Bubbles

Stephen Roach Warns Fed Headed Down ‘Highly Dangerous Path’

“Dow industrials mark their fifth fastest 1,000-point rise in history”

-MarketWatch.com, December 23, 2014

Shortly after my old blog Boom2Bust.com, “The Most Hated Blog On Wall Street,” debuted on Memorial Day Weekend 2007, I shared a warning from the former chairman/chief economist of Morgan Stanley Asia, Stephen Roach. Brett Arends wrote in the Boston Herald’s “On State Street” column on November 23, 2004:

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.

But you should hear what he’s saying in private.

Roach met select groups of fund managers downtown last week, including a group at Fidelity.

His prediction: America has no better than a 10 percent chance of avoiding economic “armageddon.”’

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach’s presentation. A stunned source who was at one meeting said, “it struck me how extreme he was – much more, it seemed to me, than in public.”

Roach sees a 30 percent chance of a slump soon and a 60 percent chance that “we’ll muddle through for a while and delay the eventual armageddon.”

The chance we’ll get through OK: one in 10. Maybe…

A decade later, it’s safe to say Roach got those calls about the slump and muddling through for a while correct (give it time on that “armageddon” bit still).

But now, Stephen Roach is sounding the alarm again.

He wrote on the Project Syndicate website earlier today:

America’s Federal Reserve is headed down a familiar – and highly dangerous – path. Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic

(Editor’s note: Bold added for emphasis)

Roach noted that the U.S. central bank remains steadfast in keeping the federal funds rate near zero, before warning:

This bears an eerie resemblance to the script of 2004-2006, when the Fed’s incremental approach led to the near-fatal mistake of condoning mounting excesses in financial markets and the real economy. After pushing the federal funds rate to a 45-year low of 1% following the collapse of the equity bubble of the early 2000s, the Fed delayed policy normalization for an inordinately long period. And when it finally began to raise the benchmark rate, it did so excruciatingly slowly.

In the 24 months from June 2004, the FOMC raised the federal funds rate from 1% to 5.25% in 17 increments of 25 basis points each. Meanwhile, housing and credit bubbles were rapidly expanding, fueling excessive household consumption, a sharp drop in personal savings, and a record current-account deficit – imbalances that set the stage for the meltdown that was soon to follow.

A “meltdown” that might be in store for us again (even worse than last time around?) if the Federal Reserve doesn’t veer from the path it’s on, says Roach.

It’s a disturbing read, which is available in its entirety on the Project Syndicate website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Arends, Brett. “Economic ‘Armageddon’ Predicted.” Boston Herald. 23 Nov. 2004. (http://www.fromthewilderness.com/free/ww3/112304_economic_armageddon.shtml). 23 Dec. 2014.

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Alan Greenspan: Gold Is A Currency, And Currently A Good Investment

Back in late October I recall The Wall Street Journal talking about some comments made by former Federal Reserve Chairman Alan Greenspan to the Council on Foreign Relations concerning gold. I’ve been meaning to look into what Greenspan, who served as Fed Chair from 1987 to 2006, actually said about the precious metal. During lunchtime, I dug up the final version of the transcript from his visit with the CFR in New York City on October 29, 2014. From the exchange between the president of Greenspan Associates LLC and presider Gillian Tett:

TETT: I’m going to turn to the audience for questions in one minute, but before I do though, I just want to ask though, one of the really interesting chapters in your book is about gold. And there’s been a lot of media debate in the past about your views on gold.

You yourself oppose a question as to why would anyone want to buy this barbarous relic — I don’t know whether John Paulson is in the audience — but it’s an interesting question. But do you think that gold is currently a good investment given what you’re saying about the potential for turmoil?

GREENSPAN: Yes.

(LAUGHTER)

TETT: Do you put…

GREENSPAN: Economists are usually perfect in equivocating. In this case I didn’t equivocate. Look, remember what we’re looking at. Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it. And so that the issue is, if you’re looking at a question of turmoil, you will find, as we always have in the past, it moves into the gold price.

But the gold price is actually sort of half a commodity price, so when the economy is weakening, it goes down like copper. But it’s also got a monetary characteristic which is instrinsic. It’s not inbred into human beings — I cannot conceive — of any mechanism by which you could say that, but it behaves as though it is.

Intrinsic currencies like gold and silver, for example, are acceptable about a third party guarantee. And, I mean, for example at the end of World War II, or just at the end of it, Germany could not import goods without payment in gold. The person who shipped the goods in would accept the gold, and didn’t care whether there was any credit standing — associated with it. That is a very rare phenomenon. It’s — it’s the reason why, for example, in a renewal of an agreement that the central banks have made — European central banks, I believe — about allocating their gold sales which occurred when gold prices were falling down, that has been renewed this year with a statement that gold serves a very important place in monetary reserves.

