The Most Important Chart for Stock Market Investors in 2020

I'm so old I can remember from fundamentals and technical analysis were relevant, but this is 2020, and the most important for stock market investors may well be the chart representing the total assets of the federal reserve.

Back in September and October 2008, the federal reserve reacted promptly to the bankruptcy of Lehman Brothers, but it was not until March 2009 before the market bottomed out. Since the the balance sheet has gone up with QE 2, QE 3 and operating twist, and it's only when the Federal Reserve Bank started to tamper in 2018 that the stock market become much more volatile, and the FED had to reserve course. The response to COVID-19 sent the assets into the stratosphere, so let's see how it correlates to the S&P 500.

The FED assets purchase started the week of March 17th, soon after the stock market bottomed out on March 24th, and the S&P 500 went up as long as the FED was purchasing assets. Since then the FED has mostly stopped purchases, and as soon as they started to lower their assets, the S&P 500 followed through.

That means the stock market is highly correlated to the FED's actions, and the rally we've seen since March 23rd may be entirely due to the FED. We should then closely follow the actions of the FED and other central banks for the future direction of the stock market. However, if they overdo it, there may eventually be a currency crisis of some sort. We live in interesting times.

Marc Faber June 2012 Market Commentary

Marc Faber has just released his June 2012 market commentary on the gloomboomdoom.com website.

This month report is entitled "The Political Function of Inflation is to Mislead Public Opinion" and he talks about the distortions created by inflation. He explains that scholars had longer discovered the viciousness of monetary inflation long time ago quoting Nicholas Oresme (14th century):

Among the many disadvantages arising from alternation of the coinage which affects the whole community is....that the prince could thus draw to himself almost all the money of the community and unduly impoverish his subjects. And as some chronic sicknesses are more dangerous than others because they are less perceptible, so such an extraction is more dangerous the less obvious it is.

He carries on saying that we need to consider seriously Sheila Bair’s tongue-in-cheek proposal to fix income inequality with a $10 million loan for everyone, especially if we are to believe the Keynesians that the "economy desperately needs a short run fix" (Krugman).

The main issue is that Keynesian economic policies are directly responsible for the current global economic crisis, because they have led to excessive debts in most Western societies, which will remain for a long time and be a drag on growth.

There is only 1 attachments with this monthly market commentary (MMC):

• "Natural Gas: A Contender for the Greatest Thematic Tailwind over the Next 20 Years" by Pedro Noronha, Noster Capital LLP

I could not find the report online, but this simply makes the case for investing in Natural over the long term. With peak oil, the limitations of coal both in terms of energy as well as political & environmental reasons, natural gas will become more and more prominent in the energy mix. Pedro Noronha is long on CHK.

If you want to access the full Monthly Market Commentary (MMC) by Marc Faber, it is available for 300 USD per year.

PS: Last month he also issued a temporary (and short) report in the middle of the month. I don't have access to it, but this kind of "urgent" report is usually not a good thing...

Jeremy Grantham's Quarterly Newsletter April 2012 Summary

Jeremy Grantham, GMO, has just released its Quarterly Newsletter entitled "My Sister’s Pension Assets and Agency Problems (The Tension between Protecting Your Job or Your Clients’ Money)".

In this newsletter, he focus on how career risk for people working in the investment business affects the markets. The first priority for professional investors is to keep their job, and for that reason they usually go with the flow to avoid being wrong on their own and be able to use the all convenient "nobody saw it coming".  Career risk (which I discovered thanks to Jeremy Grantham) is what made me realize that as an individual investor, you could beat the market over the long term, as long as you are disciplined and patient.

Here are the key points brought forward by Jeremy Grantham:

• Career risk is a main cause of volatility: two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend, whereas the market’s actual price is within plus or minus 19% two-thirds of the time.

