It is the middle of summer and I am finding it hard to get motivated to write about anything in particular right now. Day after day there are massive interventions in the markets to make all appear ok- but we all know that already. We are seeing many stock indexes hitting all-time highs while there aren’t really any reasons other than those interventions to point at to explain it all. An extra $1.5 trillion in money from nowhere over the first 6 months of this year can create some major distortions! It appears to be continuing unabated as I write this.
The volatility index is currently at historic lows also. It seems that virtually everyone is sure that this time it really is different than all other episodes of the past. Personally, I have to vehemently disagree. Human nature doesn’t change and I believe that this boom will produce the third bust that we will likely see in the past 20 years. It really is sad to see how gullible so many are and the level of apathy in digging to get to the truth of our current situation.
I guess the easy way out is to turn on CNBC and get the propaganda of the day.
Today, you can even throw on videos to get information- you don’t even have to sit down and read and yet so many would rather be playing video games and watching mind-numbing junk on TV.
The price this time could be far higher than the previous two busts as the booms and the busts are becoming larger and larger over time. The main reason for this is that no one wants to admit failure and the same failed policies just keep growing larger and larger. Zombie companies have been propped up and the natural course of stronger hands taking over for weaker hands has been short-circuited by the actions of the few at the top trying to protect their power and prestige. Of course, there is a large cost to the rest of us because of the lack of innovation that takes place and the many jobs that don’t get created because of stagnant business practices and all methods of creating profits at any cost including layoffs, offshoring jobs and financial engineering.
Our current situation isn’t all that much different than Japans was from 1989-2017. During those years there have been many stimulus programs, bridges to nowhere built (infrastructure programs), massive money “printing” and asset purchases. Actually, based upon the economic size of Japan their level of money “Printing” and asset purchase have no rival anywhere. The result? The Nikkei Index was nearly 40,000 in 1989 and after all of the shenanigans they are celebrating that 28 years later that same index is over 20,000 like it is some kind of historical achievement. A similar trip for the Dow would take us down to around 3000 and there would be partying on the financial game shows when, a decade later we get back to 10,000 or 50% below the all-time high! Real exciting eh?
I just saw an article that Bank of America has done a study that 40% of all Americans are living in homes that they cannot afford. This is just another bit of information that as home prices rise and incomes don’t there will be a large price to pay down the road- maybe not too far down the road either.
Of course, this may also be because those people couldn’t afford their homes at current prices as many homes are occupied by those who bought at a lower price and still live there.
My son, when he bought his house on Long Island a few years ago, told me that “I did the research. There is no way that the median income could ever support the price of these homes let alone the taxes. I don’t expect to make a profit- I just need somewhere to live.” That is reality.
In my opinion the moment interest rates start to rise in any meaningful manner it will mark the end of the stock, bond and real estate bubbles that have grown to dizzying heights on the back of virtually free money, asset purchases by those who can “manufacture money” on a whim and unabashed risk taking by those who believe the Central Banks have their backs and it is pedal to the metal time.
It appears that this will work until it doesn’t. Then – look out!
Getting back to stocks keep this in mind:
(S&P 500) Price to sales- which is hard to manipulate is higher now than in 2000 or 2007.
Price to earnings (massaged earnings) are the highest ever besides the year 2000.
Margin Debt (money borrowed to buy equities) is OFF THE CHARTS. It is more than double what it was in 2007 and 45% higher than in 2000. This could add a LOT of volatility to the downside if momentum picks up anywhere along the line. (NYSE data as of May 2017)
There is little doubt that the world sits in a precarious situation not only because of the financial games being played but also the geopolitical games being played across the globe. We are aware of many but there are many other potential flash points that are not reported at all in the US that I am aware of. Just a couple- China and India are skirmishing on their border and China is moving in troops and vows to defend its sovereignty at any cost. Venezuela is in a civil war. There is rioting in Greece daily. Turkey is turning toward Russia and appears to be getting ready to abandon NATO.
China has set up a naval base in Africa and is sending troops to man and defend it. It is located at the mouth of the Red Sea and will allow China to project power into the Middle East. It could also be used to blockade a major trade route from the Suez canal through the Red Sea if they thought it beneficial to do so. (NPR)
The world has changed. There is a full-court press on, in my opinion, to make sure that we, the people, are as in the dark as possible about what is happening. Power, both militarily and economically are moving from the west to the east. Are you ready for the consequences?
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa 18346
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