Month: September 2018

The Wall Street Journal’s Kimberley Strassel has been an outspoken voice of reasons among the establishment media and weighed in on the latest set of accusations against SCOTUS nominee Kavanaugh with the following succinct tweet:

“The left made a mistake with this Ramirez story. It isn’t just how embarrassingly flimsy it is; she was inebriated; took six days to find memories; everyone denies it. But it strongly suggests the Ford delay demands were about cooking this up. Destroys credibility all around.“

Her thoughts were echoed and extended by Kunstler.com’s James Howard Kunstler, who fears America is about to “Go Full Porn.”

The Resistance didn’t quite hit it out of the park with Christine Blasey Ford. After all, how effective for the purpose of character assassination is a claim of “attempted rape” without even a when-and-where piece of the story? So the DC Dem-Progs have gone to their bench and found a real thumper in Deborah Ramirez who steps forward now with the ultimate giant-killer story of Brett Kavanaugh “thrusting his penis in her face and causing her to touch it without her consent,” (as reported in The New Yorker Magazine by Ronan Farrow, America’s self-appointed great white penis-hunter, and estranged son of filmmaker Woody Allen, infamous, reputed penis-mishandler).

The charge was obviously crafted to prompt the news media to repeat the word “penis” as many times possible because the word itself has terrifying powers to shock women’s sensibilities. And understandably so. It’s not for nothing that rakes of merry old England referred to the male generative organ as “the frightful hog.” In our time, a better analog might be the ghastly interloper aboard the space-tug Nostromo in the classic sci-fi shocker Alien. Remember how it burst out of astronaut John Hurt’s chest, all slimy, drippy, and goopy, and sort of water-skied out of the sick bay to hide in the bilges? Dear me! Almost gave me a heart attack at the time and I was barely into my thirties.

Fast forward about seventy minutes to the climactic third reel where Warrant Officer Ripley (Sigourney Weaver) is preparing desperately to escape the wrecked Nostromo in her space lifeboat… and look who’s aboard starring her right in the face: the now full-grown alien beast, all goopy and tumescent, a veritable penis-of-death from another world. The movie came out in 1979, just a few years before the alleged facial penis-thrusting in the Yale freshman dorm. One wonders if Deborah Ramirez had seen the film and was possibly suffering from post-Alien-shock syndrome (PASS).

Here the Resistance has come up with a story so vivid and awful that it almost guarantees conviction without any necessary proof. I’m sure it will do the trick. It’s certainly an improvement over the old Anita Hill tale of Clarence Thomas noticing a pubic hair on his Coke can. A mere hair! The proto-Resistance of 1991 was far too timid in that case, and Mr. Thomas actually landed on the supreme court! Apparently, they learned their lesson on that one: When swinging for the fences, haul out the heavy lumber.

The part that I find interesting in the New Deborah Ramirez accusation is this:

     After six days of carefully assessing her memories and consulting with her attorney, Ramirez said that she felt confident enough of her recollections to say that she remembers Kavanaugh had exposed himself at a drunken dormitory party, thrust his penis in her face, and caused her to touch it without her consent as she pushed him away.

Six days of meditation, prayer, memory-wracking, attorney-prompting, and — no doubt — earnest and heartfelt coaching by Resistance shamans, overcame the effects of 35 years and, say, seven Jello-shots to retrieve the details of that long-ago encounter. (No one mentioned bong-hits, at least not yet, but how could there not have been, on top of the drinking games?) But the real gold in the story comes in this revelation:

      Ramirez, who was raised a devout Catholic, in Connecticut, said that she was shaken. “I wasn’t going to touch a penis until I was married.”

Really? Maybe she should have gone to the weekly meeting of the Yale Freshman Women’s Math and Physics Circle instead of an apparently mostly male dorm party convened for the purpose of getting shitfaced drunk with the greatest possible efficiency. Did she not know what was going on there? Was she forced to stick around? Did the boys make her down those shots?

