PEfer Madness

Are stocks overvalued?

Here is a metric that is accurate back 150 years - the Shiller Price/Earnings Ratio.

This looks at average prices divided by the previous ten years earnings.  It signals massive overbought when the ratio hits 26.6.  It is 26.7 now.  This is about the same level that it was at just before the market crash in 1929.

So, this week I have shown you that the velocity of money is at its slowest since the Great Depression, and that stocks are as overvalued as they were just before that depression started with a massive stock market crash in October, 1929.  The writing is on the wall people.

But what will be the trigger?

Trump was elected promising trade wars.  The markets went up on the hopes for more tax cuts and a happy consumer.

The Italian referendum was a bust.  The markets went up on the promise of even more ECB stimulus.

This was all good, but in the next 7 days we have a very significant happening.

On December 14, the US Fed will increase interest rates for the second time in 8 years. What if they surprise us and raise them by half a percent?

The last time the US Fed raised rates, markets moved lower by 11%.

Dump your stocks and buy Gold.

It is going to fall....

We have seen two massive pull-backs in the DOW in the last 18 months...

May 11 '15, 18,272

Aug 31 '15, 16,102

That was a 11.8% drop in 3.5 months

Nov 2 '15, 17,910

Feb 8 '16, 15,973

That was a 10.8% drop in 2.5 months.

We have seen a 6.8% rise in the last five weeks...apparently because Donald Trump was elected.

Oct 31 '16, 17,888

Dec 5 '16, 19,211

There will be another drop.  

The last time a new president took office, the DOW dropped from about 8,500 on election day to 6,626 on Mar 2, 2009.  That was a 22% drop in 3.5 months.

And the time before that, when Bush became president, the DOW was at 10,434 when he was confirmed by the US Supreme Court.  On Sept 10, 2001, it was 9,065...a 13% drop in 10 months.

The year after a new president takes office has historically seen a significant pull back in the markets at some point. The only exception in the last 45 years was Clinton.

Moving along.....slowly

Velocity of Money:

"The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy."

Roughly speaking, "Hot" economies drifting toward inflation have a high velocity of money as more money chases fewer goods.  "Cool" economies see the opposite as spending dries up no matter what prices are offered.

From the late 1950's to the end of the early 1990's recession, the velocity of money (M2 - cash plus savings and other deposits) moved within a fairly narrow band.  At its lowest it was 1.655 (1964), and at its highest it was 1.932 (1981).

Then in the 1990s the VOM started to grow markedly.  In 1992, it hit its highest level up to that time at 1.937 and it kept rising until it hit 2.206 in 1997.

It started to drop prior to the recession in 2001, dropping to 1.923 in 2003, then recovered to 2.034 in 2006.

Since that year it has been trending down steadily.  In 2011, it dropped below its 1964 post-WW2 low and hit 1.653.  It has continued to drop since so that today it is 1.438.

There is a direct correlation between recessions and the slowing down of the velocity of money.  The early 1980's recession; the early 1990's recession; the collapse of the tech bubble in 2001 and resulting recession; and the Great Recession of 2008 - 09 were ALL identified by significant drops in the VOM.

Here is a rather sobering graph....

The VOM is now at its lowest point EVER - even below the level it was at during the Great Depression.

To repeat - the VOM has NEVER been lower than it is now. It has plummeted since 2006, in spite of massive injection of stimulus into Western economies.  One could predict a recession from this...but the fact is that we have never seen a situation like this before, outside of the Great Depression.

But Wait! Wouldn't adding more dollars normally caused the VOM to fall as more dollars would normally slow all the other dollars in the economy down?

The whole point of stimulus is that adding more cash to the economy is supposed to cause those "more dollars" to chase relatively "fewer goods", therefore encouraging the creation of more goods to meet the demand of the more dollars.  The result should be a VOM that stays in a predictable range as economic activity picks up to match the stimulus that was added.

But the "more dollars" that have been added, especially since 2008, are not really chasing much more in the way of new goods, so the VOM is falling...OK, it is collapsing. In classical Keynesian economics, this isn't supposed to happen.

Would there be ANY real economic growth absent 1% interest rates, and massive government borrowing and spending?

What if we were in a depression, and no policy maker, bought-off media talking head, or politician would admit it?

Dump your stocks, take your profits, and buy Gold.

Eco Update

Hello readers!  Apologies for my lengthy absence - I have been writing a "Good, Bad and Ugly" for WW2 fighter planes, and it has become more involved than originally intended.

Today - the economy!

Here are some basic realities that will drive economic policy for the next decade.

1. The USA is close to broke.  As of right now the US Government owes $19.842 Trillion. The budget deficit is almost $600 Billion a year. They paid $432 Billion in interest on their debt last year, and they pay a remarkably low 2.216% interest on their debt. If interest rates on this debt rose even 1%, this would increase their interest payments to close to $650 Billion a year, which means they would have to come up with an extra $200 Billion just to pay interest on their debt. A 2% rise could force the USA into a debt death spiral requiring massive austerity and tax increases. They can't go there.

We know that rates are set to rise, and so, interest payments on the US debt will also rise, just as Trump promises to spend trillions on infrastructure. Janet Yellen advised Congress yesterday that she thinks the US Fed should let the economy run a bit. TRANSLATION....she thinks that the US Fed should let inflation run ahead of interest rates, which would slowly but surely reduce the real value of the US Government's debt. This would be good for US Government finances in the long run. It will also slowly but surely destroy the value of interest bearing assets such as bonds as it would mean a long-term negative interest rate. Retirees and others who rely on interest-bearing assets for their livelihood who have nowhere to turn, except to accept risks in the equity markets.

2. Business Profits are Declining.  Look at the chart below...

  

There is a direct correlation between rising profits and stock market appreciation. Declines like this almost always lead to significant market pull-backs.

3. US Productivity growth is close to stalled.

Productivity growth in the USA is just about tapped out. This is the underlying driver for economic growth. When it stalls, everything stalls. It stalled.

So what does this mean?

Negative interest rates are certain to drive the price of Gold as it is an asset that will hold its value no matter what. While negative rates should also spark a flight to equities, declining corporate profits are certain to hammer the US equity markets, at least in the short run.

So - short the markets and buy Gold.  Hold.  You will be rewarded.

World Trivia Night

Here is a useful site....

https://www.cafott.ca/en/events/world-trivia-night/wirecratscom5/ron-heale

I play trivia in support of a children aid foundation charity.  They do great work. Please consider supporting my team - the Wirecrats!

Thanks!

Welcome to Denny's, circa 2019

It happened.

I attended an Ottawa Champions baseball game on September 2, 2016.  I arrived late.  I walked up to the ticket window.

I offered $15 - a $5 bill and a $10 bill.  The attendant looked at me, took the $10 bill, and gave me a ticket. I thought, "How odd. Tickets are $12 for adults, and he charged me $10.  Surely he was mistaken!"

Then I looked at the ticket prices.  It was $12 for adults, and $10 for seniors over 65 years of age.

OMG!!!!! He thought I was a senior!

For the record, I was 52 years, 8 months, 23 days old when I was first pegged as an oldster!

I used to joke that I will qualify for the Denny's seniors discount when I turn 55...in a little over 2 years.

I'm not joking now.

Iraqi Malibu Taxi

It was 1981. Iraq needed taxis.  Saddam Hussein approached GM Canada, and the result was an order for 25,000 specially modified Chevy Malibus.

They had six cylinder, 110 hp engines. They had bench seating in the front.  They had no rear defog...not needed in Iraq. They had three-speed manual transmission, with the stick on the floor. The back windows did not roll down.

My dad bough one in 1982 when Iraq canceled the second half of the order, and the cars were dumped on the Canadian market. He gave it to me when I went to school in 1983. The Iraqi Malibu was my first car.

And what a car! I thought it was the coolest car in the world! It was Battleship Grey! It had a favourite highway speed of about 140 km/h! Its stereo was loud enough to cover the screaming coming from the brakes when they needed work and made noise that was loud enough to attract grimaces from all on-lookers as I drove down the road. (NB - When I finally got the car serviced, the front brake assembly actually fell off onto the ground when the mechanics put the car on a hoist and took the front wheels off to take a look at what was causing all that noise.) Forget the Cameros, Mustangs and Thunderbirds....I had a babe magnet!

Just look at it! This is very close to what the car looked like!



OK, that's a slightly used one.  Here it is new...



After a whole four years of hard service, I gave the car back in 1986. As my dad drove it down main street in the Luckiest Little Town In The North one sunny summer day that year, the front right wheel came right off and rolled into a ditch....and that was the end of the Malibu.

My next car was a 1980's Ford Mustang...enough said.