BUBBLES AND BOTTOMS: 2019

Bubbles and Bottoms 23 June 2019

Let`s start this newsletter with a bottom. Silver has been declining since 2011, but seems to have formed a bottom around 14.9 USD, which it has touched many times over the past 4 years. It is now at a point where it is both touching the long term upwards channel, as well as being at the point of breaking out of the falling resistance.

Looking at the historic performance on this chart from Chris Kimble, breaking out of this resistance can mean a years long bull market.

This week the Federal Reserve decided to not increase their interest rates, while many people even thought that they would decrease their rates. Donald Trump openly voiced that the FED should lower their interest rates to boost the U.S. economy.

The FED stood their ground, and decided not to cut the rates. This resulted in the S&P 500 briefly hitting all time highs, after which it dropped about 1%.

After the FED news, the expectations for the FED to cut interest rates during their next meeting, increased to 100%, which means that the expectations are fully priced into the stock market.

This July rate cut would come despite near record lows in the unemployment rate, and an interest rate that is not even at half the level it was before the great financial crisis. Now here`s a little interesting statistic from Sven Henrich: Every time the FED cut its rates when unemployment was below 4%, a recession immediately started and unemployment shot up to 6-7%.

Other recession indicators? How about the yield curve inversion. Every time the 5 year yield vs the 3 month yield spread inverts for longer than 3 months, a recession started within 12-18 months.

In general, 75% of the time over the past 50 years when the FED decided to cut rates, a recession followed soon after.

Can we already see signs of a recession? The New York FED Empire State Index, which reads the general business conditions, posts its biggest monthly fall on record, and is now in negative territory since Oct. 2016.

Singapore`s electronics exports have crashed, with general exports at its lowest point since 2013, which can often be seen as a good indicator for the health of worldwide trade. The electronics exports were expected to go down 19%, while it actually plunged 31%!

What does this mean for the stock market? If the small caps (Russell 2000) is any indicator, it means that the S&P 500 is doomed to go down. When the S&P 500 made new highs, the Russell 2000 was not even near such a level.

Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

Bubbles and Bottoms 11 June 2019

It took 5 days to recover 19 days of losses. If we continue in this direction, we hit 3000 on the S&P 500 in no time!

This increase in market value comes on the back of another batch of terrible news for the economy, starting with the ADP employment report which showed a difference in the actual released number compared to the median of the employment survey, that was the largest since December 2008.

The market is yet again in a state where bad news is good news, as this big miss indicates that interest rates will be cut by the Federal Reserve soon, which is good for the markets.

These misses have cause the Citi Economic Surprise Index to stay below the zero level since early 2018, indicating a big decline in economic growth.

This in turn has caused the probability of an interest rate cut to spike to 85%, despite the fact that umeployment is still at record lows and markets are at record highs. This would normally not be an environment wherein the Federal Reserve would cut rates.

Speaking of unemployment. Everything looks well in theory, with the unemployment rate being at record lows, but when you`re looking at delinquent auto loans, which normally follow the curve of the unemployment rate (less unemployed people = less auto loan delinquencies), one can see that the two started diverging since late 2014. The question is: which of these two indicators is speaking the truth?

Meanwhile, the probability of a U.S. recession is extremely high, almost reaching levels from the last recession, with a 36% chance of a recession in one year, according to the treasury curve (the relationship between interest rates in the short term, compared to long term securities. Normally short term interest rates are lower, because there is less uncertainty over what could happen in 3 months, compared to what could happen in 10 years.)

Looking at the above, it would make more sense for the Federal Reserve to cut rates, so that they can avoid a recession. Inflation wise we also don`t really have to worry, as the U.S. inflation rate is extremely low, and the European inflation expectations are the lowest on record!

The biggest problem with low interest rates is always that cheap money goes to bad ventures. You can see that very well in the chart below, which shows that the market value of AAA rated corporate debt is now lower than BBB rated corporate debt.

So now that we are very close to a new rate cut, inflation is extremely low, and unemployment is near record low levels, we should jump into the S&P 500 head first, right?

Not so fast. Below you can see that if you really want to put your money into the stock markets, you should look at Europe instead of the U.S., as the relative price performance of the S&P 500 compared to European stocks is currently at a 2.2 standard deviation! That`s higher than 97% of the time!

