September 10, 2012
- QE now or QE later? Doesn’t matter: Jim Nelson on a certainty for both “the foreseeable (and unforeseeable) future”
- How the Fed “front loads” stock returns… and why Dan Amoss says it can’t last
- But in the meantime… a chart that all but predicted the August stock run-up is back in a new edition
- Spaniards seek monetary refuge in gold… a working stiff’s tax lament… a Jeffrey Tucker-Gary Gibson online event… and more!
How long, we wonder, will it be before CNBC and Bloomberg TV put a “bug” up on the screen with a countdown clock and a catchy label like “Countdown to QE”?
As we write, it’s roughly 72 hours until the Federal Reserve announces, er, whatever it will announce at the end of its two-day meeting Wednesday and Thursday. We’ll be treated to the full dog-and-pony show: Release of the statement at 12:30 p.m., release of the Fed governors’ forecasts at 2:00 and a Ben Bernanke news conference at 2:15. We’re breathless with anticipation…
The S&P 500 has run up nearly 10% in the last three months, traders anticipating some kind of EZ money move sooner or later.
We can’t read the minds of Fed governors, so we won’t speculate what will happen on Thursday. But in light of Bernanke’s annual Jackson Hole speech 10 days ago, we can forecast one thing with confidence, and tease out the implications.
“Interest rates will be zero-bound for the foreseeable (and unforeseeable) future,” says our income specialist Jim Nelson.
“Bernanke’s primary objective at Jackson Hole was to set up the argument for another round of QE by explaining how great the previous rounds of easing have worked and that the Fed has the tools and direction to do it again.”
Indeed: “A balanced reading of the evidence,” said Mr. Bernanke, “supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.”
The middle finger he extended to people who carped about QE2 running up commodity prices? That was merely implied. Bernanke also showed the back of his hand to income investors, although Jim has developed a powerful strategy to overcome what he calls the “low-rate minefield.” (Details, if you’re curious, at this link.)
“One of the longest-running myths in financial markets,” adds our macro strategist Dan Amoss, “is going to damage a lot of portfolios: the myth that central bank money printing — in the context of a modern banking system — hikes the value of stocks.”
“Many academics” he says, “still think printing lots of money — which is thought to permanently increase stock prices — will lead to some sort of trickle-down economy phenomenon. Ben Bernanke said as much in his famous November 2010 Op-Ed in The Washington Post: ‘Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.’
“Since then,” Dan writes, “the S&P 500 has rallied from 1,200 to 1,430, mostly on the belief that stocks are a good substitute for bonds. Printing from the Fed and other central banks has front-loaded returns. Front-loading returns means the potential market gains from here will be depressed. In other words, the Fed’s money printing has temporarily pushed stock prices above their real value. When circumstances force the Fed to stop printing, the fall could be breathtaking.”
This is the Red Bull hypothesis Chris Mayer shared a couple weeks back: “Every time the Fed stops serving Red Bull, the market sags.”
One of Dan’s preferred metrics is the Shiller P/E ratio, from the same Yale professor who helped develop the Case-Shiller home price index.
“The Shiller P/E ratio is calculated as follows,” says Dan: “Divide today’s S&P 500 index by the average inflation-adjusted earnings from the previous 10 years. I look at 10 years of earnings and cash flow data in researching stocks to get a feel for how earnings might look in the future. Most investors remain too focused on the quarter-to-quarter minutiae, which often leads to surprises at turning points in the earnings cycle.”
As it stands, the Shiller P/E of the S&P 500 is 23, with the average since 1880 being 15. “A move back to the average,” says Dan, “would take the S&P 500 back to 930. A move to bear market low valuations would take the S&P 500 back to roughly 400.
We’ll pause here to note the S&P stands this morning at a comparatively lofty 1,437 — down fractionally from Friday’s 4½-year high.
“The Fed can’t grow the intrinsic value of stocks,” Dan says. “Companies can do that only by earning returns above their cost of capital.
“In the coming quarters,” he writes, “many companies that had been earning returns above their cost of capital will be earning lower returns. Free cash flow will follow returns lower. Look at Intel’s latest revenue warning; look at FedEx’s earnings warning. Profit margins have peaked in many industries. Manufacturing companies exporting to Europe and China will continue to suffer. Apple can hold neither the stock market nor the economy up.
“With each successive round of quantitative easing,” Dan concludes, “demand for gold and other stores of value will rise and demand for stocks will weaken.”
At this stage we’re compelled to invoke Keynes’ maxim about how the market can remain irrational longer than you can remain solvent.
“Along with fresh 2012 highs in the S&P 500,” writes Greg Guenthner of our technical analysis team, “we also continue to see record numbers of analysts who can’t seem to wrap their minds around the market’s recent performance.
“Analysts still hate stocks now almost as much as they hated them last month. Take a look:
“Fortunately,” says Greg, “the stock market doesn’t need approval from Wall Street professionals to move higher. Also, it’s important to note that the continued hatred of this ‘shadow rally’ can actually work in the market’s favor.”
