Inversion Invasion!

Why does an inverse yield curve matter?  How good is it as a predictor of future bad economic times?

An inverse yield curve means that interest rate yields for long term bonds are less than the yields for short term bonds.

You need to know two things…

1. Usually, long term bonds pay more interest, because they require that the bond-holders tie their money up for a longer period of time.

2. Bonds are bought and sold. The more that bonds are in demand, the higher the price for those investments, and the lower the corresponding yield.

So when yields on long term bonds are lower than yields on short term bonds, this means that some investors are buying enough of those long term assets to drive yields down to a point where they are actually below the yields on short term assets. This happens as a result of a “flight to safety”. Long term bonds - and we are talking about government bonds here – are generally considered to be safe assets. Although they provide little return to investors, they do serve to conserve wealth in difficult times, as they historically hold their value and even pay small rates of interest to investors when the stock market and the prices of other assets, like houses, tumble.

So an inverted yield curve means that some investors are taking cash out of more risky investments like the stock market, and they are parking their money somewhere that is generally considered to be very safe. 

Do you see a pattern to my recent blogs? In this uncertain and chaotic time, don’t stand pat...stay nimble and try to follow the "smart money"!

How good is this indicator?

Inverted yield curves are considered to be almost 100% predictive of recessions. On average, a recession follows about 9 months after the yield curve first inverts. 

This makes sense, as an inverted yield curve is actually saying that the “smart money” thinks we are at the end of an economic growth cycle and the economy is about to turn sour, otherwise they would not be seeking safer investments for their money.

The yield curve in the United States first inverted last Spring, and has done so twice since.

I’m just saying….

Caveat!  Virtually every single time that the yield curve inverts, a veritable army of professional talking heads takes to the airwaves and to the Internet proclaiming the reasons why it does not matter this time! History says something completely different.  

Do your own due diligence!

Francis Speaks! (Not the Pope)

Francis Fukuyama famously announced "The End of History" after the end of the Cold War. Basically, with the defeat of Communism, we were said to have reached the end of experiments with governing systems, and to have arrived at a point where democratic forms were universally acknowledged as the end point of human political development. If only...

Fukuyama moved on from this and has looked at what happens to those same democracies that he previously proclaimed were "the end point".  This, from his book, "Political Order and Political Decay", seems to capture the essence of our present time....

"Natural human sociability is based on kin selection and reciprocal altruism - that is, the preference for family and friends. While modern political orders seek to promote impersonal rule, elites in most societies tend to fall back on networks of family and friends, both as an instrument for protecting their positions and as the beneficiaries of their efforts. When they succeed, elites are said to "capture" the state, which reduced the latter's legitimacy and makes it less accountable to the population as a whole. Long periods of peace and prosperity often provide the conditions for spreading the capture by elites, which can lead to political crisis if followed by an economic downturn or external political shock."

Do we need more tax cuts for rich people?

Still reading Mueller's Tome...stay tuned.

Update on Insiders!

Since this blog.....

https://mewetree.blogspot.com/2019/08/bubble-ii-deeper-dive.html

Zuckerberg has sold hundreds millions of dollars worth of Facebook shares, and Cook has sold at least tens of millions of dollars worth of Apple shares.

These men own billions of dollars worth of shares, so they are not dumping everything. 

But they are selling - that matters.  

They are likely not selling because they think there is a huge upside to these companies. If they are selling Facebook and Apple, and you own them, you need to seriously consider selling too.

Again - before a serious stock market pull back, the smart money will get out. These are two of the smartest people in the world and they are selling.

Yup...I'm just saying...

World Leaders!!!

Comments on various World Leaders! Are they unhinged??? Are they really on top of the world?

The Donald!

Trump is not unhinged.  

He knows exactly what he is doing – anyone who can successfully balance the many, many balls in the air that can destroy him as long as he has without being crushed is a genius.  

He is also obviously Putin’s man – he probably was paid to launder hundreds of millions of dollars’ worth of Russian Oligarchs money in the early 1990s to avoid bankruptcy (…this is why he will not release his tax returns, which will show an inexplicable turn around in his fortunes about 25 years ago…), and he has been Putin’s bitch ever since.  

He won the presidency by running a better campaign than Hillary, who lost as she ran a terrible campaign (BTW – “MAGA” was brilliant, speaking directly to American angst.) He will likely lose in 2020, as we will be in a recession by then and the next Democrat will just run a normal campaign, in which case Trump simply does not have the votes – Biden is 8% ahead of Trump in polls. Trump’s only hope is a third-party socialist who attracts 10% of the vote and destroys the Dems…or that Hillary will run again. I still think she will.

Mini-T!

Trudeau is not unhinged.  

He is likely less ethical than Trump, having gone so far as to breach ethics laws twice in one term, and to have obstructed justice to help his friends. In an older era, he would have resigned in disgrace.  

