PGM Capital – Blog
14Dec/140

The Current Stock and Bond Market Bubble

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend blog edition we want to elaborate on the huge stock and bond market bubble in the West.

If you are an investor, your big concern should not be about stocks and stock markets in bubble territories, but also about the bond and currency markets and about the consequences if a bond bubble goes bust.

THE STOCK MARKET:
The last two years have been extraordinary. The stock markets in the west, have surged higher as corporate profits climbed due to  aggressive QE3 bond-buying program in the USA and Abeconomics in Japan, which was announced in September 2012.

Charted side-by-side, the relationship between higher stock prices and cumulative Fed and Bank of Japan bond purchases mirror each other closely as the S&P 500 and the Nikkei-225 have gone on to gain more than 40 percent.

 

Aside from the magnitude of the market gains, the smoothness of the rise has been noticeable as the steady flow of cheap money squeezed out volatility.

As can be seen from below chart, the S&P 500 hasn't even touched its 200-day moving average, - the green line in below chart - since September 25, 2011.

 

The fact that the S&P-500 hasn't even toughed its 200-day moving average - consistently totaling 810 trading days and counting - is a type of consistency that has only been seen three other times since World War II: In 1998, 1965 and 1956.

Based on this most investors might be asking themselves the following questions:

Does the bull market in the S&P-500 reflect the state of the underlying USA Economy or have things gone too far? And are they set to change?

THE BOND MARKET:
For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. Today, a whopping 47% of American households receive some kind of Government benefit. This is not temporary, this is endemic.

All of this spending is being financed by borrowed money… hence, the bond bubble, the biggest bubble in financial history: an incredible US$100 trillion monster that is now growing by trillions of dollars every few months.

For example, the US alone has issued over US$1 trillion in NEW debt in the last eight weeks.

The reasons it did this? Because it doesn’t have the money to pay off the debt that is coming due from the past, so it simply issues NEW debt to raise the money to pay back the OLD debt.

This Sounds a lot like a Ponzi scheme, doesn't it?

Due to the world-wide phenomenon that governments are buying bonds to keep their countries moving along economically, bonds are at ridiculous levels,

The irony of this is, that although the debt burden for countries in the West increases every day, the costs of borrowing (interest rate) has declined the last 5 years as can be seen in below chart of the yield of the 10-year US-treasury note.

 

PGM CAPITAL COMMENTS:
Regarding the bond market bubble the USA is not alone. Globally, the sovereign debt bubble is over US$100 trillion in size. Just about every major nation on the planet is sporting a Debt to GDP ratio of over 100 percent and that is just including “on the balance sheet” debts.

When we include unfunded liabilities like Medicare or Social Security the total sovereign bubble might exceed US$ 500 trillion.

This is why the Fed and every other Central Bank on earth is terrified of interest rates rising; because anything even resembling the normalization of interest rates, will balloon this debt with the consequence of entire countries going bust.

Remember when interest rates move, they tend to move quickly. Consider Italy. It was considered one of the pillars of the EU since it adopted the Euro in 1999. Because of this, the markets were happy to allow Italy to borrow at stable rates with the yield on the ten year Italy government bond well below 5% for most of the last decade.

Then, in the span of a few weeks, everything came unhinged and the yields on Italy government bonds spiked, rising over 7%: the dreaded level at which a country is considered to be insolvent and set for default. It was only through extraordinary lending mechanisms from the European Central bank (the LTRO 1 and LTRO 2 programs to the tune of hundreds of billions of Euros… for an economy that is €2 trillion in size) that Italy was saved from potential systemic collapse.

Again, Italy went from being a former pillar of Europe to insolvent in a matter of weeks, all because interest rates spiked a mere 2% higher than usual.

Italy is not alone here. Western nations in general are in a similar state. This is why QE has been such a popular monetary tool for the Central Banks (since 2008 they’ve spent US$11 trillion buying assets, usually sovereign bonds).

QE was never meant to create jobs or generate economic growth, it was a desperate ploy by Central Banks to put a floor under the bond market so rates wouldn’t rise.

It’s also why Central Banks have kept interest rates at zero or even negative: again, they cannot afford to have rates rise. In the US, every 1% increase in interest rates means between US$150-US$$175 billion more in interest payments on their debt per year.

Forget stocks, forget your concerns about this or that valuation metric!

The REAL issue is what happens when the Bond Bubble pops. When that happens it won’t be individual banks going bust, it will be ENTIRE NATIONS.

Sooner or later, rising rates will come, and a bull market in bonds, running more than 30 years long at this point, won’t end in pretty fashion.

Based on this we believe that the current bubble in the bond market will end in a very bad way.

