Retail investors are pouring into stocks at their all-time high

shutterstock 143940817 Retail investors are pouring into stocks at their all time high

September 29, 2014
London, England

[Editor’s note: This letter was written by Tim Price, frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in the UK.]

“Politicians and diapers have one thing in common. They should both be changed regularly, and for the same reason.” – Anonymous.

The French statesman George Clemenceau once commented that war is too important to be left to generals.

At this stage in the game one might be tempted to add that monetary policy is far too important to be left to politicians and central bankers.

We get by with free markets in all other walks of economic and financial life – why let the price of money itself be dictated by a handful of bureaucrats?

It should be striking that government bonds, in nominal terms, have never been this expensive in history, even as there have never been so many of them. The laws of supply and demand would seem to have been repealed.

As evidence for the prosecution we cite the US Treasury bond market, the world’s largest.

The US national debt currently stands at $17.7 trillion. With a ‘T’.

Benchmark 10 year Treasuries currently offer a yield to maturity of 2.5%. US consumer price inflation currently stands at 1.7%. (We offer no opinion as to whether US CPI is a fair reflection of US inflation.)

On the basis that US “inflation” doesn’t change meaningfully over the next 10 years, US bond investors are going to earn an annualized return just a smidgen above zero percent.

Now it may well be that US Treasury yields have further to fall. As SocGen’s Albert Edwards puts it,

“Our ‘Ice Age’ thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course.”

We nurse no particular view in relation to how the government bond bubble (for it surely is) plays out.

It could be that yields grind relentlessly lower for some time yet. Or perhaps they burst spectacularly on the back of the overdue return of economic common sense.

But as Warren Buffett himself once said, “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

The central bank bond market poker game has been in train for a good deal longer than half an hour, and the stakes have never been higher.

Sometimes, if you simply can’t fathom the new rules of the game, it’s surely better not to play.

That’s why we’re not in the business of chasing US Treasury yields, or Gilt yields, or Bund yields, ever lower – we’ll keep our bond exposure limited to only the highest quality credits yielding the highest possible return.

Even then, if Fed tapering does finally dissipate in favor of Fed hiking (stranger things have happened, though we can’t think of any off the top of our head), it will make sense to eliminate conventional debt instruments from client portfolios.

But such madness is not limited to the world of bonds. Malign, unthinking mental slavery has fixed itself upon the equity markets, too.

It’s extraordinary that as stock markets have powered ahead, index trackers have enjoyed their highest ever inflows.

The latest IMA data show that more UK retail money was put into tracker funds in July than in any other month since records began.

In other words, retail investors are pouring into the market at its all-time high.

We accept the ‘low cost’ aspect of tracker funds and ETFs; we take serious issue with the idea of buying stock markets close to or at their all-time.

But there is a middle way between the Scylla of bonds at all-time low yields and the Charybdis of stocks at all-time high prices. Value.

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Despite 2nd Slowest Income Growth In 2014, Spending Rises Most Since March Driven By Subprime, Car Sales

Mission releverage accomplished. Personal Income rose 0.3% in August (very slightly below Bloomberg’s median estimate), the 2nd slowest growth of the year. Personal spending however jumped 0.5%, beating the 0.4% expectations, and its equal best growth since March. What was spending focused on? Why autosales, which accounted for about half of the spending. And what funded this spending? Why subprime car loans of course; it sure wasn’t the real disposable income per capita which was a paltry $37,684 in August.

This is how the income and spending looked like:

 

2nd miss in a row and 2nd lowest growth in income this year.

 

But spending jumped (thank you Subprime bubble 2.0)

 

Finally, following several revisions and even more months of constant increases in the US savings rate, August finally saw a drop, from 5.6% to 5.4%, just as Goldman hinted to the Department of Commerce should happen late last week. 





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Europe, US Stocks Slide: 10 Year Bid Back Under 2.50%

10Y yields are back below 2.50% and the entire Treasury complex is flattening (erasing post-GDP losses) as fears over Catalan independence and Hong Kong protests spark safe-haven buying around the world. Gold is up, back over $1220 (pre-GDP levels) and Bunds are well bid yet the USD is fading modestly this morning driven by EUR and JPY strength. European periperhals bond risk is on the rise and stocks are mostly lower with Germany's DAX back below its crucial 50DMA. US equity futures are all red – retracing the entire Friday mini-melt-up in the afternoon (and catching back down to credit reality).

