The Next 7 Years

By Charlie Bilello

What returns are you expecting from stocks and bonds over the next 7 years?

This is a question that GMO (one of the largest and most respected asset managers) attempts to answer on a quarterly basis.

Their most recent forecast was downright depressing: -2.2% per year from large cap U.S. stocks and +1.9% per year from U.S. bonds. If correct, it would mean a 60/40 portfolio of U.S. stocks and bonds would generate a return of -0.6% per year over the next 7 years.

By comparison, GMO is expecting +3% per year from cash, implying that there is little to be gained today from taking risk.

Source: GMO.com. Note: Nominal Total Return derived from GMO’s real return and adding their inflation assumption of 2.2% per year.

Continue reading The Next 7 Years

Inflation Trade, in Progress Since Gold Kicked it Off in Q1 2016

By NFTRH

I am sure you remember the lead up to Q1 2016. The US economy and stock market were transitioning from a Goldilocks environment and narrowly avoiding a bear market while the rest of the world was still battling deflation. Precious metals and commodities were in the dumper and try though US and global central banks might, they seemed to fail to woo the inflation genie out of its bottle at every turn.

Then came December of 2015 when gold and silver made bottoms followed by the gold miners in January of 2016. Then by the time February had come and gone the whole raft of other inflatables (commodities and stocks) had bottomed and begun to set sail.

As I listened to Mr. Powell speak about inflation yesterday my mind wandered back to Q1 2016 as I thought about the Fed trying to manage inflation at or around 2%. I also thought about how inflation tends to lift boats, not sink them. At least that is what it does in its earlier stages, in its manageable stages.

The balls out post-crisis inflation begun by Ben Bernanke was a massive market input and I suspect we have not yet seen its full effects – other than in US stock prices thus far. So dialing back to Q1 2016 let’s look at a few pictures, beginning with the Fed’s 10 year breakeven inflation rate, which bottomed… you guessed it, in Q1 2016. That means that ‘deflation expectations’ topped at that time.

Continue reading Inflation Trade, in Progress Since Gold Kicked it Off in Q1 2016

Investor Cash Allocations

By Callum Thomas

When I look at charts like this, sayings such as “cash is trash” or “there is no alternative” come to mind.  The chart uses data from the AAII survey and ICI mutual fund statistics to give two views on US investor portfolio allocations to cash.  The bottom line is cash allocations are at rock bottom.  Interestingly though, the AAII surveyed allocation has rebounded from the low-point in January this year.  Question is, how many Fed rate hikes will it take until cash looks attractive again?  …but then again, interest income isn’t always all that matters, when the core job of cash in a portfolio is typically to do the heavy lifting as a defensive asset for capital preservation purposes.  So contrarians: take note.

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A West Coast State of Mind

By James Howard Kunstler

Driving south on I-5 into Seattle, the Cascadia Subduction Zone came to mind, especially when the highway dipped into a gloomy tunnel beneath Seattle’s relatively new skyscraper district. This fault line runs along the Pacific coast from north of Vancouver down into California. The western “plates” move implacably east and downward under the North American plate, building up massive tectonic forces that can produce some of the most violent megathrust earthquakes on the planet.

The zone also accounts for a chain of volcanoes that tend to produce titanic explosions rather than eruptions of lava and ash as seen in the hula movies. The most recent expression of this tendency was Mt. St. Helens in 1980, an impressive cataclysm by the standards of our fine-tuned complex civilization, but a junior event of its type compared to, say, the blow-off of Mt. Mazama 7,500 years ago, which left Crater Lake for the tourists. A publicity-shy correspondent writes:

Continue reading A West Coast State of Mind

All Enemies, Foreign, Domestic, Real And Imagined: Full Week Ahead Preview

By Heisenberg

Through it all (i.e., despite trade uncertainty, Italy’s political drama and ongoing concerns about the sustainability of the domestic political situation as Trump remains at odds with the nation’s top law enforcement agencies and intelligence apparatus), U.S. equities managed to turn in their best May performance since the bull market began.

To be sure, that’s a largely meaningless statistic, but it’s worth mentioning I suppose and if nothing else, it makes for a fun chart and an easy lead-in to my traditional Sunday evening week ahead preview:

MaySPXReturns

Over the weekend, Trump seemed to be more agitated than usual with regard to the special counsel probe and while that drama has recently taken a backseat to more pressing concerns for markets, it’s important to remember that the headline risk around the investigation is still there – it’s just a matter of when the next shoe drops. For those who missed it, here’s a smattering of egregious “covfefe”:

Continue reading All Enemies, Foreign, Domestic, Real And Imagined: Full Week Ahead Preview

Wrapping Up an Eventful Week in Bonds and Stocks

By NFTRH

US Treasury Bonds/Yields

On May 20 we presented a case in NFTRH 500 that the bearish bond play (bullish yields) was done, at least temporarily, from a contrarian perspective.

About Those Bond Yields

That was written before I realized – thanks to an alert NFTRH subscriber – that Thursday, May 31 would be another Fed SOMA (or QT) day, as bonds are allowed to hit maturity.*

The day after this bond maturation yields again went up (bonds down) as the stock market shook off the media-manufactured fears that ostensibly started in Italy but actually were destined to crop up regardless in one place or another (there was a lot of trade war noise this week).

