David M Glassman, President

3055 Harbor Drive, Suite 1101

Fort Lauderdale, Florida 33316

Email: Stockmarketdoc@comcast.net


December 13,  2017









Bitcoin Vs Fiat Currency: Which Fails First?


What if bitcoin is a reflection of trust in the future value of fiat currencies?

I am struck by the mainstream confidence that bitcoin is a fraud/fad that will soon collapse, while central bank fiat currencies are presumed to be rock-solid and without risk. Those with supreme confidence in fiat currencies might want to look at a chart of Venezuela's fiat currency, which has declined from 10 to the US dollar in 2012 to 5,000 to the USD earlier this year to a current value in December 2017 of between 90,000 and 100,000 to $1:


Exchange Rate in Venezuela:

On 1 December, the bolivar traded in the parallel market at 103,024 VED per USD, a stunning 59.9% depreciation from the same day last month.

Analysts participating in the LatinFocus Consensus Forecast expect the parallel dollar to remain under severe pressure next year. They project a non-official exchange rate of 2,069,486 VEF per USD by the end of 2018. In 2019, the panel sees the non-official exchange rate trading at 2,725,000 VEF per USD.

If this is your idea of rock solid, I'll take my chances with bitcoin, which currently buys more than 1 billion bolivars. Of course "it can't happen here," which is precisely what the good people of Venezuela thought a decade ago.

Gordon Long and I discuss Fiat Currency Failure (The Results of Financialization - Part IV) in a new 31-minute video. The bottom line is that fiat currencies are debt-based claims on future profits, energy production and wages, claims that are expanding far faster than the real economy and the productivity of the real economy.

In effect, fiat currencies and debt are like inverted pyramids resting on a small base of actual collateral.

If you look at the foundations of fiat currencies, you find loose sand, not bedrock. Massive mountains of phantom wealth have been created by central-bank inflated bubbles, bubbles based not on actual expansion of net income earned from producing goods and services, but on financialization, the pyramiding of debt and leverage on a small base of real assets.

"Free money" that accrues interest isn't free. Eventually the interest eats debtors alive, regardless of the debtor's size or supposed wealth.

Creating "free money" in unlimited quantities impoverishes everyone who holds the currency. In the initial boost phase, the issuance of "nearly free money" to borrowers, qualified or not, generates the illusion of prosperity. But once the boost phase ends, reality sets in and marginal borrowers default, inflation moves from assets (good inflation) to real-world essentials (bad inflation), and creating more "free money" ceases to be the solution and becomes the problem.

Yes, cryptocurrencies are risky--but so are fiat currencies. Illusory "wealth" evaporates, and expanding credit-based "risk-free money" at rates that exceed the rate of expansion of the real economy reduces the purchasing power of all those holding the currency. Eventually trust in the currency, and in the authorities who control its issuance, erodes, and a self-reinforcing feedback loop turns the rock-solid currency into sand.

What if bitcoin is a reflection of trust in the future value of fiat currencies? Those dismissing bitcoin as a fad might be missing the point: trust in the authorities who control the expansion of fiat currencies might be eroding fast in a certain segment of the populace.

And more importantly, they might be right, and everyone who placed their trust in the authorities who control the expansion of fiat currencies ends up holding a handful of sand.


Six Ways US Stocks Are The Most Overvalued In History


Submitted by Mish Shedlock



US large cap stocks are the most overvalued in history. Let's investigate six ways.

Crescat Capital claims US large cap stocks are the most overvalued in history, higher than prior speculative mania market peaks in 1929 and 2000.



Their 25-page presentation makes a compelling case, with numerous charts. It's worth your time to download and investigate the report.

Six Ways Socks Most Overvalued in History

  1. 1Price to Sales

  2. 2Price to Book

  3. 3Enterprise Value to Sales

  4. 4Enterprise Value to EBITDA

  5. 5Price to Earnings

  6. 6Enterprise Value to Free Cash Flow

Here are a few snips from the report.

Bear Market Catalysts



There are many catalysts that are likely to send stocks into bear market in the near term. A likely bursting of the China credit bubble is first and foremost among them. Our data and analysis show that China today is the biggest credit bubble of any country in history. We believe its bursting will be globally contagious for equities, real estate, and credit markets. The US and China bubbles are part of a larger, global debt-to-GDP bubble, which is also historic in scale, and the product of excessive, lingering central bank easy monetary policies in the wake of the now long-passed 2008 Global Financial Crisis.


