Thursday, May 15, 2014

Paul Craig Roberts: Fed Laundering Treasury Purchases to Disguise What’s Happening

By Greg Hunter’s USAWatchdog.com

In his latest article, former Assistant Treasury Secretary Dr. Paul Craig Roberts says, “The Fed is the great deceiver.

Why is he making this shocking accusation? The reason is tiny Belgium’s whopping purchase of $141 billion in Treasury bonds earlier this year.

 Dr. Roberts explains, “We know that Belgium didn’t have any money to buy $141 billion worth of bonds over a three month period. That sum comes to 29% of the Belgium GDP. So, they don’t have a surplus in their budget that is 29% of their GDP, and they don’t have trade or current account surplus in that amount. In fact, everything is in the red. Their budget deficit is in the red, and their trade and current accounts are in the red. So, Belgium didn’t have the money, and yet, they managed to pick up $141.2 billion in U.S. Treasuries over a three month period.

 So, where did they get the money?”

 

Continue reading...
Read more ...

Ralph Acampora: I have 'sick feeling' 25% crash is ahead

Ralph Acampora, who is often known as the godfather of technical analysis, tends to be bullish on stocks. But on Thursday, as the major averages all dropped more than 1 percent, he expressed a massively bearish view on U.S. equities.

 On "Futures Now," Acampora predicted that the S&P 500 would drop "10, maybe 15 percent between now and maybe October," but said it would be much worse for small caps, mid-caps and tech stocks. "If you ask me about the Russell and the Nasdaq Composite and the S&P MidCap, I think you're talking about 20, 25 percent. And I call it a stealth bear market going on."

Video:



More: www.cnbc.com/id/101677465
Read more ...

Wednesday, February 12, 2014

Snapchat and the Disappearing Bears in the Stock Market

Bear Market Alert!
See what happens in the financial markets when the bears vanish

By Elliott Wave International

If Inspector Gadget or Maxwell Smart had lived in the digital age, their bosses would have used the smartphone app Snapchat to deliver their secret missions.

Snapchat is a popular app with about 8 million users that lets your smartphone send a photo that self-destructs seconds after your recipient views it. As of September 2013, users were sending about 350-400 million vanishing messages a day -- which compares with the 127.5 million shares that changed hands in the Dow on Jan. 27, 2014.

But when Evan Spiegel, the Stanford student who came up with the idea, unveiled it to his product design class in 2011, his classmates gave it a thumbs-down. Disappearing photos? Who will use it? Little did his classmates know how the app, originally called Picaboo, would go on to capture the attention of teenagers and young adults. And even a few older folks who want to connect with them, such as 51-year-old Senator Rand Paul, who recently signed up to woo younger voters.

The idea of the disappearing photo applies beautifully to the situation in the stock market today. Pessimists on stocks are disappearing quickly. And so are bearish analysts. Not in 10 seconds, but they are still doing a version of a Snapchat disappearing act. Here's how The Elliott Wave Financial Forecast describes it (emphasis added) in this excerpt from our just-released 2014 State of the Global Markets report:
Investor Psychology
From The Elliott Wave Financial Forecast, December 2013
Our list of rare optimistic extremes is growing. This chart shows that advisors are now more optimistic about the stock market than they've been in 26 years. The middle graph displays the bull/bear ratio from the Investors Intelligence weekly advisors' survey (InvestorsIntelligence.com). Bullish advisors outnumber bearish ones by a four-to-one margin for the first time in over 2½ decades...
And it's not just advisors. Assets invested in bull funds in the Rydex family of mutual funds is 5.3 times the assets in bear funds, an all-time record ratio. The bottom graph shows the total assets in Rydex's government money market fund, which just dropped to a new all-time low on a daily and 5-day basis. This record low in money fund assets indicates a record desire to own stocks and bonds and a record disinterest in investment conservatism. These measures are as bell-ringingly bearish as any we have shown in the 14-year history of this newsletter.
But what does it mean for the markets when most of the bears capitulate to bullish optimism? Not exactly what you might think. Here's how the article continues:
The Nov. 11 issue of The Wall Street Journal delivered another key piece:
Stocks Regain Broad Appeal
Mom-and-Pop Investors Are Back
The buyers, many with investment portfolios that were scorched during the market meltdown, are climbing aboard a ride to new highs in the Dow Jones Industrial Average.
The article cites several "propelling" forces behind individuals' re-entry that are actually classic by-products of a terminating mania. The main one is that a heightened state of optimism causes people to buy simply because prices are high and rising. The WSJ article cites the case of a 65-year old real estate appraiser who returned to stocks "when he saw a market pundit predict the Dow, up 167.80 on Friday, could hit 20,000 this year. 'I still think there's huge upside in the stock market,' he said. 'I don't want to miss out.'"... A Citigroup corporate finance expert illustrates that professionals are not immune to the bullish vibes: "This year feels like it did earlier in my career, when I had the optimism to say, 'I'm really going to have a retirement.' It feels a lot better now."
Of course it does; that's what happens near a top. The former remorse and inexplicable negative feelings have completely vanished, which means the uptrend that started five years ago should be exhausted.
Is that what you expected to read?

Elliott Wave International has been sending out pictures (that is, charts) of a bearish market for a while now -- and they do not self-destruct in 10 seconds, a month or a year. No Snapchats of a bear about to turn bullish here. And if you want to get EWI's take on Snapchat itself, read on:
BACK TO THE VANISHING POINT FOR TECH
From The Elliott Wave Financial Forecast, December 2013
With the share price of mainstream technology companies such as Google, Netflix and Priceline hitting new all-time highs in November, the dot-com revival is closing in on its original late-'90s insanity. Among the many resurfacing symptoms of the old fever are reports of "eye-popping" "vanity metrics." The term vanity metrics refers to late 1999 and early 2000 valuation methods under which the standard devolved from price/earnings to price/sales to price/click ratios.
Reuters reports that "valuations for high-flying startups" are once again "hitting nosebleed levels," as "the obsession with 'eyeballs,' or raw numbers of website visitors that defined the dot-com boom of the late 1990s," is back. Reuters cites Snapchat as a prototypical example. Snapchat is a startup company based on an app that allows smartphone users to send pictures that vanish after a few seconds. The company claims users are sending 400 million "snaps" a day, but it refuses to explain exactly what constitutes a snap. It also has no profits or revenues. Nevertheless, the company's 23-year-old founder turned down a $3 billion buyout offer from Facebook "based on hypothetical revenue." Financial writers said the decision made sense because Snapchat can get more from a Chinese e-commerce company or in an IPO.
We disagree and think this kid will be kicking himself for the rest of his life. The company may indeed get lucky, but we've been down this road before. The vanishing picture app may someday become a metaphor for Silicon Valley's last hurrah.