And the question is, why do central banks put money into an asset which has no rate of return, but cost of storage and insurance and everything else like that, why are they doing that? If you look at the data with a very few exceptions, all of the developed countries have gold reserves. Why?

TETT: I imagine right now, it’s because of a question mark hanging over the value of fiat currency, the credibility going forward.

GREENSPAN: Well, that’s what I’m getting at. Every time you get some really serious questions, the 50 percent of the gold price determination begins to move.

TETT: Right.

GREENSPAN: And I think it is fascinating and — I don’t know, is Benn Steil in the audience?

TETT: Yes.

GREENSPAN: There he is, OK. Before you read my book, go read Benn’s book. The reason is, you’ll find it fascinating on exactly this issue, because here you have the ultimate test at the Mount Washington Hotel in 1944 of the real intellectual debate between the — those who wanted to an international fiat currency which was embodied in John Maynard Keynes’ construct of a banker, and he was there in 1944, holding forth with all of his prestige, but couldn’t counter the fact that the United States dollar was convertible into gold and that was the major draw. Everyone wanted America’s gold. And I think that Benn really described that in extraordinarily useful terms, as far as I can see. Anyway, thank you.

TETT: Right. Well, I’m sure with comments like that, that will be turning you into a rock star amongst the gold bug community…

(Editor’s note: Bold added for emphasis)

I’m not sure if the above will mean Greenspan is now a rock star among the “gold bugs”- he’s still considered by many as being a habitual asset bubble blower. But such a high-profile individual within the global financial community lending support to the ideas that gold is a currency and currently a good investment will no doubt anger a number of gold bears and haters.

You can read the entire transcript of Greenspan’s visit to the CFR on their website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Jim Rogers On Best Ways To Invest In Agriculture

On Monday, I blogged about well-known investor, author, and financial commentator Jim Rogers and his steadfast belief that agriculture is where big money will be made in the future.

Late last night I was on the website of the Wall Street Daily website listening to an interview of Rogers that was conducted by Robert Williams, founder of the Baltimore, Maryland-based investment research/market commentary service. Considering what I just wrote, it was what the commodities “guru” had to say about the best ways to invest in agriculture that grabbed my attention. From their exchange:

WILLIAMS: Jim, what’s the most effective route into agriculture for our readers interested in playing this long-term bull market?

ROGERS: Well, there are many ways to do it. The best way is to buy a farm- become a farmer if you really want to get rich because I explained before, some of the serious, serious, key fundamental problems in agriculture. So if you like the outdoors, if you think you’d be good at it, you might consider becoming a farmer.

Now most of your readers are probably not going to become farmers, but that’s the way. Or buy a farm and lease it to a farmer- somebody who’s competent. You can buy stocks. Certainly you can buy stocks. If you buy the right stocks- seed companies, fertilizer companies, or whatever- you’ll make a lot of money.

You can buy countries. Some countries are more agriculturally-oriented than others. Pakistan is a country that lives and dies on cotton more than anything else. So it depends on the country.

If you’re going to buy a lake house, I would buy my lake house in Oklahoma, not in Massachusetts, because stocks are at all-time highs. And we just discussed what’s been happening in commodities. So lake houses in Oklahoma or Nebraska are probably a lot cheaper than in Massachusetts. You can get a Lamborghini dealership in Iowa, because the farmers are going to be driving Lamborghinis, in my view, in the future.

Or you can buy- for most people, obviously the best way is to buy an index. Many studies have shown that index investing is far and away the best way to invest in anything- stocks, bonds, currencies, commodities, anything else. And there are plenty of exchange-traded products where it makes it very easy these days to invest in commodities.

On buying a lake house in Oklahoma or Nebraska, the former investing partner of George Soros said something similar in an May 23, 2003, interview on the Wall $treet Week with FORTUNE TV program. Nailing the U.S. housing bubble a couple years before it burst, Rogers talked property (with an eye towards natural resources) with co-anchor Karen Gibbs. From the interview:

GIBBS: How about real estate?

ROGERS: Well, real estate, Karen, depends on where you are. There is a mania, a housing bubble going on. But if you’re going to buy a second home, buy a lake house in Iowa, because Iowa is a natural-resources-based state. I’m bullish on agriculture. I’m bullish on natural resources. So houses in Iowa will probably do well. Don’t buy it in Boston. Boston is a financial town. I’m not that optimistic on financial companies or financial areas. So buy in Oklahoma, buy in Colorado, buy in states where the economy is going to get better. Stay away from places like New York and Boston — where I live — because real estate there will probably not do well.