These policies failed to resolve the debt-to-GDP imbalances that preceded the last crisis. Now, easy money policies have created even bigger debt-to-GDP imbalances and asset bubbles that will precipitate the next one.We are in the very late stages of a global economic and business expansion cycle with investor sentiment reflecting record optimism typical at market peaks, a sign of capitulation at the end of a bull market. Crescat is positioned to profit from the coming broad, global cyclical market and economic downturn that we foresee. We strongly believe that our global equity net short positioning in our hedge funds will be validated soon.

Cyclical PE Smoothing



It is critical to use cyclical smoothing to accurately gauge market valuations in their current and historical context when using P/E.Yale economics professor, Robert Shiller, received a Nobel Prize in 2013 for proving this fact so we hope you will believe it.


The problem with just looking at trailing 12-month P/E ratios to determine valuation is that it produces sometimes-false readings due to large cyclical swings in earnings at peaks and valleys of the business cycle. For example, in the middle of the recession in 2001, P/Es looked artificially high due to a broad earnings plunge. P/Es can also look artificially low at the peak of a short-term business cycle, which can produce what is known as a “value trap”, such as in 2007 during the US housing bubble and such as we believe is the case today in China, Australia, and Canada.


Shiller showed a method for cyclically-adjusting P/Es using a 10-year moving average of real earnings in the denominator of the P/E. Shiller’s Cyclically-Adjusted P/E, called CAPE multiples have been better predictors of future full-business-cycle stock market returns than raw 12-month trailing P/Es. Shiller showed that markets with historically high CAPEs lead to low long-term returns for long-only index investors. Shiller CAPEs are fantastic, but they can be improved by including an adjustment for corporate profit margins which makes them even better predictors of future stock price performance and therefore even better measures of cyclically-adjusted P/E for valuation purposes.


.Shiller’s CAPEs simply need an adjustment for profit margins because margins are a key element of earnings cyclicality. We can understand this by looking at median S&P 500 profit margins in the chart below. For example, even though profit margins were cyclically and historically high during the tech bubble, they are even higher today. In the same spirit of Shiller’s attempt to cyclically adjust earnings to determine a useful P/E, CAPEs need to be adjusted for cyclical swings in profit margins.





When we multiply Shiller CAPEs by a cyclical adjustment factor for profit margins (10-year trailing profit margins divided by long term profit margin), we get a margin-adjusted CAPE that is not only theoretically valid but empirically valid as it proves to be an even better predictor of future returns than Shiller’s CAPE!


Credit goes to John P. Hussman, Ph.D. for the idea and method to adjust Shiller CAPEs for swings in profit margins.As we can see in the Hussman chart below, margin-adjusted CAPE, shows that today’s P/E ratio for comparative historical purposes is 43, the highest ever! The 1999 peak P/E was 41 and the 1929 P/E was 40. Once again, we can see that today we have the highest valuation multiples ever for US stocks, higher than 1929 and higher than 1999 and 2000!

Margin-Adjusted CAPE


It's easy to discard such talk, just as it was in 2000 and 2006. People readily dispute CAPE, concocting all sorts or reasons why it's different this time. The most common reason is interest rates are low. We also hear "stocks are cheap to bonds" which is like saying moon rocks are cheap compared to oranges. I do not know when this all matters. And no one else knows either. What I am sure if is that it will matter.

How?

I don't know when, nor am I sure "how" it happens. It could play out as a crash or stocks can decline over a period of 6-10 years with nothing worse than a 15% decline in any given year, accompanied with several sucker rallies leading people to believe the bottom is in.

History Lesson

Some might ask: If you don't know when or how, of what use is such analysis.The answer is that history shows this is a very poor time to invest in stocks. That does not mean, they cannot go higher(and they have).

History also suggests that people who invest in bubbles, start believing in them. People believe in bubbles because they have to, in order to rationalize their investments. Others know full well it's a bubble but they think they can get out in time. Historically, few do because they are conditioned to "buy-the-dip" philosophy, and keep doing so even after it no longer works.