15 Hand-Picked Charts to Help You See What's Coming in the Markets
Prepare for 2014 with a complimentary issue of Robert Prechter's Elliott Wave Theorist
Have you ever seen price charts that tell a story clearly? Prechter chose 15 charts to explain to his subscribers where the financial markets are headed in 2014. These charts cover the S&P 500, NASDAQ, the Dow, commodities, gold, and mutual funds.
This information prepares you to be on the right side of the market's next move. And today, you have a rare opportunity to look at the whole issue of Prechter's Elliott Wave Theorist -- FREE.
"Charts tell the truth," says Prechter. Here is your chance to see what truths these charts are telling. If a picture is worth a thousand words, then this latest publication is like reading more than 15,000 words of his market analysis.
Get your FREE 10-page issue of Robert Prechter's Theorist now >>
This article was syndicated by Elliott Wave International and was originally published under the headline Snapchat and the Disappearing Bears in the Stock Market. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Read more ...

Paper Gold Ain’t as Good as the Real Thing

By Doug French, Contributing Editor

For the first time ever, the majority of Americans are scared of their own federal government. A Pew Research poll found that 53% of Americans think the government threatens their personal rights and freedoms.

Americans aren't wild about the government's currency either. Instead of holding dollars and other financial assets, investors are storing wealth in art, wine, and antique cars. The Economist reported in November, "This buying binge… is growing distrust of financial assets."

But while the big money is setting art market records and pumping up high-end real estate prices, the distrust-in-government script has not pushed the suspicious into the barbarous relic. The lowly dollar has soared versus gold since September 2011.

Every central banker on earth has sworn an oath to Keynesian money creation, yet the yellow metal has retraced nearly $700 from its $1,895 high. The only limits to fiat money creation are the imagination of central bankers and the willingness of commercial bankers to lend. That being the case, the main culprit for gold's lackluster performance over the past two years is something else, Tocqueville Asset Management Portfolio Manager and Senior Managing Director John Hathaway explained in his brilliant report "Let's Get Physical.

Hathaway points out that the wind is clearly in the face of gold production. It currently costs as much or more to produce an ounce than you can sell it for. Mining gold is expensive; gone are the days of fishing large nuggets from California or Alaska streams. Millions of tonnes of ore must be moved and processed for just tiny bits of metal, and few large deposits have been found in recent years.

"Production post-2015 seems set to decline and perhaps sharply," says Hathaway.

Satoshi Nakamoto created a kind of digital gold in 2009 that, too, is limited in supply. No more than 21 million bitcoins will be "mined," and there are currently fewer than 12 million in existence. Satoshi made the cyber version of gold easy to mine in the early going. But like the gold mining business, mining bitcoins becomes ever more difficult. Today, you need a souped-up supercomputer to solve the equations that verify bitcoin transactions—which is the process that creates the cyber currency.

The value of this cyber-dollar alternative has exploded versus the government's currency, rising from less than $25 per bitcoin in May 2011 to nearly $1,000 recently. One reason is surely its portability. Business is conducted globally today, in contrast to the ancient world where most everyone lived their lives inside a 25-mile radius. Thus, carrying bitcoins weightlessly in your phone is preferable to hauling around Krugerrands.

No Paper Bitcoins

But while being the portable new kid on the currency block may account for some of Bitcoin's popularity, it doesn't explain why Bitcoin has soared while gold has declined at the same time.

Hathaway puts his finger on the difference between the price action of the ancient versus the modern. "The Bitcoin-gold incongruity is explained by the fact that financial engineers have not yet discovered a way to collateralize bitcoins for leveraged trades," he writes. "There is (as yet) no Bitcoin futures exchange, no Bitcoin derivatives, no Bitcoin hypothecation or rehypothecation."

So, anyone wanting to speculate in Bitcoin has to actually buy some of the very limited supply of the cyber currency, which pushes up its price.

In contrast, the shinier but less-than-cyber currency, gold, has a mature and extensive financial infrastructure that inflates its supply—on paper—exponentially. The man from Tocqueville quotes gold expert Jeff Christian of the CPM Group who wrote in 2000 that "an ounce of gold is now involved in half a dozen transactions." And while "the physical volume has not changed, the turnover has multiplied."

The general process begins when a gold producer mines and processes the gold. Then the refiners sell it to bullion banks, primarily in London. Some is sold to jewelers and mints.

"The physical gold that remains in London as unallocated bars is the foundation for leveraged paper-gold trades. This chain of events is perfectly ordinary and in keeping with time-honored custom," explains Hathaway.

He estimates the equivalent of 9,000 metric tons of gold is traded daily, while only 2,800 metric tons is mined annually.

Gold is loaned, leased, hypothecated, and rehypothecated, over and over. That's the reason, for instance, why it will take so much time for the Germans to repatriate their 700 tonnes of gold currently stored in New York and Paris. While a couple of planes could haul the entire stash to Germany in no time, only 37 tonnes have been delivered a year after the request. The 700 tonnes are scheduled to be delivered by 2020. However, it appears there is not enough free and unencumbered physical gold to meet even that generous schedule. The Germans have been told they can come look at their gold, they just can't have it yet.

Leveraging Up in London

The City of London provides a loose regulatory environment for the mega-banks to leverage up. Jon Corzine used London rules to rehypothecate customer deposits for MF Global to make a $6.2 billion Eurozone repo bet. MF's customer agreements allowed for such a thing.

After MF's collapse, Christopher Elias wrote in Thomson Reuters, "Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global's leverage reaching 40 to 1 by the time of its collapse, it didn't need a Eurozone default to trigger its downfall—all it needed was for these amplified costs to outstrip its asset base."

Hathaway's work makes a solid case that the gold market is every bit as leveraged as MF Global, that it's a mountain of paper transactions teetering on a comparatively tiny bit of physical gold.

"Unlike the physical gold market," writes Hathaway, "which is not amenable to absorbing large capital flows, the paper market, through nearly infinite rehypothecation, is ideal for hyperactive trading activity, especially in conjunction with related bets on FX, equity indices, and interest rates."

This hyper-leveraging is reminiscent of America's housing debt boom of the last decade. Wall Street securitization cleared the way for mortgages to be bought, sold, and transferred electronically. As long as home prices were rising and homeowners were making payments, everything was copasetic. However, once buyers quit paying, the scramble to determine which lenders encumbered which homes led to market chaos. In many states, the backlog of foreclosures still has not cleared.

