Halls of Shrewd'm / US Policy
No. of Recommendations: 20
What does it mean when the prices of all assets are rising together to record highs?
Stocks. The Price-to- earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio)is over 40, compared with the long-term median of 16.
Bonds, including Treasuries and junk bonds. The junk bond spread is low.
Gold, silver, copper, oil, bitcoin.
Housing.
USD is stable. The Fear & Greed Index is neutral but the trade is risk-on.
The Federal Reserve is shedding assets so the money isn't coming from the Fed.
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows very loose conditions.
The only way that all assets can rise
together is on a wave of borrowed money.
The Shadow Banking System creates lending money through a process known as credit intermediation that operates largely outside of traditional, regulated banks. This is achieved primarily through a combination of maturity transformation and securitization which generates highly liquid, short-term debt instruments that are used as "money-like" funding for longer-term, riskier lending. Shadow banking entities often employ leverage and a process called rehypothecation to magnify their lending capacity.
https://gemini.google.com/app/71c0f02467711e85Remember that this isn't "real money" like cash. It's "funny money" that is created without regulation. If the market turns from risk-on to risk-off the demand for long-term loans could evaporate and the value of the loans could go "poof!" overnight. Crashes have followed manias many times before, wiping out both the borrowers and the lenders. (cf. "Manias, Panics and Crashes," by Kindleberger.)
According to Doug Noland at the Credit Bubble Bulletin:
https://creditbubblebulletin.blogspot.com/
On the one hand, so long as the AI mania spell holds, underlying sector Credit quality might not play much role. The lack of “private Credit” transparency may remain a non-issue. On the other hand, when the market environment turns south and folks start to fear deteriorating economic, market, and Credit prospects, I expect a much more circumspect view of “private Credit,” leveraged lending, structured finance, and AI-related finance more generally. Q3 exuberance ensured fading memories. But early April provided inklings of things – like risk aversion and deleveraging - to come.... [end quote]
Doug Noland's concern is contagion. That's what happened in 2007-2008 when failure and default in some sectors of the loan market caused lenders to become more risk averse and raise yields in supposedly safer areas. The spreading risk aversion shows in the Financial Stress chart.
https://fred.stlouisfed.org/series/STLFSI4A huge amount of private credit today is opaque and illiquid. The size of the private credit market is estimated to be north of $1 Trillion. The companies list the values at much higher than market prices in many cases so investors (lenders) could panic if they try to withdraw their money only to find that it's frozen.
At the moment that's not happening. Financial Stress is very low.
The markets showed virtually no reaction to the government shutdown.
The METAR for next week is sunny. The bubble continues to inflate.
Wendy
https://stockcharts.com/freecharts/candleglance.ht...https://stockcharts.com/freecharts/candleglance.ht...https://stockcharts.com/freecharts/candleglance.ht...https://www.cnn.com/markets/fear-and-greedhttps://stockcharts.com/freecharts/yieldcurve.phphttps://www.chicagofed.org/research/data/nfci/curr...https://fred.stlouisfed.org/series/STLFSI4https://www.multpl.com/shiller-pehttps://fred.stlouisfed.org/series/CSUSHPINSAhttps://fred.stlouisfed.org/series/WALCL
No. of Recommendations: 7
If I make it whole through the Santa Claus rally, I'm outta here and apres moi le deluge. Lots of taxes simply means lots of profits - and you can't take it with you if it evaporates.
Jeff
No. of Recommendations: 0
true everything bubble should have select high reward:risk shorts, at low fee and drag.
what are they? ideas?
No. of Recommendations: 1
If I make it whole through the Santa Claus rally, I'm outta here...
Going where?
IP
No. of Recommendations: 3
If I make it whole through the Santa Claus rally, I'm outta here...
Going where?
_________________________________________
Well, I meant it metaphorically, that I intend to sell most of my US equities at that point (might keep a few - we'll see).
On the physical plane, we will be leaving the country for about 4 1/2 months by ship. Spending about a month each in Japan and Australia, a couple of weeks in New Zealand and otherwise bouncing around thee Pacific. I am going to be paying attention to "what if's" while in the Anzac arena.