So if you`re smart, you should look at European stocks. But if you`re really smart, i`d suggest you to look at commodities. The S&P 500 vs the CRB commodities index is at new all time highs, and i personally think that these all time highs won`t last very long. You can see that it tends to move in cycles that can last for more than a decade, and the current outperformance of the S&P 500 is already 11 years old.

Which commodity in particular should you choose? i would suggest to just pick a basket of commodities, like the CRB index, but if you`re interested in metals, then perhaps you want to have a look at the following:

the gold to silver ratio is at a high last seen in 1993. Basically you can buy 1 ounce of gold with 90 ounces of silver currently, while in 2011 for example, you could get an ounce of gold with just 32 ounces of silver! I`ve spoken a lot about this ratio in my previous newsletters, and i still think that silver is one of the best commodities to invest in right now. The great thing about this metal is that it also has a lot of industrial use, so unlike almost only institutional and consumer demand of gold, silver also has corporate demand.

Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

Bubbles and Bottoms 4 June 2019

We are in a global recession, it has not been officially announced yet, but with the Purchasing Managers` Index being below 50 (indicating a contraction) in South Korea, Japan, Taiwan, Malaysia, Russia, Poland, Turkey, Czech Republic, Italy, Germany and the UK, we can be assured that the world is in trouble.

As central banks all over the world have used up all the tools in their toolbox to avoid the last crisis from spiraling out of control, they have no more buffer to absorb declines from any future recession. This means that the upcoming recession might turn into an all out depression, where each individual, each company and every government will have to tighten their belts.

The main tool that has been used is of course the money printer, inconspicuously called "Quantitative Easing" or any other term that central banks have used to distribute as much money as possible.
Why does the man on the street still feel poor? because this money ended up in the hands of private and public companies, and it created something that can be described as miraculous: The Greek 10-year bond yields have dropped below 3% for the first time ever!

Investors are so hungry for yield in a world of zero interest rates, that they only see a 3% chance of Greece defaulting on its debt. Even though history shows that since 1800, Greece has spent half of its time in default!

Before the crisis, Germany`s stock market capitalization was about 3.8% of the worldwide market capitalization. Currently this is sitting at 2.6%, even though Germany accounts for 4.6% of total global economic output. Is this an opportunity? is the German stock market highly undervalued? or will the rest of the world catch up to Germany on the downside?

Last week i showed you a great chart, depicting all the IPO`s that have taken place recently, and the massive losses that they have incurred over the past year. The following chart compares the recent IPO`s to the ones over the past 2 decades, and one can see that even around the dotcom mania, companies were not as loss making before their IPO than that they currently are. It`s truly a different world today!

The IPO madness can also be seen in the S&P 500 index, where record valuations have been hit. It does look like it hit a wall recently, with a double top forming. As the amazing Northmantrader shows below, there`s a lot of similarity to the 2000 and 2007 tops. For example the declining RSI with an increasing index price, a bottom in the unemployment rate, and a break of the multi year trendline.

Will this be a copy of 2007? Looking at the below chart, you would think so. You can see a strong rise with low volume, a double top, a sharp decline in between those tops, and what the future will bring... well if we follow the path of 2007, it won`t look good for us!

The summer slowdown is now well underway, but with the US-China trade tensions, i don`t think we should rest on our laurels! Look at what happened in the last two weeks of December, which should have normally been slow weeks... it surprised us all, and gave many of us a very red Christmas!

Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

Bubbles and Bottoms 27 May 2019

This being the first weekly instead of monthly edition, i thought i`d start off with some bottoms instead of bubbles, just to keep the positivity going.

Looking at tax receipts, personal current taxes have been steadily on the rise, while taxes on corporate income really seem to have hit rock bottom. Considering that this chart is not measured in percentages, but in Billions of Dollars received, it`s difficult to argue that this will go down to an even lower level than it already is.

Another bottom can be seen in Gold and Silver mining stocks, especially when compared to Utility stocks. This chart shows a perfect double top, which would indicate that mining stocks could increase threefold in 8 months if they follow the previous path!

Going back to my specialty, bubbles, i saw this great chart from Doug Short, showing that the Conference Board Leading Economic Index peaks, on average, 12-13 months before an official recession is announced. What is this leading economic index precisely? it`s an index of indexes, consisting of 10 key variables. Examples are: unemployment rate, unemployment claims, building permits, consumer sentiment index and many others. The fact that this index is still peaking, means that most likely we won`t be ending up in a recession soon (at least a year from now) and if we follow the path of the late 80`s or 90`s, we can be peaking for a much longer period of time.