 

US equity futures have erased the late Freiday meltup gains and are back at pre-GDP levels…

 

They tried their best to rally stocks with some USDJPY momo…

 

Treasuries have erased post-GDP losses and 10Y is back under 2.50%

 

USD is losing steam this morning…

 

Gold has broken back above pre-GDP levels…

 

European stocks are weak, as the DAX drops below its 50DMA and into the red year-to-date…

 

Charts: Bloomberg

*  *  *

As FTN noted, Financial markets are becoming more sensitive to their own price reactions and leaving fundamentals to the side

Trading isn’t thin, but it remains confused across the key markets.

 

Only currency moves have clear explanations on most days, while stocks and bonds produce the answer ‘because’ to the daily question of why did they go up or down”




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The Best Campaign Rap Video You’ll See All Day, feat. Wyclef Jean

Mike Dunafon is running
for governor of Colorado as an independent candidate.
He’s the mayor of Glendale and married to the owner of a strip club
called Shotgun Willie’s
.

He’s polling at less than 1 percent according to the
latest USA TODAY/Suffolk poll, but this video, featuring Wyclef
Jean, is pretty great, especially as campaign vids go.

“Hemp is just a plant” run the lyrics over a great groove.
“Individual rights is where it’s at/Collective thinking is a
cancer/And with liberty our guide/We can find the answer…” Sounds
better than it reads!. Dunafon’s main site is pretty
fun too.

The Colorado race is looking like a tight one, with
incumbent Democratic Gov. John Hickenlooper neck and neck with
Republican challenger Bob Beauprez. In
the most recent poll
 listed at RealClearPolitics (over a
week old), Hickenlooper is at 43 percent and Beauprez at 40
percent, with Libertarian Matthew Hess and Green Party candidate
Harry Hempy each just under 2 percent and fully 10 percent
undecided.

This race is something of a bellwether, given Colorado’s
swing-state status and the match-up between Hickenlooper and
Beauprez, who are fairly archetypal representations of each major
party.

And, according to a poll not listed at RealClearPolitics, the
Libertarian Hess (issue page here) is on
track to
pull 5 percent of the vote
. That survey, done by Gravis
Marketing, has Beauprez over Hickenlooper by 48 percent to 43
percent.


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The Best Campaign Rap Video You'll See All Day, feat. Wyclef Jean

Mike Dunafon is running
for governor of Colorado as an independent candidate.
He’s the mayor of Glendale and married to the owner of a strip club
called Shotgun Willie’s
.

He’s polling at less than 1 percent according to the
latest USA TODAY/Suffolk poll, but this video, featuring Wyclef
Jean, is pretty great, especially as campaign vids go.

“Hemp is just a plant” run the lyrics over a great groove.
“Individual rights is where it’s at/Collective thinking is a
cancer/And with liberty our guide/We can find the answer…” Sounds
better than it reads!. Dunafon’s main site is pretty
fun too.

The Colorado race is looking like a tight one, with
incumbent Democratic Gov. John Hickenlooper neck and neck with
Republican challenger Bob Beauprez. In
the most recent poll
 listed at RealClearPolitics (over a
week old), Hickenlooper is at 43 percent and Beauprez at 40
percent, with Libertarian Matthew Hess and Green Party candidate
Harry Hempy each just under 2 percent and fully 10 percent
undecided.

This race is something of a bellwether, given Colorado’s
swing-state status and the match-up between Hickenlooper and
Beauprez, who are fairly archetypal representations of each major
party.

And, according to a poll not listed at RealClearPolitics, the
Libertarian Hess (issue page here) is on
track to
pull 5 percent of the vote
. That survey, done by Gravis
Marketing, has Beauprez over Hickenlooper by 48 percent to 43
percent.


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To Avoid Cop Rape Just Don’t Just Break Any Laws, Says Oklahoma Police Captain

In less than two months,

three Oklahoma police officers have been arrested
for allegedly
sexually assaulting women while on duty. One of the officers, state
trooper Eric Roberts, was accused of raping women he pulled over
for traffic violations. In the wake of this, Tulsa news station
KJRH interviewed Oklahoma Highway Patrol Captain George Brown about
how women can ensure they won’t meet a similar fate.  