In a Barron’s interview that appeared on the publication’s website on October 12, 2013 (blogged about here), the Singapore-based investor who correctly-called the commodity bull market that began in 1999 expanded:

I could buy farmland and become a farmer—although I would be hopeless at it—or buy farmland and lease it out. Buy shares in farms, farm equipment, fertilizer and seed companies that trade on exchanges around the world. Stock markets in agriculture-producing countries should do better than those in agriculture-importing ones. Retailers, restaurants, banks in agricultural areas will do well. Buy a vacation home on a lake in Iowa, not Massachusetts.

Good stuff. You can listen to/read (transcript provided) that recent Wall Street Daily interview on their website here. And for a trip down memory lane, that Wall $treet Week with FORTUNE exchange here.

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Boston Globe: We Need Financial ‘Doomsayers’ Like Jeremy Grantham

“Legendary value investor Jeremy Grantham, chairman of the global investment management firm Grantham Mayo Van Otterloo (GMO), said in a recent letter to shareholders we are now witnessing the first global bubble in history, covering all asset classes. ‘From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!’ Grantham adds, ‘Everyone, everywhere is reinforcing one another. Wherever you travel you will hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets must keep rising,’ and ‘private equity will continue to drive the markets.'”

-Christopher E. Hill, Boom2Bust.com, June 14, 2007

Regular readers of Survival And Prosperity know I blog regularly about “crash prophets” Marc Faber, Jeremy Grantham, Jim Rogers, and Peter Schiff- individuals well-known in financial/investing circles who correctly-predicted the global economic crisis that reared its ugly head back in 2008.

Why do I like reading and writing about their investment activities/recommendations?

From this blog’s “About” page:

“Vice President Dick Cheney says that his boss, President George W. Bush, has no need to apologize to the American people for not doing more to head off the financial calamity, saying no one saw the crisis coming.

During an interview Thursday with The Associated Press in his West Wing office, Cheney defended the administration’s performance on an economy that is growing weaker daily and which recently collapsed in spectacular fashion. Cheney said that ‘nobody anywhere was smart enough to figure it out.'”

-Associated Press, January 8, 2009

(Editor’s note: Bold added for emphasis)

Who are the “Crash Prophets?”

Contrary to the former Vice President’s assertions, a small number of individuals did see the current economic crisis coming. Among them were prominent investors, advisors, and money managers who, despite being ridiculed by their so-called “peers,” bravely warned others that a financial storm was coming. Perhaps their now-discredited colleagues should have known better, for these same persons also have impressive track records when it comes to calling the markets. Today, the “Crash Prophets” are positioning their or their clients’ money and continue to share their insights for what they see is more financial turbulence ahead.

Others are also now recognizing the worth of what the “crash prophets” have to say. Writing about British-born investment strategist Jeremy Grantham and his latest quarterly investment letter (I blogged about it here on November 20), columnist Carlo Rotella for The Boston Globe penned the following on the paper’s website on November 22:

Grantham’s ice-bath clarity, coming from a self-described fat cat, gives me some faint hope that the currently infantile conversation about economics and the planet being conducted by our money-handlers and elected leaders, many of them awash in the oil money that lubricates our political system, might someday advance beyond the notion that we can’t do anything about the long term for fear of inhibiting short-term growth.

Clear, forceful, disciplined thinking like Grantham’s seems obvious when you read it, but it makes much of what everybody else is saying on the same subject seem twisted and bizarre. Grantham’s quarterly letters, wry and measured in tone and solidly based on well-presented data, feel like an antidote to the magical thinking purveyed by Congress and hysterically optimistic stock-pickers.

Grantham’s long-view investment philosophy centers on the principle that prices eventually revert to the mean, and his bemused view of human nature centers on a similar reversion to the behavioral mean. We want to hear good news and assume that present conditions will persist, we tend to be bad with numbers and uncertainty, and we take comfort in short-term-oriented herd behavior of the sort that characterizes the financial industry. We need doomsayers like Grantham to counteract these tendencies.

Yes, we do need “doomsayers” like Jeremy Grantham to counteract the Pollyannish tendencies of many Americans.

Do they actually believe the same people who brought us the 2008 financial crisis and so-called “Great Recession” were actually able to “fix” that mess?

I, for one, hope to be fairly “insulated” from the Pollyannas when the balloon finally goes up, because I’ve seen how this crowd reacts WTSHTF. And it ain’t pretty.

By the way, did I mention Dick Cheney was a former client of Grantham’s?

“Nobody anywhere was smart enough to figure it out.”