Yesterday, I noted Oppenheimer Predicts PE Expansion, Most Bullish S&P Forecast Yet.So if you are looking for a reason to stay heavily invested in this market, you have one. But don't fool yourself, this is the most expensive market in history.

David Stockman Lashes Out At Mainstream Media's "Peak Fantasy Time"


If you want to know why both Wall Street and Washington are so delusional about America's baleful economic predicament, just consider this morsel from yesterday's Wall Street Journal on the purportedly awesome November jobs report.



Wages rose just 2.5% from a year earlier in November - near the same lackluster pace maintained since late 2015, despite a much lower unemployment rate. But in a positive sign for Americans’ incomes, the average work week increased by about 6 minutes to 34.5 hours in November.... November marked the 86th straight month employers added to payrolls.

$80,000 annually in wages and benefits.

When the line is trending inexorably from the upper left to the lower right, of course, it means there are more of the former and fewer of the latter. Six more minutes of continuing worse----is still bad.



As a matter of fact, the November report showed 20.199 million goods-producing jobs in manufacturing, construction and energy/mining, which did represent about a 2% improvement from prior year.

The real story, however is not about the short-term monthly or annual deltas being generating by an economy barely crawling forward. Rather, at 102 months, the current business cycle is exceedingly long in the tooth by historic standards (the longest expansion was just 118 months under the far more propitious circumstances of the 1990s).

In fact, what has been the weakest expansion in history by far may now be finally running out of gas.

During the last several weeks the pace of US treasury payroll tax collections has actually dropped sharply---and it is ultimately Uncle Sam's collection box which gives the most accurate, concurrent reading on the state of the US economy. Some 20 million employers do not tend to send in withholding receipts for the kind of phantom seasonally maladjusted, imputed and trend-modeled jobs which populate the BLS reports.

Yet we we are not close to having recovered the 4.3 million goods producing jobs lost in the Great Recession; 40% of them are still AWOL---meaning they are not likely to be recovered before the next recession hits.

Stated differently, the US economy has been shedding high paying goods producing jobs ever since they peaked at 25 million way back in 1980. Indeed,  we are still not even close to the  24.6 million figure which was posted  at the turn of the century.


By contrast, the count of leisure and hospitality jobs( bars, hotels and restaurants), or what we have dubbed the "Bread and Circuses Economy" keeps growing steadily, thereby filling up the empty space where good jobs have vacated the BLS headline total.

Thus, when goods-producing jobs peaked at 25 million back in 1980, there were only 6.7 million jobs in leisure and hospitality. Today that sector employs 16.0 million part-time, low-pay workers or 2.4X the four decade ago level.

Yes, there is nothing wrong with these jobs or the workers who hold them, but the fact that they constitute a rapidly increasing share of the mix is powerful proof that the job market is not nearly as awesome as it is cracked up to be; and that the monthly BLS report is surely no measure at all of a rising standard of living in Flyover America.


The larger point is that the monthly jobs report is really neither a report on true labor market conditions or a proxy for genuine economic growth. The fact is, without sustained growth of  full-time, full-pay "breadwinner" jobs there is no real economic recovery or progress.

And we literally mean, no progress. With an update for November's results, the chart below would show 72.8 million "breadwinner jobs" in goods production, the white collar professions, business management and support, transportation and distribution, FIRE (finance insurance and real estate) and full-time government jobs outside of schools.

As it happens, that is virtually the same number posted by the BLS back in January 2001 when Bill Clinton was packing his bags to vacate the Oval office. In short, three presidents later---all of whom have claimed undying devotion to good jobs and rising living standards---and there is hardly a single new breadwinner job.


The above chart does not bring the concept of awesome to mind. In fact, it reminds of the same kind of stagnation that is evident in all the key metrics for real economic progress. For instance, an economy flat-out can not grow without steady gains in industrial production, which includes energy extraction and all facets of goods manufacturing from automobiles to furniture clothes, shoes and canned soup.

But like in the case of "breadwinner jobs", this so-called recovery has generated none of it. The index of industrial production stands at exactly the level of the pre-crisis peak a full decade ago.


There is a whole raft of these statistics,  but the following graph leaves little to the imagination.

Notwithstanding the Fed's whacko claim that it hasn't generated enough inflation in recent years, the truth is that even by the BLS' faulty measuring stick every single dollar of median household income gain has been eaten up by CPI inflation. Accordingly, there has been zero gain in real median household income for the entirety of this century!


