Investing in 2018 – the trend is your friend

Topic: Macro research is all but useless for predicting the future. However just as with weather forecasts it can provide a gauge of the current state as well as current trends. Rather than predicting turning points, be content with an accurate measure of things as they are now and invest with the expectation of the continuation of said trends.

Conclusion: Stock prices will rise, gold will stay flat or rise modestly, Bitcoin and other cryptos will soar, the oil price will keep rising, the dollar index will be flat but volatile, central bankers will stay deranged crooks (they will also raise policy rates very slowly, always talking a little tough but hiking more slowly than they communicate they will)


Use macro data carefully – don’t make the mistake of believing you can predict the future

Macro what is it good for? I wrote at length about that some time ago (here).

Here is a short version: Identify the 5-10 most important variables regarding the general big picture for the economy and assets.

Those are in a nutshell policy rates, bond prices, the spread between the two, as well as various spreads between corporate bonds, junk bonds and so on; the dollar index, the gold price, the oil price, GDP growth rates, job market data (e.g., unemployment rates), various inflation gauges (CPI, PPI), debt data (economy wide, debt growth, NYSE margin debt); and finally the stock market valuation (I prefer sales valuation measures like P/S and Hussman’s (non-fin MC/GVA).

Are the variables trending? Extrapolate the trends and draw the appropriate conclusions.

Are some correlations breaking down, e.g., if higher rates are accompanied by a weaker USD instead of a stronger USD, you might want to tread a bit more carefully.

If everlasting surpluses turn to deficits, or the other way around, is also a reason to worry. By the way, isn’t it weird with falling US tax receipts, at the peak of this everything bubble, vs. previous falls that occurred at economic troughs like in 1991, 2002 and 2009? Does that mean the economy has that much further to rise, or are asset prices and the economy a house of cards waiting to catch down to what tax receipt trends are signaling?


My outlook and strategy for 2018

In short, the fiat money game is unsustainable.

Central bankers aren’t at all ignorant of that fact. Contrary to appearances they aren’t stupid. They might be scared, conniving and evil, and slightly confused by certain “conundrums”, but they are not stupid. Right now central bankers are scheming and jostling for position ahead of the end game, the big re-set, the fourth turning, perhaps a debt jubilee, the end of the eurodollar, the end of the USD hegemony and perhaps eventually the end of cash money.

There simply is no way out of welfare promises, given current levels of public debt, tax deficits etc, with less than a productivity explosion fueled by Singularity technologies like strong AI, nanotech and ubiquitous automation. Consequently, authorities will push the current trends as far as possible, hoping to avoid a breakdown on their watch. The ones who know they will be responsible when the shit hits the fan do what they can to position their private wealth as safely as possible, while amassing as much relative bargaining power for their respective countries ahead of the carnage as possible.

Bankers always keep dancing (musical chairs) until the very end, well aware that the bigger they are and the more in the wrong they are, the more systemically important they are, and thus  guaranteed a rescue with tax payer money. Creating as much private bonuses as possible in the meantime doesn’t hurt either.

Actually the more certain the coming crash becomes, the stronger the reason for bankers to push the pedal to the floor. Why go slowly now, and not even get a rescue later, when they can maximize bonuses and importance now and guarantee a rescue later?

Investors like Warren Buffett, Soros, Gundlach and Klarman are hoarding record amounts of cash (but what is a 100bn USD among friends?) – apparently even negative rates are more palatable to a very select group of finance geniuses than equities at this point.


No turning in sight

The above all but guarantees current trends will continue. My best guess therefore is that we will see higher stock prices, oil, gold and Bitcoin in 2018 than 2017, despite record high valuations, climate change, an eroding eurodollar system and an oil market in flux ahead of the Aramco IPO.

Remember that inevitable (as the coming crash is) does not mean imminent. No matter how certain the future crash is, that doesn’t mean it has to happen right away. Sometimes, it’s quite the opposite.

Without an expanding eurodollar system (listen to MacroVoices’ 5-part podcast series from December 2017), central bankers will have to print ever larger amounts of money to compensate. Even if that leads to financialization and speculation, on both the corporate and consumer sides of the aisle, rather than real investments; 5x the money together with 20% lower real profits still mean 4x the nominal profits. Even if valuations would halve in the meantime, stocks still double from here in that scenario.

However, please note that if the 5x money scenario plays out over five to ten years, I expect massive interim volatility and buying opportunities of a lifetime in both real estate and stocks.

I think stocks will reach an index of 50 (from the current 100) before gong to 200. Some real estate prices could follow the same trajectory. Probably Bitcoin too, but while exhibiting even larger swings. Gold is a different story, since it has already had its halving, and I fully expect the gold price to rise by 5-10x or more from its recent nadir around 1000 USD.

So, stocks will be better than money over the coming 5-10 years, but gold will be so much better. I include platinum and silver, and possibly uranium as well, in my gold price forecast, even if they are four almost completely different assets.

Oil is a tougher nut, but given the promises of the shale industry and the rise of solar power and some tentative signs of a nuclear renaissance, I wouldn’t want to buy oil assets above 45 USD/barrel.

Regarding trends breaking down… For the last 75 years or so fiat money has ruled over gold; and oil prices (cheap energy) and the eurodollar (cheap money) have ruled the world. Now there are signs of gold becoming an important pawn (potential queen) in the chess end game, while both the eurodollar system and petrodollar system are breaking down. Come to think of it, the fourth horseman of the apocalypse is the US Treasury 10 year bond price. It’s still under control, but if fiat money and energy markets are re-set, then the price of money (interest rates) will be maybe the most important gauge of the collapse gaining momentum.

As brilliantly covered in the MacroVoices USD Hegemony series, the dollar is about to lose its special status. In the interim that means that the eurodollar system loses its liquidity and malleability, meaning there is a sort of technical short squeeze of dollars when eurodollar players are finding it increasingly difficult to roll their overnight dollar shortages. The question now is if this has already happened and the dollar is on a one way street downward, or if there is a final surge left before the dollar’s slow demise resumes.


Be careful what you wish for – all is not gold that (not) glitters

What do you want?

We want gold!

How do you want it?

In physical!

If you hold ETFs like GLD or other kinds of paper gold, i.e., promises by a third party to settle your claims on gold in cash then, if the price suddenly accelerates upward, or fixes at a much higher level, that third party either can’t or won’t make good of their promises. Rather, they’ll refer to the fine print saying they have the right to liquidate the position if the market becomes disorderly.

There is 100x as much paper gold as real gold, so there is no way paper gold holders will get even a fraction of the benefit of a gold price fix significantly higher than today’s 1315 USD per oz. All they’ll get is a cash settlement at perhaps 10-25% up, even if the price fixes at 10 000 USD.

You should also be wary of the very real risks of government gold confiscation or draconian windfall taxes on gold


Final words – the start and end end points are almost irrelevant for investors in macro matters, the path is paramount

Given all of the above I think 2018 will resemble 2017. The current trends will continue (until they break, but who knows when that will happen?), and I think the correlations and gyrations between asset classes in that break will surprise everybody. I think the real re-set is 10 years out, so I would look to buy an intermediate correction, just as everybody has done the last 5-10 years.

The optimistic view is a soft fiat/eurodollar/reserve currency reset in 2018-2019. The pessimistic view is a 4th Turning style total solution in ten years… In the end I think gold will outshine stocks, but stocks will still have a good run vs. money – in particular if you save your large share purchases for the coming correction.

Ten year view:

  • Gold price 10x (but flattish through 2018)
  • Uranium price 3x
  • Stocks 2x (but interim crash of -50%)
  • 10 year bond market rates 5%
  • Real estate prices 2x (with interim large correction)
  • Oil price (today’s dollar): 40 USD

…and here is what I wrote about my portfolio and macro views 6 months ago

 

Taking stock of the financial year of 2017 and adjusting my direction for 2018

Topic: my poor trading skills, and total tally for 2012-2017, as well as my plans for 2018

Length: short

Conclusion: I’ll quit trading listed stocks (after a final handful of  +100%-ers)


Hubris

(see my post on Hubris here in the TAOS series)

Six years ago I opened a private trading account. I did it mainly to take advantage of the coming stock market crash. It never came, and as a result I lost 15.3 million SEK on my short Swedish stocks position (Nasdaq OMX S30 index) – almost 2m USD. This year I sold the last of that position, which means I can finally take stock of the position and tally the result.


Positive surprise

I thought I had barely made up for the losses on other positions, maybe falling short by as much as 5 million SEK or so, but when I finally found the tool for it today, it turned out I’ve made a positive total result of +1.8 million SEK on my trading account. That means my other positions have gained 17.1 million SEK over the same 6-year period. I should be embarrassed – not by the result but by my not knowing the result, and not caring.

Anyway, I’ve learned a handful of things from this experience:

  • I don’t care about financial losses (too little, since I haven’t bothered to stop the losses or even to calculate the result)
  • I hardly care about gains (I like being proven right, but it’s a very fleeting sensation – and a year later it’s completely gone; I couldn’t care less whether I have 2 million USD more or less in my bank account)
  • I’m not good at predicting the market or at trading
  • It’s been a waste of time (except for these lessons)
  • The obvious conclusion is that I should (and will) stop trading listed stocks, and thus free up many quality hours for 2018

Other trading results: why did I make 2 measly dollars in profit on Hennes & Mauritz?

Some people may be interested to know that my life time result on Hennes & Mauritz is 22 SEK (about 2 dollars and 50 cents — I made one single trade on September 20, 2016 in the stock); that I made half a million SEK in profits on Net Gaming Europe in 2017, and about as much on Gaming Innovation Group over the 2 years I’ve been active in the stock.

Some Swedes might be surprised to learn that if I add up my lifetime losses on Studsvik and Stockwik and add in my result on URA(nium), CF Industries (Thank you Jesse Felder [I think]), Xact Bull x2, BEAR x15, FING(erprint) and Finepart; that entire pile of dog excrement amounted to nil, zip, nothing but a waste of time.


Calling it quits – soon

Going into 2018, I only hold a few small listed positions in Stockwik, Finepart and Net Gaming Europe, plus a for-fun-position in BEAR x15 (i.e., a devil’s instrument for being short the Swedish stock market with a leverage of 1500%). My plan is to get rid of all of them in the coming 12 months unless the market or any of the companies significantly changes character.

I think all positions are set up for 100% gains each in 2018. But, hey, who would listen to the guy who just admitted he lost a fortune on one single position going against the best bull market of a century?

Draghi said “Whatever it takes” back in 2012. Did I listen? Yes. Did I understand or believe him. Apparently not.

Look out for another year end report on the more important aspects of life in a few days.

Meanwhile, here is my pre-year end review for 2016, and the actual YER2016 and here is the one for 2105, and a bonus one that I wrote in May 2016. I’ll use those as templates for my coming real Year End Review for 2017.

The coming stock market crash of 2017-2018

Topic: The case for a 50% downside for stocks in the coming 12 months, and then some

Style: Funny, ’cause it’s true (kind of)

Nota bene: this post should be read in conjunction with my previous post on the bull case for stocks


1 The trend has gone too far

I mean, what are the odds of this trend continuing (see chart) without a major hickup?

Trees don’t grow to the sky. Sooner or later, the human psyche will pull the index back to its long term trend (asymptotic to population growth + productivity growth)

Remember that stocks went nowhere between 1996 and 2009, and 2000 and 2012 or was it 2013? That’s a long time going nowhere and it seems to be about time for a re-run of a crash and no returns fro a dozen year or so.

2 Stocks are expensive

Historical peaks in the S&P 500 ratio have only briefly broken above the 20 level. Today we’re at 24.57. And that’s with significant accounting tricks, massive stimulus, zero interest rates and a generally upbeat mood and risk tolerance at highs. Whenever stimulus wanes, reality comes back to bite creative accountants in the derriere, interest rates stop falling or start rising P/E-ratios are bound to explore earlier depths. And that’s even before taking into account a less optimistic sentiment, as well as increasing actual need for funds.

By the way, here is an alternative valuation measure. It’s based on Price/Sales (from Hussman Weekly the previous week) which is an automatically cyclically adjusted valuation measure (more or less) Notice how the valuation measure has increased 4-fold since 2009. That alone carries an inherent risk of a ca. 75% fall in share prices, if sentiment were to fall to 2009 levels.

A permanently higher plateau?

3 Profits are going… where exactly?

Not that fundamentals are that important, except over very long time periods, but the profits have stalled lately. That’s despite historically hysterical monetary stimulus and budget deficits (essentially fiscal stimulus one way or the other). It’s hard to conceive of a new and bigger wave of stimulus on top of the already failing ones. There is no new China, no new India, no hoping for Africa to pull profits higher when the low hanging fruit in the U.S. and Europe have been plucked.

In addition, after 9 years of expansion a profit recession is way overdue. The profits for S&P companies quite often decrease by 30-50%, and the swings have become bigger since 1980, not smaller.

With both lower earnings multiples and stalling or falling earnings in the cards, a 50% decrease in S&P 500 is actually a quite modest expectation. Time for a black Friday soon?

Labor costs recently hit a low (inverted scale) and profit margins a mirroring high. With the magic of debt (that postpones the need for a real living wage) faltering it’s about time wages reflected living costs, and margins came back to earth. Guess what’ll happen to profits… Hint: it’s not positive.

4 Interest rates are about to rise

This chart speaks for itself, I hope. With interest rates this low, the only way is up. Retirees and pension funds can’t live off of a 2.2% return. Nominal!

Look at the chart, can you honestly say you think rates are going even lower? Anyway, rates don’t really matter, at least not fundamentally. If rates are staying low or going lower, then history teaches us that it’s because growth is low. In terms of equity valuations, lower interest rates and lower growth will cancel each other out. No, matter, unless we go completely digital, interest rates are not going negative (for long). A situation where suppliers want to be paid late, where you’re paid to mortgage your house and so on, simply is to perverse for an economy to take.

5. Dividend yields are low, and if they are about to rise, it’s only because stock prices are about to come crashing down

The dividend yield is lower than the interest rate, but rates are fixed and nominal, whereas dividends are risky and contingent of profits and not least cash flow. Dividends can be reduced or cancelled altogether.


Many more and bigger fundamental reasons to worry

There are of course numerous more reasons to expect lower profits, multiples and share prices, such as profit margins mean reverting (or inverting!), increasing churn rate among the top companies in a digital world etc. No need to mention the boomer cohort retiring, thus both reducing their equity portfolios, and cutting back on consumption (due to uncertainty about longevity and investment returns; feeding into lower sales and profits on top of any other adversity or recession trigger). I also don’t want to spoil any bull party with mentions of the debt ceiling and a congress that actually wants to see the president fail.

Finally, there is that minor detail of all too much debt in all sectors of the economy (government, corporate, student, auto, mortgage, credit cards) having already pulled sentiment and consumption forward, and henceforth putting a lid on future growth.

Oh, I almost forgot The Fourth Turning which with impeccable timing is soon upon us with its convenient total solution to small matters such as a failing European Union, currency wars, nuclear bickering with North Korea, unsustainable pension promises and the obese healthcare sector. Maybe a digital World War III, followed by a gold backed cryptocurrency fiat re-set accord could interest you?


And the bad news?

Technicals don’t look good either. Dr Hussman has frequently noted that high valuations alone rarely slow down equities. However, when the appetite for risk eventually recedes, it’s visible in “market internals”.

He theorizes that when risk is in universal demand it makes asset classes, industries, sectors and companies converge. The mirror image of such bull behavior is widening dispersion in a number of respects as a harbinger of more widespread flight to safety. The FANG phenomenon is hardly new, and narrowing markets are but one example of an early risk off signal for equity markets.

FYI: As of August 14, Dr Hussman no longer calls the rising risk aversion subtle.

Ain’t nuthin’ but a FANG!

As a final word: never forget that all securities have to be held until retired. That means that no matter how far a stock price has fallen there is still 100% owners, and thus potential sellers of the stock left. If falling equities means record high NYSE margin debt will trigger forced selling those potential sellers risk becoming increasingly urgent. And then there is the case of Ponzi schemes which have an uncanny knack of being exposed and exacerbating the negativity right when they do the most harm.

Do you still preach dancing while the music is playing, albeit close to the exits (or remaining chairs)? I mean, central banks have no way to go but ever more retard. The same goes for banks and corporations. They’ll push for just one more quarter of play pretend. Maybe they can pull themselves up by their own hair a final time before the ultimate solution. Some even claim it was the earlier downturns that were anomalies and due to very specific one-time issues.


Well I’m peepin’ and I’m creepin’ and I’m creep-in

But I damn near got caught ’cause my beeper kept beepin’

Now it’s time for me to make my impression felt

So sit back, relax and strap on your seatbelt


I wouldn’t bet on it; there’s no reason to. You can always decide to simply pass on this round and see what happens. Or, you just have to ask yourself if you feel lucky.

Well, do ya? (Please read this post in conjunction with my previous ironic post on the bull case for stocks)


Are you afraid yet? You should be.

The fire is lit, and there are very few exits — small and obscure ones.

You should be

Gold is one of those exits. Bitcoin might be another. Soft commodities could also be worth a look.


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BONUS: Check out Ludvig’s write-up in English of our interview with billionaire and hedge fund founder Martin Sandquist here.