For evidence, Greg points to the performance of hedge funds: They “continue to lag the major indexes,” he says — as they did last year. “Hedge fund returns increased only 0.7% in August, according to Reuters. That’s well behind the S&P, which rose 2.25% last month alone. Year-to-date data are even worse. Collectively, hedge funds are up just a little more than 4% this year. On the other hand, the S&P 500 is up 13.5%.
“It appears that fund managers are going to be chasing their benchmarks again this year. That means big money could potentially push the market dramatically higher in the coming months.”
If China’s heading for the proverbial “hard landing,” it just got a little harder.
August trade figures out this morning reveal imports “shrank unexpectedly,” in the inimitable words of the Associated Press — a 2.6% drop year over year.
Precious metals are taking a breather after Friday’s big run-up. Gold is down about four bucks, to $1,731. Silver is off a few pennies, to $33.64.
“Up until very recently,” Marion Mueller said last week, “to speak about gold as an investment or as wealth protection insurance was grin-provoking. That is changing.”
As vice president of the Spanish Precious Metals Association (AEMP) and founder of online publication Oro y Finanzas, Mueller has her eyes glued to Spain’s newest trend: gold.
Not too long ago, a Spaniard buying gold was a running joke. Now, in the midst of a financial panic, the joke is no longer funny.
“Since 2010,” Mueller tells Peter Schiff’s Gold Letter, “when the Spanish economic downturn became inescapable, a growing tendency to invest in physical gold developed among Spanish investors, brokers and financial institutions. Demand for physical gold from the general public is also growing, but Spaniards are not yet as educated about the market as northern Europeans.”
Of course, there’s no shortage of gold sellers, either: “Cash for Gold” is big business: The purveyors of such shops even hire sign walkers…
Coming soon to a country near you…
But here too is an interesting story: Scrap gold isn’t going back to the jewelry sector, Mueller says: “100% of it is going back to feed the international gold bullion industry in places such as England, Switzerland and Belgium.
“The rise in gold prices is a reflection not of the crisis, but rather of the end of a monetary cycle,” she explains. “We live in a period of maximum government control… you can rest assured that if [the government] decides to intervene, it will.”
Gold, Mueller says, “remains the best protection against wealth confiscation.”
“Where should we store our gold so that the U.S. government cannot confiscate it?” writes a safe-haven seeking reader. “I assume in a stable country that won’t buckle and turn it over to the U.S., not receiving foreign aid. Where might that be?”
The 5: Our best guess is in a decentralized platform that isn’t bound by only one country’s rules and regulations. That’s why we’ve been strong advocates of Hard Metals Alliance.
Investing with them gives you full control of your metals, and the ability to move them around the world with a couple clicks — Zurich, London and Melbourne are among your options. Learn how the Hard Assets Alliance can eliminate the hassle, risk and uncertainty of buying and selling metals by following this link. Please note we may be compensated when you fund your account.
“Nothing new here,” writes a frustrated reader after our Taxmageddon coverage last week. “The politicos just don’t get it.
“I looked at the what the possible tax increases will cost me. I am a working stiff, and the tax increase will basically wipe out any discretionary savings I am able to put away each week.
“I have been working for years to build a base and save in my personal trading and investing account, but someone always seems to get a hand in my pocket.
“It’s frustrating because I spent a lot of time getting debt free so I could get ahead; I have sacrificed so I could build. Now certain do-gooders are once again going to destroy.
“I am trying to avoid being on the government dole in the future, but it seems that the government wants to force me to be a part of the welfare state.
“That is one of the unseen consequences that these people don’t see. They force more and more people onto the government welfare system. Or maybe that is by design.
“These bills won’t really hurt the 1% — it will be an inconvenience — but they destroys the middle class.”
The 5: And that’s even if Congress addresses the yearly issue of the “AMT patch.” We got a couple of inquires about that: We’ll address it tomorrow…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. The good folks at EverBank advise us they will not offer another issue of the MarketSafe Emerging Markets CD after the funding deadline for the current issue expires this Wednesday, Sept. 12.
So if you want exposure to the currencies of four booming emerging economies — Colombia, Israel, South Korea and Turkey — now’s your only chance.
P.P.S. Laissez Faire Books is hosting its very first Whiskey Bar tomorrow afternoon. Join Jeffrey Tucker and Gary Gibson for a frank discussion of “the invisible economy.”
“Gary and I will discuss hacking, sneaking, evading, breaking bad and the economic rebels who are increasingly driving the creation of wealth in a hyper-regulated and regimented world.”
Nor will this be a one-way conversation. You can submit questions using real-time chat.
Here’s the catch: Participation is open only to readers of Laissez Faire Today. Fortunately, it costs nothing to become one. Just go to the Laissez Faire Books homepage; the sign-up window is on the right side.