What does our latest Oval Office occupant plan to do about this? Why nothing less than borrow $1.8 trillion from future taxpayers in order to enable corporations and other business to crank-out even bigger financial engineering distributions to shareholders in the form of dividends, stock buybacks and M&A deals.


Bank of America: Every Time Chinese Yields Hit 4%, A Crash Happens


In his latest flow show report, BofA's Michael Hartnett finds that while inflows into markets in the past week continued, with $3.1bn going into stocks - of which $13.7bn went into ETFs, and $10.6bn was redeemed from active managers, $1.2bn into bond and $0.3bn into gold (unfortunately EPFR doesn't track inflows into bitcoin yet), although he noticed something peculiar: the “yield” trade appears to be fading, with the smallest IG inflows in 50 weeks ($1.4bn), while the revulsion to junk continued after the 6th consecutive week of HY outflows.

Furthermore, the "growth" trade is reversing: BofA spots a big (7th largest ever) redemption from US equity growth funds, as inflows to tech funds waning; coincides with bout of weakness in tech (e.g. EMQQ -11%, SOX -10% in 10 trading days)


Not everything has changed though, and EM debt saw the largest inflows in 26 weeks ($2.2bn), although Hartnett does note that EM debt & equities have been struggling in recent weeks despite the inflows.

So do these flows indicate the end of the conventional "rotation?" There is just one thing that will determine the answer: wages, because according to Hartnett "Rotation needs wages."  Indeed, the most popular, "risk-parity"  trade right now is “growth” in equities, “yield” in bonds associated with QE-leadership: This trade ends when “end of QE + start of fiscal stimulus + start of inflation = higher bond yields”; There is just one missing piece of evidence which is inflation:



"US tax reform needs wage growth to cause higher yields & sustained rotation to QE-losers; wage data critical in coming months"

It won't get with today's jobs report however, which despite a strong headline print, missed on hourly earnings.

Still, despite the continued big inflows into equities and bonds, perhaps this is not the right time to allocate capital. In a second observation, Hartnett notes that "Big Inflows can equal Poor Returns"



Record inflows 2017 into bonds ($347bn), stocks ($286bn); but years of big equity inflows (2010/13/14) were followed by poor returns (2011/14/15 – see Table 1); this especially case when BofAML Bull & Bear high (currently 6.4); we believe upside for risk assets in Q4/Q1 big but both credit & stocks peak early-18)


But Hartnett's most interesting observation had nothing to do with capital flows, and everything to do with inflation risk in the one economy, which as both we, and Albert Edwards believe, will be the cause of the next global collapse: China.

Here the only number that may matter is 4%, as in the yield on the 1Y bond (or 10Y for that matter since China's yield curve is largely inverted). Or, as Hartnett puts it, crashes need China:



Crashes need China: China bond yields rising in response to PBoC tightening (EM reflects this); but higher China yields (Chart 1) precursor to asset inflection point not big global growth surge & G7 bond crash

Which assets are likely to be impacted the most once this Chinese bubble pops? Two suggestions according to BofA are cryptos and/or emerging markets...



Signs Of The Peak: These 10 Charts Reveal An Auto Bubble On The Brink


U.S. auto sales have hovered well north of replacement rates for several years now on the back of an improving labor environment and more importantly an extremely accommodating financing market characterized by $0 down, 0% interest loans to subprime borrowers, with perpetually longer maturities to help manage monthly payments...because if your monthly payment is $500 you can afford it, right?


But, according to data presented in Experian's Q3 2017 auto financing market update slides, the auto market may finally be on the brink of running right off the other side of Ford's proverbial "Plateau."

First, as we've warned numerous times, inflated auto sales continue to come solely from an unprecedented expansion in consumer credit...


...an expansion which has thrived by targeting lower and lower credit quality borrowers.


Of course, with auto OEM's now fully dependent on further penetration of the 'Deep Subprime' and 'Subprime' borrower universe as a source of their marginal buyer of last resort, it's only logical that the term structure of auto loans on the lower end of the credit spectrum would continue to get stretched with Experian noting that 85+ month loans have now become the norm. 