Like Trump, where Putin has stuff on him, it may be that SNC Lavalin has something on Trudeau. His understanding of economics is that of a man who has never had to work for a living. His stance on Global Warming is a fraud. He is lost without Butts as he is not a smart person.  

Unlike Trump, who realizes that he is just the President, Trudeau thinks he is Canada. He will govern for 20 years – I predict a 5 – 10 seat Liberal majority this year, but with only 36% of the popular vote. This is about to be a repeat of Bob Rae’s victory in 1990.

Macron!

Macron is not unhinged.  

His love of an older woman is genuine and guarantees him a massive amount of support from women in France, who are the majority of voters. Like so many Frenchmen, his wife is partly for show – I have to wonder if he has other younger women on the side, and she is likely OK with that?  

He stood up to the Yellow Vests, and won, and he is making significant changes to the French economy for the first time in 40 years. On that, it is very rare for a French politician to stand up to anyone at the barricades!  

Finally, he is positioning France for the inevitable day when the USA leaves Europe, when the French think they will be the political leaders of the continent again. He thinks he is The Sun King, reborn…he may be right.

Boris!

Boris the Spider is not unhinged.  

He is trying to crush the Europhile arm of the Conservative Party in Britain, which has divided that party since 1973, thinking that if he can do that then the party will emerge more unified than at any time in the last fifty years; ready to run the country for the next fifty years. That he is wrong in this is not his fault – Brexit could destroy the Conservatives, as it will reveal just how many risks they are willing to take with the country’s future in aid of parochial party politics.  

His prorogation ambit is designed to get Parliament out of the way so he can negotiate a Brexit deal – he understands the risks, and he does want a deal. He is a gambler, not at idiot. 

The person he has not reckoned with is QE II. I think there is a 50/50 chance she will first prorogue for Boris, but then in a few weeks she will dismiss him and force an election - which will effectively be a second referendum. The risks are now to the UK itself, as the Scots and Northern Ireland could leave without Britain in  Europe – if he won’t protect the union, she just might….got to keep the Summer residence in Scotland, after all!

The Papacy!

The Pope is not unhinged.  

He is taking on a completely rotten edifice of massive proportions that has needed a house cleaning for over 100 years. He needs to root-out pedos, money launderers, and anti-abortion fascists. He is making progress. 

Specifically, he has focused his attention on saving souls and doing good works, and not anti-abortion and anti-gay culture wars; he has forced the Vatican (a.k.a. The Mob) Bank to follow international banking laws, ending the money laundering; he has set up a separate bureaucracy at the Vatican, destroying the power of the Curia (the old Vatican bureaucracy that protected so many monsters and allowed so much unethical behaviour…); and he has reamed-out the bishops and archbishops and cardinals over many of these issues, especially the pedo stuff, where he has forced reforms including the immediate communication of information of abuse to the civil authorities. 

What is at risk is the future of the Church itself. I am a Catholic. I would give him a “B –“ so far.  While there are a lot of things that I would like him to do, when he excommunicates pedo priests; allows priests to marry; and closes the seminaries that operate like pedo recruitment centers, he gets an “A –“.   

He is the first Jesuit Pope. In the 1930’s, when the Dominicans wanted to make a deal with Hitler, the Jesuits wanted to launch a culture-war against his pagan state and destroy him – they do not fool around (…unfortunately for history, the Dominicans won that argument.) 

I expect much more from this Pope. Specifically, I expect a mass dismissal of scores of bishops and archbishops and cardinals, in a Catholic “night of the long knives” to root-out all the scum bags, all at once. But first he needs Benedict to die, so these people have no one to turn to in order to try to launch a counter-attack by claiming that Benedict is the “real Pope”. When this happens, the Laity will be cheering him on.

The others? 

Xi is on the ropes – if the economy continues to slow – it probably has zero growth now - and he can’t stop the problems in Hong Kong, the Communist Party could be in serious peril. This regime has to shoot people to survive, and Hong Kong is showing that they can’t just shoot people anymore, which is the eventual end of their regime. Trump is strangling him to death.

Putin is less and less popular in Russia. Expect a foreign adventure soon, which is what he does when his popularity wanes. It may not work this time. Tens of thousands of people took to the street to protect against him a few weeks ago. 

A lesson from history - strongmen only appear strong until they are not, and it is only when they are gone that their previous weaknesses becomes apparent. Putin may be a façade.

Rouhani and Khamenei in Iran are in serious trouble as the place may be about to implode, courtesy again, of Trump who’s real goal is regime change. The people are going hungry under the sanctions – no amount of anti-Israeli propaganda and fake religious fervour can address empty stomachs. They have had very serious demonstrations there in the last few years, bordering on violent insurrection. This will come to pass.

