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Tech Trumps Tyranny
“How’s that National Conversation going?” Like I wrote about in a post almost 6 months ago, 3D printers are here to stay (HERE) and they will have an impact despite our owners’ best attempts.
Technology makes so many things obsolete, one of those things being unconstitutional and immoral laws.
One of the most likely avenues that the gun-grabbers will take is a ban on the so-called “hi-cap” magazines. Just like the days of and leading up to prohibition; smart, inventive, and resourceful people developed work-arounds that made the decrees of the political elites moot. Below is a 30 round AR-15 magazine (in clear plastic) that came off of a 3D printer. HERE is the article from Extreme Tech.
Here is an early attempt, which ended prematurely due to what looks like a feeding issue.
But then whatever bugs existed must have been worked out because it runs fine in both semi-auto and in 3 round burst.
Obviously it isn’t as robust as a Magpul P-Mag but one must walk before they can run.
Hedge Funds Cut Commodities’ Bets to 6-Month Low
Contrarians are you paying attention?
Bloomberg reports that hedge funds cut their bets on commodities to a six-month low even as commodities have rallied a bit.
Speculators trimmed net-long positions across 18 futures and options by 5.4 percent to 654,443 contracts in the week ended Jan. 8, the lowest since June 19, U.S. Commodity Futures Trading Commission data show. Wagers on a corn rally dropped for a fifth week before a reduction in U.S. stockpile data sparked the biggest jump in prices in five months. Gold holdings fell to the lowest since August as the metal snapped a six-week slump.
Gold net-long positions decreased by 13% to the lowest level since August 14. Net-longs in Silver declined 7.7 percent, a sixth straight drop that’s the longest run of declines since May.
Gold “Still Stuck in Range”, But Futures Traders “Could Provide Springboard for Sharp Rise in Price”
WHOLESALE gold bullion prices hovered just below $1670 an ounce Monday morning in London, having regained some ground after Friday’s losses, while stocks and commodities also ended the morning up on the day, while the Euro and the Chinese Yuan made gains against the Dollar.
“We saw a fair amount of buying from China [this morning] after gold prices fell last Friday,” says Peter Tse, Hong Kong-based director at bullion bank Scotia Mocatta.
“The Yuan hit a record high [against the Dollar], making local prices cheap…[but] gold is still range bound and I wouldn’t put too much on this morning’s rise.”
“Gold needs to sustain the close above the $1665 area to signal a move toward the $1695 area,” adds a note from Barclays Capital, whose analysts see support for gold at $1640 and resistance at $1680.
Open interest in gold futures and options on the New York Comex recovered last Tuesday compared to the previous Monday, climbing 3.4%, the weekly Commitments of Traders report from the Commodity Futures Trading Commission shows. The CFTC reported its lowest open interest in over three years for New Year’s Eve.
The so-called speculative net long however fell last Tuesday to its lowest level since August. The spec net long measures the difference between the number of ‘bullish’ long and ‘bearish’ short contracts held by traders classified as ‘noncommercial’, such as hedge funds.
“The fact that speculative financial investors are continuing to withdraw from the gold market is doubtless partly to blame for the gold price’s failure to make any substantial recovery,” says a note from Commerzbank.
“More and more ‘shaky hands’ are getting out of the gold market…[but] their current skepticism may offer a springboard for a sharp price rise in future were sentiment among money managers to shift again.”
Like gold, silver also recovered some of Friday’s losses this morning, climbing to $30.77 an ounce by the end of the morning in London.
The US Treasury will not mint a $1 trillion platinum coin as a way of getting round the federal debt ceiling, a spokesman said Saturday.
Various commentators, including Nobel Prize-winning economist Paul Krugman, have proposed in recent weeks that the Treasury could use an existing law, designed to allow flexibility in supply to meet demand from platinum coin collectors, to produce such a coin without needing to seek the approval of Congress. The coin could then be deposited with the Federal Reserve, according to the proposal, and its face value credited to the Treasury’s account.
“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” said Saturday’s statement from Treasury spokesman Anthony Coley.
“Congress can pay its bills or they can fail to act and put the nation into default,” added White House spokesman Jay Carney.
“When congressional Republicans played politics with this issue last time, putting us at the edge of default, it was a blow to our economic recovery, causing our nation’s credit rating to be downgraded.”
The Euro meantime touched its highest level against the Dollar in almost eleven months Monday when it briefly traded above $1.34.
German finance minister Wolfgang Schaeuble said Friday that the Eurozone is “over the worst of the crisis”, a day after European Central Bank president Mario Draghi said confidence in financial markets has “significantly improved”.
Elsewhere on the currency markets, the Yen fell to its lowest level against the Dollar since June 2010 this morning, after Japan’s prime minister prime minister Shinzo Abe said he wanted the next Bank of Japan governor to be someone “who can push through bold monetary policy”.
Following his election victory last month, Abe said his government and the central bank will issue a joint statement ahead of its policy meeting later this month, in which they will set a 2% inflation target – double the current targeted rate. The most recent data show Japanese inflation running below zero, indicating price deflation.
China’s State Administration of Foreign Exchange (SAFE) announced Monday that it has created a new unit tasked with finding new investments to diversify China’s $3.31 trillion reserves, though it did not add what such investments might be.
Ben Traynor
BullionVault
Gold value calculator | Buy gold online at live prices
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault’s weekly gold market summary on YouTube and can be found on Google+
(c) BullionVault 2013
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
STTG Market Recap January 14, 2013
Monday was quite a strange session, although sleepy as almost every day of 2013 has been other than the first. What was old was new again as Dell Computer (DELL) jumped 13% on reports it is considering taking itself private. Meanwhile recent darling Apple (AAPL) was socked in the face yet again with another 3.6% loss as the WSJ reported component orders for iPhones were slashed dramatically. I suppose Apple could be considered old school as well, but not the new version of it with the iPhones and the iPads. As for the indexes, the S&P 500 fell 0.09% and the NASDAQ 0.26%. Traders remain frustrated as there has been almost no action in 2013 as all the year's gains essentially came on the first day of the year.
The S&P 500 continues to hold onto all gains and gyrate in a smallish range near the top end of its ascending channel. Next we have to see if it's building up energy for a run at breaking those intraday highs of September, or a filling of the gap created from the first day of 2013 is in order.
The NASDAQ continues to remain in a similar state, although the weight of Apple has had it underperform. That said, considering it was a rough day for both Apple and Google (GOOG) the index held in quite well.
As for Apple the news was as follows:
Shares in Apple Inc dipped below $500 for the first time in almost one year after reports it is slashing orders for screens and other components as intensifying competition erodes demand for its latest iPhone. Apple has asked Japan Display, Sharp and LG Display Co Ltd to roughly halve supplies of LCD panels from an initial plan for about 65 million screens in January-March.