Meanwhile, the continued deterioration in credit quality comes despite elevated delinquencies all across the country.


But the key data which seems to suggest that the auto bubble may have run its course comes from the following charts which reveal that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer...


But we're sure all this is just a natural result of healthy competition between lenders and has absolutely nothing to do with banks getting nervous about that coming flood of lease returns...







Enron 2.0? ECB, Global Banks On The Hook For $21 Billion In Steinhoff Implosion


Earlier this week we reported that as part of the stunning, unexpected collapse of South African retail giant Steinhoff, which also owns France-based Conforama furniture chain, Mattress Firm in the U.S. and Poundland in the U.K., none other than the ECB was unveiled as owning an unknown amount of its recently issued €800 million in 2025 bonds, which plunged from 85 to as little as 41 cents on Wednesday when the news hit...




... and which we said would be sharply downgraded in the coming days as the rating agencies - once again painfully behind the curve - caught up with reality. That's precisely what happened late on Thursday, when Moody’s cut its Baa3 rating by four notches deep into junk territory, highlighting “the uncertainties and implications for the company’s liquidity and debt capital structure.”

After the downgrade- much to the humiliation of the ECB which has to explain why as part of its economic revitalization efforts, i.e. QE it is holding this pile of steaming garbage - Steinhoff bonds extended losses on Friday as the world paid increasingly more attention to the accounting scandal that’s threatening the survival of the global furniture and clothing retailer.

Meanwhile, whispers of Enron 2.0 have emerged as the investing community begins to appreciate the potential implications of Steinhoff's implosion. For South Africa, the collapse of the company which employs 130,000 people worldwide, already has systemic implications. As Bloomberg reports, South African Finance Minister Malusi Gigaba said he’s “mindful” that many retirement and savings funds will be hurt by the loss in value and has asked the PIC to prepare a report on the extent of the exposure.

Still, unless South Africa is willing to fund a state bailout, the fate of Steinhoff, which has appears to be sealed.

"I think it is the end," Simon Brown, Johannesburg-based chief executive officer of trading company JustOneLap, told Bloomberg. “The end will be a break up. There are lots of decent businesses that others will want to buy and it’s likely they’ll fetch decent prices. so staff will mostly be fine, except in head office.”

“There’s no way back,” David Shapiro, deputy chairman of Sasfin Wealth in Johannesburg, said in emailed comments on Friday. “The worry is that there are a huge number of operating companies within the stable – if you were a supplier to these businesses would you sell goods on credit? I reckon they should file for Chapter 11 or business rescue and try and salvage what they can.”

That outcome would be a disaster not only for the ECB, which as we showed is a proud owner of an unknown amount of the company's plunging bonds.


The fallout from the spectacular implosion also means that U.S. and European banks with billions of dollars at stake were told they’d have to wait another week to confront the global clothing and furniture retailer that’s engulfed in an accounting scandal, Bloomberg reported on Friday.  



The company on Friday delayed a meeting with lenders to Dec. 19 from Dec. 11, citing that full-year earnings that are typically discussed in the annual gathering haven’t been published. The owner of chains such as Mattress Firm in the U.S. and Conforama in France didn’t say whether it planned to report financials before Dec. 19.

Finding themselves in limbo, and in a communication lockout, is hardly good news for lenders who stand to lose massive amount should Steinhoff liquidation. Total exposure to lenders and other creditors was almost 18 billion euros ($21 billion) as of the end of March, with Bloomberg reporting that "long-term liabilities were 12.1 billion euros and short-term liabilities 5.87 billion euros." Those are the most recent Steinhoff results available after it indefinitely postponed publishing full-year financials on Wednesday. The latest numbers will likely be even greater to account for the July issuance of the company's 2025 bonds.

But the real dangers is what is not reported on the books: “The great unknown is the funding of the off-balance-sheet structures, which could spill over into fresh bank liability,” Adrian Saville, chief executive officer of Cannon Asset Managers in Johannesburg, told Bloomberg on Friday. The short-term debt could “fall over if the business fails,” he said.

It is unclear which banks are on the hook although in South Africa, Steinhoff has relationships with Standard Bank Group, Investec and a unit of FirstRand. Globally some of the lenders include Citigroup, Bank of America, HSBC and BNP Paribas.