For the sake of humanity, we hope and wish that our analysis as written in this blog is completely wrong, nevertheless we advise our reader to hope for the best but plan for the worst by having a great portion of their assets in tangible assets with a history as a storage of value such as Gold and Silver.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

 

7Dec/140

USA National Debt Surpassed 18 Trillion US-Dollars

By Eric Panneflek

debt_ball_chaindebtiv 18 trllion

Dear PGM Capital Blog readers,

On Friday November 28th, the national debt of the United States officially surpassed 18 trillion US Dollars, of which the debt held by the public rose to US$12,922,681,725,432.94, an increase of US$32 billion in one day, as can be seen from below screenshot.

The Congressional Budget Office (CBO) released two startling reports in April of this year, showing crippling levels of U.S. national debt under the status quo and President Obama’s proposed budget.

While the White House frequently touts recent deficit reductions, the claim is misleading for several reasons. It is only in the short-term that budget deficits are projected to decrease, but in the long-term they are projected to explode.

The CBO said:

“Such high and rising debt would have serious negative consequences,”

“Federal spending on interest payments would increase considerably when interest rates rose to more typical levels. Moreover, because federal borrowing would eventually raise the cost of investment by businesses and other entities, the capital stock would be smaller, and productivity and wages lower, than if federal borrowing was more limited.”

THE HISTORY OF THE USA NATIONAL DEBT:
On October 22, 1981, the US public debt crossed the US$1 trillion mark for the first time, and it had taken the USA 205 years to reach there, while in less than one year the US National debt ballooned from US$ 17 trillion to US$ 18 Trillion.

Below chart shows the explosion of the US National Debt since October 1981.

It was 1981 and Ronal Reagan, was president of the USA, and the US treasury borrowed large sums each day to fund what we were called in those days "the Jimmy Carter’s inherited deficits".

On top of that, the Reagan administration also gave green-light to a huge defense build-up, with the consequence that the first trillion dollar national debt threshold became a fact in October of that year.

In fact, the surge of the USA Debt, accelerated in 1981, far more rapidly than had been anticipated because by the fall of 1981, the Reagan White House had enacted the largest tax reduction in American history.

On top of that, the Reagan administration in 1981, had also green-lighted a huge defense build-up.

Since the fall of 1981, in just 33 years from the first trillion dollar debt, the Debt-to-GDP ratio of the USA has tripled from approx. 32 percent in 1981 to 106% of GDP today, as can be seen from below chart.

And when you add the US$3 trillion of state and local debt, the current USA total public sector debt ratio is nearly 120% of GDP.

PGM CAPITAL COMMENTS:
It worth mentioning that the total US debt has increased by 70% under Obama, from US$10.625 trillion on January 21, 2009 to US$18.005 trillion now.

Based on the nominal GDP as of last September 30, which was US$17.555 trillion, the debt-to-GDP of the country is now 106%. Keep in mind that this GDP number was artificially increased by about half a trillion dollars a year ago thanks to the "benefit" of R&D and intangibles.

Maybe sooner much sooner than most people can imagine, the USA might adjust the way it calculates its GDP again, in order to increase it artificially like most European country did, by adding the contributions from prostitution to the GDP and by doing so pushing the total debt/GDP ratio below the psychological 100% level.

What really amazes us, is the total disconnect of the US-Dollar and Capital markets with the ballooning USA public Debt.

As can be seen from below chart, the US-Dollar Index rose to a fresh 5-year high of US$ 89.36.

USD Index

Based on this the US dollar rose on Friday, December 5  above 121 Yen for the first time since 2007, while the euro slipped below US$1.23, a two-year low.

On Sunday, December 7th, the Bank of International Settlement, sounds the alarm over the rising US-Dollar.

The main reason for the rising US-Dollar is the fact that, investors are speculating about US interest rate increases in 2015, while conditions in other major economies remain subdued.

Since mid-October the Bank of Japan has upped the size of its asset buying as part of its quantitative easing program, while the European Central Bank has dropped big hints that it will unveil its own package of sovereign debt purchases early next year.

It will not be IF, but WHEN, a higher US-Dollar will start to hurt the already fragile tourism and export of the USA, with all the negative consequences for the country's labor market.

It is also worth mentioning that a higher US-Dollar will hurt profits USA multinationals make abroad when consolidated in the US-Dollar.

Based on this we believe that the chances of policy makers in Washington not to increase interest rates in 2015, but to start a new round of Quantitative Easing program is much bigger than most people might think.

Due to the fact that more than a third of the USA Debt is owned by foreigners, the big question will be at what exchange rate of the US-Dollars, will those foreign holders of the US Treasury Securities, start to sell or diversify their reserves from the US-Dollar into Gold.

Based on this we are currently shorting the US-Dollar and are accumulating Gold and Silver.

We believe that below quote from John Maynard Keynes

The Market Can Remain Irrational Longer Than You Can Remain Solvent

is applicable for the current situation in the Global Capital Markets.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

30Nov/140

Oil & Commodities prices at 5-Year Low

By Eric Panneflek

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you why Oil and commodities prices are falling and are now at a 5-year low.

CRUDE OIL:
Oil futures on Friday, November 28th, settled at their lowest level in five years as the Organization of the Petroleum Exporting Countries’ decision to keep crude production the same heightened, fears that the existing glut in the oil market would persist.