The stock has now given up almost a year's worth of gains:
With Dell the news was taken as positive by the Street
Shares of Dell Inc soared to a near eight-month high on Monday after Bloomberg reported the world's No. 3 PC maker is in talks with at least two private equity firms about going private. The discussions between the PC maker, which has steadily ceded market share to larger rival Hewlett Packard and China's Lenovo, and private equity are preliminary and financing has not been secured. Like HP and Lenovo, Dell is grappling with dwindling demand for traditional desktop and laptop computers with the advent of tablets like Apple Inc's iPad. Sales of PCs over the holidays slid for the first time in more than five years, according to industry researcher IDC. The company saw shipments of computers plummet 21 percent in the fourth quarter, according to IDC. In the third quarter, its profit slid 47 percent.
The metrics between the two companies are complete opposites but it shows why just looking at growth rates is not enough for stock investing, especially in the short to intermediate run. Apple - despite stellar (but slowing) growth rates - has been getting hit for months, while today a major also ran in a shrinking industry, skewered short sellers who were targeting the company.
The rest of the week will be dominated by earnings reports, especially Wednesday forward as some of the top names in America report. Stay tuned.
Original post: STTG Market Recap January 14, 2013
Alamos Gold Bids for Aurizon Mines
Aurizon shares finished up 32% today after Alamos Gold offered $792 Million for the company.
Bloomberg Reports:
Aurizon is considering the proposal, Jennifer North, a spokeswoman for the Vancouver-based company, said during a phone interview. Aurizon rose 34 percent to C$4.57 at 12:55 p.m. in Toronto after earlier rising as much as 36 percent, the most intraday since May 23, 2006. Alamos fell 9.9 percent to C$15.25, the most intraday since June 28.
Aurizon has eight projects in Abitibi including the operating Casa Berardi mine, according to the company’s website. The bid is “opportunistic” given the decline in Aurizon’s shares, said Steven Green, an analyst at TD Securities Inc. in Toronto. The stock dropped 37 percent in the 12 months through Jan. 11 while the S&P/TSX Materials Index declined 13 percent.
“At surface it looks to be off-strategy,” Green, who has a buy recommendation on Alamos, said in a note. “Alamos is a low-cost, open-pit heap leach producer in Mexico and Turkey, while Aurizon is a high-cost underground producer in Quebec.”
Alamos Gold has been a strong performing producer while Aurizon is a company that has strong cash flow but is lacking immediate production growth. The Abitibi is becoming a hot area and Alamos may like the value in Aurizon combined with the potential of the company’s holdings in the area.
The root cause of gold’s bull market
The following is excerpted from a commentary originally posted at www.speculative-investor.com on 6th January 2013.
Why is gold in a bull market? The answer isn’t “price inflation”, because although “price inflation” is happening it isn’t widely perceived to be a major problem at this time. Furthermore, there was relentless “price inflation” during the 1980s and 1990s while gold was in a bear market. Monetary inflation is part of the answer, but it isn’t the most important part because there was plenty of monetary inflation during the 20-year period when gold was in a bear market. The reversing of the US stock market’s secular trend (from up to down) during 2000 is also part of the answer, but saying that gold is in a bull market because the stock market is immersed in a secular valuation decline just prompts the question as to why this should be so. Why should a long-term gold bull market coincide with a long-term equity bear market?
The answer to the question “Why is gold in a bull market?” is related to the propensity to save. When there is an increase in uncertainty and/or the perceived level of economic/financial-market risk, people naturally want to save more and spend less. This is especially the case after an economy-wide inflation-fueled boom turns to bust, because in this situation debt levels will be high, many investments that were expected to generate large returns will be shown to have been ill-conceived, and it will be clear that much of what was generally believed about the economy was completely wrong. The public’s first choice in such circumstances would be to hold more money, but central banks and governments respond to the factors that are prompting people to save more by taking actions that reduce the value of money. Policy-makers do this because they are operating from the Keynesian playbook, in which almost everything is backward. In the real world an increase in saving comes at the beginning of the economic growth path and an increase in consumption-spending comes at the end, but in the Keynesian world the economic growth path begins with an increase in consumption-spending. Moreover, in the back-to-front world imagined by Keynesian economists an increase in saving is considered bad because it results in less immediate consumption.
So, things happen that make the public want to save more, but the central planners then say “if you save more in terms of money we will punish you!” They don’t actually say “we will punish you”, but they take actions that guarantee a real loss on cash savings. However, the actions taken to reduce the appeal of saving in terms of the official money do nothing to reduce the underlying desire for more savings. In fact, the actions tend to further undermine the economy and create more uncertainty, thus leading to an even greater propensity to save.
That’s where gold comes in. People want to save more, but they can’t save in terms of the official money unless they are prepared to lock-in a negative real return on their savings. They therefore opt for the next best thing: gold. Gold is almost as liquid and as transportable as money, but its supply is essentially fixed. Gold also has a very long history as a store of value and as money, so even though it is presently not money it is a good alternative to cash.
Long-term gold bull markets can therefore be viewed as periods lasting 10-20 years when the public has an increasing propensity to save and when the actions of the authorities make it increasingly risky to save in terms of the official money.
The best ways that we know of to illustrate gold’s major trend are via long-term charts of 1) the Inflation-Adjusted (IA) gold price, 2) the gold/commodity ratio (gold relative to the Continuous Commodity Index (CCI)) and 3) the gold/Dow (or gold/SPX) ratio. The first two are displayed below.
“Price inflation” was widely viewed as a big problem during the 1970s, but if the gold bull market of that decade had been primarily driven by “price inflation” then the gold price would not have made huge gains in inflation-adjusted terms and relative to the prices of almost all other inflation hedges (other commodities, for example). It made huge real gains because there was an increasing propensity to save, and because in addition to there being a general expectation that holding the official money would generate a real loss there was uncertainty regarding the on-going viability of the entire monetary system.
“Price inflation” has not been widely viewed as a big problem over the past 10 years, but it is clear to many people that the Fed has been playing fast and loose with the US dollar. There are also obvious questions about the long-term viability of the euro, the main fiat-currency alternative to the US$. At the same time, economic progress has slowed, investments in stocks and real estate seem a lot riskier than was the case several years ago, and nominal interest rates have been forced down to levels where real returns on monetary savings are certain to be well into negative territory even with annual “price inflation” of only a few percent.
Unless the world’s major economies miraculously return to health despite policy-makers doing the opposite of what they should be doing, or policy-makers start doing the opposite of what they have been doing, the propensity to save will remain in a long-term upward trend and savers will be forced to consider liquid alternatives to cash. That is, gold’s long-term bull market will remain intact.
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Has a New China Bull Market Begun?
After another big up day today, China's Shanghai Composite is now up a whopping 18% since making a multi-year low in early December.