Rotella’s November 22 piece- “Why we need financial doomsayers”- is a good read (don’t expect much investment intel although Grantham’s U.S. stock bubble-crash warning is touched on), which you can view in its entirety on the Globe website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Jim Rogers On Commodities: ‘This Is A Correction In A Bull Market’

Not sure how I missed an interview of investor Jim Rogers on the Business Insider website back on November 14- because it’s a terrific one. From an exchange between BI co-founder, CEO, and Editor-In-Chief Henry Blodget and the “guru” who predicted the commodities boom that began in 1999:

HB: You made a great call on commodities more than a decade ago. We’re in a downturn now. What is your view going forward?
JR: Great question. I certainly missed this correction. The correction has been worse than I thought. Some of it I knew — I’ve been quite vocal that gold would go down and stay down for a while during this bull market, maybe even under $1,000 dollars per ounce. But still the overall correction I got wrong. My view, rightly or wrongly, is that this is a correction in a bull market. You will remember in the bull market in stocks between 1980 and the end of the century, we had some very serious corrections. And every time people said the bull market was over, it wasn’t. It ended in a bubble. My view is that’s what’s going to happen with commodities. We’re in a correction, a serious one, but that it will turn around. Back to what we said about oil, most major oil fields are in decline. In agriculture, we’re running out of farmers. So we’re facing a serious problem worldwide. I don’t see enough new supply to say the bear market has started again, that the bull market is over. I think there will be one more big leg.
HB: So is this a buying opportunity?
JR: For sugar maybe. Rice maybe. I do own gold, I do own silver. I haven’t bought any of significance in a few years. I haven’t sold any. Gold went up for 12 years in a row without a down year, which is extremely unusual in markets. So in my view the correction will be unusual as well. Gold has not had a 50% correction in years, which too is unusual. That would be $960 per ounce. I’m not predicting it’s going to go there. I’m just pointing out to you there’s going to be another chance to buy gold and silver in another year or two or three, I have no idea why. If America goes to war with Iran, I’ll probably buy gold at $1,600, begging to get more…

The former investing partner of George Soros in the Quantum Fund also talked about:

• U.S. stocks
• Fed stimulus
• More economic “hard times” ahead
• Crude oil
• Russia
• Ukraine
• Asia
• Timing investments
• Advice for young professional investors

The Business Insider piece really is one of the best interviews of Jim Rogers in a while, which you can read on their website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Jeremy Grantham: Fed Will Engineer Another Stock Bubble, Crash

Today I spent my lunch reading the latest quarterly letter from British-born investment strategist Jeremy Grantham. Last time around, the founder and former chairman of Grantham, Mayo, Van Otterloo & Co. (GMO)- which oversees $120 billion in client assets as of September 30- was predicting a bubble in the U.S. stock market. From “Summer Essays”:

My recent forecast of a fully-fledged bubble, our definition of which requires at least 2250 on the S&P, remains in effect.

As the S&P 500 sits at 2,051 as I type this (199 points below that bubble benchmark), Grantham- whose individual clients have included current Secretary of State John Kerry and former Vice President Dick Cheney- still thinks U.S. equities are headed for bubble territory- before crashing. From his aptly-named “Bubble Watch Update”:

I am still a believer that the Fed will engineer a fully-fledged bubble (S&P 500 over 2250) before a very serious decline…

(Editor’s note: Bold added for emphasis)

For those looking to put their money to work, Grantham lamented:

It is a particularly tough process today with nowhere to hide and no very good investments compared to, say, the time around the 2000 bubble when there were several…

Nevertheless, he offered:

An example of a portfolio that might be used in a world that excludes private equity and venture capital, and for a client who can do without a benchmark and can settle for owning a (hopefully) sensible long-term efficient portfolio. Efficient, that is, in terms of trying to minimize risk per unit of estimated returns…

This example portfolio was comprised of Equities (39%), Fixed Income (30%), Cash/Cash Plus (17%), and Alternative Strategies (14%).

Grantham concluded the essay with more talk about that U.S. stock bubble and crash. He penned:

My personal fond hope and expectation is still for a market that runs deep into bubble territory (which starts, as mentioned earlier, at 2250 on the S&P 500 on our data) before crashing as it always does. Hopefully by then, but depending on what the rest of the world’s equities do, our holdings of global equities will be down to 20% or less. Usually the bubble excitement – which seems inevitably to be led by U.S. markets – starts about now, entering the sweet spot of the Presidential Cycle’s year three, but occasionally, as you have probably discovered the hard way already, history can be a snare and not a help.

(Editor’s note: Bold added for emphasis)

Jeremy Grantham’s made some great investment calls (hence Cheney and Kerry being clients), so his prediction about U.S. stocks having quite a bit more room to run shouldn’t be so easily dismissed.

You can read the entire quarterly letter (.pdf file) on the GMO website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Marc Faber, Peter Schiff Issue Another Bubble Warning

“I think we are in a gigantic financial asset bubble.”

-Marc Faber on Bloomberg Television’s Street Smart, January 14, 2014

“We have an entire economy that is supported on a foundation of bubbles.”