• Ignoring long term trends may be the correct response on the part of most market players, for ignoring the volatile up-and-down market moves and attempting to focus on the slower
  burning long-term reality is simply too dangerous in career terms.
• The quote “The market can stay irrational longer than the investor can stay solvent.”  can be expressed as “The market can stay irrational longer than the client can stay patient.”  for investment companies. GMO found that clients patience time has been around 3 years on average in normal conditions.
• 3 conditions must be met to bet against market irrationality:
  • Allow a “margin of safety” and wait for a real outlier before you make a big bet
  • Stay reasonably diversified
  • Never use leverage

He admits that his sister portfolio (managed by himself) did better than his clients' portfolio, mainly because he has only had to consider absolute return without the investment constraints some investors impose and felt absolutely no career risk.

GMO tries to find the right balance between short term client expectations and long term prospects, but this is challenging as it appears they lost 40% of their clients when they stayed out of the 1999/2000 stock market bubble. But as they were proven right as time passed by, the company  eventually "attracted a flood of new business" in 2003 to 2006.

Before the 2008 crash, his sister portfolio had virtually 0% allocation in stocks, but GMO clients still had about 45%, again because of business risk. 

GMO now offers a "Benchmark-Free Allocation Strategy" which allowed great return during last decade and reflects little career or business risk. The strategy intended to protect capital first and yet still make good money by taking into account historical trends and valuations.

The second part of the newsletter "Force Fed" written by Ben Inker provides GMO's investment outlook and explains how the Federal reverse market manipulation makes it to invest.

Here are the key points I noted:

• The Fed has engineered a situation in which the really unattractive asset classes are the ones we have always thought of as low risk: government bonds and cash. (etfideas: That's actually the main reason why I hate the fed)
• Stocks are expensive relative to GMO estimate of long-term fair value, but so are bonds and cash.
• Australian and New Zealand government bonds are the only bonds (unenthusiastically) liked by GMO because of decent real yield and government spending policies that are sustainable in the
  long run.

You can read the complete newsletter for free on GMO website.

Marc Faber: Inflation or Deflation ?

Marc Faber is interviewed by Lauren Lyster's Capital Account on Russia Today on the 3rd of April 2012.

Marc Faber says inflation in money and credit can cause bubbles, but it is hard to know where they are, and it is not easy to know where inflation is taking place. He also notes that governments hide inflation and much of that inflation goes into asset prices. We do not know exactly how much the Federal Reserve, the ECB, the BOJ, etc. are propping up the prices of stocks, commodities, etc. We can only estimate. The money printing and loose language of the central bankers and policy makers around the world certainly does distort the price mechanism, however, and Marc Faber is not optimistic about the ramifications of these actions.

He also mentioned the quadrillions in derivative, and that derivatives bubble will eventually collapse and lead to massive wealth destruction.

When asked to give advice to young people in their 20s and 30s, he referred to his generation and how it was easy to get a job at the time, but since the collapse of communism and the advance of the internet, 3 billion persons entered the world economy and western youngster have a lot of competition by young people living in developing economies, so he just think young people should lower their expectations and people in the western world should change their mentality and reject the nanny state.

 The interview starts at 3:18.

Eric Sprott: The Recovery Has No Clothes

Sprott Asset Management published their monthly newsletter Market at Glance (March 2012) entitled "The [Recovery] Has No Clothes".

Eric Sprott and David Baker explain that although Greece has been papered over, and many people are now bullish, very little has actually changed for the better, and it's too early to declare a new bull market has started.

Among all the cheer-leading with "good" indicators, they give some counter examples of not so good indicators:

1. Although the BLS announced an unemployment rate of 8.3%, the Gallup survey showed unemployment increasing to 9.1% in February (8.6% after seasonal adjustments) versus 8.6% in January.
2. US food stamp participation has reached an all-time record of 46,514,238 in December 2011, up 227,922.
3. Europe's 9.7% year-over-year decrease in auto sales
4. 100bp drop in the March consumer confidence index
5. 5 consecutive months of manufacturing contraction in China
6. 0.9% drop in US February existing home sales.
7. In February 2012, the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011.

They also commented on the Federal Reserve stress test on large US banks:

The test used an almost apocalyptic hypothetical 2013 scenario defined by 13% unemployment, a 50% decline in stock prices and a further 21% decline in US home prices. The stress tests tested where major US banks' Tier 1 capital would be if such a scenario came to pass. Anyone who still had 5% Tier 1 capital and above was safe, anyone below would fail. So essentially, in a scenario where the stock market is cut in half, any bank who had 5 cents supporting their "dollar" worth of assets (which are not marked-to-market and therefore likely not worth anywhere close to $1), would somehow survive an otherwise miserable financial environment. The market clearly doesn't see the ridiculousness of such a test, and the meaninglessness of having 5 cents of capital support $1 of assets in an environment where that $1 is likely to be almost completely illiquid.

They also mentioned that Dexia, a Belgian bank, passed the European stress test, only to fail 3 months later.

Then Eric Sprott and David Baker turned to their specialty: Precious metals.

Our skepticism would be supported if not for one thing - the recent weakness in gold and silver prices. Given our view of the market, the recent sell-offs have not made sense given the considerable central bank intervention we highlighted in February.

After the good performance of Gold and Silver in January and February, both markets were hammered on the 29th of February, as Ben Bernanke gave a speech (QE3 not needed) and the European central bank flooded the market with another €529.5 billion with the second part of Long-Term Refinancing Operation (LTRO).

QE3 is not off the table, just delayed, and Gold and Silver price drop was exclusively due to a sell-off on the paper market with the equivalent of 173 million ounces of physical silver exchanged between 10:30 am and 11:30 am. Compared that to the yearly production of Silver (730 million ounces), almost 24% yearly silver production exchanged in 1 hour.

An analysis of the paper-silver market shows that Silver is  traded 143 times higher in the paper markets versus what is produced by mine supply compare that to crude oil (14.3 X), Aluminum (46.8 X), Gold (69.4 X) and Copper (75.1 X) and they conclude:

The prevalence of paper trading in the silver market is what makes the drastic price declines possible by allowing non-physical holders to sell massive size into a relatively small market. It's not as if real owners of 160 million ounces of physical silver dumped it on the market on February 29th, and yet the futures market allows the silver spot price to respond as if they had.

The Gold market also looked suspicious with $3 billion of physical gold dumped into the market in a short time, and this was probably not done by speculators or investors.

They conclude as follows:

If we are right about gold and silver as currencies, and if they we are right about the continuation of central bank printing, both gold and silver will continue to appreciate in various fiat currencies over time. If there is indeed some sort of manipulation in the futures market that is designed to suppress the prices for both metals so as to detract from the mainstream investor's interest in them as alternative currencies, then both metals are likely trading at suppressed prices today.

...

The equity market rally that began in late December appears to be generated more by excess government-induced liquidity than it does by any raw fundamentals. We continue to scour the data for signs of a true recovery and we are simply not seeing it.

...

We would also expect the precious metals complex to enjoy renewed strength as the year continues. One bad month does not change a long-term trend that has been building over 10 years. Gold and silver will both have an important role to play as the central bank-induced printing continues, and we expect more on that front in short order.

The full version of the newsletters is available at http://sprott.com/markets-at-a-glance/the-%5Brecovery%5D-has-no-clothes/

Peter Schiff: Ben Bernanke is Public Enemy No. 1

Peter Schiff is interviewed on CNBC Fast Money on the 26th of March 2012 and explains the Federal Reserve is now blowing a massive bubble in US treasury and government debt and once this pops (as interest rate must be increased due to inflation), banks will fail and the crisis will be worse than 2008/2009.

Marc Faber: Beware of The Unintended Consequences Of Money Printing

Interview with Marc Faber and Chris Martenson (March 16,2012) about the unintended consequences of money printing by central banks.