His response?

First and foremost: Do your part, and do what it takes to obey
the traffic laws and not get stopped.

See how simple it is folks?  Just don’t give cops the
opportunity to rape you! If you simply never come into contact with
any cops, then they can’t sexually assault (or beat, or kill) you,
duh

Captain Brown told The Huffington Post that he
didn’t mean to imply that all Oklahoma state
troopers are rapists waiting to strike and was
merely offering general safety tips
for women
during traffic stops. Full
interview here
; KJRH distillation of it below. 

from Hit & Run http://ift.tt/10dXPgG
via IFTTT

To Avoid Cop Rape Just Don't Just Break Any Laws, Says Oklahoma Police Captain

In less than two months,

three Oklahoma police officers have been arrested
for allegedly
sexually assaulting women while on duty. One of the officers, state
trooper Eric Roberts, was accused of raping women he pulled over
for traffic violations. In the wake of this, Tulsa news station
KJRH interviewed Oklahoma Highway Patrol Captain George Brown about
how women can ensure they won’t meet a similar fate.  

His response?

First and foremost: Do your part, and do what it takes to obey
the traffic laws and not get stopped.

See how simple it is folks?  Just don’t give cops the
opportunity to rape you! If you simply never come into contact with
any cops, then they can’t sexually assault (or beat, or kill) you,
duh

Captain Brown told The Huffington Post that he
didn’t mean to imply that all Oklahoma state
troopers are rapists waiting to strike and was
merely offering general safety tips
for women
during traffic stops. Full
interview here
; KJRH distillation of it below. 

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via IFTTT

New Global Crisis Imminent Due To “Poisonous Combination Of Record Debt And Slowing Growth”, CEPR Report Warns

Deleveraging? What Deleveraging?”

No, that’s not the title of a Zero Hedge article from 2011, 2012, 2013 and so on (because we have written on the concept of global “deleveraging” simply because there has been none). It is, however, the title of the 16th Geneva Report on the world economy, released this morning by the Center for Economic Policy Research, which merely confirms, once again, everything we have said, namely that while the Fed’s liquidity injections have boosted the stock market, everyone else has been levering up as much as possible, with corporations once again in debt to record levels using easy debt proceeds to buyback their own stock (and push their equity-linked exec comp into the stratosphere), while consumers have loaded up on term debt, mostly in the form of student loans, to pay for their increasingly unaffordable lifestyle (and certainly not for tuition or textbooks), while defaulting, not deleveraging, on mortgages.

That’s what we call it. The Geneva Report has far harsher words. Here is an excerpt via the FT:

A “poisonous combination” of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard-hitting report will warn on Monday.

The 16th annual Geneva Report, commissioned by the International Centre for Monetary and Banking Studies and written by a panel of senior economists including three former senior central bankers, predicts interest rates across the world will have to stay low for a “very, very long” time to enable households, companies and governments to service their debts and avoid another crash.

The warning, before the International Monetary Fund’s annual meeting in Washington next week, comes amid growing concern that a weakening global recovery is coinciding with the possibility that the US Federal Reserve will begin to raise interest rates within a year.

So here is lie #1, debunked: “One of the Geneva Report’s main contributions is to document the continued rise of debt at a time when most talk is about how the global economy is deleveraging, reducing the burden of debts.”

It got so bad in recent years, we thought everyone is so stupid they no longer grasp the concept of debt fungibility in an intimately interconnected, globalized world. Thankfully, the Geneva guys get it: “Although the burden of financial sector debt has fallen, particularly in the US, and household debts have stopped rising as a share of income in advanced economies, the report documents the continued rapid rise of public sector debt in rich countries and private debt in emerging markets, especially China.

And this is where the report tells us what it really thinks:

It warns of a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”.

 

The total burden of world debt, private and public, has risen from 160 per cent of national income in 2001 to almost 200 per cent after the crisis struck in 2009 and 215 per cent in 2013.

 

“Contrary to widely held beliefs, the world has not yet begun to delever and the global debt to GDP ratio is still growing, breaking new highs,” the report said.