Banks also have exposure to Steinhoff through loans provided to Chairman, billionaire Christo Wiese’s investment vehicles. Last year, the billionaire and largest shareholder of the company pledged 628 million of Steinhoff’s shares in collateral to borrow money from Citigroup, HSBC, Goldman Sachs Group Inc. and Nomura Holdings Inc. That was to participate in a share sale in conjunction with the acquisition of Mattress Firm and Poundland, according to a company statement. It’s unclear whether Wiese has repaid part of those loans since, Bloomberg notes. The value of all shares pledged as collateral is now 365 million euros, down from 2.2 billion euros a month ago.

Meanwhile, in a desperate attempt to salvage value, Steinhoff said after the market close on Friday that it had appointed a new sub-committee to improve corporate governance at the company.



The three non-executive directors are all existing board members, and are led by Johan van Zyl, the co-CEO of financial services firm African Rainbow Capital Ltd. Steve Booysen, an ex-head of lender Absa, and Heather Sonn, a former investment banker, make up the trio.

Steinhoff also said it was considering boosting liquidity by selling assets worth at least 1 billion euros. It also said one of its African subsidiaries would refinance long-term liabilities amounting to another 1 billion euros, while the possibility of recovering assets for around 6 billion euros was being investigated. All of these measures may help recoup some of the money owing to banks and investors, and while a complete loss on the $21 billion in exposure is unlikely, it seems virtually guaranteed that the banks will suffer steep haircuts on their Steinhoff exposure.

As will the ECB, which on Friday was rumored it was considering selling its Steinhoff bonds. It is not exactly clear how this would take place, since the ECB's QE by definition only buys, not sells, at least for now.

One thing that is certain, however, is that this is just the beginning of the ECB's balance sheet woes: as we showed on Wednesday using UBS data, the ECB now holds no less than 26 "fallen angel" equivalent bonds, amounting to €18 billion in notional exposure; both numbers are set to soar when the next recession hits and the bulk of the ECB's holdings shift down in quality, leaving Mario Draghi and his henchmen dealing with countless credit committees in bankruptcy court as the European central bank finds itself the post-reorg equity holder of countless European companies.








Everyone In The (Stock Market) Pool?


The percentage of households’  financial assets currently invested in stocks has jumped to levels exceeded only by the 2000 bubble.


Updating one of our favorite data series from the Federal Reserve’s latest Z.1 Release, we see that in the 3rd quarter, household and nonprofit’s stock holdings jumped to 36.3% of their total financial assets. This is the highest percentage since 2000. And, in fact, the only time in the history of the data (since 1945) that saw higher household stock investment than now was during the 1999 to 2000 blow-off phase of the dotcom bubble. Perhaps not everyone is in the pool, but it certainly is extremely crowded.


As we’ve discussed many times, this data series is one of our favorite metrics pertaining to the stock market. It is not necessarily an effective timing tool, but is what we call a “background” indicator. It provides an instructive representation of the longer-term backdrop — and potential — of the stock market. It also serves as an interesting lens into investor psychology. As we wrote in a September 2014 post:

“This is one of our favorite data series because it reveals a lot about not only investment levels but investor psychology as well. When investors have had positive recent experiences in the stock market, i.e., a bull market, they have been happy to pour money into stocks. It is consistent with all of the evidence of performance-chasing pointed out by many.

Note how stock investment peaked with major tops in 1966, 1968, 1972, 2000 and 2007. Of course, investment will rise merely with the appreciation of the market; however, we also observe disproportionate jumps in investment levels near tops as well. Note the spikes at the 1968 and 1972 tops and, most egregiously, at the 2000 top.

On the flip side, when investors have bad recent experiences with stocks, it negatively effects investment flows, and in a more profound way than the positive effect. This is consistent with the scientifically proven notion we’ve discussed before that feelings of fear or loss are much stronger than those of greed or gain. Stock investment during he 1966-82 secular bear market provides a good example of this.

After stock investment peaked at 31% in 1968 (by the way, after many of the indexes had topped in 1966 — investors were still buying the dip), it embarked on steady decline over the next 14 years. This, despite the fact the stock market drifted sideways during that time. By the beginning of the secular bull market in 1982, the S&P 500 was right where it was in 1968. However, household stock investment was at an all-time low of 10.9%. If the stock averages drifted sideways, why did stock investment drop by two thirds? The repeated declines over that period left investors scorned and distrustful of the stock market. They never really started putting money back into stocks until 1991.

