunch.com/2014/04/21/say-media-owned-blogging-platform-typepad-enters-day-5-of-on-and-off-ddos-attacks/" target="_blank">tech companies</a> are experiencing DDoS cyber attacks including SAY Media (Typepad), <a href="http://techcrunch.com/2014/03/03/meetup-suffering-significant-ddos-attack-taking-it-offline-for-days/">Meetup</a>, <a href="http://techcrunch.com/2014/03/24/basecamp-becomes-latest-victim-of-ddos-attackers-attempting-to-extort-money-from-tech-companies/">Basecamp</a>, Vimeo, Bit.ly and others.</li>
<li><a href="http://ap-gfkpoll.com/featured/findings-from-our-latest-poll-2" target="_blank">51% of Americans</a> are unsure of the validity of the Big Bang theory. For many it's because it can't be <em>seen</em> or seems too far away A look at the iron triangle of science, religion and politics,</li>
<li>For the first time in history, the rich find themselves <a href="http://www.economist.com/news/finance-and-economics/21600989-why-rich-now-have-less-leisure-poor-nice-work-if-you-can-get-out?fsrc=scn/tw/te/bl/ed/nicework" target="_blank">working longer</a> than the poor.</li>
<li><a href="http://www.marketwatch.com/story/fed-must-choose-more-jobs-or-less-inflation-2014-04-22?mod=latestnewssocialflow&link=sfmw" target="_blank">The Fed must choose:</a> more jobs or lower inflation.</li>
<li>Shipments through the <a href="http://qz.com/201663/heres-the-hugely-bullish-chart-everyone-on-wall-street-is-talking-about-today/" target="_blank">port of Los Angeles</a> jumped 34% spurring a bit of (recovery) conversation today on Wall Street</li>
<li>Google follows Facebook and Twitter with <a href="http://mashable.com/2014/04/22/google-app-install-ads/?utm_cid=mash-com-Tw-main-link" target="_blank">app-installed advertising.</a></li>
</ul></div>Education Cost Concerns Highest Among Young Adultshttp://stockbuz.ning.com/articles/education-cost-concerns-highest-among-young-adults2014-04-21T18:27:28.000Z2014-04-21T18:27:28.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>PRINCETON, NJ -- Paying tuition or college loans far exceeds other money matters as the top financial challenge young adults in the U.S. say they face today. More than one in five adults aged 18 to 29 mention college costs as the biggest financial problem their families are dealing with, well exceeding the percentage of older Americans who identify this as their top issue.</p>
<p>While college expenses outpace all other financial concerns among the youngest adults, it ties with overall lack of money or low wages as the top concern of those aged 30 to 49. And it ranks near the bottom of the top 10 financial problems that older Americans name, mentioned by 7% of 50- to 64 year-olds and 1% of seniors -- those aged 65 and older.</p>
<p>Housing costs also emerge as a relatively bigger concern for younger adults (14%) than those aged 30 and older (9% or less). At the same time, at 5%, cost of living/inflation is a particularly low concern for young adults, perhaps because this age group has not been paying bills long enough to experience as much change in prices as have older adults.</p>
<p>Despite the availability of Medicare for seniors, healthcare is the chief concern of adults aged 65 and older as well as those aged 50 to 64, mentioned by 15% of both groups. However, other issues come close, including paying bills -- for 50- to 64-year-olds -- and lack of money -- for seniors.</p>
<p style="text-align: center;"><img alt="Top financial problems facing family, by age" src="http://content.gallup.com/origin/gallupinc/GallupSpaces/Production/Cms/POLL/oe6gzzz3numo3kanagmn-q.png" /></p>
<p style="text-align: left;">Full story at <a href="http://www.gallup.com/poll/168584/young-adults-cite-college-costs-top-money-problem.aspx?utm_source=alert&utm_medium=email&utm_campaign=syndication&utm_content=morelink&utm_term=Economy" target="_blank">Gallup.com</a></p>
</div>We Have No Inflation? What Of Cost To Rent?http://stockbuz.ning.com/articles/we-have-no-inflation-what-of-cost-to-rent2014-03-05T17:12:27.000Z2014-03-05T17:12:27.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290449?profile=original"><img class="align-left" style="padding: 5px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1290449?profile=RESIZE_480x480" height="215" width="375"></a>It makes me insane when the Fed says inflation remains subdued. Subdued? idk where they live but my rent in 2013 went up 7% and this year, 9%. A 2-liter bottle of CocaCola used to be .99 cents. Now it's $1.99. Don't even get me started on the ridiculous increase in crude oil versus a few years ago (doubled) and how small a bag of my favorite chips has become 1/3 the size for the same price. Oh, that's right. They don't include food and energy (the stuff that always goes up).</p>
<p>Last time I looked, housing cost was still included in inflation numbers but yet today a minimum wage person would have to work two weeks just to pay the rent. Forget about the electric, cable, phone or food. Oh wait, let's see if we qualify for a free Obama phone and food stamps (sarcasm). I'm sorry but I hope they raise the minimum wage. The government should not have to subsidize workers to survive because minimum wage has not risen along with cost of living. They two should go hand-in-hand if you ask me.</p>
<p>Is the Fed not doing the math or are they intentionally cooking the books so that the Corporate Welfare continues? It's a joke; plain and simple.</p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p></p>
<p>Image courtesy of <a href="http://www.upworthy.com/how-many-minimum-wage-hours-does-it-take-to-afford-a-two-bedroom-apartment-in-your-state?c=ufb1" target="_blank">Upworthy</a></p></div>Daily Readshttp://stockbuz.ning.com/articles/daily-reads-2-28-142014-02-28T22:41:29.000Z2014-02-28T22:41:29.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><ul>
<li>The argument to lift the ban on crude oil exports <a href="http://www.bloomberg.com/quicktake/u-s-crude-oil-export-ban/" target="_blank">Bloomberg</a></li>
<li>How big oil (and Senators) are positioning at the Senate Energy and Natural Resources Committee <a href="http://www.bloomberg.com/news/2014-02-11/drillers-eye-gains-from-oil-state-senators-heading-panel.html" target="_blank">Bloomberg</a></li>
<li>A 3pm gold "fix"?  This study says it began in 2004. <a href="http://www.bloomberg.com/news/2014-02-28/gold-fix-study-shows-signs-of-decade-of-bank-manipulation.html" target="_blank">Bloomberg</a></li>
<li>That's what I've been saying.  Fed may have to let inflation run hot to meet goals. <a href="http://www.reuters.com/article/2014/02/28/us-usa-fed-idUSBREA1R19820140228" target="_blank">Reuters</a></li>
<li>Markets spooked as confirmation came of Russian troops taking over two airports in the Crimean area of the Ukraine.  UN to hold closed-door session this weekend to discuss situation. <a href="http://www.reuters.com/article/2014/02/28/us-ukraine-crisis-un-idUSBREA1R1M920140228" target="_blank">Reuters</a></li>
</ul>
<p></p>
</div>