First they discuss about the Greek default which does not matter according to Marc Faber, then they focus on central banks, the fact that they will never reduce their balance sheets as they have embarked on the path of money printing, and how the lower purchasing power of money particularly affects low and middle income people.

When Chris Martenson mentions the high price of oil, Marc Faber explains that consumers of Oil (mainly western economies) are suffering, but producers (Russia,. Saudi Arabia...) are benefiting.

Finally, they talk about Gold and Silver. Everybody should own precious metals as an insurance policy against a financial meltdown. Gold is not particularly expensive according to Marc Faber, although he still think we are in a correction phase. Having said that he won't sell his Gold as long as Obama (or a republican) is in power because they won't address the problems.
Marc Faber eventually sees the full financial system become an MF Global (he said some people got all their money whereas some didn't) and for that reason you should keep your Gold in a safe deposit, not in the US, but rather at some airports such as Singapore.

Jim Grant: How About Capitalism, Ben Bernanke ?

James Grant is interviewed on Bloomberg and the 13th of March 2012 after the federal reserve meeting.

He first talks about the Federal Reserve monetary policy and the bond market.

He explains that by distorting interest rates, the Federal reserve has suppressed price mechanisms and with little value in bonds (he calls the bond market a "desert of value"), many people flock to high yielding junk bonds.

Ben Bernanke

He also "translates" terms of Bernanke speech:

• Highly accomodative = high manipulative
• Quantitative easing = money printing

He explains that Gold price is a function of the action of central banks and note that the ECB has increased its balance sheet by an astounding 89% on an annual basis, the British central bank by 67% and the fed by only 15%. All those numbers are unprecedented and the way they do it is by simply taping numbers on a computer screen.

Jim Grant also took a stab at Warrent Buffet's "Stocks outperform Gold" by showing a chart between 1996 and today with the prices of Gold, sugar and Coca-Cola stock. During that period Gold was the best performer, followed by sugar and then Coca-cola. He explains that valuation is important. Whereas Coca-cola had a PE ratio of 39 in 1996, it now has a much better 16 PE ratio. He also mentioned that while Gold is now the refuge of the fearful, back in 1996, Gold was considered to be the refuge of the idiots. :)

Finally he says he's bearish on the Chinese economy and worries about the consequence of a Chinese slump, since many people think the Chinese have found the formula to make it work...

GEAB 63: Global Systemic Crisis: The 5 Devastating Storms of Summer 2012 at the Heart of the Global Geopolitical Dislocation

Here are the highlights of GEAB 63 (March 2012) entitled "Global Systemic Crisis: The 5 devastating storms of summer 2012 at the heart of global geopolitical dislocation":

• Global Systemic Crisis: The five devastating storms of summer 2012 at the heart of the global geopolitical dislocation.  Global recession, debt crises, stock market crashes, potential war with Iran.
  
• Summer 2012: The US falls back into recession as Europe stagnates and BRICs slow down. LEAP 2012 predicts a global recession in 2012.
• Summer 2012: Central banks roadblocks and the rise of interest rates. The US federal reserve must now manage two new problems: the lack of demand for US treasuries and the rise of two other currencies: the Euro and the Chinese yuan.
• Summer 2012: Storm on currency markets and western public debts. After several attempts to stabilize exchange rates over the last few quarters, the failure to come to an agreement for a new currency at the G20 in order to build a new monetary system will lead to more currency volatility and further debt crises in western economies.
• Summer 2012: Iran, the war "too many". Whether this war occurs or not, it will be the war too many for the western world.
• Summer 2012: The new stock market and financial institutions crash. Iran's allies, such as China, are likely to hurt Washington financially by diversifying US dollar assets into other currencies.by announcing with Moscow that they will stop buying US treasuries in order to stop the US war machine.
• 2015: "The great fall of western real estate" - Excerpt of the chapter on the evolution of US residential real estate. As the US manufactures less and less, the country will become poorer and accelerated the fall of American real estate.
• Strategic and operational recommendations. Consequence of the emergence of 3 main monetary zones (US Europe and China). Inflection point for Gold. Commodities: conflict vs recession. End of the illusion for the US economy. Orange alert (whatever that means) on financial products..
• The GlobalEurometre - Results & Analyses. 85% of respondents think of European governance is being put into place.

The full GEAB 63 (PDF format) is available to LEAP 2020 subscribers for 200 Euros per year (10 + 6 issues).

6 Video Interviews With Jim Rogers

TheStreetTV has uploaded 6 short video interviews with Jim Rogers on the 6-7 December 2011.

2012 Investment Strategy

Fed Is the Worst Central Bank

Own Japanese Stocks for 2 to 3 Years

Adam Smith for President?

China's #1 Problem

Euro Will Survive 2012

Marc Faber: US Markets Could Outperform

Interview with Marc Faber on the 14th of November 2011.

They discussed the current European debt crisis, his current portfolio allocation recommendation (25% stocks, 25% real estate, 25% bonds and 25% gold) and his views on the market.

He thinks emerging markets have bottomed out for the time being and that US market will probably continue to outperform other market, because of the Federal Reserve policy. The fed is considering a target of 7.5% unemployment before raising rates, but it may actually never happen.

Marc Faber: Stock Market Rally Could Last Longer

Marc Faber is interviewed by Bloomberg on the 23rd of August 2011.

He said that due to technical the current rally could carry on for a while.

He also said that both extra bear and bull are likely to be disappointed, as we are not likely to revisit the May 2011 highs nor test the lows of March 2009.

Finally, he discusses about what he expects from the Federal Reserve meeting in Jackson Hole later this week.

Where is Gold headed in the Short Term ?

Gold has broken the trend its started in 2008 on the upside in recent weeks as shown in the chart below (Gold in USD, source: Boursorama.com)
Gold has now started a parabolic move, and is headed towards 2000 USD per ounce. This remind me of the run-up in Silver earlier this year, where Silver reached 50 USD per ounce before severely correcting. It has since then somewhat recovered.

Although I still think that in the long term, Gold is headed much higher until we get positive real interest rates and debt issues are resolved, in the short term, Gold could reach a psychological level such as 2000 USD and then correct somewhat (10% to 20%) before moving up again.

2000 USD (or just above) also corresponds to the top line of the trend started in 2001 (See chart below. Source: Boursorama). Please note that it is a logarithmic chart as such scale is better suited for longer periods of time.



Right now, it's difficult to see what could trigger a sell-off in gold. The recent margin requirement hike did not put much downward pressure on gold. On the 25-26 August 2011 (This week), the federal reserve will meet at Jackson Hole and many people expect them to announce QE3 (explicitly or in disguise) at that time. If it does not happen, and the FED clearly waits and sees, we could see a short term correction in Gold as QE3 (or equivalent) will eventually be implemented.

Marc Faber August 2011: All Members of the FED Should Resign Collectively

Marc Faber discusses the FED decision, Treasury Market and Gold on Bloomberg (9 August 2001).

He explains that he's glad that they (The Federal Reserve) did not offer further stimulus, but only specified low rates until 2013.

He would still short treasuries and he's amazed people are still piling onto them comparing it to the bubbles of the Nikkei,the Nasdaq and the recent Housing bubble.

He does not think Gold is a bubble, but it has gone up high to fast and a correction should be expected. He also stresses that every responsible adult should accumulate Gold every month and complain about Bloomberg employees who do not buy Gold even though they are intelligent persons :).

On the stock market, he would use any rebound as a selling opportunity and after further correction move money back into emerging economies.

Jim Rogers: Close the Federal Reserve!

Interview of Jim Rogers on Yahoo Breakout (new financial show) on the federal reserve, what he thinks about it and what he would do about it. He also said he plans to short US treasuries and that earnings margins are stretched and poised to fall. He's still short the Nasdaq via ETFs and emerging markets.