Remarkably, the Shanghai Composite is currently stuck in the longest bear market it has ever seen (going back to 1990). A bear market is a 20%+ decline that was preceded by a 20%+ rally, and vice versa for a bull market. The current bear market that the Shanghai is in has lasted 756 calendar days and seen the index decline 38%. Below is a table of past bear markets for the Shanghai. The longest bear market China had seen prior to this one lasted 461 days from April 2004 to July 2005. Should the Shanghai gain another couple percentage points, a new bull market will be at hand, and it will certainly be a welcome relief for Chinese investors.
US 10-Year Yield: Breakout or Fake Out?
While equities have been the place to be so far in 2013, some of the gains have come at the expense of US Treasuries where yields have been on the rise. Less than two weeks ago, the yield on the 10-year US Treasury broke out above significant resistance and traded as high as 1.97% on January 4th. At the time, it looked as though the yield was staging a textbook breakout. That breakout in yield, however, is quickly beginning to look like a fake out. As shown in the chart below, after the last few days the yield on the 10-year has now drifted back below its breakout point. Commentators have been quick to write the obituary of the bull market in treasuries, but based on the 10-year yield in the last few days, the market may be saying not so fast.
Is Apple the Old Facebook and Facebook the New Apple?
Oh how the tides have shifted in Tech waters since the start of the fourth quarter. Apple (AAPL) was once the most beloved stock on Wall Street (and probably the world), but it has been the most loathed since the start of the fourth quarter last year. At the same time, Facebook (FB) was likely the most loathed stock on Wall Street following its disastrous IPO last year, but it has been one of the most loved since the start of the fourth quarter.
In the Nasdaq 100, the shift away from Apple (AAPL) and towards Facebook (FB) can be seen clearly. As shown, since the end of the third quarter last year, Facebook (FB) is up the most of any stock with a gain of 43.70%. Apple (AAPL), on the other hand, is down the most of any stock in the index with a decline of 24.48%. As the biggest stock in the world (for now it seems), Apple has hurt the overall market much more than Facebook has helped.
WHO BENEFITS?
Submitted by Charles Hugh Smith from Of Two Minds
The Neoliberal Financial Skim
The perfection of the Neoliberal order is a parasitic financial sector protected by the Central Bank and State.
If the Status Quo is ultimately a distribution system, as correspondent Simon H. proposes, then we should focus our attention on the inordinate share of the system’s profits being distributed to the financial sector. Frequent contributor B.C. has ably captured this perfection of Neoliberal economic order in five charts.
The essence of neoliberalism is that a liberalized financial sector will efficiently regulate itself via market mechanisms and make more profitable use of capital than either the State or the non-financial sectors of the economy.
The State’s proper role is the classical Neoliberal view is the following:
1. Get out of the way so the financial sector is free to enrich the nation with market-based allocation of capital
2. If reducing regulation is not possible, then benign neglect will do
3. Reduce the State’s skim of the economy so more of the national income flows to the private economy, where the financial sector’s can allocate capital according to profit potential rather than the State’s cronyism and/or political corruption.
This is the classic theory, but in practice the Neoliberal financial sector is the ultimate perfection of cronyism and political corruption, as the Central Bank and State protect the financial sector’s vast skim of the national income with a combination of toothless regulations and regulations that are only enforced for purposes of percetpion management (see Soviet Show Trials).
When the aforementioned benign neglect is insufficient to divert the national income to the parasitic finance-rentier sector, then the Central Bank and State actively transfer taxpayer monies to the financial sector via tax breaks, loopholes, and massive direct and indirect subsidies.
With this context in mind, please look at the following charts to grasp the scope and scale of the State-protected financial sector skim:
Precisely what benefits from this gargantuan parasitic skim flow to the general good? Into whose pockets does this gargantuan parasitic skim flow? Hint: not the lower 90% of the American populace.
The perfection of the Neoliberal order is a parasitic financial sector protected by the Central Bank and State. That is the U.S. Status Quo in a nutshell.
Lone Bear Comes From Market Internals
Below is the sentiment/bias of the major contributors at zentrader for the next 2 weeks. This is the most bullish I’ve seen the contributors since we started keeping track of this in November.
All About Trends - It’s touchy here. This overall trend is up,however this is resistance. Topping is a process in most cases.
Short term pullback then expect another push higher to continue to carve a top. Don’t rule out a shake and bake new high over next few weeks. – Neutral
Financial Tap - The Daily Cycle is in an extremely bullish position here. We should expect a solid 15 trading days before entering the timing for any sort of top. I’m seeing plenty of strength and a likely move over 1,500. However watch for a quick 2-3 session drop this week before the move begins. – Bullish
Liz DeMera - 30 Moving Average of advancing minus declining Oscillator has peaked on 01/02/13 and rolled over with no chance of making a higher high. Less new NYSE 52 week highs since 01/02/13, yet higher in price. – Bearish
Karen Starich - Pluto at 10 degrees Capricorn is very positive for the economy and suggests capital expenditure and manufacturing could be on the rise beginning next week. Most likely we will surpass the decade long resistance just over 1500 on the S&P 500 in the very near term. - Bullish
Jeff Pierce - My market timing signal turned bullish on 1/4 for the Nasdaq and subsequently my others for Dow and TSX have flipped as well. I’m firmly in the bull camp at this point and expect a slow grind higher. – Bullish
Chris Ebert - Covered call trading remains profitable, so the bulls retain control, however long call trading is currently unprofitable so the bull’s confidence is weak. Long straddle trading is approaching abnormal losses that would indicate the market could break out, possibly to new highs. Bullish-Neutral.
Previous Trading Sentiment:
12.31 Fiscal Cliff Keeps Many Traders On Sidelines
12-10-2012 Fed Has Trader Sentiment At Standoff
She survived Hitler. Will she survive Obama?
Found this recently. Submitting without commentary.
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“What I am about to tell you is something you’ve probably never heard or read in history books,” she likes to tell audiences. I am a witness to history.”
“I cannot tell you that Hitler took Austria by tanks and guns; it would distort history. We voted him in.”
“I wasn’t old enough to vote in 1938. I was eleven. But, I remember. We elected him by a landslide – 98 percent of the vote.”
“Everyone thinks that Hitler just rolled in with his tanks and took Austria by force. No so. In 1938, Austria was in deep Depression. Nearly one-third of our workforce was unemployed. We had 25 percent inflation and 25 percent bank loan interest rates.”
“Farmers and business people were declaring bankruptcy daily. Young people were going from house to house begging for food. Not that they didn’t want to work; there simply weren’t any jobs. My mother was a Christian woman and believed in helping people in need. Every day we cooked a big kettle of soup and baked bread to feed those poor, hungry people – about 30 daily.”
“We looked to our neighbor on the north, Germany, where Hitler had been in power since 1933.” she recalls. “We had been told that they didn’t have unemployment or crime, and they had a high standard of living.”
“Nothing was ever said about persecution of any group – Jewish or otherwise. We were led to believe that everyone in Germany was happy. We wanted the same way of life in Austria. We were promised that a vote for Hitler would mean the end of unemployment and help for the family. Hitler also said that businesses would be assisted, and farmers would get their farms back.”