What widely held beliefs? We have been saying this since 2010! In fact, we have also been saying what one of the report’s main authors says next, namely that the “solution” to every growth crash in the past has been… drumroll… more debt!

Luigi Buttiglione, one of the report’s authors and head of global strategy at hedge fund Brevan Howard, said: “Over my career I have seen many so-called miracle economies – Italy in the 1960s, Japan, the Asian tigers, Ireland, Spain and now perhaps China – and they all ended after a build-up of debt.”

 

Mr Buttiglione explained how, initially, solid reasoning for faster growth encourages borrowing, which helps maintain growth even after the underlying story sours.

 

The report’s authors expect interest rates to stay lower than market expectations because the rise in debt means that borrowers would be unable to withstand faster rate rises. To prevent an even more rapid build-up in debt if borrowing costs are low, the authors further expect authorities around the world to use more direct measures to curb borrowing.

Oh come on: even the IMF figured it out. Recall: “Global debt markets have grown to an estimated $100 trillion (in amounts outstanding) in mid-2013 (Graph C, left-hand panel), up from $70 trillion in mid-2007.” Is everyone else really that dumb they can’t do simple math?

Anyway, about debt rates: lower for longer. Got it. Can we now stop all that BS about the Fed hiking rates already?

Oh, and yes, there is a bubble:

Although the authors note that the value of assets has tended to rise alongside the growth of debt, so balance sheets do not look particularly stretched, they worry that asset prices might be subject to a vicious circle in “the next leg of the global leverage crisis” where a reversal of asset prices forces a credit squeeze, putting downward pressure on asset prices.

At this point we hope ZH regulars are yawning, because none of the above, which apparently goes according to conventional wisdom, is new, especially for those who recall: Deutsche Bank: “We’ve Created A Global Debt Monster“, to wit:

We’ve created a global debt monster that’s now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber aggressive policy responses. It’s arguably too late to change course now without huge consequences. This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick starting the exponential rise in leverage across the globe. Since then we saw big corporates saved in the early 00s, financials towards the end of the decade and most recently Sovereigns bailed out. It’s been many, many years since free markets decided the fate of debt markets and bail-outs have generally had to get bigger and bigger.

 

This sounds negative but the reality is that for us it means that central banks have little option but to keep high levels of support for markets for as far as the eye can see and defaults will stay artificially low. As such we remain bullish for 2014. However it’s largely because we think the authorities are trapped for now rather than because the global financial system is healing rapidly. So as well as EM being very important for 2014, we continue to think the Fed taper pace is also very important. If the US economy was the only one in the world then maybe they could slowly taper without major consequences. However the world is fixated with US monetary policy and huge flows have traded off the back of QE and ZIRP so it does matter. We have suspicions that the Fed may have to be appreciative of the global beast they’ve helped create as the year progresses.

In other words: all of this is super bullish because the system will continue to collapse and need more bailouts. The Bizarro world Bernanke created truly is a fascinating place.




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New Global Crisis Imminent Due To “Poisonous Combination Of Record Debt And Slowing Growth", CEPR Report Warns

Deleveraging? What Deleveraging?”

No, that’s not the title of a Zero Hedge article from 2011, 2012, 2013 and so on (because we have written on the concept of global “deleveraging” simply because there has been none). It is, however, the title of the 16th Geneva Report on the world economy, released this morning by the Center for Economic Policy Research, which merely confirms, once again, everything we have said, namely that while the Fed’s liquidity injections have boosted the stock market, everyone else has been levering up as much as possible, with corporations once again in debt to record levels using easy debt proceeds to buyback their own stock (and push their equity-linked exec comp into the stratosphere), while consumers have loaded up on term debt, mostly in the form of student loans, to pay for their increasingly unaffordable lifestyle (and certainly not for tuition or textbooks), while defaulting, not deleveraging, on mortgages.

That’s what we call it. The Geneva Report has far harsher words. Here is an excerpt via the FT:

A “poisonous combination” of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard-hitting report will warn on Monday.

The 16th annual Geneva Report, commissioned by the International Centre for Monetary and Banking Studies and written by a panel of senior economists including three former senior central bankers, predicts interest rates across the world will have to stay low for a “very, very long” time to enable households, companies and governments to service their debts and avoid another crash.