What is the significance of the current reading? As we mentioned, it is the highest reading since 2000. Considering the markets are at an all-time high, this should not be surprising. In fact, while most of the indexes surpassed their prior peaks in early 2013, household stock investment did not surpass the 2007 highs until the first (revised to) 2nd quarter of this year (2014). The financial crisis put a dent in many investors’ psyches (along with their portfolios) and they’ve been slow to return again. However, along with market appreciation, investor flows have seen at least streaks of exuberance over the past 18 months, boosting investment levels.

Yes, there is still room to go (less than 6 percentage points now) to reach the bubble highs of 2000. However, one flawed behavioral practice we see time and time again is gauging context and probability based on outlier readings. This is the case in many walks of life from government budgeting to homeowner psychology to analyzing equity valuations. The fact that we are below the highest reading of all-time in stock investment should not lead one’s primary conclusion to be that there is still plenty of room to go to reach those levels.

There are no doubt many investors who are still wary of returning to the stock market due to the two cyclical bear markets in the past dozen years. However, while there may be a certain level of investor mistrust, the moniker of “most hated bull market of all-time” does not seem appropriate. It should not be lost on investors that we are at the second highest level of stock investment ever, behind only the most speculative stock blowoff in U.S. history.”


Finally, An Honest Inflation Index – Guess What It Shows






Finally, An Honest Inflation Index – Guess What It Shows

Posted with permission and written by John Rubino, Dollar Collapse





Central bankers keep lamenting the fact that record low interest rates and record high currency creation haven’t generated enough inflation (because remember, for these guys inflation is a good thing rather than a dangerous disease).


To which the sound money community keeps responding, “You’re looking in the wrong place! Include the prices of stocks, bonds and real estate in your models and you’ll see that inflation is high and rising.”


Well it appears that someone at the Fed has finally decided to see what would happen if the CPI included those assets, and surprise! the result is inflation of 3%, or half again as high as the Fed’s target rate.




New York Fed Inflation Gauge is Bad News for Bulls




(Bloomberg) – More than 20 years ago, former Fed Chairman Alan Greenspan asked an important question “what prices are important for the conduct of monetary policy?” The query was directly related to asset prices and whether their stability was essential for economic stability and good performance. No one has ever offered a coherent answer even though the recessions of 2001 and 2008-2009 were primarily due to a sharp correction in asset prices.






A new underlying inflation gauge, or UIG, created by the staff of the New York Fed may finally provide the answer. Its broad-based measure of inflation includes consumer and producer prices, commodity prices and real and financial asset prices. The New York Fed staff concluded that the new inflation gauge detects cyclical turning points in underlying inflation and has a better track record than the consumer price series.



The latest reading shows inflation of almost 3 percent for the past 12 months, compared with 1.8 percent for the consumer price index and 1.8 percent for core consumer prices, which exclude food and energy. Since the broad-based UIG is advancing 100 basis points above CPI, it indicates that asset prices are large, persistent and reflect too easy monetary policy.






The UIG carries three important messages to policy makers: the obsessive fears of economy-wide inflation being too low is misguided; monetary stimulus in recent years was not needed; and, the path to normalizing official rates is too slow and the intended level is too low.



Harvard University professor Martin Feldstein stated in a recent Wall Street Journal commentary that “The combination of overpriced real estate and equities has left financial sector fragile and has put the entire economy at risk.” If policy makers do not heed his advice odds of another boom and bust asset cycle will be high — and this time they will not have the defense mechanisms they had after the equity and housing bubbles burst.




To summarize, a true measure of inflation – one that is highly correlated with the business cycle – is not only above the Fed’s target but accelerating.


Note on the above chart that both times this happened in the past a recession and bear market followed shortly.


The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.


But it’s too late to moderate anything this time around. Asset prices have been allowed to soar to levels that put huge air pockets under them in the next downturn. Here’s a chart that illustrates both the repeating nature of today’s bubble and its immensity.




In other words, it is different this time — it’s much worse.