See this NFTRH Premium update, now unlocked to the public, as it was presented in-day and in real time to give perspective for subscribers (and myself) as the media were scaring the herds into risk ‘off’ behavior and the perceived safety of Treasury bonds.

Continue reading Wrapping Up an Eventful Week in Bonds and Stocks

Pink Tickets on QT Days

By Kevin Muir

I know I have told this story before, but it bears repeating. Way back in 2011 I was watching the S&P like a hawk. Trading each squiggle, I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.

But on some days, the stock market would get mysteriously strong. It would usually occur mid-morning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden – out of the blue – stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.

It took me a while, but eventually, I figured it out.

Although it flies directly in the face of Dr. Malkiel’s Random Walk Down Wall Street, the days when the Fed expanded their balance sheet through bond purchases resulted in outsized stock market gains. These bond buys were conducted through Permanent-Open-Market-Operations (POMO) and the great thing about a transparent Federal Reserve is that they listed the schedule in advance, so it was easy to measure the relationship between POMO operations and stock market performance.

Continue reading Pink Tickets on QT Days

Problems Are Emerging

By Heisenberg

Well, first thing’s first.

Donald Trump sent 11 tweets by 3:00 p.m. ET, a truly impressive “covfefe” tally, that included this batshit ramble about Lisa Page and Peter Strzok:

Yes, “what a total mess.” And for Christ sake, will someone please teach him what a proper noun is or, more to the point, what a proper noun isn’t?

But this was the one that mattered:

Continue reading Problems Are Emerging

Old Roach Motel

By Doug Noland

One hundred and six months. The current expansion, having emerged in the aftermath of the collapse of the mortgage finance Bubble, is now the second-longest on record (lagging only the 120-month 1990’s Bubble period). The unemployment rate dropped to 3.9% last month, the lowest level since the 3.8% print in April 2000. Corporate earnings are at unprecedented levels and stock prices only somewhat below records. Home prices in most markets are at all-time highs. U.S. GDP is forecast to expand 2.8% this year, just below 2015’s (2.9%) 12-year high.

We should be leery of prolonged expansions. The longer a boom, the greater the opportunity for deep-rooted structural impairment. Back in 2013, I proposed the concept of “Government Finance Quasi-Capitalism.” This was updating previously updated Hyman Minsky analysis. Minsky’s “Stages of Development of Capitalist Finance” seems especially relevant these days:

Minsky: “In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure… To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures.”

Continue reading Old Roach Motel

Macro Changes for Gold and Stocks

By NFTRH

Since early 2016 we have been carrying forward a theme illustrating that until the macro trends in place since 2011 change, the situation would be as is, stocks trending up and the precious metals in consolidation/correction. The current trends were kicked off symbolically, and functionally to a degree, by the Fed’s concoction of Operation Twist, a plan with the expressed goal of manipulating the macro (or in the Fed’s word, “sanitizing” inflation signals). Until this year it has been the gift that keeps on giving to unquestioningly bullish stock market participants.

We have also carried a theme forward that in order for a bull view to be widely recognized in gold, a bear view or at least a relative bear view will need to come about on the stock market, whether that means stocks rise nominally or not (ref. 2003-2007 when stocks rose nominally, but declined in terms of gold).

Gold does not move. It does not do much of anything other than mark its holders’ place, while the asset world goes in motion (up and down). Gold is a stable asset and its perceived value will diminish in the eyes of the average market participant during the risk ‘on’ good times, as instigated by the Bernanke and Yellen Fed and its perceived value will increase in line with a shift in other assets from risk ‘on’ to ‘off’.

Most recently we highlighted the following…

Gold and the Stock Market; It’s Not the Best of Both Worlds

In short, the general conditions of our handy Macrocosm graphic need to come into place.

macrocosm, nftrh 363 Continue reading Macro Changes for Gold and Stocks

Investors Becoming More Confident on Risky Assets

By Callum Thomas

The April round of the State Street global investor confidence indexes showed institutional investors appear to be growing more confident on the outlook for risky assets.  The regional indexes showed this uptick in risk appetite has been widespread across the major regions.  It appears as though institutional investors are looking through much of the “noise”, and focusing on the reset in sentiment and valuations against the backdrop of decent earnings and economics.  With this group of investors controlling large sums of money it will be interesting to see if this increased confidence translates into higher stock prices.

The key takeaways from the latest State Street investor confidence index results are:

-Global institutional investors are increasing allocations to risky assets.

-The uptick in investor confidence is widespread across the major regions.

-The investor confidence indexes are quantitative indicators, and take account of actual changes in allocations across State Street’s $30 trillion global custodian business.

-As the Euphoriameter shows, there has been a reset in ‘investor euphoria’ driven by lower valuations, higher volatility, and less bullishness in the surveys.

1. Global Institutional investor Confidence Index:  The April reading of the State Street global investor confidence index showed a further rise, +3pts to 114.5, which is the strongest reading since March 2016 – which coincidentally was just after a substantial stock market correction.  Basically institutional investors are feeling fairly confident on the outlook for risky assets, and appear to be looking through the noise (trade wars, geopolitics, etc) and focusing on the reset in valuations, decent earnings results, and solid global macro pulse.