The US benchmark for Oil, "West Texas Intermediate" for delivery in January, closed at US$ 66.15 a barrel on the New York Mercantile Exchange, down US$ 7.54 or 10.45% from the closing price on Wednesday.

As can be seen from below chart, that was the lowest settlement for a front-month oil contract since Sept. 25, 2009, and it brought crude’s monthly losses to 18%, the largest one-month percentage decline since December 2008.

January Brent Crude - the global oil bench mark -  had fallen more than 6% on Thursday when the NYMEX was closed for Thanksgiving. On Friday, November 28, on the London’s ICE Futures exchange it fell US$2.43, or 3.4% , to finish at US$70.15 a barrel, its lowest settlement since May 25, 2010.

Similar with WTI, Brent also lost 18% on the month and has been down for five straight months.

COMMODITIES PRICES:
On Friday, November 28, commodities retreated to a five-year low as crude oil tumbled after OPEC refrained from cutting output to ease a global glut. Gold and copper also declined.

OPEC-logo

The Bloomberg Commodity Index (BCOM) of 22 raw materials dropped as much as 2.1 per cent to 115.0054, the lowest since July 2009 as can be seen from below 5-year chart.

Spot gold fell 2.1 percent to US$1,167.35 an ounce, the lowest since Nov. 13 and the first weekly loss in four. Gold futures on the Comex in New York fell 1.8 percent to US$1,175.50.

Copper for delivery in three months traded 3.2 percent lower at US$6,351 a metric ton on the London Metal Exchange, the biggest weekly drop since April 2013.

PGM CAPITAL COMMENTS:
OPEC’s announcement on Thursday dashed hopes of an output cut that could boost prices, with the cartel showing it was willing to withstand the lower prices in order to defend its market share.

Market share has been under threat from growing production from countries outside OPEC, including shale-oil production from the U.S. and output from Latin American countries and from Russia.

Oil prices have lost nearly 40% of their value since a peak in June, and OPEC’s decision to maintain its current production ceiling of 30 million barrels a day does little to remove the glut that has kept oil prices low.

Drillers and miners were hit the most last week and saw their stocks plunging with more than 10 percent in the week of November 23rd.

History might be repeating itself: in 1986, the last time that oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.

In December 1985, Saudi Arabia declared its intention to regain market share and oil prices began to decline, sinking to as low as US$10.42 a barrel in March 1986 from a November 1985 peak of US$31.72 as can be seen from below chart.

20141126_oil2

By December of 1986, when OPEC reached a new production-sharing agreement the damage to U.S. producers had been done. Unemployment in the USA Oil states Oklahoma and Texas rose to respectively 8.9 an 9.3 percent, compared with the 7 percent national average. Production in Oklahoma fell 8.3 percent in 1986 and 7.1 percent in Texas, according to the Energy Information Administration.

Based on the above we believe that the current decline in crude oil prices will have a similar effect on the so-called USA shale revolution, which has a breakeven production cost of approx. US$ 75.00 per barrel.

For more information on the 1986 oil crash, please read the New York University report, entitled "Lessons from the 1986 Oil Price Collapse"

Similar with the BCOM, the CRB Index – the Commodity Research Bureau’s index of commodities –  (An index that measures the overall direction of commodity sectors) has been struggling to stay up since 2011.

This index is a true reflection of the health of the US economy.  As the CRB rises, the economy tends to be in “good shape”

As can be seen from below chart, the CRB hasn’t come close to its all time high of 2008, unlike most of the stock markets in the USA and most western countries.

The stock market should reflect the real economy and economic growth and real economy is highly dependable on energy and commodities. Which means that if the stock markets are at an all time high, commodity prices should be also be at an all time high.

So why the difference?

We believe that the value of the USA stock markets and those of most western countries, doesn't reflect the state of their underlying respective economies, but is only up because the printed money by central banks has no other way to go than into the stock market.

Based on the above we believe that the elephant in the living room is the S&P500’s complete detachment from the CRB.

The result of this manipulation and money printing by Central Banks in order to manipulate markets, might lead to a disastrous long-term market correction or crash, which has all the potential of bringing the world in the second big depression.

History has proven, that in that case Central Banks will try to cure the deflationary cycle by printing even more money and by doing so, bringing the purchasing power of fiat currency to its real intrinsic value, which is ZERO.

History has also proven that, in that case Gold and Silver will be the only safe haven, for which reason their prices will shoot through the roof.

Below chart shows the development of Gold and Silver prices in "Reichsmark" during the German Weimar Republic.

The above sustains our point that the world today is engaged in a very cruel currency / commodity war, which is being fought on the capital markets.

Based on the Warren Buffett quote:

BE GREEDY, WHEN OTHERS ARE FEAR FULL and FEAR FULL WHEN OTHERS ARE GREEDY.

We believe that long-term investors now have a unique chance to add miners, drillers, commodities and precious metals to their portfolio.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek