stock bubbles

Signs Of The Time, Part 87

It’s been interesting watching the run-up to the recent carnage on Wall Street.

For some time now, the “crash prophets” who correctly-called the housing market bubble and 2008 economic crisis have been warning the stock market was frothy, if not in bubble territory.

Meanwhile, the Pollyannas who didn’t see either of those events from the last decade convinced themselves that not only had the United States managed to get on solid footing again after the blatant “papering over” of the debacle that reared its ugly head seven years ago, but that U.S equities and their valuations were a fair reflection of an economic “recovery” that was charging “full-steam ahead.”

At the same time, the Pollyannas (with the assistance of the financial mainstream media) ridiculed the “prophets” at any chance they got.

Reminds me a lot of that time period from roughly 2004 to 2008, until the Pollyannas got spanked hard and many of their mouthpieces were put out to pasture.

Make no mistake about it, America’s financial crash is coming.

The powers-that-be can only “kick the can down the road” until the road runs out. And that time is almost here.

Is the recent stock market plunge the event that pushes us over the edge?

I’m not sure it is. That being said, the dive has resulted in some serious financial losses. Steve Goldstein, the D.C. Bureau Chief for the MarketWatch website, wrote this afternoon:

As of March 31, households and nonprofits held $24.1 trillion in stocks. That’s both directly, and through mutual funds, pension funds and the like. That also includes the holdings of U.S.-based hedge funds, though you’d have to think that most hedge funds are held by households.

Using the Dow Jones Total Stock Market index through midmorning trade, that number had dropped to $22.32 trillion.

In other words, a cool $1.8 trillion has been lost between now and the first quarter — and overwhelmingly, those losses occurred in the last few days…

(Editor’s note: Bold added for emphasis)

$1.8 trillion. Whew. After riding the bull for so long, it looks like the Pollyannas weren’t expecting the beast to pull an abrupt about-face… and gore them.


The White Stripes, Conquest (2007)
YouTube Video

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)

Source:

Goldstein, Steve. “Households just saw $1.8 trillion in wealth vanish as stocks fall.” MarketWatch. 24 Aug. 2015. (http://www.marketwatch.com/story/households-still-hold-22-trillion-in-stocks-even-after-market-rout-2015-08-24). 24 Aug. 2015.

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Jeremy Grantham Identifies 10 ‘Potential Threats To Our Well-Being’

Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (oversees $117 billion in client assets as of June 30, 2015), just released his latest investment letter on the GMO website. Writing about the second quarter of 2015, Grantham, whose individual clients have included current Secretary of State John Kerry and former Vice President Dick Cheney, focused on ten “potential threats to our well-being” (echoing a Morningstar piece I blogged about on July 14). These threats are (in his own words):

1. Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3%
2. The age of plentiful, cheap resources is gone forever
3. Oil
4. Climate problems
5. Global food shortages
6. Income inequality
7. Trying to understand deficiencies in democracy and capitalism
8. Deficiencies in the Fed
9. Investment bubbles in a world that is, this time, interestingly different
10. Limitations of homo sapiens

Grantham talked about each threat in detail. I’ll be focusing on those items I think would interest Survival And Prosperity readers.

Regarding pressure on U.S./developed world GDP growth, Grantham wrote:

Factors potentially slowing long-term growth:
a) Slowing growth rate of the working population
b) Aging of the working population
c) Resource constraints, especially the lack of cheap $20/barrel oil
d) Rising income inequality
e) Disappointing and sub-average capital spending, notably in the U.S.
f) Loss of low-hanging fruit: Facebook is not the new steam engine
g) Steadily increasing climate difficulties
h) Partially dysfunctional government, particularly in economic matters that fail to maximize growth opportunities, especially in the E.U. and the U.S…

On “plentiful, cheap resources” being gone:

All in all I am still very confident, unfortunately, that the old regime of irregularly falling commodity prices is gone forever…

On oil:

Oil has been king and still is. For a while longer… Now, as we are running out of oil that is cheap to recover, the economic system is becoming stressed and growth is slowing…

Grantham added:

The good news is that with slower global growth and more emphasis on energy efficiency and a probability of some carbon tax increases, global oil demand may settle down to around 1% a year for the next 10 to 15 years. At that level of increase in demand, even modest continued increases in recovery rates will keep us in oil even if no new oil is found for the next 15 years.

Beyond 15 years, the resource and environmental news gets better because cheaper electric vehicles and changes in environmental policy will enable steady decreases in oil demand…

On global food shortages, Grantham referred to some recent research. He wrote:

I was completely gruntled by a report last month from the Global Sustainability Institute of Anglia Ruskin University in the U.K. This unit is backed by Lloyds of London, the U.K. Foreign Office, the Institute of Actuaries, and the Development Banks of both Africa and Asia – a grouping with a very serious interest in the topic of food scarcity and societal disruptions to say the least. The team of scientists used system dynamic modeling, which uses feedbacks and delays, to run the business-as-usual world forward 25 years. Without any new and improved responses from us, the results are dismaying: Prices of wheat, corn, soybeans, and rice were all predicted to be at least four times the levels of 2000. (They are currently about double.) The team concluded, “The results show that based on plausible climate trends and a total failure to change course, the global food supply system would face catastrophic losses and an unprecedented epidemic of food riots. In this scenario, global society essentially collapses as food production falls permanently short of consumption.” And you thought my argument on food problems of the last three years was way over the top!

Grantham is still not impressed with the Federal Reserve. He predicted:

And what of the current Fed regime – the Greenspan-Bernanke-Yellen Regime – that promotes higher asset prices and lower borrowing costs, which facilitate stock buybacks amongst other speculative forces? Well, this regime, too, will change. Regression of regime, if ou will. Painfully, politicians, the public, businessmen, and possibly even some economists will recognize the current regime as a failed experiment.

And on the “limitations of homo sapiens”? Grantham observed:

Not only does our species have a strong predisposition to be optimistic (or bullish) – it is probably a useful survival characteristic – but we are particularly good at listening to agreeable data and avoiding unpleasant data that does not jibe with our beliefs or philosophies. Facts, whether backed by 97% of scientists as is the case with man-made climate change, or 99.9% as is the case with evolution, do not count for nearly as much as we used to believe. For that matter, we do a terrible job of planning for the long term, particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math. All of this makes it easy for us to forget about the previously painful market busts; facilitates our pushing stocks and markets on occasion to levels that make no mathematical sense; and allows us, regrettably, to ignore the logic of finite resources and a deteriorating climate until the consequences are pushed up our short-term noses.

The take-away from all of the above?

• Grantham forecasts U.S./developed world GDP growth to slow to 1.5 percent
• Investment opportunities may exist in commodities, agriculture, and other things food-related
• The outcome of the Fed’s current monetary policies will be painful
• Human nature- in particular, our unbridled optimism and focus on short-term gratification- will continue to result in asset bubbles and longer-term problems outside of the financial markets/economy/larger financial system

You can read Grantham’s latest investment newsletter on the GMO site here.

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: ‘Gold’s Going To Take Off’ When Fed Doesn’t Raise Interest Rates, Starts QE 4

Economist, financial broker/dealer, and author Peter Schiff appeared on the Fox Business Network yesterday. As the price of gold hit a 5-year low, the noted gold bull was asked his thoughts. Referring back to the dot-com bust and gold’s subsequent lift-off into the 2000s, Schiff told viewers:

I think people are making the same mistake again. They have faith in the Fed. They have faith in Yellen. This is the biggest bubble ever. And I think people should be buying gold, but they don’t know enough to do it.

Schiff, who correctly called the housing bust and 2008 economic crisis, added later:

The dollar has been rising on the idea that the Fed is going to raise rates. But I don’t think that it’s actually going to happen. I don’t think the Fed can raise rates. That’s why they’ve been at zero for seven years. This bubble is so big that even a small rate hike will prick it. So I think all the Fed can do is talk about raising rates. They know that they can’t do it. Now, could they do a 25-basis point hike just symbolically to pretend that they’re going to do more? Maybe. But I don’t even think they’re going to do that. I think they’re going to do QE 4, and when the market comes to terms with reality, gold’s going to take off. But when people are going to wake up? I can’t tell you. It’s amazing that they’re so clueless for so long.


“Gold Will Take Off Once Market Comes to Terms With Reality”
YouTube Video

The CEO and chief global strategist of Euro Pacific Capital remarked that he tells people to have ten to fifteen percent of their portfolio in gold, and still stands by the recommendation.

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 Shares Top 10 Issues On His Mind Today

The last time I blogged about Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (oversees $118 billion in client assets as of March 31), he warned (once again) in an investment letter released around the start of May:

It seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet…

To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250…

(Editor’s note: The S&P 500 ended the day at 2,109)

Grantham, whose individual clients have included current Secretary of State John Kerry and former Vice President Dick Cheney, should be coming out with a new advisory on the GMO website in a couple of weeks. Meanwhile, for readers who can’t get enough of Mr. Grantham’s insights, this afternoon I came across a piece on the Morningstar website entitled “10 obsessions of an investment guru.” Jason Stipp wrote right before the weekend:

Jeremy Grantham is the chief investment strategist at Grantham Mayo van Otterloo (GMO). Before launching into his formal keynote presentation at the 2015 Morningstar Investment Conference at Chicago, Grantham took a moment to tick off the top 10 issues on his mind today.”In my current role, I’m totally free to obsess about important issues that interest me,” he said. And here they are, fleshed out a bit with some quotes from Grantham’s commentaries…

Those who pay regular attention to Grantham will recognize some of those issues, including resource “limitations” and a Federal Reserve that’s forever blowing asset bubbles. However, in the Morningstar piece he also talks about income inequality, corporate (ir)responsibility, and, did I mention investment bubbles? From the article:

10) Investment bubbles. Grantham said we’re not there yet, but we’re well on our way as valuation levels approach the 2-sigma event that creates the sufficient but not necessary environment for bubbles. But every bubble needs a trigger — such as deal mania or mass speculation by individual investors. Those factors are not yet present, Grantham said. “I’m going to be incredibly prudent starting closer to the election,” Grantham added. “I recommend the same to you.”

This is a good read, which you can view in its entirety on the Morningstar website here.

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 Hell-Bent On Stimulating Asset Prices Until ‘Fully-Fledged Bubble’ Forms

Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (oversees $118 billion in client assets as of March 31, 2015), has just released his latest investment letter on the GMO website. Writing about the first quarter of 2015, Grantham, whose individual clients have included current Secretary of State John Kerry and former Vice President Dick Cheney, focused on U.S. economic growth and the bubble-blowing Federal Reserve. Regarding growth, Grantham wrote:

I am still just about certain about three things: first, our secular growth rate in the U.S. is indeed about 1.5% (at least as stated in traditional GDP accounting, wherein expensive barrels of oil increase GDP; perhaps closer to 1% in real life); second, economists move their estimates slowly and carefully in order to stay near the pack and minimize career risk (despite the recent IMF heroics); and third, that we do not like to give or receive bad news and, when in doubt, we tend to be optimistic…

On the Federal Reserve and asset bubbles, Grantham noted:

In the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully-fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet

To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250…

(Editor’s note: Bold added for emphasis)

The S&P 500 finished up today at 2,114.

Back on August 4, 2014, I blogged about Grantham’s second quarter 2014 letter, in which he predicted:

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

Grantham’s other forecasts in his latest letter on the GMO website included:

• U.S. Economic Cycle- “Still seems only middle-aged, despite its measured long duration”

• U.S. Housing Market- “In terms of houses built is still way below the old average, and house prices are only around long-term fair value; there is room for improvement in both in the next two years.”

• U.S. Stock Market Correction- “We could easily, of course, have a normal, modest bear market, down 10-20%, given all of the global troubles we have. If we do, then the odds of this super-cycle bull market lasting until the election would go from pretty good to even better.”