-Peter Schiff in a MoneyShow Las Vegas presentation, May 12, 2014

These days, the U.S. economic landscape feels a lot like 2007- if you ask me. There’s a tremendous amount of bullish sentiment out there from rising asset prices. Likewise, a number of threats are simmering in the economy and larger financial system- as was the situation seven years ago.

And just like in 2007, “crash prophets” Marc Faber and Peter Schiff are again sounding the alarm on asset bubbles.

Remember- while most other financial types were predicting clear sailing ahead back then for the U.S. economy and housing market, Faber and Schiff correctly-forecast the bursting of the U.S. housing bubble and the financial crisis that reared its ugly head by the autumn of 2008.

Peter Schiff, CEO and Chief Global Strategist of Euro Pacific Capital, wrote the following on his company’s website Wednesday:

The truth is the Fed knows the economy needs zero percent rates to stay afloat, which is why they have yet to pull the trigger. The last serious Fed campaign to raise interest rates led to the bursting of the housing bubble in 2006 and the financial crisis that followed in 2008. This occurred despite the slow and predictable manner in which the rates were raised, by 25 basis points every six weeks for two years (a kind of reverse tapering). At the time, Greenspan knew that the housing market and the economy had become dependent on low interest rates, and he did not want to deliver a shock to fragile markets with an abrupt normalization. But his measured and gradual approach only added more air to the real estate bubble, producing an even greater crisis than what might have occurred had he tightened more quickly.

The Fed is making an even graver mistake now if it thinks the economy can handle a measured reduction in QE. Similar to Greenspan, Bernanke understood that asset prices and the economy had become dependent on QE, and he hoped that by slowly tapering QE the economy and the markets could withstand the transition. But I believe these bets will lose just as big as Greenspan’s. The end of QE will prick the current bubbles in stocks, real estate, and bonds, just as higher rates pricked the housing bubble in 2006. And as was the case with the measured rate hikes, the tapering process will only add to the severity of the inevitable bust

According to “Doctor Doom” Marc Faber, the extent of the bubbles goes even further than what Schiff identified. Appearing on CNBC’s Squawk Box earlier today, the publisher of the monthly investment newsletter The Gloom Boom & Doom Report warned viewers:

Today, the good news is we have a bubble in everything, everywhere- with very few exceptions. And, eventually, there will be a problem when these asset markets begin to perform poorly. The question is- what will be the catalyst? It could be a rise in interest rates not engineered by the Fed, because I think they’ll keep interests rates at zero on the Fed funds rate for a very long time… We could have essentially a break in bond markets at some point. We also could have a strong dollar. A strong dollar has already happened in the last two months signifies that international liquidity is tightening. And when that happens, usually it’s not very good for asset markets.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Source:

Schiff, Peter. “A New Fed Playbook for the New Normal.” Euro Pacific Capital. 17 Sep. 2014. (http://www.europac.net/commentaries/new_fed_playbook_new_normal). 19 Sep. 2014.

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Jeremy Grantham: ‘Severe Market Decline Is Not Imminent’

I just got finished reading the latest quarterly letter from British-born investment strategist Jeremy Grantham. As usual, the founder and former chairman of Grantham, Mayo, Van Otterloo & Co. (GMO)- which oversees $118 billion in client assets- penned a good one. Note what Grantham- who individual clients have included current Secretary of State John Kerry and former Vice President Dick Cheney- had to say about claims that stocks are in a bubble and/or on the verge of a major correction. From “Summer Essays”:

My recent forecast of a fully-fledged bubble, our definition of which requires at least 2250 on the S&P, remains in effect.

At the end of the trading day Monday, the S&P 500 stood at 1,939- 311 points below “bubble level.”

Grantham argued:

The economy, despite its being in year six of an economic recovery, still looks in many ways like quite a young economy…

Perhaps the single best reason to suspect that a severe market decline is not imminent is the early-cycle look that the economy has.

Still, Grantham- who became widely known for his April 2007 declaration about the first worldwide bubble in history occurring which covered all asset classes- doesn’t discount another bubble being formed. From his section entitled “Post Script”:

In early July, Janet Yellen made an admirably clear statement that she is sticking faithfully to the Greenspan- Bernanke policy of extreme moral hazard. She will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause. Well, it is a clear policy and in my opinion clearly wrong. I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck, at least in the case of the Fed. The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence. This affirmation of moral hazard – we will not move to stop bubbles, dear investors, but will help you out when things go badly wrong – should be of great encouragement to speculators and improve the odds of having a fully-fledged equity bubble before this current episode ends.

(Editor’s note: Bold added for emphasis)

You can read the entire quarterly letter (.pdf file) on the GMO website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Does Robert Shiller See ‘Froth’ In U.S. Housing And Stocks?

I first blogged about Robert Shiller, the Yale professor credited with correctly-calling the “dot-com” and housing busts, on Survival And Prosperity way back on December 29, 2010. I wrote:

Back when the housing bubble was fully-inflated, I happened to catch a CNBC special on housing in which Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller Home Price Indices, appeared with a number of individuals tied to the housing industry. When it was Professor Shiller’s turn to speak, he warned that there was a bubble in residential real estate.

The other panel members subsequently ripped Shiller a new one.

Subsequently, those panelists were made to look like major asses as the bubble turned into a bust, while Dr. Shiller was vindicated.

So what does Shiller think of the recent run-ups in U.S. stock and housing prices?

You make the call.

From a piece he penned and which appeared on The Guardian (UK) website Tuesday:

We have had only three salient global crises in the last century: 1929-33, 1980-82, and 2007-9. These events appear to be more than just larger versions of the more frequent small fluctuations that we often see, and that Stock and Watson analysed. But, with only three observations, it is hard to understand these events.

All seemed to have something to do with speculative price movements that surprised most observers and were never really explained, even years after the fact. They also had something to do with government policymakers’ mistakes. For example, the 1980-82 crisis was triggered by an oil price spike caused by the Iran-Iraq war. But all of them were related to asset-price bubbles that burst, leading to financial collapse.

Those who warn of grave dangers if speculative price increases are allowed to continue unimpeded are right to do so, even if they cannot prove that there is any cause for concern. The warnings might help prevent the booms that we are now seeing from continuing much longer and becoming more dangerous

(Editor’s note: Bold added for emphasis)

Personally, I think Robert Shiller may see the current housing and stock market booms as being “frothy.” Consider what I noted back on December 1, 2013- the last time I really brought him up on this blog:

These days, Dr. Shiller is worried about U.S. stocks once more. Madeline Chambers reported on Reuters.com this morning:

An American who won this year’s Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly, he told a German magazine.

Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles, pinpointed the U.S. stock market and Brazilian property market as areas of concern.

“I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets,” Shiller told Sunday’s Der Spiegel magazine. “That could end badly,” he said.

I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable,” he said, describing the financial and technology sectors as overvalued.

(Editor’s note: Bold added for emphasis)

And now, several months later, as I keep reading/hearing the term “new all-time record” in the financial mainstream media outlets?

Yep. I’d venture to guess he’d say frothy- at the very least.

You can read his entire piece on The Guardian website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Peter Schiff On Gold: ‘We’re Going To Have A Big Rally Probably Beginning Here In The Second Half Of 2014’

It’s been a little over a month since I last blogged about “crash prophet” and head of Euro Pacific Capital Peter Schiff. But tonight, I’ll be talking about the first-ever installment of Peter Schiff’s Gold Videocast (which replaces the monthly Peter Schiff’s Gold Newsletter). Schiff, who also heads up Euro Pacific Precious Metals, told videocast viewers on July 9:

I think that the sellers have been exhausted in the gold market, and the buying continues. And when we run out of sellers- again, there’s only one direction for the price of gold. And I think once all of these speculators that have been shorting gold discover that their premise is wrong- that we’re not going to get this vibrant recovery. And that we’re not going to get less QE, we’re going to get more. That we’re not going to get rate hikes, but the Fed is going to keep interest rates at zero in order to prop up this phony, bubble economy that they’ve inflated. You’re going to have to see this mad rush from all the short sellers who are going to be anxious to buy back their money losing positions. But that’s going to be a lot more difficult, because there’s not going to be a lot of gold around. Because a lot of the gold that was liquidated in the second half of 2013 is not going to be available for sale in the second half of 2014. That gold was probably purchased by entities that never intend to sell it.

So I think we’re going to have a real short squeeze and we’re going to have a big rally probably beginning here in the second half of 2014. But maybe gathering momentum as the year comes to a close.

Schiff, who is credited for calling the U.S. housing bust and 2008 economic crisis, added:

I expect the price of silver to rise. Other precious metals- platinum- and commodities in general are all responding to the inflation that the Fed is creating to prop up this phony economy. All the while denying that inflation is a problem.


“Gold Videocast: Gold’s 2014 Half-Time Report”
YouTube Video

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Peter Schiff: ‘We Have An Entire Economy That Is Supported On A Foundation Of Bubbles’

Tonight I watched Peter Schiff’s presentation at the MoneyShow Las Vegas back on May 12, 2014. The CEO and Chief Global Strategist of Euro Pacific Capital shared his current assessment of the U.S. financial landscape in “Too Big to Bail: Why the Next Financial Crisis Will Be Worse Than the Last”- as well as where he thinks we’re heading. Schiff warned attendees:

There is no economic recovery in the United States at all. There is no evidence of an economic recovery. The U.S. economy is in far worse shape than it was on the eve of the 2008 financial crisis. We have never been in as worse shape as we are right now. But they say, “Whoa! But the stock market went up.” Yeah, of course the stock market went up. You print enough money, you can make the stock market go up. Yes, the Federal Reserve succeeded in reflating the stock market bubble. But that’s all that it did. That isn’t evidence of a strong economy. Stock prices went up from 2002 to 2007. Does that mean we had a sound economy? No. We were on the verge of a complete implosion. The main difference though between the stock market bubble that we have today and the one that blew up, let’s say, in 2000, is that fewer individuals are participating. This is the bubble for the 1 percent. This is for the hedge funds, the private equity guys… The overwhelming concentration of buyers are very wealthy people. The average American is not participating in the stock market to the extent that he was in the 1990s. And so the Fed is not getting the boost to consumption that you would normally have from the wealth effect because a lot of people aren’t feeling the effects of the wealth because they don’t own stocks.

The same thing is happening in the real estate bubble, which the Fed has managed to reflate. The difference again between the real estate bubble we have now and the real estate bubble that popped in 2007 is again- the average American isn’t participating. Home ownership rates are at 19-year lows. You have hedge funds and private equity companies that are buying up real estate. Last month, I think 43 percent of all the properties purchased in America were purchased for cash. These are not typical Americans buying houses to live in. These are investors buying houses to flip, buying houses to rent out. This is not a healthy market. It is an extremely speculative real estate market thanks to the Federal Reserve.

So the Federal Reserve has managed to reflate two bubbles simultaneously.

And of course, the biggest bubble of them all is the bubble in the bond market.

So we have an entire economy that is supported on a foundation of bubbles…


“Peter Schiff at Las Vegas Moneyshow 2014”
YouTube Video

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Bearish Peter Schiff Debates Bullish Nouriel Roubini

“How long was I warning about the housing bubble and the financial crisis before it happened? It was years. It takes a while for these problems to surface. We do have an inflation problem. We do have a bubble. And commodity prices are rising. Gold prices are rising.”

-Peter Schiff, debating with noted “bear”-turned-“bull” Nouriel Roubini on CNBC’s Fast Money yesterday


“Roubini vs. Schiff: Who’s “Doomier” on US Economy?
YouTube Video

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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31 Percent Of Chicago-Area Homeowners With Mortgages ‘Seriously Underwater’

Memorial Day Weekend 2007. I had just launched my first blog, Boom2Bust.com, “The Most Hated Blog On Wall Street,” from my apartment on Chicago’s Northwest Side. I remember thinking to myself, “Well, I don’t want to just focus on turmoil in the financial markets as part of a coming financial crash. I also need to talk about the housing bubble and when that monstrosity bursts as well.”

All of it happened (except Washington and the Fed managed to postpone the crash I was- and have been- warning about, leaving us with the “Panic of ’08” and the Great Recession instead), providing me tons of material to blog about over the last seven years.

Now, my girlfriend and I were lucky enought to spot and sit out the housing bubble, eventually picking up a place last year for $117,000 less than it was at the height of the madness (according to one valuation). Regrettably, a number of friends and acquaintances in the Chicagoland area bought homes during the market’s craziest years, when price levels were incredibly high (in my neighborhood, some barely inhabitable “shacks” were on the market for half-a-million dollars back then). I really hope they aren’t “underwater”- owing more on their mortgages than their properties are worth- but I suspect a number of them are. Mary Ellen Podmolik reported on the Chicago Tribune website this morning:

Despite improving home prices, 31 percent of Chicago-area homeowners with a mortgage were seriously underwater in March, owing at least 25 percent more on their home loans than the property’s value, a new report shows…

(Editor’s note: Bold added for emphasis)

31 percent? That’s bad news for the Chicagoland residential real estate market. The last time I talked about the “underwater people” on this blog was last fall, when I blogged:

This past Sunday, I spotted the following about underwater mortgages in my Chicago Tribune. Mary Ellen Podmolik wrote:

A lack of inventory is frustrating potential Chicago-area homebuyers, and a report last week from Zillow explains why some homeowners might like to sell their properties but can’t. Despite improving home values, 35.4 percent of Chicago-area homeowners with a mortgage were underwater at the end of June, meaning they owed more on their loan than the home was worth, Zillow said. That means those homeowners would have to sell their properties through a bank-approved short sale.

(Editor’s note: Bold added for emphasis)

So will that 31 percent “seriously underwater” rate improve anytime soon? Here’s hoping. But considering the economic headwinds still working against housing- I’m not going to hold my breath (no pun intended).

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Podmolik, Mary Ellen. “Almost 1/3 of Chicago-area homeowners still significantly underwater.” Chicago Tribune. 18 Apr. 2014. (http://www.chicagotribune.com/business/breaking/chi-homeowners-underwater-20140417,0,7135589.story). 18 Apr. 2014.

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Peter Schiff: No Recovery, Just An Illusion Of Prosperity

I first started paying attention to Euro Pacific Capital’s Peter Schiff just prior to picking up his book Crash Proof: How to Profit From the Coming Economic Collapse (now Crash Proof 2.0, second edition) shortly after its early 2007 release. While some of the calls he made in that controversial text are still playing out, others have already come to fruition.

Subsequently, Schiff has been given credit for correctly-calling the U.S. housing bubble and its burst, and the 2008 global economic crisis.

Being one of Survival And Prosperity’s “crash prophets,” his latest investment recommendations are chronicled on this blog. As are his economic analyses and forecasts as well.

Here’s a recent breakdown of what Schiff sees going on with the U.S. economy and larger financial system, courtesy of a March 21 commentary entitled “Debt and Taxes” that’s posted on his Euro Pacific Capital website:

The last few years have proven that there is no line Washington will not cross in order to keep bubbles from popping. Just 10 years ago many of the analysts now crowing about the perfect conditions would have been appalled by policies that have been implemented to create them. The Fed has held interest rates at zero for five consecutive years, it has purchased trillions of dollars of Treasury and mortgage-backed securities, and the Federal government has stimulated the economy through four consecutive trillion-dollar annual deficits. While these moves may once have been looked on as something shocking…now anything goes.

But the new monetary morality has nothing to do with virtue, and everything to do with necessity. It is no accident that the concept of “inflation” has experienced a dramatic makeover during the past few years. Traditionally, mainstream discussion treated inflation as a pestilence best vanquished by a strong economy and prudent bankers. Now it is widely seen as a pre-condition to economic health. Economists are making this bizarre argument not because it makes any sense, but because they have no other choice.

America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity. To do this you must convince people that inflation is a good thing…even while they instinctively prefer low prices to high. But rising asset prices do little to help the underlying economy. That is why we have been stuck in what some economists are calling a “jobless recovery.” The real reason it’s jobless is because it’s not a real recovery! So while the current booms in stocks and condominiums have been gifts to financial speculators and the corporate elite, average Americans can only watch from the sidewalks as the parade passes them by. That’s why sales of Mercedes and Maseratis are setting record highs while Fords and Chevrolets sit on showroom floors. Rising prices to do not create jobs, increase savings or expand production. Instead all we get is debt, which at some point in the future must be repaid

(Editor’s note: Bold added for emphasis)

“Which at some point in the future must be repaid”

Good luck trying to get your average American in 2014 to wrap their head around that crucial concept.

Once again, I agree with Schiff’s observation of what is going on all around us.

“Illusion of prosperity” is a fine choice of words here, and makes sense that I find a fine economic blog by the same name good reading.

As certain as the “Big One” will eventually hit California, so must our nation’s “financial reckoning day” arrive for all this debt we’ve accrued for some short-term “prosperity.”

You can read Schiff’s entire commentary on the Euro Pacific Capital website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Jeremy Grantham: Bonds Dangerous, U.S. Stocks Not In Bubble, Sees Value In Foreign Stocks

I just got finished reading an interview of British-born investment strategist Jeremy Grantham on the Barron’s website. I’ve been so busy lately I haven’t gotten the chance to read his latest investment newsletter, but here’s what the founder and former chairman of Grantham, Mayo, Van Otterloo & Co. (GMO) is saying these days about bonds, a U.S. stock bubble, and potential investment opportunities out there:

Bonds

They look absolutely, nerve-rackingly overpriced, and in a crisis, who knows what will happen to those securities? They could make stocks look like a safe haven if the next bust occurs at the federal levels of the large countries. Bonds, including government bonds, are a lot more dangerous than people imagine.

U.S. Stock Bubble

We are not even that close to a bubble… They’re 65% overpriced. If they go up another 30%, you would have a true bubble, at which point stocks would be close to twice their fair value. Similarly, in 2000, stocks were more than double their fair value. So they are quite capable of doing that. But my point is that with the professionals getting reinforced by the Fed going back to 1994, it will be very surprising if they don’t keep on playing this game until the market at least hits a classic bubble definition. Bubbles don’t usually stop until sensible investors, value investors, and prudent investors have been hung out to dry and kicked around the block. That hasn’t happened yet, so that tells you there is probably quite a bit left in this rally.

Potential Investment Opportunities

Because of some secondary factors, there are pockets of global equities that haven’t been swept along to anywhere near bubble territory. Emerging markets collectively are selling at very close to fair value. And the value stocks in most of Europe are pretty close to fair value. High-quality stocks in the U.S. are not nearly as bad as the rest of the market. So you can patch together global equities and get a semi-respectable-looking portfolio…

(Editor’s note: Italics added for emphasis)

You can read the entire interview here on the Barron’s website. It’s a good one.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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