Now that all American womanhood has been faced, shall we say, with the image of the looming universal horrifying penis, all bets on the Kavanaugh nomination are off. But the gambit does raise the possibility that it will be answered by some rough justice from the conservative side of the field. It will be interesting to see in the weeks and months ahead how many Democratic house and senate members will be revealed as would-be rapists and sluts. I can’t imagine that none of them have secrets to hide. In fact, I would take the Ramirez accusation as tantamount to a declaration of war by the Resistance.

And as the old saying goes, all’s fair in love and war.

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31 percent of US households have struggled to afford their energy bills, according to a Wednesday report by the Energy Information Administration, which notes that Hispanics and racial minorities were hit the hardest.

According to the most recent results from EIA’s Residential Energy Consumption Survey (RECS), about one in five households reported reducing or forgoing necessities such as food and medicine to pay an energy bill, and 14% reported receiving a disconnection notice for energy service. Households may also use less energy than they would prefer; 11% of households surveyed reported keeping their home at an unhealthy or unsafe temperature. –EIA.gov

Meanwhile, 11% of households surveyed keep their home at a unsafe or unhealthy temperature, whatever that means. 

“Of the 25 million households that reported forgoing food and medicine to pay energy bills, 7 million faced that decision nearly every month,” reads the report. “Of the 17 million households who reported receiving a disconnection notice, 2 million reported that they received a notice nearly every month.”

The data, from the federal agency’s most recent energy consumption survey in 2015, also showed that some seven million households (6% of the national total) reported broken heating equipment, while 6 million (5%) reported the loss of air conditioning. 

EIA found only minor differences across geographic regions of the country and between urban and rural respondents. These differences suggest that the structural features of a home and demographic characteristics are more likely to be associated with a household’s ability to afford energy and maintain equipment than geography and associated climates.

For instance, households that included children, that had residents who identified with a minority racial group or as Hispanic, or that were classified as low income experienced more energy insecurity. Households experiencing energy insecurity were also more likely to live in homes built before 1990. –EIA.gov

NPR adds that people of color were disproportionately affected, with about half of respondents who reported challenges paying their energy bills identified as black, while 40% identified as Latino. 

A 2016 study conducted by the American Council for Energy-Efficient Economy and Energy Efficiency for All found that black and latino households “paid more for utilities per square foot than the average household,” partially because low income housing tends to be less energy efficient. 

“Households can spend more than 20 percent of their total income on their electricity needs,” George Koutitas, CEO and co-founder of Gridmates, a crowdfunding platform told NPR. Gridmates funnels donations to utility companies for struggling customers’ energy bills.

Low-income heat assistance programs, he says, only go so far. Weatherization programs that insulate a home “take a lot of time and they are not very responsive.” Bill assistance alternatives, he says, are underfunded and have been canceled. –NPR

Last fall and winter, the Trump administration called for an end to the Low Income Home Energy Assistance Program, according to NPR. 

“Please I beg you to bring back this assistance with electricity,” wrote a north Texas woman after a state assistance program called Lite-Up Texas ran out of money, according to The Texas Tribune. “I am going to freeze during this cold season.”

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Submitted by Eric Peters, CIO of One River Asset Management

“Trump represents authenticity,” said the Australian investor, reflecting. “Childish, self-centered, misogynistic, money-focused, bullying, full of shit – but authentically so,” he continued.

As an American abroad, you discover most discussions weave their way back to The Donald, what his presidency says about the state of our union, our world, humanity. Nearly every foreigner I meet is appalled. But intrigued, perplexed. Most are drawn to the spectacle in the way that attracts our gaze to horrific car wrecks.

“The more transgressions that come out, the more authentic he becomes.” And it’s true. “Mainstream politicians are the ultimate distillation of inauthenticity.” In pursuit of becoming what people want them to be, they become nothing, often worse.

