Punters: Time to Get Greedy
Today’s Daily Reckoning comes with its nose in the air, like a tiger that’s caught the scent of prey. Opportunity to feast beckons.
The market knock-down last week is exactly what every speculator likes to see…an opportunity to go against the crowd when the time is right.
That’s now. Shares are on sale. You will need to embrace the volatility.
I’m even more bullish on the market’s potential from here after coming across this little statistic: Australian investors are sitting on the highest level of cash ever.
That’s $244 billion, according to Bank of America Merrill Lynch.
Markets are unlikely to collapse with so much cash sitting on the sidelines.
Even if the market declines somewhat further, the value managers and bargain hunters should go shopping. After all, cheaper prices are what these guys are waiting for, right?
They will buy the market back up.
Actually, you don’t even have to believe me…
The ‘fundies’ can’t sit in cash, hiding forever
Here’s why. Just listen to Geoff Wilson, Chairman of Wilson Asset Management.
Señor Wilson is quoted in The Australian Financial Review …
‘“As an investor, this is when we get excited,” Mr Wilson said of the global sell-off and the prospect of finding bargains.’
Indeed. Geoff Wilson is an old hand at this. He’s seen many a rodeo like this before.
Consider that one of his funds is 40% cash. That has to be put to work at some point…I’d say a 10% correction in US stocks is the time to do it.
There have not been many drawdowns as big as this in the US over a long time. In fact, only five since 2009…barely one every two years.
Those were 2011 (US debt downgrade), 2013 (the bond ‘taper tantrum’), 2015 (Chinese yuan devaluation), and 2016 (negative interest rate spook).
Now we have our latest reason…rising interest rates. The bogeyman around this is that it raises borrowing costs.
I’m not so convinced this is a big issue for US companies.
Between 2010-2016, for example, US companies spent $3 trillion buying back their own shares and paid out US$2 trillion in dividends.
Granted, some of this would have been with borrowed money, but a lot of it came from retained earnings too.
Buffett’s Berkshire Hathaway has US$100 billion in cash.
The tech giants (Amazon, Microsoft, etc.) have US$500 billion in cash from their overseas operations to bring home too.
There’s plenty of money flowing through corporate America.
In fact, these guys have more money than they know what to do with.
The strong US economy will keep earnings growing for the next 12 months at least.
Brain flip: Be scared when no one else is worried
Even so, you’re probably still nervous.
Everyone loves to trot out the Warren Buffett quote about being fearful when others are greedy, and greedy when others are fearful.
It’s a little bit harder in real time. Suddenly the mainstream is reminding everyone about the danger of shares and the scary, uncertain outlook of the future.
Here’s the funny thing about that…the future is always a little scary and uncertain when it comes to risking your money.
That’s why investing is not easy, and is an emotional battle as much as an intellectual one.
But there’s a little clue here…when everything DOES look rosy, this is actually a DANGER sign.
That’s because the more comfortable people get, the bigger the risks they’re willing to take.
So instead of leaving cash aside — as investors are clearly doing now — they plough it all into the market…and then add leverage on top.
This is when markets become vulnerable to big downturns…but they do need to get bid up first on aggressive buying and leverage. That’s not the case in Australia. Margin loans are a quarter of what they were in 2007.
The GFC scarred a generation.
Of course, I can’t tell you what’s going to happen tomorrow.
There’s always the chance of a wildcard, which spooks markets even more so than now.
That’s the nature of the game.
But earnings are growing from companies reporting at the moment. The resource sector is smashing it out of the park relative to the rest of the market.
That means the risk/reward equation favours treating this dip as a buying opportunity…and scooping up any names you want to own, or add.
If you’re looking for some ideas on where to start, go here now.
For The Daily Reckoning Australia
PS: We’ve decided we can add value to your Daily Reckoning subscription using video. We’re going to record regular updates on the trends we’re seeing in the markets that can help your investing. I gave it my first crack last week. To check it out, go here. Leave feedback if you like!
A Weak US Dollar is a Boon for Aussie Investors
By Jim Rickards
Since last Thursday, we’ve seen a triple meltdown in bonds, stocks and cryptocurrencies. What’s amazing is that there’s no consensus on why these three markets were all crashing at once.
Using my unique predictive analytic methods, I can offer investors a clear view of why markets have been falling, and what’s next.
Despite the recent losses and volatility, investors who position correctly today can reap huge gains in the weeks ahead.
Usually there’s some convergence among analysts when there’s this much drama in the markets. Analysis will agree on a theme such as ‘higher rates’ or a ‘fat finger’ trade to explain the mayhem.