Gundlach Reveals His Favorite Trade For 2018


One day after Stanley Druckenmiller confessional to CNBC that as a result of central planning and markets that make no sense, the legendary hedge fund manager had a "terrible" year, and his "first down year in currencies ever" (he also said many not very nice things about bitcoin), it was Jeffrey Gundlach's turn to confess some of his more controversial views. And so, the man who two years ago correctly predicted the Trump presidency, first discussed his best investment idea for the new year. To those who listened to his latest DoubleLine investor presentation last week, the answer will hardly be a surprise: namely commodities, because they're "historically, exactly where you want it to be a buy."

"I think investors should add commodities to their portfolios," Gundlach says on CNBC's Halftime Report.

Gundlach said commodities are just as cheap relative to stocks as they were at historical turning points, while the macroeconomic backdrop also supports the case for commodities; he was referring to the following chart which he highlighted last week.


Echoing his presentation from last week, Gundlach said that once "you go into these massive cycles... the repetition is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy."



Investors should add commodities to their portfolios. There is a really remarkable relationship between a market cap or the total return of the s&p 500 and the total return something like the Goldman Sachs commodities index. The cyclicality is really repettiive.

Gundlach also noted that commodities are just as cheap relative to stocks as they were at turning points in previous cycles that began in the 1970s and 1990s. The S&P Goldman Sachs Commodity Index is up 5% this year, versus the S&P 500's 19% gain.

There is also a fundamental case for investing in commodities, Gundlach said. He pointed out that global economic activity is increasing, a tax cut could boost growth and the European Central Bank is implementing "absurd" stimulus policies in the euro zone.

http://www.zerohedge.com/news/2017-12-13/gundlach-reveals-his-favorite-trade-2018

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Jeffrey Gundlach: Investors should add commodities to their portfolios from CNBC.

In addition to his favorite trade, Gundlach touched upon several other topics including:

What drives the dollar:



"Short-term fed moves are not what drives the dollar. It correlates much more to what the bond market thinks vis-à-vis the fed say 18 months forward. So if you actually rook at the bond market pricing for 2019 now, there’s a pretty big discrepancy between the bond market and the fed, so that’s going to be really interesting in driving the dollar, and this time i think the bond market is going to be right."

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Why the markets are so calm:



"I think it’s because of central bank pegging of rates and quantitative easing going on full bore in  europe and in japan. One of the charts that i love to reference is the nearly linear rise in central bank balance sheet holdings ever since 2011, where the Fed stopped quantitative easing back three years ago, and japan and the ecb just took over the slack, and it’s just a linear rise."


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Jeffrey Gundlach: This has been a great year for investors from CNBC.

On ECB president Mario Draghi:



"That’s going to slow things down a little bit, but the real worry from the central bank activity would be forward about a year. Because Mr. Draghi has said astonishingly that they’re going to continue 30 billion euros per month of quantitative easing at least until September and then he threw  in, just to put a cherry on top of the cake of stimulus, he said, and negative rates well past the end of quantitative easing. Which means – sounds to me you’ll have negative rates as long has Mr. Draghi is around which is a little under two years."

On tax cuts and bonds:



"If there is a net tax cut, it has to be bond unfriendly. we already have growing bond supply. we’ve been liiving in a world for the last three years thanks to quantitative easing of negative net bond supply, really, from sovereign bonds in the developing world. and that’s gonna flip because the fed is now letting bonds roll off, the budget deficit is increasing, a tax cut would increase the deficit further, and to the extent that a tax cut might be stimulative to the economy, that’s bond unfriendly, because bonds don’t like economic growth and also it’s more bonds, expanding the deficit, so even more supply."

On tax hikes and risk:



"If i'm correct and i’m going to receive a seven-point bump in my tax rate, which is actually about a 15% tax increase, i have a feeling that i’m probably going to be less able and willing to buy risky assets or buy all the other things that are bubbling up these days, and maybe that side of the narrative will start showing up."

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Jeffrey Gundlach: Tax plan could have unintended consequences from CNBC.

On stimulating the economy:



"While we’re not probably going to get 3% real for the year, we’ve had it for two quarters in a row. and gdp now at the atlanta fed has been bouncing around but it’s around 3% for the third quarter. when is the last time we had something like 3% growth for three quarters in a row? it’s a long time. why would you be stimulating the economy?"

Finally on bitcoin:


Do you see the bear?   Look far below.











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