“Ninety-eight percent of the population voted to annex Austria to Germany and have Hitler for our ruler. We were overjoyed, and for three days we danced in the streets and had candlelight parades. The new government opened up big field kitchens and everyone was fed.”
“After the election, German officials were appointed, and like a miracle, we suddenly had law and order. Three or four weeks later, everyone was employed. The government made sure that a lot of work was created through the Public Work Service.”
“Hitler decided we should have equal rights for women. Before this, it was a custom that married Austrian women did not work outside the home. An able-bodied husband would be looked down on if he couldn’t support his family. Many women in the teaching profession were elated that they could retain the jobs they previously had been required to give up for marriage.”
“Then we lost religious education for kids.”
“Our education was nationalized. I attended a very good public school.. The population was predominantly Catholic, so we had religion in our schools. The day we elected Hitler, March 13, 1938, I walked into my schoolroom to find the crucifix replaced by Hitler’s picture hanging next to a Nazi flag. Our teacher, a very devout woman, stood up and told the class we wouldn’t pray or have religion anymore. Instead, we sang ‘Deutschland, Deutschland, Uber Alles,’ and had physical education.”
“Sunday became National Youth Day with compulsory attendance. Parents were not pleased about the sudden change in curriculum. They were told that if they did not send us, they would receive a stiff letter of warning the first time. The second time they would be fined the equivalent of $300, and the third time they would be subject to jail.”
“And then things got worse.”
“The first two hours consisted of political indoctrination. The rest of the day we had sports. As time went along, we loved it. Oh, we had so much fun and got our sports equipment free. We would go home and gleefully tell our parents about the wonderful time we had.”
“My mother was very unhappy. When the next term started, she took me out of public school and put me in a convent. I told her she couldn’t do that and she told me that someday when I grew up, I would be grateful. There was a very good curriculum, but hardly any fun – no sports, and no political indoctrination.”
“I hated it at first but felt I could tolerate it. Every once in a while, on holidays, I went home. I would go back to my old friends and ask what was going on and what they were doing. Their loose lifestyle was very alarming to me. They lived without religion. By that time, unwed mothers were glorified for having a baby for Hitler. It seemed strange to me that our society changed so suddenly. As time went along, I realized what a great deed my mother did so that I wasn’t exposed to that kind of humanistic philosophy.”
“Then food rationing began.”
“In 1939, the war started and a food bank was established. All food was rationed and could only be purchased using food stamps. At the same time, a full-employment law was passed which meant if you didn’t work, you didn’t get a ration card, and if you didn’t have a card, you starved to death. Women who stayed home to raise their families didn’t have any marketable skills and often had to take jobs more suited for men.”
“Soon after this, the draft was implemented.”
“It was compulsory for young people, male and female, to give one year to the labor corps. During the day, the girls worked on the farms, and at night they returned to their barracks for military training just like the boys. They were trained to be anti-aircraft gunners and participated in the signal corps. After the labor corps, they were not discharged but were used in the front lines.”
“When I go back to Austria to visit my family and friends, most of these women are emotional cripples because they just were not equipped to handle the horrors of combat.”
“Three months before I turned 18, I was severely injured in an air raid attack. I nearly had a leg amputated, so I was spared having to go into the labor corps and into military service. When the mothers had to go out into the work force, the government immediately established child care centers.”
“You could take your children ages four weeks old to school age and leave them there around-the-clock, seven days a week, under the total care of the government. The state raised a whole generation of children. There were no motherly women to take care of the children, just people highly trained in child psychology. By this time, no one talked about equal rights. We knew we had been had.”
“Before Hitler, we had very good medical care. Many American doctors trained at the University of Vienna..”
“After Hitler, health care was socialized, free for everyone. Doctors were salaried by the government. The problem was, since it was free, the people were going to the doctors for everything. When the good doctor arrived at his office at 8 a.m., 40 people were already waiting and, at the same time, the hospitals were full.”
“If you needed elective surgery, you had to wait a year or two for your turn. There was no money for research as it was poured into socialized medicine. Research at the medical schools literally stopped, so the best doctors left Austria and emigrated to other countries.”
“As for healthcare, our tax rates went up to 80 percent of our income. Newlyweds immediately received a $1,000 loan from the government to establish a household. We had big programs for families.”
“All day care and education were free. High schools were taken over by the government and college tuition was subsidized. Everyone was entitled to free handouts, such as food stamps, clothing, and housing.”
“We had another agency designed to monitor business. My brother-in-law owned a restaurant that had square tables. Government officials told him he had to replace them with round tables because people might bump themselves on the corners. Then they said he had to have additional bathroom facilities. It was just a small dairy business with a snack bar. He couldn’t meet all the demands. Soon, he went out of business. If the government owned the large businesses and not many small ones existed, it could be in control.”
“We had consumer protection, too”
“We were told how to shop and what to buy. Free enterprise was essentially abolished. We had a planning agency specially designed for farmers. The agents would go to the farms, count the live-stock, and then tell the farmers what to produce, and how to produce it.”
“In 1944, I was a student teacher in a small village in the Alps. The villagers were surrounded by mountain passes which, in the winter, were closed off with snow, causing people to be isolated. So people intermarried and offspring were sometimes retarded. When I arrived, I was told there were 15 mentally retarded adults, but they were all useful and did good manual work.”
“I knew one, named Vincent, very well. He was a janitor of the school. One day I looked out the window and saw Vincent and others getting into a van. I asked my superior where they were going. She said to an institution where the State Health Department would teach them a trade, and to read and write. The families were required to sign papers with a little clause that they could not visit for 6 months. They were told visits would interfere with the program and might cause homesickness. As time passed, letters started to dribble back saying these people died a natural, merciful death. The villagers were not fooled. We suspected what was happening. Those people left in excellent physical health and all died within 6 months. We called this euthanasia.’
“Then they took our guns”
“Next came gun registration. People were getting injured by guns. Hitler said that the real way to catch criminals (we still had a few) was by matching serial numbers on guns. Most citizens were law abiding and dutifully marched to the police station to register their firearms. Not long afterwards, the police said that it was best for everyone to turn in their guns. The authorities already knew who had them, so it was futile not to comply voluntarily.”
“No more freedom of speech. Anyone who said something against the government was taken away. We knew many people who were arrested, not only Jews, but also priests and ministers who spoke up.”
“Totalitarianism didn’t come quickly, it took 5 years from 1938 until 1943, to realize full dictatorship in Austria. Had it happened overnight, my countrymen would have fought to the last breath. Instead, we had creeping gradualism. Now, our only weapons were broom handles. The whole idea sounds almost unbelievable that the state, little by little eroded our freedom.”
“This is my eye-witness account.”
“It’s true. Those of us who sailed past the Statue of Liberty came to a country of unbelievable freedom and opportunity. America is truly is the greatest country in the world. Don’t let freedom slip away.”