Not this time. Opinion is all over the place. In fact, there are two completely contradictory storylines making the rounds. It’s truly a tale of two markets.
Let’s cut through that to see where things really stand…
The first narrative could be called ‘Happy Days are Here Again!’
It goes like this: We’ve just had three quarters of above-trend growth — at 3.1%, 3.2% and 2.6% — versus 2.13% growth since the end of the last recession in June 2009.
The Federal Reserve Bank of Atlanta’s GDP forecast for the first quarter of 2018 is a stunning 5.4% growth rate.
This kind of sustained above-trend growth will be nurtured further by the Trump tax cuts. With unemployment at a 17-year low of 4.1%, and high growth, inflation will return with a vengeance.
This prospect of inflation is causing real and nominal interest rates to rise.
That’s to be expected because rates typically do rise in a strong economy as companies and individuals compete for funds.
The stock market may be correcting for the new higher rate environment, but that’s a one-time adjustment. Stocks will soon resume their historic rally that began in 2009.
In short, the ‘Happy Days’ scenario expects stronger growth, an improved fiscal position due to higher tax collections, higher interest rates, and stronger stock prices over time.
Behind the data lies this ugly truth
The competing scenario is far less optimistic than the Happy Days analysis. In this scenario, there is much less than meets the eye in recent data.
Last Friday’s employment report was much touted because of the 2.9% year-over-year gain in average hourly earnings.
That gain is a positive, but most analysts failed to note that the gain is nominal — not real. To get to real hourly earnings gains, you have to deduct 2% for consumer inflation.
That reduces the real gain to 0.9%, which is far less than the 3% real gains typically associated with a strong economy.
The employment report also showed that labour force participation was unchanged at 62.7%, a historically low rate. Average weekly earnings declined slightly — another bad sign for the typical worker.
It’s also important to note that the Atlanta Fed’s GDP report, while useful, typically overstates growth at the beginning of each quarter and then gradually declines over the course of the quarter.
This is a quirk in how the report is calculated, but it does suggest caution in putting too much weight on the above-trend GDP growth suggested.
In fact, GDP growth for all of 2017 was just 2.3%, only slightly better than the 2.13% cumulative growth since 2009, and worse than the 2.9% growth rate in 2015 and the 2.6% rate in 2014.
In other words, the ‘Trump Boom’ is nothing special; it’s actually just more of the same weak growth we’ve seen since 2009.
Finally, analysts need to recall that monetary policy acts with a substantial lag. The effects of Fed tightening in 2016 and 2017 are just beginning to be felt now.
These effects are being felt even as the Fed doubles down with further rate hikes and balance sheet reductions, which are another form of tightening.
All of these forces — weak labour markets, Fed tightening, weak growth and a tapped-out consumer — point to a Fed pause in interest rate hikes by June at the latest. That pause will lead to a weaker dollar, and higher commodity prices.
With these two competing economic scenarios in mind, what are my predictive analytic models telling us about the prospects for commodity prices in 2018?
Forecasting the market using artificial intelligence
I use third-wave artificial intelligence (AI) to offer readers the most accurate and powerful predictive analytics for capital markets available anywhere.
First-wave AI involved rules-based processing. Second-wave AI involved deep learning, as the iteration of rules produced new data that could be incorporated into the original rules.
Third-wave AI combines deep learning with big data, as machines read billions of pages of information in plain language, and interpret what they read.
Right now, these analytics are telling us that commodity prices are set to rally through the remainder of 2018.
This is based on continued weakness in the US dollar. That weakness will emerge under either of the two economic scenarios outlined above.
If the economy falters, which I expect, the Fed will pause in its path of interest rate hikes. Today the market is pricing in at least two, and as many as three, Fed rate hikes this year. A rate hike in March seems certain unless the stock market falls another 10% between now and mid-March.
However, if the Fed pauses in March (due to a market decline) or in June (due to weaker economic conditions), this will be a form of ease relative to expectations. That ease will weaken the dollar.
Conversely, if the economy shows continued strength and above-trend growth, which I do not expect, inflation will emerge.
That inflation, combined with a weakened fiscal position for the US, will cause a decline in confidence in the US dollar as a store of value.
That decline in confidence will weaken the dollar, and lead to higher dollar prices for commodities. This scenario is basically a replay of what happened in the late 1970s and early 1980s, before the dollar was rescued by Paul Volcker, Ronald Reagan and James Baker.
In either scenario — weakness with a Fed pause, or strength with increasing inflation — the dollar will weaken, and commodity prices will rally.
For The Daily Reckoning Australia