As I’ve highlighted on the “Crash Prophets” page, Jeremy Grantham has an incredible knack for identifying changes in the direction of the stock market. He also nailed the economic crisis late last decade. However, I don’t know how what kind of track record he has with correctly-calling the economic and housing cycles. I guess I’ll just have to see how these two pan out.

An update to the “7-Year Asset Class Real Return Forecasts” chart was also provided in “Are We the Stranded Asset?”, which can be viewed in its entirety on the GMO website here (.pdf format; starts p. 7).

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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GoldSilver.com’s Mike Maloney Sees Stock Market Crash Coming In Near Future

Yesterday, I noted the bull market in U.S. stocks turned 6.

Subsequently, I’ve been dying to hear what certain individuals in the finance/investing world think where equities might be heading from here.

Enter Mike Maloney, who I blogged about back on January 21. I wrote at that time:

Regular Survival And Prosperity readers may recall that GoldSilver.com used to be an affiliate marketing partner of the blog. Great company (specializes in the instruction of precious metals investing and providing world-class gold and silver dealer services and products), but they pulled the plug on their affiliate marketing program not too long ago. Anyway, I still receive e-mails from the Santa Monica, California-based operation, and yesterday I watched a video by Mike Maloney, the precious metals expert, advisor, and author who heads up the firm. Maloney has been an advisor to Robert Kiyosaki of Rich Dad Poor Dad-fame, and even wrote a book about investing in gold and silver under the Rich Dad’s Advisors series.

Maloney discussed the potential ramifications of the Swiss franc being unpegged from the euro in that GoldSilver.com video. Seizing upon another current event (the booming stock market), he warned viewers in a different video today:

Is there a stock market crash coming in your near future?

And I believe that there is…

The current stock market bull market that we’ve seen since 2009 is just a cyclical bull within a secular bear. And that it’s probably peaking and it’s going to continue down.


“Stock Super Bubble Setting Up For Crash – Mike Maloney”
YouTube Video

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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Tuesday, March 10th, 2015 Bubbles, Investing, Precious Metals, Stocks No Comments

Robert Shiller: ‘I’m Thinking Of Getting Out Of The United States Somewhat’

The second topic from earlier this week I’ll be revisiting tonight is Robert Shiller. The Nobel Prize-winning economist was on CNBC’s Squawk Box TV show Wednesday and talked equities (among other things) with Becky Quick, Andrew Ross Sorkin, and Brian Sullivan. From their exchange:

SHILLER: The things that is really striking- and maybe not today- is the low-level, long-term interest rates. It is just stunning how low they have gotten. Recently, the 30-year TIPS real rate was at half-a-percent. That’s incredible for 30 years. And that is pushing the stock market up. But it’s not the kind of euphoria that we saw notably in 2000.
SORKIN: What percentage do you have in equities?
SHILLER: It’s about half.
SORKIN: Half?
SHILLER: Yeah.
SORKIN: Have you changed it recently? Will you change it?
SHILLER: Yeah. I’m thinking of getting out of the United States somewhat.
SORKIN: You are?
SHILLER: Yeah. I think Europe is so much cheaper.
SORKIN: And you’d buy big multinationals based in Europe? You’d buy smaller companies in Europe? What would you do?
SHILLER: Well, what I have done is I’ve invested in Italy indexes. Spain index.
SORKIN: Are you hedging currency?
SHILLER: No, I’m not.


“Shiller: Europe so much cheaper than US”
CNBC Video

The Yale professor talked about exiting his U.S. stock positions not too long ago. I blogged on December 10, 2014:

Dr. Shiller appeared on CNBC Tuesday morning and told viewers the following when asked what he’s doing with his own money:

I worry about valuation in the stock market. And I’ve been wondering if I should pull out. But I have not. And in fact I’m still thinking that even at the CAPE ratio of 27, the expected return is still higher than you expect to get on either housing, on real estate, or fixed income. So it still seems like- I feel a little trepidation because I know my own indicator is looking kind of scary. I wouldn’t over go into the market, but I wouldn’t be completely out either.

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)

Dr. Shiller’s latest book (revision, actually)…

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