“After America, there is no place to go.”
FRANCE SURRENDERS TO MALI REBELS
BAMAKO, Mali (AP) — Despite intensive aerial bombardments by French warplanes, Islamist insurgents grabbed more territory in Mali on Monday and got much closer to the capital, French and Malian authorities said.
In the latest setback, the al-Qaida-linked extremists overran the garrison village of Diabaly in central Mali, France’s defense minister said in Paris. Jean-Yves Le Drian said Monday the rebels “took Diabaly after fierce fighting and resistance from the Malian army that couldn’t hold them back.”
The Malian military is in disarray and has let many towns fall with barely a shot fired since the insurgency began almost a year ago in the northwest African nation.
French military forces, who began battling in Mali on Friday, widened their aerial bombing campaign against Islamic extremists occupying northern Mali, launching airstrikes for the first time in central Mali to combat the new threat. The rebels, who come from several nations besides Mali, had been bottled up in the narrow neck of central Mali. But by now sweeping in from the west, they are now only 400 kilometers (250 miles) from Mali’s capital, Bamako, in southern Mali.
KUNSTLER GOES TO THE MOVIES
We saw The Hobbit and Les Miserables over the holidays. I liked them both. I have no interest in seeing the two movies Kunstler saw this weekend.
Going To the MoviesBy James Howard Kunstler
on January 14, 2013 9:26 AM
I don’t go to the movies much anymore, alas, because the nearest mall cineplex — owned by a company named Regal that runs the place like a self-storage facility — is a dump with broken seats and teenage employees who forget to turn out the lights when the movie starts. But the weekend weather here was sloppy, and this is the movie awards season, and I wanted to get an idea of what Hollywood thinks America is about these days, so I hauled my carcass over to see Django Unchained and Zero Dark Thirty, in that order.
Years ago I rather admired Tarantino’s Pulp Fiction for its rococo storytelling method and comic expansiveness. The sheer volume of gore and mayhem strained my suspension of disbelief, but I was charmed by the audacity — for instance the scene where a character played by Quentin himself repeats to the two hit men with a dead body that he’s not in the business of “dead nigger storage,” which was in there, I’m sure, just to rub a lot of sanctimonious minds the wrong way.
Django Unchained is something else: perhaps the most incoherent movie ever made, but in a way that nicely represents the culture that it comes out of. For the uninitiated, the movie tells the tale of a slave named Django (“the D is silent,” actor Jamie Foxx informs another character) rescued from a slave coffle by a German bounty hunter named Schultz posing as an itinerant dentist. Together they ride forth to slaughter white people involved in the slavery business to 1) make a lot of money off bounties, 2) free Django’s captive wife Broomhilda, and 3) enjoy many acts of bloody revenge.
What you notice right away is that the filmmaker has no sense of American history or geography. One moment you’re in the Sonoran Desert, the next moment the Montana Rockies. Huh? Of course the line on Tarantino by film savants is that his weltanschauung is a gleeful composition of movie history pastiche. That is, his ideas come only from other movies (or television), not from the so-called real world and the record of goings-on there. So in this case they are derived from previous movies made by earlier auteurs who got the details wrong about mid-19th century life. That may be so, but the difference is that the earlier movie directors, however mis-educated or befuddled by convention, might have cared about the milieu they attempted to represent. Tarantino is content to be wildly wrong about just about everything. Or rather, the details don’t matter as long as the fantasy satisfies portions of the brain where ideas are not processed.
What interests me about all this is how perfectly Tarantino’s mental universe reflects the current situation in our nation, in particular the infantile disregard for the facts of life, the self-referential inanity of our culture, and the complete absence of authenticity in anything. What disturbed me about the movie was the sense that Tarantino has set the table for race war, like a jolly arsonist playing with matches and gasoline in a foreclosed house. He won a Golden Globe award for directing last night.
Zero Dark Thirty tells the tale of a CIA unit based in Pakistan and its laborious efforts to track down Osama bin Laden, perpetrator of the 9/11 airplane attacks on the USA and other misdeeds. It focuses on the doings of a female American agent, uncelebrated in the annals of this long, strange “War on Terror,” who pored over the minutiae of cell phone records for a decade before locating the messenger who led CIA watchers to bin Laden’s hideout in Abbottabad, where Navy SEALs finally sent him to his eternal reward of feasts and virgins.
The movie, directed by Kathryn Bigalow, is a bloodless recounting of some very grim and bloody business from recent history. The controversy around it comes from the extensive scenes of “extreme interrogation” carried out by American officials against captured jihadists in “dark” locations. Critics have objected to the movie’s lack of a moral position about these brutal activities. Was it right? Was it wrong? The movie simply asserts that it happened that way. Some politicians have objected as to whether the depiction of all these matters is correct in the first place. Nor is the killing of bin Laden treated as an occasion for fist-pumping histrionics. If anything, the event leaves you with a hollow feeling and a bad taste for the time we live in. I admired especially – for the first time in many a movie – the absence of techno-triumphalism involving computers.
The contrast between the two movies is extremely interesting to me: Tarantino the populist, shall we say, reveling in a splatter-film Americana with barely a tenuous connection to reality, either historical, cultural, or emotional; and the assiduous Bigalow laying out the very serious business of capable adults engaging with a world that consistently terrifies and disappoints. Kathryn Bigalow didn’t win an award for directing at the Golden Globes.
ONLY $9,000 PER HOUSEHOLD
And there it is. The liberals and unions never want to deal with the cold hard facts of our economic situation. This is not just a Pennsylvania problem. Every state, municipality and school district in the country has this problem. Even using the ridiculous annual return assumption of 8%, the Pennsylvania government pension plan is underfunded by $41 billion. Using the real return rate of 4% will add tens of billions to that number.
I pay approximately $4,000 per year in real estate taxes. In order to fund the government worker pensions, EVERY household in PA would have to pay $9,000 more per year in real estate taxes. Talk about trying to get blood from a stone. If you are a government worker who thinks taxpayers are going to fund your gold plated retirement by having their taxes double or triple, you are living in a dream world. If the unions and politicians refuse to see the writing on the wall, municipal bankruptcies will proliferate across the land and they will see their pensions go up in smoke.
Pa. pension crisis is ‘tapeworm’ of state budget
Sunday, January 13,2013
GOV. TOM CORBETT likens Pennsylvania’s public pension problem to a tapeworm, a parasite that devours new revenue as fast as an improving economy can create it.
“We have to consider everything,” in fixing the problem; it’s the “tapeworm of the budget,” he told a Digital First Media editorial board meeting last week.
Corbett called pension reform the one thing he seeks to accomplish this year. Property tax reform, he says, will have to wait.
Corbett’s call to action is not without merit. The public pension drain has escalated to a crisis in Pennsylvania with nearly $700 billion in year-over-year cost growth robbing state coffers of 62 percent of any new revenue.