Finally, Assad will be assassinated at some point by supporters who likey can’t take living in a modern version of Nazi Germany anymore. I suspect that even he knows he is a “dead man walking.”

Bubble II - A Deeper Dive

I noted the five phases of a bubble in the last post. 

Let's take a brief look at a few classic signs that a stock market bubble is about to burst: 

i) Few Advancers: the phenomena of a rising stock market led by very few stocks, meaning most of the market is actually flat or declining; and, 

ii) Smart Money: the spectacle of the "smart money" getting out - the essence of the fourth or "Crisis" phase of a bubble.

Regarding the first phenomena, this is easy.  

Last year six companies - Yahoo, Microsoft, Netflix, Amazon, Apple and Facebook - accounted for 99% of the net gain in US stock markets. Don't look for this to happen - we are already there. The market is only being kept up by corporate buy-backs aided and abetted by the US Fed.

Regarding the second phenomena, watch for any sign that the Buffets and Dimons of the world are selling shares. No matter what reason they give for selling, when they start selling then you need to be selling too.

And when they start selling, you will be hit with a bombardment of idiotic propaganda telling you to stay in no matter what! For example, see many articles and commentaries on CNBC now!  

Aside - if "you can't time the market"...then why has the smart money done precisely that, again and again throughout history? Answer - Because you can, that's why! 

Consider that in 1929, most of the smart money got out just before the crash...Joseph Kennedy literally a few weeks before it happened.  

If you see the big players selling, we will be very close. Ignore the propaganda this time....

"The Swindle Continues..."

Bubbles!!!

I think we are near the end of a business cycle and primed for a crash. This cycle has been driven by the greatest injection of new money into world economies in human history. Adding liquidity like this is bound to cause asset bubbles – in stocks, housing, and existential stuff like fine art and cars purchased by rich people with too much cash. To illustrate why I think this is almost the end, please consider the following.

Asset bubbles go through five phases…

1. The Change – there is a beginning based on things like a new technology; new money flowing into the economy from previously unknown investors; the development of new management techniques that drive efficiencies etc. The Smart Money sees these changes, and invests.  

2. The Build Up – the value of companies that are part of The Change rise through the normal course of investment with investments tied to actual profit growth and other rational barometers like the expansion of market share. As these companies rise, confidence grows and the entire market follows suit. Astute average investors and professionally managed money is invested here.

3. The Euphoria – the value of companies and the price of their shares become divorced from anything rationale as share prices rise seemingly without limit. For example, in the 1990’s people started talking about The New Economy based on the Internet, forgetting that companies in this new world still had to make money. The main way to gauge the value of a company ion the stock exchange is the P/E ratio – price of the shares over the earnings per share.  A healthy company with normal valuations – like a bank – should have a P/E of about 15. A quickly growing company with loads of upside should have a P/E of about 30.  At the height of the High Tech Bubble, Nortel had a P/E as high as 124. This was an insane level, that screamed that the stock would eventually crash – and it did, falling from $124 a share to $0.67 a share (…yes, you read that right – the price fell to sixty-seven cents a share from $124 a share).  Neflix’s P/E today is…..124. In the Euphoria, unknowledgeable people who believe the BS about “New Economies” etc., pile in so that they don’t miss out!  They are more commonly known as “Suckers”.

4. The Crisis – once it becomes clear to some that the share prices are divorced from financial reality, especially for companies that lead The Change, the Smart Money starts to cash out. This causes the prices of these companies to fall.  The Suckers keep buying with every drop in share prices seen as a “new buying opportunity” or “new entry point” utterly divorced from any actual analysis. The result of these sales and purchases are massive swings in the prices of these stocks, which is matched by wild swings in the value of the overall stock market. The S&P 500 has moved up and down by an average of about 8% six times in a year and a half. This is not normal.   

5. The Collapse – when it becomes clear to everyone that stock prices are divorced from financial reality, the market falls dramatically. This can be anywhere from 20 – 60% in a short period of time. Some of the companies that started The Change will go under at this time – they were only ever a fantasy. With the Smart Money long gone, only the Suckers get killed as they try to sell in a collapsing market.  Professional managers keep money in at this point telling their investors to “hold for the long run.”

This process of bubble and collapse is usually hastened by corruption and malfeasance that seems to underpin every bubble. You never really know what corruption that helped drive a bubble was until the bubble has collapsed, as it is the collapse itself that starts the real enquiries and audits. Think Savings and Loans in the late 1980s, and Enron, Madoff, and subprime mortgages in the mid-2000’s. Next time, I think we will discover malfeasance in stock buybacks and manipulation of options (…companies buying their own stock in the stock market to pump the price – they bought back $1.1 TRILLION in their own stocks in the USA last year, and $50 Billion in Canada – then managers blow out their options at the higher stock prices…), and corporate bonds which I think are mostly based on nothing but predictions of forward earnings that will never happen. We shall see.

Why does this matter for you?

If we are at the end of a cycle, it is time to think about asset preservation not about making more money. Given the wild movements in the S & P 500 over the last 18 months, I think we are in The Crisis phase of a stock market expansion. No one knows when The Collapse will come, but it will come.

Note – commentators are saying that Trump’s trade war with China is responsible for the latest market woes. These same people conveniently ignore the massive injection of cash into the markets courtesy of corporate buy backs, without with the markets would all be in the red. Reality is that real confidence is not shaken by trade wars, nor does it need a back stop of hundreds of billions of dollars’ worth of buy backs.

Suggestion - you may want to meet your advisor and lighten the amount of your cash that is exposed to the stock market, and move it to something like “Money Market Funds” which basically buy super safe bonds. You won’t make any money doing this, but you won’t lose any either. I don’t give advice that I would not follow – I have had my professionally managed cash in these super safe funds for almost three years.

If you want to short, please see HFD on the TSX which is a 2 x inverse play on Canadian banks whose debt has been downgraded twice in the last three years owing to concerns about Canada’s housing bubble. 

Do your own do diligence! 

Mueller and Fusion GPS

Mueller has testified. 

In spite of a new low in the world of American political theatre, where Republicans used Russian-inspired propaganda to accuse a Vietnam war hero, military volunteer, and life-long loyal Republican public servant of trying to launch a coup against the Trump Presidency, he did his job and stuck to his script, which is his report.

At one point, he was asked this...

"When you talk about the firm that produced the Steele reporting, the name of the firm that produced that was Fusion GPS. Is that correct?”

His answer was “I’m not familiar with that."

The next thing said to him was this...“It’s not a trick question.” 

To which Mueller responded as follows...“This is outside my purview.”

Right-wing pundits have stated that this is proof that Mueller did not know what was going on with the investigation because he did not even know about Fusion GPS, and that this is therefore proof that his investigation was a "witch-hunt". They also allege that he should have looked at the Steele Dossier because it alleged collusion, and his failure to do so shows his investigation is flawed as it missed looking at all that evidence.

Let's look at these idiotic claims one by one.

By saying that "THIS" is outside his purview, Mueller was signalling to the Republican scumbag who was questioning him that he knew full well what "THIS" is, otherwise how could he say that it was outside of his purview? As with all of his other testimony, he stuck rigidly to his report - to what is actually in his "purview".

Here is news for the Republican scumbag who asked this question - Fusion GPS and the Steele Dossier have NOTHING to do with Mueller's report, either in its content or in the origins behind the investigation itself. This is crystal clear from the first few pages of the report itself.    

As well, the Republican scumbag who asked these questions likely knows full well that Fusion GPS and the Steele Dossier have nothing to do with the investigation - the scumbag was just playing a role in the sad passion play that is America. 

On that, I invite readers to search the PDF version of the report in full - the terms "Fusion GPS" and "Steele" do not appear anywhere.

Again - this is political theatre at its lowest, where even resort to a propaganda script that originated with the Russians is considered fair game when it comes to trying to score political points.

Mueller is not an idiot. If he had engaged this utterly disgraceful line of questioning which was clearly designed to lead to an accusation that he led a Clinton-sparked "witch hunt" to overthrow Trump, he would have lent credence to this total bull shit. His answers were designed to cut off that line of questioning before it even started, which he did accomplish.

As also noted, he has also been accused of having conducted a limited investigation because he did not look at the Steele Dossier which includes claims of collusion.  

No one making this accusation is actually interested in getting to the truth of Russian interference in the last presidential election. Like Mueller, they know that the dossier has been widely discredited, except to the extent that anyone tied to it can be accused of being a Clinton hack - so he paid no credence to it at all, so as to not tie his investigation to it in any way shape or form so he could not be accused of being a Clinton hack.  Again - the man isn't an idiot.

Oh, and on that, those pundits who now say he should have looked at the Steele Dossier in order to conduct a full investigation are the same people who two years ago were saying the dossier was 100% bull shit.  

So which is it?  Is it total bull shit, or is it actual evidence of collusion - it can't be both.  

Do you see the utter shamelessness in this?

To score points today, the dossier is now said to be real and Mueller should have looked at it as if it contained actual evidence. That he didn't apparently suggests that he is corrupt. 

To score points yesterday, these same people claimed that it was a total lie designed to set up Trump, who won the election fair and square and who is a good if misunderstood man. 

To those esteemed pundits, I say "F&^% Y98!."

Mueller had one main message - Russia usurped the last US presidential election, and this remains a clear and present danger to American democracy. There is no question that his report shows this. 

He is wrong in this. The greatest threat to American democracy now consists in how politics is conducted in that country, where even disgraceful conspiracy theories which have their origins in the machinations of America's enemies may be resorted to in order to score political points.