Jeff
No. of Recommendations: 0
I wonder what the pin will be?
No. of Recommendations: 2
Well, I meant it metaphorically, that I intend to sell most of my US equities at that point (might keep a few - we'll see).
Sure. But where will the cash go? If the lenders are also at risk, what sort of investment does that leave you? If all assets are skyrocketing and subject to crash, where is safety?
IP
No. of Recommendations: 4
Wendy,
Something which you didn't mention which is also at an all-time high is Bitcoin when you were discussing assets which could be used with margin to keep the balloon inflated. I'm thinking that the "average Bitcoin owner is far more likely to us financial leverage from his/her ever-growing wealth to acquire other assets - despite the apparent risk.
This may go a long way towards explaining where the excess liquidity is coming from.
If the balloon pops (pick whichever one suits you), do you think this pours accelerant onto the fire.
Jeff
(Who abashedly admits to never owning any bitcoins and still doesn't "get" why they should be worth anything)
No. of Recommendations: 0
What does it mean when the prices of all assets are rising together to record highs?
https://finance.yahoo.com/quote/NQ%3DF/Hit the 5Y setting to get the view of this chart.
I do not see the momentum here to go parabolic.
I am not saying no Santa, but this goes out with a whimper. The economy is not good enough for anyone to get excited.
The momentum of great fools is drying up.
No. of Recommendations: 4
"Sure. But where will the cash go? If the lenders are also at risk, what sort of investment does that leave you? If all assets are skyrocketing and subject to crash, where is safety?"
___________________________________________________
Please don't take the following as anything more than the idle thoughts and musings of one individual:
That depends on how apocalyptic you want to plan for. Putting the "end of the world" senecios aside (and while not a "prepper", I've mad a few provisions for that eventuality), it depends on how things roll out.
Possible scenarios:
Liquidity crisis in the US dollar:
If this causes a pulling of US funds by the carry-trade, a decrease in the value of the US dollar coupled with an increase in the value of gold and currencies of low-population countries with substantial natural resources (Canada, Australia, Brazil, for example).
US equities will drop precipitously and drag down the foreign markets (though the foreign stock prices drops will be partially supported in terms of USD by currency translation differential. Interest rates on US bonds will depend on whether they are perceived as safe and the amount of currency flowing into them. Real estate will tend to drop as leverage dries up and illiquidity (and drop in revenue of commercial property) is deemed a negative.
We lived through this in 2008.
US Stock market crash:
Less extreme than the above, but more or less the same pressures. This will not necessarily affect the US dollar to the same extremity, and therefore, a commensurate drop in foreign markets will not be abated by currency ratio shifts. These used to take place separated by a few years to a decade, but the Fed has financially engineered them away between the Great Recession and the COVID crash.
Black Swans:
Well, if wee could predict them, they wouldn't be called that:-)
My opinion is that, at some point or other, for some reason or other, cryptocurrencies will have a dramatic issue - which will snowball into other markets around the world.
So, what to do?
The following is not optimal "investing" in the same context that buying a fire extinguisher or an insurance policy is an expense - until you need them.
Physical gold (not to be confused with "paper" gold) is not a good investment for me (regardless of it's rise in price). It has to be safely stored, etc., etc. and would only be sold in time of extremis - such as if the currency became worthless. To me, keeping 1%-2% of "liquid" net worth in this and similar easily portable, universally valuable stuff makes sense. Owning foreign equities, in their native currencies, provides a stream of income in foreign currencies (much as I hate them, Interactive Brokers is the best shop to use for this purpose). Foreign bank accounts are legal, as long as filing procedures with the federal government are complied with (and can provide "targets" for bank wires if desired).
In essence, cash is king. Stocks sold can always bought back. While the market can't easily be "timed", as Warren Buffest seems to feel, having a pile of currency to re-deploy can reward the patient investor.
Real estate, while providing a long-term good investment, especially in times of duress, can be far from liquid.
Jeff
No. of Recommendations: 6
Jeff wrote, "Something which you didn't mention which is also at an all-time high is Bitcoin when you were discussing assets which could be used with margin to keep the balloon inflated."
Actually, I did mention bitcoin. I also added IBIT, the largest bitcoin ETF, to the Control Panel.
Jeff wrote further, "(Who abashedly admits to never owning any bitcoins and still doesn't "get" why they should be worth anything)"
I'm with you there. All cryptocurrencies are inherently speculative. Like gold, they don't produce interest or dividends and can't be used as currency to buy stuff. Unlike gold, they do not have a physical existence and could evaporate into the ether in the event of an electronic interruption like another Carrington event.
Wendy
No. of Recommendations: 5
"Please don't take the following as anything more than the idle thoughts and musings of one individual:"
Absolutely.
"In essence, cash is king."
And of course comes with it's own risk. Risks. Lets make that plural. Inflation of course and currency not holding value, but also possible breaking of the buck in money market funds.
We are already very cash heavy and about to become more so with the sale of our primary residence at the end of October. Looking at taking those proceeds and investing in a Golden Visa for Portugal. Gets money out of the US, invests in Euros, which of course has it's own issues, and provides us with a way to stay in Europe Visa free. Our vacation home here in the US gives us a new primary residence, one that is maintained by others, needing no hands on attention from us.
I confess I am a pretty vanilla investor. This is feeling very much like a Man plans, God laughs moment. Feels like there is no right move, just less wrong.
IP
No. of Recommendations: 1
IP,
I feel your pain (or at least your uncertainty). My comment, cash is king, is very over-simplified and dealt with what immediately would be beneficial in the event of a repeat, of say, the financial crisis of a couple of decades ago. That said, I have always (well, since the early 1970's at least) practiced a multi-currency form of diversification which has not damaged me financially and has tended to smooth out the bumps.
Something to consider as a proxy for cash (not as liquid and certainly more volatile as they follow the global economy) are the world's major miners (Rio Tinto, BHP, Vale, Newmont, etc. and some of the metal processors, such as Wheaton Precious Metals Corp. As long as mankind continues to "make stuff", these guys will do fine.
As in all waiting, waiting for a stock market crash takes patience and doesn't mean you stop breathing, but rather change one's portfolio balance (as well as mentally prepare for body blow to the breadbasket at some point - losing less is still losing).
I agree that Portugal is a great choice and a great environment. That said, both Lisbon and Porto are "vertical" cities with dramatic changes in elevation, so check your transportation options as it pertains to your locale (though Uber works well and is cheap in both).
Jeff
No. of Recommendations: 1
"This is feeling very much like a Man plans, God laughs moment. Feels like there is no right move, just less wrong."
I very much have that exact same feeling. I own ex-USA ETF's, will probably add
to them ( money for purchase coming from sale of SPY and QQQ etf's *). But Europe
has it's own problems.
Was interested in TIPS, per WendyBG's previous posts, but am fairly certain
that the inflation numbers posted by current admin are going to be fraudulent.
Will hold short term T's and maybe CD's up to FDIC protection. Of course, those
yields are shrinking.
* SPY and QQQ have significant overlap, no real diversification there, imo.
No. of Recommendations: 5
Couple of thoughts:
I've found treasury.gov really easy to use. 1month (or any other duration) T-bills directly from the USG. No question of breaking the buck as with money market funds. You can set up auto-renewal and the proceeds flow into your bank account each month. Fido will also let you purchase Tbils directly.
Slightly more risky is TBIL, an etf of 3month Tbills. Only say that because your counterparty isn't the USG. But you can sell at any time, so better liquidity than the 1month T-bills.
As for non-US, Jim has mentioned WIP, an etf of non-US inflation-protected bonds. Currently ~2% FRG bonds, 1.5% Spain, 1.35% Poland, 1.3% NZ. You aren't going to get rich quick on it but as a way to diversify and have some inflation-protection it will do.
Rgds,
HH/Sean