In recent years, both the state employees fund (SERS) and public school employees fund (PSERS) have accrued unfunded liability amounting to billions of dollars a year, according to Charles Zogby, secretary of the budget. The funds’ current unfunded liability is $41 billion, not including future shortfalls.
Just to get the funds back on good footing would require a tax increase of $9,000 on every household in Pennsylvania, Zogby said.
The story of how Pennsylvania’s public pensions got to this point can be explained, but not without pain. It’s a story of generous benefit increases without correponding changes to contributions. It’s a timeline of “kicking the can down the road,” as Zogby puts it, intentionally underfunding the systems and pushing the liability into the future. In 2001, the Legislature moved to enhance member benefits by increasing the multiplier that calculates pension amounts. In 2002, employer contributions from school districts and government were capped. In 2003, Act 40 was passed to restrain future growth in employer contributions.
AND, THROUGHOUT that time period, investment growth was nil, sending the funds into a downward spiral.
Unlike 401(K) or private investment funds, a defined benefit pension plan maintains a liability in payout no matter what happens to the fund’s investments. While SERS and PSERS fell in value, liabilities grew. And the tapeworm grew, too.
While the path that brought us here is obvious, the way out is more clouded.
The reform floated most often is moving away from a defined benefit plan to defined contribution, a proposal that was part of a 2010 pension reform package which did not go far enough. Zogby says state officials are looking closely at reforms that have been tried in other states, including changes in benefit calculations, such as capping the salary or rolling back the modifier.
Corbett says a proposal will be part of his budget plan for this year, although he admits his office is down to about two weeks to figure out the specifics. His only hint to the editors’ group was that adjustments to the multiplier could make an important difference.
BOTH OFFICIALS stressed changes have to take into consideration what people have already earned and what they are counting on. Current retirees have to feel secure their pensions won’t be affected, they said.
However, what they don’t say is how they plan to convince state employees and the powerful state teachers union that change has to happen.
“The taxpayers get it,” Zogby said. The people of Pennsylvania know this is a crisis. But for pension reform to work, the state needs to get the unions and groups representing public employees on board, as well as the lawmakers.
One way to start might be to enlist the ideas and help of those groups in writing the reforms. Get buy-in first and soften the sell.
Corbett has made his emphasis on pension reform clear to the public. It’s time now to get down to brass tacks and figure out a plan that not only will work but that will also have the needed support.
Time is of the essence. That tapeworm gets hungrier by the day.
— Journal Register News Service
Still Bullish But Getting Less So
As shown below, 53% of respondents to our weekend market poll said the S&P 500 would be higher one month from now, while 47% said the index would be lower. This is the tenth consecutive week that has seen more bulls than bears in our poll, which is by far the longest streak we've seen since we began the poll in early 2012. That being said, the percentage of bulls has been drifting lower since peaking out at 66% back in mid-November. At 53% bulls and 47% bears, there's certainly not a glut of bulls out there, even with the S&P at a bull market high.
FACTS DO NOT CEASE TO EXIST BECAUSE THEY ARE IGNORED
Can those in power keep the stock market going up when corporate profits are falling, taxes are going up, consumer debt is at an all-time high, energy, food, healthcare, and tuition costs are soaring, 25 to 54 year olds continue to lose jobs, Obamacare costs are now beginning, and we entered recession in the 2nd half of 2012? Ben and his buddies on Wall Street have managed to elevate the stock market by 20% in the last year. Valuations are stretched and the 10 Year Treasury has risen 50 basis points in the last four months. Those in power are doing the Victor Cruz touchdown dance at halftime. The 2nd half will be a different story.
Declaring Victory at HalftimeJohn P. Hussman, Ph.D.
“It’s important to emphasize that standard bear market declines have historically produced losses averaging about 30% – generally not just 20% (15% declines don’t even qualify). I don’t expect the next one to be a significant exception… Suffice it to say that the only reason to buy stocks here is a) the belief that one can sell them to a greater fool at higher prices despite already overvalued, overbought, overbullish and rising yield conditions, or b) the belief that the stock market will soar 30-50% from these levels, without experiencing even a minimal bear market in the next 4-5 years.
“Sometimes, it is sensible to speculate to some extent, even in overvalued conditions, if market action indicates an appetite of investors for risk and the market is not overbought or excessively bullish. Sometimes, strong multi-year gains without an intervening bear market are reasonable to expect, but those periods generally begin at much more favorable valuations. I realize that there is a visceral urge to participate here, as well as a fear of missing out when the market is hitting new highs, but over the full market cycle, investing to achieve short-term comfort costs a fortune.”
Hussman Funds Weekly Market Comment: June 18, 2007 – New Economy, or Unfinished Cycle?
Last week, the S&P 500 came within 1% of reprising a syndrome that we’ve characterized as a Who’s Who of Awful Times to Invest, featuring a Shiller P/E over 18 (S&P 500 divided by the 10-year average of inflation-adjusted earnings), the S&P 500 more than 50% above its 4-year low and 8% above its 52-week smoothing, investment advisory bulls (Investors Intelligence) over 47% with bears below 27%, and Treasury bond yields higher than 6 months earlier. This combination is one of numerous and nearly equivalent ways of defining an “overvalued, overbought, overbullish, rising-yields” syndrome. While there are certainly numerous conditions that are informative about stock market returns, and capture a much broader set of negative market outcomes, I don’t know of any other syndrome of market conditions – however defined – that has been so consistently hostile for stocks over the past century.
The historical instances corresponding to the above conditions represent a chronicle of overextended bull market rallies, where investors would typically have been quite incorrect to declare victory at halftime:
December 1972 – January 1973 (followed by a 48% collapse over the next 21 months)
August – September 1987 (followed by a 34% plunge over the following 3 months)
July 1998 (followed abruptly by an 18% loss over the following 3 months, and at the beginning of a nearly 14-year period where the S&P 500, including dividends, has underperformed Treasury bills, with the S&P 500 nearly 30% lower four years later)
July 1999 (followed by a 12% market loss over the next 3 months, and a series of whipsaw recoveries and losses, with the S&P 500 over 40% lower three years later)
January 2000 (followed by a spike 10% loss over the next 6 weeks, a series of whipsaw recoveries and losses, and finally a bear market that took the S&P 500 over 45% below its Jan 2000 level by late 2002)
March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)
July 2007 (followed by a 57% market plunge over the following 21 months)
January 2010 (followed by a 7% “air pocket” loss over the next 4 weeks, with a recovery into April and then a renewed decline, leaving the S&P 500 about 11% lower by July)
April 2010 (followed by a 17% market loss over the following 3 months)
December 2010 (near the start of QE2, and followed by a 10% further advance in the S&P 500 into May 2011, when an additional syndrome emerged that was also observed last week – see Extreme Conditions and Typical Outcomes – whereupon an 18% market plunge wiped out the entire gain, and then some).
March 2012 (followed by a further advance of about 3% over the following 3 weeks, and then a quick if unmemorable market decline of nearly 10%).
To examine this syndrome in data before the early 1960’s, sentiment figures have to be imputed, but that’s not difficult to do given the strong correlation between sentiment and the size and volatility of preceding market movements. On the basis of those estimates, we would include December 1961 (followed by a 27% market decline over the next 6 months), August 1929, and several other periods of risk, but the more recent record should be sufficient to encourage caution.
I should note that the thresholds in the above syndrome aren’t magic numbers – they’re simply ways to make the syndrome operational. We capture the same set of instances, with little variation, even with different cutoffs, as long as they reflect a reasonable “overvalued, overbought, overbullish, rising-yields” combination. Importantly, regardless of whether we look at the period since the 1920’s, or only the period since the 1960’s, the average market loss within a two-year period following these conditions has been over 27%. Indeed, if we look only at periods prior to 2010, the average market loss within a two-year period following these conditions has actually been about 36%.
What now?
Repeated monetary interventions have deferred the onset of market weakness following these syndromes since 2010, and appear – for now – to have held off the full-fledged bear market declines that have normally started within a few quarters. But even since 2010, the overvalued, overbought, overbullish, rising-yields syndromes we’ve observed have regularly been followed by sufficiently large corrections to make these conditions worth noting. That record doesn’t ensure a significant correction in this instance, of course, but in my view, present conditions represent a “textbook” example of conditions where investors have been misguided to place their faith in a market advance. It’s certainly possible that investors could still drive stocks higher over several weeks or a few months, but given a bull market that is already quite mature, the historical record suggests that investors will ultimately find their present enthusiasm regrettable.
The strongest investment returns emerge at points that are diametrically opposed to what we observe today – valuations are reasonable (even if not depressed), stocks are oversold, bearishness is rampant, and yields are falling. From a return/risk standpoint, the best opportunities to accept market
risk emerge when a decline to moderate valuations is joined by an early firming in market action – not when the market has already enjoyed an extended advance, carries a Shiller P/E of 22, exhibits lopsided bullish sentiment, and pushes every upper Bollinger band (two standard deviations above the 20-period moving average) at daily, weekly and even monthly resolutions.
These observations would be more obvious and intuitive had we provided a more recent example by moving away from a defensive position in 2009-early 2010, as we did after the 2000-2002 bear market. It’s an unfortunate reality that the credit crisis was so out-of-sample from the standpoint of post-war data that we were forced to stress-test our approach against Depression-era data. During the Depression, stocks dropped by two-thirds even after “reasonable” valuations were achieved, and even strong trend-following measures were subject to whipsaws that allowed for repeated drawdowns in the area of 40-50%.
Elevating economic risk through monetary interventions and accounting changes that remove balance-sheet transparency (the latest being a watering-down of the Basel Accords that only Charles Ponzi could love) have ironically made it rewarding in the recent cycle to simply ignore concerns about systemic risk, stress-testing, illiquidity, and policy distortion. We’ll see how that plays out over the coming market cycles (and the completion of this one). I believe that we’re prepared for a much broader range of outcomes than investors seem to anticipate, and have also adapted to a world – however unlikely – where massive interventions might continue without negative consequences.
In any event, however, the proper way to seek returns is not to embrace market risk in a mature bull market featuring the most hostile of investment conditions, in violation of everything we know about risk. Rather, having addressed the extraordinary requirements of the recent market cycle, the proper response is to proceed with a robust, well-tested approach in the expectation that strong opportunities (or at least repeated moderate opportunities) will emerge during the coming cycle, as they have emerged during every market cycle in the past.
Frankly, I doubt that any of the market’s return since early 2010 will prove to be durable by the end of the market cycle that began from the 2009 low. Indeed, given that the average cyclical bear market in a secular bear market takes the S&P 500 about 39% lower, I suspect that the resolution of the coming cycle may wipe out not just half (which is typical), but most of the bull market advance since 2009.
Overbullish equity sentiment is now full-blown with 51.1% bulls vs. 23.4% bears; stock margin debt now exceeds 2% of GDP, as it has in only three prior instances: the 2000 market peak, the 2007 market peak, and the intermediate market peak of February 2011 (not a terrible outcome, but still followed by an 18% decline in the S&P 500 over the following 7 months); earnings prospects appear dismal on a 4-year horizon (as supported in more detail below); and the main reason for reduced investment allocations to stocks – compared to bonds – is the enormous new issuance of debt in recent years, since somebody has to hold the outstanding quantity of both. With those caveats in hand – specific to the equity market – I strongly recommend reading the latest letter from celebrated bond investor Howard Marks of Oaktree Capital, who echoes our own broad concerns about financial risk here.
We remain both optimistic and patient for bullish opportunities to emerge as market conditions change. Present overvalued, overbought, overbullish, rising-yield conditions fall within a tiny percentage of market history that is associated with dismal market outcomes, on average. It’s true that we’ve observed extreme conditions since about March 2012 with little resolution aside from short-term declines. But the S&P 500 remains only a few percent from its March 2012 high, and if history is any guide, the extension of these unfavorable conditions is not likely to reduce the depth of the market loss that can be expected to resolve them.
Take it to the limit
“In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
- Federal Reserve Statement, December 12, 2012 (emphasis ours)
Inflation expectations are typically inferred using the difference between nominal interest rates and the real interest rate on inflation-protected securities of the same maturity. Since nobody at the Fed actually seems to be tracking long-term inflation expectations, the following chart shows 10-year inflation expectations implied by the difference between the 10-year nominal Treasury yield and the yield on the Treasury Inflation Protected Security maturing closest to 10 years from today.
Notice that the 10-year expected rate of inflation abruptly spiked past 2.5% months ago. The precise date of that spike? September 13, 2012 – the day that Ben Bernanke announced QEternity. At present, the 10-year TIPS yield is -0.70%, meaning that investors are paying for inflation protection by pricing the bond at a negative real interest rate. This compares with a yield of 1.86% on the 10-year nominal Treasury, implying a 10-year inflation expectation of 1.86 – (-0.70) = 2.56%.
The upshot is that further quantitative easing became inappropriate on precisely the day that it was announced. The Fed has already successfully destabilized inflation expectations not for two years, but for the next decade. So much for “anchoring” long-term inflation expectations.
Does that mean this recklessness will stop? Probably not. The Fed will likely wait until the spread between the 2-year nominal yield (presently 0.25%) and the 2-year TIPS yield (presently -1.79%) shoots above 2.50% (presently 2.04%). At that point, long-term inflation expectations will be further destabilized, and we can all watch as the Fed tries to stuff Genie back in the bottle.
What is distressing about quantitative easing is that aside from distorting savings and investment decisions, it achieves no real effects other than a short burst of pent-up demand for a quarter or so, and a “portfolio balance” effect that helps the stock market recover whatever loss it experienced over roughly the prior 6-month period. Other than that, the additional reserves simply accumulate as idle bank balances. Put simply, QE does not relieve any constraint on the economy that is actually binding.