“Who’s the most authentic politician you can think of globally? Scarily, given he’s horrible – to me at least – on so many levels, I reckon it’s Trump. Possibly because… at least he’s a wolf in wolf’s clothing.”

There’s a price to pay for Bill Clinton’s serial infidelities wrapped in slick lies, Bush’s tragic neo-conservative wars waged on pretense. Not a single banker was incarcerated for 2008’s corruption, conflicts of interest. Obama, earth’s most powerful commander-in-chief, proved unwilling to shield black children from everyday slaughter in his hometown Chicago ghettos.

As Barak was Bush’s legacy, Trump is the legacy of Obama’s empty eloquence.

We lose faith in institutions when priests prey on their young flock, then find shelter in the churches shadow.

“Authenticity is knowing and embracing all aspects of our self. Our strengths, weaknesses. Our light, darkness. And if we don’t have this level of self-awareness – as most don’t – authenticity is having the intention to get there,” he said.

“And we’re learning that people would prefer an authentic dickhead versus someone who is perceived inauthentic and controlled by shadowy vested interests that haven’t worked for the majority.”

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The Turkish Lira has spiked higher – extending earlier gains – after US SecState Mike Pompeo told reporters that Pastor Brunson could be released this month and should be released immediately.

Pushing the Lira back to one-week highs…

So releasing Brunson apparently will fix Turkey’s fundamental economic/USD-debt crisis.

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Panama has revoked the registration of the NGO migrant transport ship Aquarius 2, which was the last remaining charity rescue vessel operating in the central Mediterranean area. It is currently at sea with 58 refugees on board. 

The move by the Panama Authority (PMA) means that once the Aquarius 2, operated in part by SOS Mediterranee, arrives into port it will be deflagged and barred from operating. As such, there are no more NGO vessels able to transport people from the Libyan coast in the near future unless the ship can find a new flag to sail under. 

SOS Mediterranee, one of the charities that operates the Aquarius, said in a statement it was reeling from news of the revocation, which it said followed pressure from the Italian government.

“On Saturday … the Aquarius team was shocked to learn of an official communication from the Panamanian authorities stating that the Italian authorities had urged the PMA to take ‘immediate action’ against the Aquarius,” it said. –Reuters

Italy’s interior minister Matteo Salvini denied that the Italian government applied pressure on Panama. He has previously accused SOS Mediterranee and similar groups of acting as a Mediterranean “taxi service” for migrants, and that the Aquarius 2 had hindered the work of the Libyan coast guard by ignoring instructions. 

Public backlash against the influx of hundreds of thousands of migrants by sea over the past five years was a large part of the rise of Italy’s anti-establishment coalition government, which took office in June and immediately began cracking down on migrant vessels. 

Salvini has led a popular crackdown against immigration since his League party and the anti-establishment 5 Star Movement took office in June.

Salvini has previously accused SOS Mediterranee and other charities of acting like a Mediterranean “taxi service” for the migrants.

Salvini said on Sunday that Aquarius 2 had hindered the work of the Libyan coast guard, ignoring instructions.

He said that, according to newspapers, Aquarius 2 was about to have its registration revoked by Panama because it was “illegal and does not respect procedures”. –Reuters

“They can change their name and flag another thousand times but Italy’s ports will remain shut to these gentlemen,” he said.

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, Mark Hulbert warned of an indicator that hasn’t been this inflated since the “Dot.com” bubble. To wit:

“It’s been more than 25 years since the stock market’s long-term trailing return was as low as it is today. Since the top of the internet bubble in March 2000, the S&P 500 has produced a 1.4% annualized return after adjusting for both dividends and inflation. “

Whoa! How can that be given the market just set a record for the “longest bull market” in U.S. history?

This is a point that is lost on many investors who have only witnessed one half of a full market cycle. It is also the very essence of Warren Buffett’s most basic investment lesson:

“Price is what you pay. Value is what you get.”

