The idea that it takes more risk to make more return is wrong.
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Welcome. The content below is free to the public. It might be worth what you are paying for it. Having studied economics and being in finance for over two decades, I have learned that only one thing is certain - that is almost nothing is certain. As we endeavor to come up with our best analysis of the world around us, the opportunities and risks, we have to try to overcome a myriad of issues including our own ignorance, biases and emotions. What follows are my attempts to overcome those obstacles. Welcome to my view.
Overnight that Bank of Japan refrained from adding any additional stimulus to their monetary system. It was a mild surprise, although many of us thought they'd wait until some sort of market turbulence to add more money to the money fire.
The Federal Reserve sounded, well, like the Federal Reserve yesterday. In a written statement nothing really changed from before. It was so boring, it's barely a headline today. There was an important message though that continues to be overlooked. The Fed is very concerned about a coming slowdown triggered by international factors.
Today, GDP clocked in at the slowest pace in two years with business investment the lowest since -buhm, buhm, buhm - 2008. The low business investment plays into my theme of "slow growth forever."
The markets reached an 8 month high today and breadth is wide. Normally that signals a bull trend. And to be honest, we could see one for a few more months. But that doesn't negate everything else we've been talking about recently.
Chasing markets higher is a trap that the big market players set for the little guys. Take a look at volume, it is very low. What that means is little guys are chasing higher and big guys are letting them do it by standing aside.
This is a just a quick mid-week interjection. As you know, I recently issued a crash alert. There are literally dozens of reasons I did that. However, here are three more charts that should hit home and make the point that being a very, very patient buyer right now is the play.
The lead chart is the Shiller CAPE ratio. What is that? It is the cyclically adjusted price-to-earnings ratio. Basically, it adjusts for normalized earnings over a ten-year period. It does this to represent the cycles that earnings go through from peak to trough to peak again.
The normal CAPE is around 15 or 16, but it can go a few points higher or lower with no real consequence. Right now, earnings are just coming off of peak that was the fourth highest in history. Certainly, with enough central bank money or government stimulus, the ratio could climb to challenge all-time highs. However, given global debt and general mood, the odds of central banks and governments printing and borrowing without a crisis to rally around seems remote.
The more plausible scenario is that the earnings cycle plays out, meaning that earnings, which are already heading down, fall more. So, if earnings do indeed fall, then we would expect prices of stocks to follow suit. I think this is especially true for a few reasons I mention below.
For the past year I have been advocating maintaining high cash balances within investment accounts. Those who have done that, even with some losses along the way, are in a good position to withstand and then benefit from the coming stock market correction. If you are not holding 25-50% cash in your accounts, find a way to do so now!
For most investors, selling stocks in companies that are heavily indebted, have a high forecasted PEG ratio (price to earnings / growth) or a high price to book ratio are good places for selling. Exchange traded funds (ETF) with high PEG are also candidates to sell. Most growth mutual funds can also be jettisoned in favor of short-term U.S. Treasury funds or insured money market accounts.
Why all the angst. First of all, it's been a long time coming. This is not some sudden shift in position. I have been warning about "slow growth forever" for a year now. There are no fast answers for the aging demographics issues and global debt stress that all of the developed nations are facing and many developing nations are facing. In recent months, it has become apparent that those problems are outweighing the positives.