The approach is misguided because it is based on a belief in “wealth effects” that can be found nowhere in economic theory (where the concept of “permanent income” argues strongly against the idea that transient portfolio fluctuations affect consumption), nor in historical data (where a 1% change in stock market value has at best a short-lived effect on GDP on the order of 0.03-0.05%). Yes, one can demonstrate a “portfolio balance” effect – increasing the stock of zero-interest cash balances will tend to reduce the yield on competing investments, particularly short-dated instruments like Treasury bills. But this is pushing on a string; there’s no transmission mechanism to the real economy. Unfortunately, as I’ve said before, if you’re around academia for any length of time, you learn that few academic economists actually study the economy. They study “economies” in a very abstract sense. As in “consider an economy in which there are two islands, a turnpike, and five guys named Jack, one of whom is the government but nobody knows it…”
Several years ago, the credit crisis emerged as years and years of debt on easy terms finally came face-to-face with unproductive and overpriced assets that had been financed with that debt. Quantitative easing is little more than a hat trick to perpetuate this imbalance by encouraging even more debt on easy terms, but it also suppresses the incentive to save, and it lowers productivity by encouraging financial speculation rather than the allocation of capital toward its highest uses.
The economy is trapped in a low-level economic equilibrium where businesses are slow to create jobs because consumer demand is weak, and where consumer demand is weak because businesses are slow to create jobs. Until the root causes of the weak demand (excessive consumer debt and underwater mortgage obligations) are addressed, until pressing global risks are addressed (the need to restructure unserviceable European debt burdens and quietly insolvent European banks), and until new innovations emerge that employ enough workers to create enough income to sustain demand for those innovations (which requires productive investment, research and development), little is likely to change. Meanwhile, funds that would normally finance new productive investment are instead going to finance new government debt, and the proceeds from new government debt is going – in aggregate – to finance the shortfall between consumer income and consumer spending. In the process, corporate profit margins are broadly distorted because revenues are propped up despite depressed employment, and because deficits in one sector of the economy must be matched by a surplus in another. This bad equilibrium leaves the combined share of consumption and government spending at a record high proportion of GDP, while the share allocated to productive investment dwindles.
Quantitative easing will do nothing to fix this, because it perpetuates debt accumulation, distorts savings and investment decisions, and enables government spending, transfer payments, and growing indebtedness instead of investment, capital accumulation, and employment. To some extent, we should welcome higher inflation expectations, because at least they might bring the Fed’s intentional distortions closer to an end.
On the outlook for corporate profits
Presently, corporate profits as a share of GDP remain about 60-80% above their historical norm, depending on the measure one uses. Meanwhile, Wall Street is enthusiastic not only to take current price/earnings multiples at face value, but to extrapolate strong future rates of earnings growth. As a reminder of the reality that will predictably follow this mistake, the chart below shows the ratio of corporate profits to nominal GDP (left scale), along with the subsequent annual growth rate of corporate profits over the following 4-year period (right scale, inverted). Note that the inverted right scale means that higher values represent slower profit growth.
At present, current profit margins are consistent with earnings contraction over the coming 4-year period at something close to a -10% annual rate, implying a drop in corporate profits by more than one-third in the coming years (even assuming intervening growth in GDP). That sort of decline would be consistent with a normalization of profit margins, without taking them below their historical average. Investors who believe that stocks are “fairly priced” on the basis of “forward operating earnings” seem to have no appreciation of the extent to which depressed savings rates and massive government deficits have temporarily boosted corporate profits over the past few years (see Too Little to Lock In for the accounting relationships here).
The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Only comments in the Fund Notes section relate specifically to the Hussman Funds and the investment positions of the Funds.
Fund Notes
With market conditions now recapitulating the most negative overvalued, overbought, overbullish, rising-yields syndromes that we identify, we remain defensive at present. Conditions can change quickly, and we are patiently looking for opportunities to take a more constructive stance, but to reach for gains in a strenuously overbought market, where prospective returns are quite low by our estimates, bullishness is excessive, and competing returns are rising, is a dangerous way to invest in my view.
Strategic Growth Fund remains fully hedged, with a staggered strike position that raises our index put option strikes somewhat closer to market levels, at the cost of additional option premium amounting to less than 1% of assets looking out to springtime. Strategic International remains fully hedged. Strategic Dividend Value is hedged at about 50% of the value of its stock holdings – its most defensive position. Strategic Total Return has a duration of about 3.5 years at present (meaning that a 100 basis point move in Treasury yields would be expected to impact the Fund by about 3.5% on the basis of bond price fluctuations), with just under 10% of assets in precious metals shares – where general conditions remain positive but real interest rates after inflation have recently been pressed higher (as nominal interest rates have increased even faster than inflation expectations) – and about 5% of assets in utility shares.
A few comments specific to the Strategic Growth Fund: Since the all-time high in Strategic Growth Fund on 9/17/08 through last Friday, the Fund has experienced a total peak-to-trough drawdown of 24.36%, including reinvested distributions. Of this, 21.45% of the decline occurred in the two months between 9/17/08 and 11/20/08. The period since then includes a moderate recovery followed by an extension of the 2008 drawdown by about 3%. By comparison, the deepest loss experienced by the S&P 500 during the recent cycle was 55.25%, including dividends, between 10/09/07 and 3/09/09.
To put some algebraic perspective on that difference in risk exposure, even if you’ve experienced a 24.36% drawdown, it takes more than an additional 40% decline to turn that into a 55.25% drawdown. Conversely, it takes a 69% advance just to turn a 55.25% drawdown into a 24.36% drawdown. So while we’ve been uncomfortable during the recent cycle, the notion that our risk has somehow approached that of the market, or that heroic gains are required to establish new highs, or even that we are very tolerant to risk, is simply a misjudgment in my view.
Strategic Growth seeks to outperform the S&P 500 over the complete cycle, with smaller periodic losses than a buy-and-hold approach (and has indeed done so since the Fund’s inception – additional performance figures and reports are available on The Funds page of the website). The drawdown we’ve experienced in Strategic Growth in the most recent cycle has been frustrating, but is hardly insurmountable. The majority of my personal assets remain invested in Strategic Growth Fund, and I’m enthusiastic about that despite feeling put through the ringer in recent years.
As anyone familiar with our pre-2009 experience knows, I have no intention or expectation of running a single-digit, perpetually-defensive horserace with the S&P 500 over time. The fact that the past cycle has produced that result is a reflection of economic events, policy interventions, and market action that were extraordinary from a historical perspective, and that I believe we can navigate in the future if they become more commonplace. Past performance, favorable or unfavorable, is not indicative of future returns. In my view, there are some points where process, discipline and historical research carry great weight, and I believe this is one of them – as much as bulls might like to declare victory at halftime.
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