Over the last 147-years of market history, there have only been five (5), relatively short periods, in history where the entirety of market “gains” were made. The rest of the time, the market was simply getting back to even.

Where you start your investing journey has everything to do with outcomes. Warren Buffett, for example, launched Berkshire Hathaway when valuations, and markets, were becoming historically undervalued. If Buffett had launched his firm in 2000, or even today, his “fame and fortune” would likely be drastically different.

Timing, as they say, is everything.

It is also worth noting, as shown below, that valuations clearly run in cycles over time. The current evolution of valuations has been extended longer than previous cycles due to 30-years of falling interest rates, massive increases in debt and leverage, unprecedented amounts of artificial stimulus, and government spending.

This was a point I discussed last week:

“There are two important things to consider with respect to the chart below.

1. The shift higher in MEDIAN valuations was a function of falling economic growth and inflationary pressures.
2. Higher prices were facilitated by increasing levels of leverage and debt, which eroded economic growth. “

But with returns low over the last 25-years, future returns should be significantly higher. Right?

Not necessarily. As Mark noted:

“Your conclusion from this sobering factoid depends on whether you see the glass as half-full or half-empty. The ‘half-full’ camp calls attention to what happened to stocks in the years after 1992, when stocks’ trailing two-decade return regressed to the mean — and then some: equities skyrocketed, elevating their trailing 18.5 year inflation-adjusted dividend-adjusted return to 11% annualized.“

This optimistic view is the most pervasive. Return estimates for the S&P 500 have steadily risen in recent months as earnings have been buoyed by massive amounts of share buybacks and tax cuts.

With earnings rising, what’s not to love?

I get it.

But I disagree, and here’s why.

Throughout history, there is an undeniable link between valuation and return. More importantly, it is the expansion, or contraction, in valuations which are directly tied to the cycles of the market. When investors are willing to “pay up”for a future stream of cash flows, prices rise. When expectations for future cash flows decline, so do prices.

For those expecting a repeat of the post-1992 period, they are likely to be disappointed. As shown, in 1992, the deviation from the long-term median price/earnings ratio (using Shiller’s CAPE) was just below 0%. This gave investors plenty of room to expand valuations as inflation and interest rates fell, consumer and government debts surged, and the general masses swept into the “Wall Street Casino.” 

Today, valuations are at the second highest level in history. Despite the massive surge in earnings due to tax cuts – inflation and interest rates are low, revenue growth is weak as consumers, government, and corporations are fully leveraged, and households are “all in” the equity pool.

This is an important point which should not be overlooked.

The bullish premise has been that since tax cuts will cause a surge in earnings which we reduce valuations back to their long-term average. However, such is true as long as prices don’t increase during the period earnings are rising. But such as NOT been the case. Currently, the market has continued to “price in” those earnings increases keeping valuations elevated. 

As noted by Mark:

“Unfortunately, the CAPE today is back to within shouting distance of where it stood at the top of the internet bubble. It reached 44.2 then, and is 33.2 today. At no time in U.S. history other than the internet bubble has the CAPE been as high as it is now.”

CAPE Is B.S.

It is not surprising that during periods of valuation expansion that investors eventually come to the conclusion that “this time is different.” The argument goes something like this:

“Sure, the CAPE ratio is elevated but had you sold, you would have missed out on this booming bull market.”

That statement is 100% true.

However, it grossly misunderstands the “value” of “valuations.” 

Valuations are not, and have never been, useful as a market timing indicator. Valuations should not be used as a “buy” or “sell” indicator in a portfolio management process.

What valuations do provide is a very clear understanding of what future expected returns will be over the next 10-20 years. Bill Hester wrote a very good note in this regard in response to critics of Shiller’s CAPE ratio and future annualized returns:

“We feel no particular obligation defend the CAPE ratio. It has a strong long-term relationship to subsequent 10-year market returns. And it’s only one of numerous valuation indicators that we use in our work – many which are considerably more reliable. All of these valuation indicators – particularly when record-high profit margins are accounted for – are sending the same message: The market is steeply overvalued, leaving investors with the prospect of low, single-digit long-term expected returns.“

It is also the same over 20-year periods even on a rolling 20-year real total-return basis.

“Even on a 20-year real total return basis, there was a negative return period. But while the three other periods were not negative after including dividends, when it comes to saving for retirement, a 20-year period of 1% returns isn’t much different from zero.”

There is also a reasonable argument that due to the “speed of movement” in the financial markets, a shortening of business cycles, changes to accounting rules, buyback activity, and increased liquidity, there is a “duration mismatch” between Shiller’s 10-year CAPE and the financial markets currently.

Therefore, in order to compensate for the potential “duration mismatch” of a faster moving market environment, I recalculated the CAPE ratio using a 5-year average as shown in the chart below.

The high correlation between the movements of the CAPE-5 and the S&P 500 index shouldn’t be a surprise. However, notice that prior to 1950 the movements of valuations were more coincident with the overall index as price movement was a primary driver of the valuation metric. As earnings growth began to advance much more quickly post-1950, price movement became less of a dominating factor. Therefore, you can see that the CAPE-5 ratio began to lead overall price changes.

A key “warning” for investors, since 1950, has been a decline in the CAPE-5 ratio which has tended to lead price declines in the overall market. The two most recent declines in the CAPE-5 also correlated with drops in the market in 2015-2016 and the beginning of 2018.

To get a better understanding of where valuations are currently relative to past history, and why this is likely NOT 1992, we can look at the deviation between current valuation levels and the long-term average. 

The importance of deviation is crucial to understand. In order for there to be an “average,” valuations had to be both above and below that “average” over history. These “averages” provide a gravitational pull on valuations over time which is why the further the deviation is away from the “average,” the greater the eventual “mean reversion” will be.

The first chart below is the percentage deviation of the CAPE-5 ratio from its long-term average going back to 1900.

Currently, the 76.15% deviation above the long-term CAPE-5 average of 15.86x earnings puts valuations at levels only witnessed two (2) other times in history – 1929 and 2000. As stated above, while it is hoped “this time will be different,” which were the same words uttered during each of the two previous periods, you can clearly see that the eventual outcomes were much less optimal.

However, as noted, the changes that have occurred Post-WWII in terms of economic prosperity, changes in operational capacity and productivity warrant a look at just the period from 1944-present.

Again, as with the long-term view above, the current deviation is 61.8% above the Post-WWII CAPE-5 average of 17.27x earnings. Such a level of deviation has only been witnessed one other time previously over the last 70 years as we headed into the “Dot.com” peak. Again, as with the long-term view above, the resulting “reversion” was not kind to investors.

Is this a better measure than Shiller’s CAPE-10 ratio?

Maybe, as it adjusts more quickly to a faster moving marketplace. However, I want to reiterate that neither the Shiller’s CAPE-10 ratio or the modified CAPE-5 ratio were ever meant to be “market timing” indicators.

Since valuations determine forward returns, the sole purpose is to denote periods which carry exceptionally high levels of investment risk and resulted in exceptionally poor levels of future returns.

Currently, valuation measures are clearly warning the future market returns are going to be substantially lower than they have been over the past ten years. Therefore, if you are expecting the markets to crank out 10% annualized returns over the next 10 years for you to meet your retirement goals, it is likely that you are going to be very disappointed.

Does that mean you should be all in cash today? Of course, not.

However, it does suggest that a more cautious stance to equity allocations and increased risk management will likely offset much of the next “reversion” when it occurs.

My client’s have only two objectives:

1. Protect investment capital from major market reversions,  and;

2. Meet investment returns anchored to retirement planning projections.

Not paying attention to rising investment risks, or adjusting for lower expected future returns, are detrimental to both of those objectives.

Or, you can just hope it all works out.

For 80% of Americans, it just simply hasn’t been the case.

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