The warning, before the International Monetary Fund’s annual meeting in Washington next week, comes amid growing concern that a weakening global recovery is coinciding with the possibility that the US Federal Reserve will begin to raise interest rates within a year.

So here is lie #1, debunked: “One of the Geneva Report’s main contributions is to document the continued rise of debt at a time when most talk is about how the global economy is deleveraging, reducing the burden of debts.”

It got so bad in recent years, we thought everyone is so stupid they no longer grasp the concept of debt fungibility in an intimately interconnected, globalized world. Thankfully, the Geneva guys get it: “Although the burden of financial sector debt has fallen, particularly in the US, and household debts have stopped rising as a share of income in advanced economies, the report documents the continued rapid rise of public sector debt in rich countries and private debt in emerging markets, especially China.

And this is where the report tells us what it really thinks:

It warns of a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”.

 

The total burden of world debt, private and public, has risen from 160 per cent of national income in 2001 to almost 200 per cent after the crisis struck in 2009 and 215 per cent in 2013.

 

“Contrary to widely held beliefs, the world has not yet begun to delever and the global debt to GDP ratio is still growing, breaking new highs,” the report said.

What widely held beliefs? We have been saying this since 2010! In fact, we have also been saying what one of the report’s main authors says next, namely that the “solution” to every growth crash in the past has been… drumroll… more debt!

Luigi Buttiglione, one of the report’s authors and head of global strategy at hedge fund Brevan Howard, said: “Over my career I have seen many so-called miracle economies – Italy in the 1960s, Japan, the Asian tigers, Ireland, Spain and now perhaps China – and they all ended after a build-up of debt.”

 

Mr Buttiglione explained how, initially, solid reasoning for faster growth encourages borrowing, which helps maintain growth even after the underlying story sours.

 

The report’s authors expect interest rates to stay lower than market expectations because the rise in debt means that borrowers would be unable to withstand faster rate rises. To prevent an even more rapid build-up in debt if borrowing costs are low, the authors further expect authorities around the world to use more direct measures to curb borrowing.

Oh come on: even the IMF figured it out. Recall: “Global debt markets have grown to an estimated $100 trillion (in amounts outstanding) in mid-2013 (Graph C, left-hand panel), up from $70 trillion in mid-2007.” Is everyone else really that dumb they can’t do simple math?

Anyway, about debt rates: lower for longer. Got it. Can we now stop all that BS about the Fed hiking rates already?

Oh, and yes, there is a bubble:

Although the authors note that the value of assets has tended to rise alongside the growth of debt, so balance sheets do not look particularly stretched, they worry that asset prices might be subject to a vicious circle in “the next leg of the global leverage crisis” where a reversal of asset prices forces a credit squeeze, putting downward pressure on asset prices.

At this point we hope ZH regulars are yawning, because none of the above, which apparently goes according to conventional wisdom, is new, especially for those who recall: Deutsche Bank: “We’ve Created A Global Debt Monster“, to wit:

We’ve created a global debt monster that’s now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber aggressive policy responses. It’s arguably too late to change course now without huge consequences. This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick starting the exponential rise in leverage across the globe. Since then we saw big corporates saved in the early 00s, financials towards the end of the decade and most recently Sovereigns bailed out. It’s been many, many years since free markets decided the fate of debt markets and bail-outs have generally had to get bigger and bigger.

 

This sounds negative but the reality is that for us it means that central banks have little option but to keep high levels of support for markets for as far as the eye can see and defaults will stay artificially low. As such we remain bullish for 2014. However it’s largely because we think the authorities are trapped for now rather than because the global financial system is healing rapidly. So as well as EM being very important for 2014, we continue to think the Fed taper pace is also very important. If the US economy was the only one in the world then maybe they could slowly taper without major consequences. However the world is fixated with US monetary policy and huge flows have traded off the back of QE and ZIRP so it does matter. We have suspicions that the Fed may have to be appreciative of the global
beast they’ve helped create as the year progresses.

In other words: all of this is super bullish because the system will continue to collapse and need more bailouts. The Bizarro world Bernanke created truly is a fascinating place.




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