The failure of a handful of counterparties in the paper-gold market would be many times worse. In many cases, five to ten or more lenders claim ownership of the same physical gold. Gold markets would seize up for months, if not years, during bankruptcy proceedings, effectively removing millions of ounces from the market. It would take the mining industry decades to replace that supply.

Further, Hathaway believes that increased regulation "could lead, among other things, to tighter standards for collateral, rules on rehypothecation, etc. This could well lead to a scramble for physical." And if regulators don't tighten up these arrangements, the ETFs, LBMA, and Comex may do it themselves for the sake of customer trust.

What Hathaway calls the "murky pool" of unallocated London gold has supported paper-gold trading way beyond the amount of physical gold available. This pool is drying up and is setting up the mother of all short squeezes.

In that scenario, people with gold ETFs and other paper claims to gold will be devastated, warns Hathaway. They'll receive "polite and apologetic letters from intermediaries offering to settle in cash at prices well below the physical market."

It won't be inflation that drives up the gold price but the unwinding of massive amounts of leverage.

Americans are right to fear their government, but they should fear their financial system as well. Governments have always rendered their paper currencies worthless. Paper entitling you to gold may give you more comfort than fiat dollars.

However, in a panic, paper gold won't cut it. You'll want to hold the real thing.

There's one form of paper gold, though, you should take a closer look at right now: junior mining stocks. These are the small-cap companies exploring for new gold deposits, and the ones that make great discoveries are historically being richly rewarded… as are their shareholders.

However, even the best junior mining companies—those with top managements, proven world-class gold deposits, and cash in the bank—have been dragged down with the overall gold market and are now on sale at cheaper-than-dirt prices. Watch eight investment gurus and resource pros tell you how to become an "Upturn Millionaire" taking advantage of this anomaly in the market—click here.

Read more ...

Tuesday, February 11, 2014

65 Is Not a Magic Number


By Dennis Miller

Is retirement really all it's cracked up to be? The answer depends on where you find yourself financially, emotionally, and health-wise come age 65 or so.

When we're young, we trade time for money and hope to stash away enough of it to later reverse the process and trade money for time. Ideally, we'd each have a few decades of independence before the grim reaper—or assisted living facility—comes knocking.
The statistics published on the Social Security website note that: "A man reaching age 65 today can expect to live, on average, until age 84. A woman turning age 65 today can expect to live, on average, until age 86."

Should you retire at age 65? What's so magic about age 65 anyway? Nothing! It was the retirement age the government used when setting up Social Security in the 1930s. Since then Social Security's full retirement age has moved to 68 to compensate for increasing life expectancies. Should Washington get serious about fixing Social Security, the age is likely to be pushed back further.

Keep age in perspective. It's only one barometer; there are other factors much more important for deciding if and when to retire. Poor health may make the decision for you. But if you're healthy, the most important factor is whether you have enough acorns stashed away to support yourself and your spouse for the rest of your lives. When you run the numbers—there are countless financial calculators available for doing just that—be optimistic and assume you'll live long past age 84 or 86.

If you do have enough to make it and you enjoy your job, consider working a few extra years. That extra money is icing on the cake. Think of it this way: if you're lucky enough to be healthy and vital at age 95, you don't want to find yourself wishing for a bout of pneumonia because you've run out of money.

Once you've jumped over the financial hurdle, it doesn't mean you have to or even ought to retire. Quite the contrary! Now you're ready to do work or projects that fit your terms. If you love your job, are having fun, and see nothing else you'd rather do, just keep on enjoying it.

Personally, the wealthiest friend I have—now age 73—could have retired before he was 50, and he's still working. When I discuss retirement with him, he makes it clear that boredom is the biggest enemy of retirees. He loves the challenges of the business world and feels it keeps him going.

On the flip side, I have a doctor friend in his 40s who's unhappy with the state of the healthcare system here in the US. He has plenty of money and plans to give up his practice and move back to the family farm. He also mentioned that being on call and working weekends robbed him of too much time with family. He has several children and wants to be a more integral part of their lives. He no longer wants to work in an environment he does not enjoy, and trading more of his time for wealth is no longer a necessity for him.

Here are some questions to ask yourself:
  • Is there anything else I would rather be doing?
  • Do I enjoy the environment I'm working in?
  • Am I accomplishing something other than just earning a paycheck?
  • Do I enjoy the people I work with, or am I just putting up with them?
  • Do I feel I am missing something?
  • Is my spouse on board, or does he/she feel my working is prohibiting us from doing too many other things?
  • Do I have other hobbies I enjoy that I could turn into a part-time business I would enjoy?
  • Do we currently live where we want to live?
  • Am I just tired of the rat race and want a change?
When I was in my late 50s, I asked a friend how you know when you're ready to retire. He grinned and simply said, "You'll know." He was right.

Matching Wants with Financial Ability

A happy retirement means you have enough to money to quit working and live the lifestyle you want—for most people that does not mean microwave dinners in front of the television.
Sad to say, we have a few old friends who made the mistake of not saving. They discovered you cannot live very well on Social Security alone. They are all back to work at low-paying jobs, and their time choices are subordinated to their work schedules. That's far from the dream of enjoying your golden years.

Helpful Hints

What kind of lifestyle do you want? It may take some compromises to mesh your dream with reality. We have several friends who live in doublewide mobile homes in 55-plus gated communities here in Florida. The communities have clubhouses, golf courses, community pools—most anything you would want. If you look at the calendars on their refrigerators, you realize their biggest challenge is finding time to schedule all the fun things they want to do.

Many of our friends in these communities were very successful and have plenty of money. They've decided to downsize economically so they have money for trips, cruises, time for family, friends and most of all, no money stresses. They are truly enjoying their golden years and don't feel like they're missing a thing.

I asked them if they want any do-overs. The most common answer was wishing they'd moved there five years before they retired instead of waiting. They would have been a bit better off financially, and they could have built up their network of retired friends sooner. Many admitted to initial reluctance about retirement and said that had they known it would be this much fun, it would have made the transition much easier.

Family also plays a key role in retirement decisions. Being part of your grandchildren's lives often means spending most major holidays in your children's homes, watching the next generation build their family traditions. It seems more grandmas and grandpas are traveling over the river and through the woods, to their children's house they go.

We have fed 20-plus on many holidays. Just showing up and enjoying a meal has some advantages. Seeing the next generation handle the family gatherings has helped me realize the family will continue on just fine for many years to come.

On that note, proximity to family has a wide range of implications. As we age, some children feel it's easier to keep an eye on us if we live nearby. Others want grandparents far enough away to ensure they stay independent as long as they possibly can.

We have friends who pick up the grandchildren from school every day and are taking a major role in raising the next generation. Other friends say they want no part of that; raising children is their parents' job. They much prefer to be grandparents and not recycled parents. Whatever floats your boat and works for your family is the right way to go.

The Biggie

Once you've experienced the exhilaration of true freedom and independence from a full-time job—doing what you want, when you want—you never want to go back. Never again do you want to financially depend on anyone.

My wife Jo loves to share this experience as a good example. We were traveling in our motorhome from point A to point B and ended up in Cheyenne, Wyoming for the night. As I looked at all the brochures in the campground office I said to Jo, "This looks like a cool place." We stayed a week and had a blast. As we left she said, "Ten years ago you would have never done that." She was right. Retirement changes your mindset.

What is retiring on your own terms? It's being financially able to approach a state of mind where your time is your own. You and your spouse can do the fun things you want to, whether that's planning a long trip or making spur-of-the-moment decisions because you feel like it.

We have friends who go on cruises, but they wait for the deals on ships that depart in less than a month. They're having a ball. For them, a long-term plan is a couple of weeks away, and they like it that way.
The peace of mind that you can "keep on keeping on" as long as your health allows is what enjoying your golden years truly means.

One last thought: if you want to earn a steady "retirement" income—whether you're actually retired or not—our premium subscription can help make that a reality. If your goal is to hit a "five-run homer" with huge gains, our newsletter is probably not for you. On the other hand, if your goal is to provide good income well ahead of inflation, with the best safety measures available in today's investment climate, then I recommend you give us a try.

Click here to learn more and sign up today.
Read more ...

Thursday, February 6, 2014

John Mauldin Outside the Box: Challenging the Consensus



One of the most universal consensus calls in the markets today is that interest rates are destined to rise. Thirteen out of 13 major investment banks all think that interest rates for global fixed-income will rise this year. I get nervous when everybody is on the same side of the boat. And so does my good friend and business partner Niels Jensen of Absolute Return Partners in London. This week’s Outside the Box is another of his thoughtful essays, giving us five reasons why interest rates may in fact go down this year. That is not to say that we don't both agree that rates have to go back up eventually, but to us the timing is not so obvious as it is to the major investment banks. Rather than tip his thunder, I’ll let Niels advocate for his position. (And you can see more of his consistently excellent work at www.arpinvestments.com.)

It’s been a busy week here in Dallas, but then aren't they all lately? But it’s good to be busy at home for the next few weeks. Lots of material to be written and edited, plans to be made, and trips to be scheduled, of course. My current sedentary lifestyle will soon revert to its normal peripatetic frenzy, but it’s good to give the body a bit of rest. Enjoy your week.

 Your getting ready for some left-over Super Bowl chili analyst,
John Mauldin, Editor
Outside the Box
subscribers@mauldineconomics.com

Stay Ahead of the Latest Tech News and Investing Trends...
Each day, you get the three tech news stories with the biggest potential impact.

Challenging the Consensus

"The noble title of 'dissident' must be earned rather than claimed; it connotes sacrifice and risk rather than mere disagreement."
- Christopher Hitchens, Polemicist

Herd mentality is one of the strongest and most powerful human instincts. Humans take great comfort from walking the same path as others have walked before them, and nowhere is this more evident than in the field of investments. Most investors are simply incapable of disregarding the consensus when making investment decisions, if for no other reason than because 'being out there on your own' is associated with considerable career risk (I wrote about this back in October 2012 – see here).
I consider myself a contrarian investor. Not a contrarian for the sake of being a contrarian but a contrarian nevertheless. My inclination to go against the prevailing view is based on one very simple piece of knowledge acquired through 30 years of trial and error. When an investor states that he is bullish, he is more often than not close to being fully invested, hence he has used most, if not all, of his dry powder. Obviously, the more people who find themselves in this situation, the less purchasing power there is on an aggregate basis. At this point the market is at or near its peak. Precisely the opposite is the case when most investors are bearish. They have sold most if not all of their holdings, at which point the market is more likely to go up than down.

This way of thinking is frequently challenged by people (often academics) who argue that it cannot be that way, because investing is a zero sum game. We cannot all sell out at the same time, as someone has to own those bonds, or so the argument goes. Whilst theoretically correct, this view fails to take into account the distinction between core and marginal investors. Whilst marginal investors (e.g. private investors, hedge funds) can, and do, move freely between asset classes, core investors (e.g. pension funds, sovereign wealth funds) are at least partially restricted in their movements. Such limitations ensure that, in practice, investing is not a zero sum game.

Now, when I look at financial markets going into 2014, I cannot recall ever having come across a more one-sided view than the one which prevails. The consensus view on bonds is overwhelmingly bearish while pretty much everyone is bullish on equities – or at least they were until EM equities began to fall out of bed. Barry Ritholtz (The Big Picture blog) has done a great job of assembling, and presenting, the sell-side view in a simple to understand format (chart 1).

Source: http://www.ritholtz.com/blog/2014/01/surprising-consensus-on-asset/
Some may argue that the sell-side is always bullish on equities, and while that is not a million miles away from the truth, this year is still uniquely one-sided. And it is certainly not the case that the sell-side is always uniformly negative on the outlook for interest rates. As far as the bond market is concerned, the 2014 consensus is a major outlier, and that is precisely what has piqued my interest. It is much more difficult to obtain reliable information on the buy-side consensus. Suffice to say that none of the information I have at hand has given me any reason to speculate that the buy-side view differs materially from that of the sell-side. See, for example, the recently updated policy portfolio for the Harvard University Endowment here.

Five reasons you may want to change your bearish view

In the December 2013 Absolute Return Letter ('Squeaky Bum Time') I discussed our 2014 expectations for equities – see here. This month I will focus on the outlook for interest rates and challenge the prevailing wisdom – i.e. that rates are destined to rise as 2014 progresses. I am not suggesting that the consensus view will definitely prove wrong in 2014; however, I can think of at least five plausible reasons why many may end up with a little bit of egg on their faces as interest rates fall before they rise.
I agree with the view shared by many that, in the long term, as economic conditions normalise, interest rates will almost certainly rise. I cannot possibly disagree with that. The words to pay attention to, though, are 'long term'. In the meantime, 2014 may contain one or two surprises, effectively delaying the bond bear market.

Now to those reasons, and in no particular order:
  1. The emerging market crisis escalates further;
  2. The Eurozone crisis re-ignites;
  3. The disinflationary trend intensifies and potentially turns into deflation;
  4. The economic recovery currently underway proves unsustainable; and/or
  5. Flow of funds provides more support for bonds than anticipated.

The emerging market crisis escalates further

Quite a serious crisis has been brewing in some EM countries since talks of Fed tapering first began in May of last year. I first referred to it in the September 2013 Absolute Return Letter ('A Case of Broken BRICS?' which you can find here). More recently the 'Fragile Five' have become the 'Fragile Eight', suggesting that the crisis is spreading (see for example Gavyn Davies' excellent analysis here).
At the heart of this crisis is a realisation that many EM economies depend on foreign capital to fund their external deficits. That foreign capital is more often than not U.S. dollars. I am not the first to have noted that the 'Fragile Five' all run substantial current account deficits (chart 2).


Source: Barclays Research, Haver Analytics
The United States provides liquidity to the rest of the world through two channels, one of which is well understood whilst the other one is not. Extraordinarily expansive monetary policy in the U.S. in recent years has provided a surge of private capital flowing towards EM economies. This is now in danger of reversing (chart 3).


Source: World Bank

The World Bank has made a valiant effort to estimate the effect of QE on capital flows and have found that over 60% of all capital inflows to EM countries can be either directly or indirectly attributed to QE (chart 4). No wonder one or two EM central bank chiefs are looking slightly unsettled at the moment.

Source: World Bank

The other channel through which the U.S. provides liquidity to the rest of the world is its chronic current account deficit. Every dollar of deficit in the U.S. is by definition somebody else's surplus, so when the U.S current account deficit narrows, fewer dollars find their way to other countries. History is littered with examples of deteriorating U.S. dollar liquidity leading to a crisis somewhere, even if it is not always entirely predictable where and when it happens.

The U.S. economy is experiencing a true boom in domestic oil and gas production. In pre-crisis times, the U.S. would import the equivalent of 10-11 million barrels of oil per day (mbpd) to meet its demands. That has now dropped to 7-8 mbpd as a result of rapidly rising domestic production levels. Going into the 2008-09 recession, the U.S ran a quarterly deficit of about $200 billion. As a result of the deep recession, the quarterly deficit fell to less than $100 billion. Now, as the U.S. economy is doing better, one would have expected the deficit to deteriorate again, but it isn't happening (chart 5). Increased domestic oil and gas production is the key reason behind this, and the trend is likely to continue for years to come.


Source: Federal Reserve Bank of St. Louis

Stage one of the EM crisis was a relatively contained crisis, limited to a handful of countries with large current account deficits. Stage two, which began in earnest early in the New Year, has engulfed other countries such as Argentina, Chile and Russia. The crisis is manifesting itself in two ways – higher interest rates and deteriorating foreign exchange rates. A recent article in the FT made a very good point about how falling exchange rates pose yet another set of problems for many EM economies many of which heavily subsidise fuel costs. As their currency falls in value, the fuel price soars when measured in local currency (see here), putting further pressure on already stretched government budgets.
All of this has the potential to escalate into a full-blown EM crisis like the one we experienced in 1997-98, even if most EM countries are in much better shape today than they were going into the previous crisis. Remember, there is never only one cockroach! Should this happen (and I am not yet saying it definitely will happen), there will be significant private sector capital outflows from emerging markets seeking refuge in safe(r) havens, like T-bonds, bunds and gilts.

Then there is the ultimate joker, better known as the People's Republic of China. The debt problems in China are massive, and the probability of a hard landing uncomfortably high. According to Morgan Stanley, no less than 45% of all private debt in China must be refinanced in the next 12 months. It appears that the Chinese leadership has finally begun to confront the problems. I have no particular insight into how well that process is managed but I feel obliged to remind you that debt bubbles rarely have happy endings.

The Eurozone crisis re-ignites

The problems in mainland Europe are well advertised and I see no need to repeat them all here. Suffice to say that the Eurozone banking system continues to be seriously under-capitalised. The ECB recognises this and has published a preliminary list of 124 Eurozone banks that it will subject to an Asset Quality Review (AQR) later this year. The market seems to expect a shortfall of tier one capital of around €500 billion; however, a recent study conducted by two academics on behalf of CEPS (see here) suggests that the actual number will be much higher – at the order of €750-800 billion (chart 6).

Source: CEPS Policy Brief

The French have, unlike some of their Latin neighbours, managed to escape the worst of the storms in recent years, but this may change soon, provided the analysis above is correct. €280 billion in new capital is an awful lot of money, even for the French, and President Hollande may soon have bigger issues than his private affairs to deal with.

Could the AQR re-ignite the crisis and de-rail all the good work of the last couple of years? It could, but it is not my base case. A central problem in the early days of Europe's fight against crisis was the perceived lack of a lender of last resort. Then, in the summer of 2012, Super Mario gave his famous 'Whatever it Takes' speech, and the markets haven't looked back since. Draghi, without spending a penny, single-handedly managed to persuade investors that the ECB is indeed the de- facto lender of last resort, even if officials continue to avoid using the term when referring to the ECB.

Having said that, the very public debate that is likely to follow the publication of the AQR could very well lead to a renewed widening of yield spreads between perceived safe havens and the crisis countries. This is my second reason why bond yields in the U.S., U.K. and Germany could actually fall in 2014.

The disinflationary trend intensifies and potentially turns into deflation

A more likely consequence of the 2014 AQR is sustained pressure on lending activities across the Eurozone, a trend which is already underway. Most banks in the Eurozone have seen the writing on the wall and are already preparing for higher capital standards. Of the larger countries, only in France does the penny not seem to have dropped yet (chart 7).


Source: Standard & Poors
The Eurozone is probably only one shock away from outright deflation. Consumer price inflation is running at 0.7% year-on-year, and that number is inflated by austerity driven tax hikes. According to Ambrose Evans-Pritchard, if those tax rises are stripped out, then (and I quote) "Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria and Lithuania have all been in outright deflation since May [...]. Underlying prices have been dropping in Poland and the Czech Republic since July, and France since August." Not good. The inflation trend is unequivocally down and there is nothing to suggest that it is about to change (chart 8).


Source: Societe Generale Cross Asset Research

The one shock that would take the Eurozone into deflationary territory could indeed come from an escalation of the EM crisis, or it could come from somewhere few consider to be an issue right now – oil prices. I referred earlier to rising production volumes in the United States. A similar trend is to be expected from OPEC with both Libya and Iran (and possibly also Iraq) anticipating a significant increase in production levels, possibly as much as 3 mbpd between the two countries. If this happens at a time where much of the world is struggling to fire on all cylinders, oil prices could experience a significant drop.

The risk of outright deflation is much lower in the U.K. and U.S. than it is in the Eurozone. The U.K. is notoriously inflation-prone; however, more recently it has benefitted from a period of extraordinarily low growth in wages which will almost certainly not persist, if the economy continues to grow at the current rate. At the same time, the currency has a significant impact on UK inflation. When sterling is weak, inflation accelerates and vice versa. The recent strength of sterling has undoubtedly suppressed U.K. inflation to levels that are not consistent with current economic activity.

Underlying inflation is probably softer in the U.S. than it is in the U.K. but to suggest that the U.S. is on the verge of outright deflation seems to me to be a step too far. U.S. inflation has benefitted from a considerable amount of labour market slack in recent years but, if a recent study from Barclays Research is to be believed, that is about to change (chart 9).


Source: Barclays Research
On the other hand, those who expect QE to ultimately lead to a dramatic rise in inflation rates are likely to be thoroughly disappointed. We are still in the early stages of deleveraging, following the bust of a massive credit cycle (chart 10). Disinflation, or perhaps even deflation, is the natural consequence of such deleveraging – not inflation. Any risk to our central forecast that bond yields will remain largely unchanged in 2014 is thus to the downside (as in yields going down, not up).


Source: Reinhart & Rogoff, IMF Working Paper

The economic recovery currently underway proves unsustainable

U.S. economic indicators have been mixed recently. Home sales, auto sales and capital goods orders have all shown signs of weakness. It may be no more than a wobble or it may be signs of a turning point in the economy but, as Frank Veneroso states: "The U.S. economy almost never grows above trend without participation from these three cyclical sectors: autos, capex, and housing."
Veneroso goes further in his analysis and makes a very interesting point:

You have to mistrust all the economic data. Why? BECAUSE AT TURNING POINTS IT IS ALWAYS WRONG. Ninety percent of all economic forecasters do not recognize a recession because the preliminary data always says there is no recession. It is only later that the data is revised to show a recession. After having failed to correctly forecast the economy for decades, Alan Greenspan late in his tenure as Fed Chairman realized why: he told us then that there is so much extrapolation in the preliminary economic data it can never reflect important cyclical changes. Economists never tell you this, because to do so would be tantamount to saying that if they forecast the upcoming data correctly they will be wrong about the underlying reality since it is always greatly revised at turning points. If this truth was well advertised, those who pay for their bogus forecasting exercise might not pay them as much – or at all."
Frank Veneroso: "U.S. Economy – Will the Fed Taper $10 Billion?"

Gavyn Davies takes a more sanguine position:

There have been some mildly disappointing data releases in the US, but these have been mostly due to an excessive build-up in manufacturing inventories since mid-2013, and the prospects for final demand seem firm.
Gavyn Davies: http://blogs.ft.com/gavyndavies/2014/02/02/the-ems-fragile-8-must-save-themselves

We will have to wait and see who is right and who is wrong; however, I don't particular like the quality of recent corporate earnings reports. Even to the untrained eye it is pretty obvious that many companies are struggling to deliver the earnings growth expected of them. Massive buyback programmes are used to generate EPS growth, but underlying sales and profits growth is dismal. This cannot go on forever. Given this and all the other factors conspiring against economic growth, the risk to our central forecast is very much on the downside.

Flow of funds provides more support for bonds than anticipated

Now to the fifth and final reason why the bond market could confound everyone this year and deliver positive rather than negative returns – flow of funds. Bond mutual funds hold record high levels of cash (chart 11), supposedly prepared for a sell-off in bonds, but with plenty of dry powder to step in and ultimately provide support, should the anticipated sell-off materialize.


Source: Deutsche Bank

Secondly, U.S. pension funds have had a very strong year on the back of the powerful equity rally and, as a result, have increased the average funding ratio to 92% (http://www.businessinsurance.com/article/20131107/NEWS03/131109861?tags=|307|77|82). Such funding level was not expected to be reached until 2017 at the earliest, and the fact that the industry is several years ahead of its own recovery plan could very well mean that many pension funds decide to take some risk off the table in 2014 and move their funds into what is perceived to be a safer asset class – namely bonds.

Thirdly, foreign investors are often considered to be a risk factor when it comes to the outlook for U.S. bond yields and thus, by default, for bond yields in other developed markets as well (due to the high correlation between bond markets in most developed countries). Such views are often expressed in complete disregard of national accounting identities. The rest of the world's claims on the United States must equal the sum of all prior U.S. current account deficits. The rest of the world doesn't have to hold U.S. T-bonds but they must hold U.S. assets of some kind.

So, if we know that the U.S. economy will produce a current account deficit of $400 billion or so in 2014, we know that foreign claims on the U.S. will rise by $400 billion. From decades of experience, we also know that the vast majority of such claims will be placed in highly liquid instruments such as Treasuries. Foreigners now own near 50% of all Treasuries outstanding (chart 12). Most importantly, and the point missed by many, we know that the rest of the world simply cannot sell U.S. assets, even if they wanted to!


Source: Deutsche Bank

Conclusion

For all these reasons I am not at all convinced that 2014 will be the year where the bond market finally breaks down, but I have saved my trump card for last. I was recently introduced to a bond research firm called Applied Global Macro Research (www.appliedglobalmacroresearch.com). Started by Jason Benderly, who is an ex- colleague of mine from my days at Goldman Sachs and with a strong Danish line- up (Carsten Valgreen and Niels Bjørn both of whom came from senior positions at Danske Bank), I am embarrassed to admit that I haven't paid attention to them until recently when a good friend forwarded a research paper called 'The Year of the U.S. Curve Flattener', authored by Carsten.


Source: Applied Global Macro Research

Applied Global Macro Research is a quant shop. The smart guys working there have built several interesting models, but the one catching my attention is a model designed to identify the basic drivers of 10-year T-bond yields. The research is highly proprietary, so I am not going to give everything away, but suffice to say that the model explains about 70% of the change in the 10-year yield over time. However, it is when you make some assumptions about the three underlying factors that the story becomes really interesting. Even in a strong economic environment, the model suggests that the total return on 10-year T-bonds in 2014 will be close to zero. Yields rise modestly in that scenario, but the carry will almost fully offset those losses. On the other hand, should the U.S. economy actually weaken, 10-year T-bonds should generate very attractive returns.

This asymmetry in expected returns is largely a function of the historically high spread between U.S. 2-year and 10-year Treasuries (the blue line in chart 13 above). On that basis, the smart trade appears to be a spread trade – long 10-year vs. short 2-year Treasuries – rather than an outright short at the long end. For this and all the other reasons mentioned above, I cannot be bearish on bonds, be it U.S. or European.

Niels C. Jensen
4 February 2014

Like Outside the Box?
Sign up today and get each new issue delivered free to your inbox.
It's your opportunity to get the news John Mauldin thinks matters most to your finances.


© 2013 Mauldin Economics. All Rights Reserved.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.
Please write to subscribers@mauldineconomics.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.
To subscribe to John Mauldin's e-letter, please click here: http://www.mauldineconomics.com/subscribe
To change your email address, please click here: http://www.mauldineconomics.com/change-address
Outside the Box and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC, through which securities may be offered . MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.
Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at http://www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop.
Read more ...

Many Are Betting on a Calm Market. We're Not.

Here's one good reason why: A historic market sentiment extreme.

The DJIA, S&P and NASDAQ are struggling to bounce. Yet the bullish convictions remain high. Says a February 5 Investor's Business Daily headline:

"Why Mutual Fund Investors Need Not Panic After January Sell-Off"

When is the best time to get out of the stock market? When everyone else is invested and extremely optimistic. When is the best time to buy, then? Exactly: when you see the opposite sentiment.

Market sentiment is one indicator you don't hear much about on financial networks. Yet we've seen sentiment extremes repeat at every recent market top and bottom. What's more, as Robert Prechter, the president of Elliott Wave International, puts it, "the greater the degree of the advance that is ending, the greater the optimism at its peak."

This contrarian view of the market can be a financial lifesaver.

Below is an excerpt from Prechter's recent Elliott Wave Theorist, a monthly newsletter he has published since 1978. It shows you one way how Bob finds bearish and bullish extremes in the market.
Conviction Among the Bulls
(Robert Prechter, The Elliott Wave Theorist, December 2013) 
The Daily Sentiment Index (trade-futures.com) reported 93% bulls twice, on November 15 and 22. Two readings this high are a rarity. 
The weekly Investors Intelligence poll on December 11 and 18 showed over 80% bulls among committed advisors (i.e. bulls/(bulls+bears), omitting those expecting a correction), the highest reading since 1987. 
Such extreme readings in conjunction are even rarer. 
The Rydex family-of-funds data afford good sentiment indicators. Recent figures show a record low investment in conservative money-market funds, meaning nearly everyone is invested in stocks and bonds. 
At the same time, the ratio of money in bullish stock funds vs. bearish stock funds is over 5:1, and per sentimenTrader.com the ratio of money in leveraged bull vs. bear funds (see Figure 2) is 10:1!
This reading leaves past extremes in the dust. If you study Figure 2, you will notice that the biggest rush has come in the past six months, which is precisely the time that stocks' ascent has been slowing! 
In other words, optimism is soaring while upside momentum is waning.
Once this epic complacency melts, I doubt we will see such a ratio again in our lifetimes.

Bad Start for Stocks in 2014: Buying opportunity or more pain to come?
You can benefit greatly from looking at charts that take a historical look at what's going on in the financial markets. Robert Prechter has just released an issue of his Elliott Wave Theorist publication that includes 15 charts of the S&P 500, NASDAQ, gold, and mutual funds -- along with his analysis.
With this information, his Elliott Wave Theorist subscribers are now prepared for 2014. And you can be, too, because you can get the full 10-page issue, FREE.
Download your free 10-page report now >>
This article was syndicated by Elliott Wave International and was originally published under the headline Many Are Betting on a Calm Market. We're Not.. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Read more ...

Harvard Economist Is Pulling His Money From Bank Of America

"Harvard Economist Is Pulling His Money From Bank Of America"
An excerpt from a new article by Terry Burnham, a former Harvard economics professor.

By Elliott Wave International

EWI's president Bob Prechter has been warning about the safety of the U.S. banking system for a while.

Enjoy this excerpt from a new article by Terry Burnham, a former Harvard economics professor, author of "Mean Genes" and "Mean Markets and Lizard Brains", who spoke at last year's Socionomics Summit in Atlanta.

Mr. Burnham's article appeared on pbs.org on January 30 and was quickly picked up by Zero Hedge.
Last week I had over $1,000,000 in a checking account at Bank of America. Next week, I will have $10,000. 
Why am I getting in line to take my money out of Bank of America? Because of Ben Bernanke and Janet Yellen, who officially begins her term as chairwoman on Feb. 1. 
Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That's because I believe that when the Fed intervenes in markets, it has two effects -- both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected).
Why do I risk starting a run on Bank of America by withdrawing my money and presuming that many fellow depositors will read this and rush to withdraw too? Because they pay me zero interest. Thus, even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee.
Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money. They will not be able to return my money if: 
Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people -- 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not. Consider this image from a fully insured U.S. bank, IndyMac in California, just five years ago. 
Some of the investments of Bank of America go bust. Because Bank of America has loaned out the vast majority of depositors' money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of Bank of America, AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.
In recent days, the chances for trouble at Bank of America have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China. The emerging market fears caused the Dow Jones Industrial Average to lose more than 500 points over the last week. 
If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my million, or $10,000. That far exceeds the interest I receive, which, I hardly need remind depositors out there, is a cool $0. Even a 0.1 percent chance of loss has an expected cost to me of $1,000. Bank of America pays me the zero interest rate because the Federal Reserve has set interest rates to zero. Thus my incentive to leave at the first whiff of instability.

See what Bob Prechter's Elliott Wave International has to say about the outlook for the global markets and the safety of your financial assets. They have just published their annual report, The State of the Global Markets -- 2014 Edition. You'll get some of the choicest selections from their monthly publications along with analyst presentations covering the U.S., European and Asian-Pacific markets.
Sign up to get access to The State of the Global Markets -- 2014 Edition now >>
This article was syndicated by Elliott Wave International and was originally published under the headline "Harvard Economist Is Pulling His Money From Bank Of America". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Read more ...

Debt: The Last Social Taboo

Social taboos have dropped left and right since I was a young man raising a family, but one is unlikely to disappear any time soon: holding too much personal debt. But debt need not be a personal tragedy nor a badge of shame. For some, it is simply a practical problem with practical solutions. For others, however, it isn't even the real problem.

Debt: The Last Social Taboo?

By Dennis Miller

In the last few year I've watched two friends handle debt quite differently, and those differences illustrate the real taboo about debt that we seem to ignore. I've changed names and tweaked a few details to keep peace in the world, but what follows are essentially two true stories: those of Joe Able and Tom Baker.

Both Joe and Tom are early baby boomers. During their careers, both had the external trappings of success: nice homes, luxury cars, and a good amount of other cool stuff. They earned good incomes and paid a lot in taxes along the way. They moved into their peak earning years during the Internet boom, and both of their companies flourished.

Nevertheless, neither Joe nor Tom amassed much wealth. Instead, they financed signs of wealth. Their justification: they made enough money to easily afford the payments. Neither Joe nor Tom had a problem with this approach.

In short, both enjoyed playing the role of big shot.

Well, the economy turned and their incomes were cut. Joe eventually realized he would never be able to retire because he had accumulated, well, basically nothing. This must have been terribly difficult for him.

Joe had to fess up to his spouse and family that he may have been "rich dad" for a decade or so, but things were going to have to change radically. Otherwise, he would become "poor dad."

Joe's wife had become quite comfortable with her life of luxury, so together they sought professional advice from his accountant and a qualified financial planner. Together they built a plan to get out of debt and accumulate some real capital. This was the only way they could ever enjoy retirement. Perhaps it would be more modest than they'd once envisioned, but that was OK.

To borrow Joe's words, "I decided to stop the world. I wanted to get off!" He described it as a never-ending treadmill: work hard; make a lot of money; pay off bills; buy more cool and expensive stuff; repeat, repeat, repeat. So they built a plan and refocused. Joe and his wife worked together and are quite happy today.

Tom took a different road. He, too, realized his lifestyle was unsustainable. Family and professionals convened in an effort to help Tom see reality. They encouraged him to change his behavior.
Tom discussed his mounting debts and reduction in income very rationally, but he was unable to change his behavior.

As I looked at these two men, I noticed differences. Joe lived in a large city. Tom lived in the small town where he grew up. Joe was the proverbial little fish in a big pond; Tom was the big fish in a small pond. Everyone in town knew Tom as the kid who grew up and obviously really made something of himself.

What the public did not see was this. Tom's business had a line of credit with the bank and was a good business. Unfortunately Tom maxed out his company's line of credit and used the money for personal spending. The particular business is capital intensive and his company began to suffer. Now he had to make huge payments to the bank for fear his company would shut down.

Eventually the banks were breathing down his neck. Tom had no leverage and gave the bank whatever they needed to keep the line of credit.

Sad to say, his friends told me he became very depressed. They called him the poster child for depression spending. He had several credit cards and bought designer clothes and new toys to make himself feel good. His children said their dad had a spending addiction.

About a year ago, Tom filed for personal bankruptcy. Of course, that notification hit the local paper in the little town he lived in. Six months later, Tom had a heart attack and died in his sleep. He was not yet 65, and appeared to be in good physical health.

For many, debt is not the real problem, but rather a symptom of a much larger problem: an addiction to a self-image and a way of life. Until you address the real problem, you cannot solve the symptom—debt.

While I am not a psychiatrist, I can pick out common traits from among those who walked the walk—retired friends who have accumulated wealth and enjoy retirement on their own terms. Perhaps it is not as lavish as they once hoped, but they enjoy the absolute freedom of being debt- and stress-free. Here are some tips I have learned along the way.
  • Start with a financial checkup. I have written many times about the epiphany many of us experienced when we first sat down with a financial advisor to look at our fuzzy retirement goals. It can be just the dose of reality needed to change our behavior.
  • Set real, measurable financial goals. As we get closer to retirement, it is no longer some vague event that we hope will happen in a decade or so. Set firm, measurable short- and long-term financial goals.
  • Build a workable plan. Achieving those milestones along the way is exhilarating—almost like a preview of what being debt-free is all about. If you just keep doing what you are doing and stick to your plan, you will make it.
  • Both spouses have to be totally committed. This was another major difference I saw between Joe and Tom. Joe's wife was a country girl whose real values in life are family and friends. Tom did not have that kind of support. He had remarried a younger woman who thought she was marrying a big shot. I guess she just married him "for better" because, when it became evident their lifestyle was an illusion, she left him.
  • Realize you are not alone. As a member of Lending Club, every day I see hundreds of loan applications from people with great incomes who want to consolidate and get out of debt. It sounds funny borrowing money to get out of debt, but they want to consolidate and reduce their interest rates, which is part of the process. Many of these people are doctors and lawyers making huge amounts of money. Not only do they need to make the payments to reduce their debt; they also have to curtail their spending at the same time, something Tom was emotionally unable to do.

    Since 2008, when the interest rates on CDs and fixed income securities dropped to the point of not keeping up with true inflation, even folks who have managed to accumulate some wealth have had to make some tough choices when it comes to priorities. We have many friends who have owned a lot of luxury cars who are quite proud to drive up in their new Toyota and discuss how much they saved along the way.
  • There is no shame in adjusting your lifestyle to the current environment. Simply put, you have to do what you have to do! While it may have been nice to feel rich during the boom times, adjusting your lifestyle and spending patterns to avoid being poor is not shameful; quite the contrary, it is prudent. Many couples tell us how they worked together and the process made their marriage even stronger. Shame? No way! Pride is much more accurate.
Once your goal is true, stress-free financial independence, it is worth giving up a lot of stuff. Unfortunately for Tom, he was such an addict he could never make the transition. Joe and his wife are happy, surrounded by loving family, and enjoy seeing their next generation grow and mature.
Being debt-free is a major step. You are halfway home. The next step is accumulating wealth. Instead of making payments to creditors, now you can start making those payments to yourself and prepare for the future.

There are many ways to avoid Tom's fate if you get started right away. We've prepared a free special report that will help you take a critical look at your personal budget and categorize it to make it easier to cut out unnecessary expenses. It also provides some insight into ways to get started on improving the income side of your ledger.

Click here to access this free report and get started on your path to more savings and income today.
Read more ...

Wednesday, February 5, 2014

Get ready. Here comes the next great depression

What follows is a rough transcript from Mike Maloney's February 4 video presentation on the next great depression.  Be sure to watch the full video below.

- - -

I've often said that 2008 was just a speed bump on the way to the main event.

I do believe that we are in for something absolutely catastrophic when it comes to the global economy.

Looking at the chart, this is total debt, including the private sector - home loans and such, as compared to GDP. In 1929, after the crash, there was a huge rise in outstanding debt, but what it actually represented was the economy shrinking. So debt became a larger and larger in proportion, compared to the economy. Mind you, this is not because debt is rising. People did not take on a whole bunch of debt in 1930, '31 and '32. What was happening was that the economy was shrinking. So this chart rises because the debt is a larger portion of the economy. And then, this is all liquidation here. This is people losing the family farm, and homes being foreclosed on, farms being foreclosed on and businesses going out of business.
Read more ...