The market is also not showing any fear, despite December`s pullback. On average, there are 3 times per year when the market pulls back 5% or more. So far this year, we had none.

The last image that i will show you is that of tech IPO`s over the past 3 quarters. You can find the valuation, the revenue and the losses that were made by each company. If you would put all these companies together, you would have 25 Billion in revenue, with 6 Billion in losses.
Not surprisingly, of these 15 companies, only 2 of them make a profit.

I hope you enjoyed this bite-sized newsletter! A big shout-out as usual to all the amazing people who are making these charts and giving them away for free on twitter. Our lives wouldn`t be the same without you, and your contributions are priceless!

Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

April/May 2019 - Introduction -

April has been a month of new record highs on most indexes. The S&P 500 IT sector valuation is now nearing a 20 P/E ratio, while being at 14 in the last week of December 2018. Complacency can be seen all over the place, and fundamentals are looking increasingly worrying.

Earnings growth slows to the lowest level since Q1 2016, global trade volumes are falling at their fastest pace in a decade, U.S. wholesale inventory is at its highest level since 2009 (don`t believe it when Trumps says this is good for the economy, it shows that there`s just more supply than demand, simple as that). 81.4% of borrowers who refinance their mortgage, take out cash off their homes (last time it was this high, it was late 2007 at the dawn of the global financial crisis). And last but not least: Germany`s factory orders have now declined at its fastest pace since the global financial crisis and is down by a massive 8.4%.

Fundamentals say that a worldwide recession is around the corner, while most markets in the developed world act like nothing is happening, and we are just at the start of a decades long economic miracle.

While Mr. Market is never wrong, it can stay irrational much longer than anyone expects. I expect it to catch up to reality sooner than later, and no central bank that can do anything against it (unless we`d consider a hyperinflation scenario, where the markets can go up by thousands of dollars, but its real value actually declines).

I will show you a lot of charts that will indicate a decline in various sectors, in different countries around the world, together with the market`s irrational response to it. As you might have expected, the most irrational sector is once again the tech sector, which is behaving like it`s 1999 all over again.

This will be the last monthly newsletter, after which I will switch to a weekly edition. This is necessary to stay up to date to the latest developments, as they move incredibly quickly. Over the past 2 months i`ve seen myself rewriting the entire newsletter, just because the narrative has completely changed within a matter of weeks.

Enjoy the ride, and don`t forget to stay positive after reading this newsletter, this too shall pass!

Robbert-John Sjollema

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The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.

April/May 2019 - Bubbles and bottoms for consumers -

Ray Dalio has come up with a great presentation about why capitalism should be “reinvented”, as it seems to make the rich richer, and the poor poorer. His chart below shows that the income share of the top 1% richest people, in relation to the income share of the bottom 90%, is hovering around its highest point since the great depression in 1929. The bottom of the chart is reached in 1971.

If you`re a bit familiar with my newsletters, you know that this is when the gold standard got abolished, and the world started to get addicted to debt. If you put two and two together, you`d likely come to the conclusion that less debt creation means less wealth disparity, for whichever reason that might be. Perhaps it`s because when you`re rich, it`s easier to get cheap loans, which can make you even more rich.

Now i`d like to play the devil`s advocate here. Despite the fact that there`s a massive wealth disparity, it also seems like the worldwide poverty rate has never been lower than today. So perhaps a big income disparity is not all that bad? Perhaps that top 1% of richest people create a lot of jobs, which in turn stimulates the economy. Perhaps equality is not something we should strive for, as equality always comes with mediocracy. Communism is the greatest example of this.

Perhaps we shouldn`t strive for equality, and perhaps we shouldn`t blame the 1% for all that is wrong with the world, but perhaps we should look at why this 1% had opportunities that others didn`t, and fix the issue from the source.

People think there is a shortcut to becoming part of the 1%, and that is real estate. It has been a piggy bank for generations on end, simply because populations and productivity kept on growing. We all know what happened during the great financial crisis; people`s homes had sky high valuations, and they started using their property as an ATM machine. Why wait to cash in on the different between the purchase value and the actual value, if you can already take out some money during your mortgage refinancing? Great idea if the housing prices keep on rising!

Unfortunately, nobody has learned their lesson from the 2008 crisis and property bubble, and we are now at a rate of more than 81% of people who take out cash of their homes during their mortgage refinancing. That is at the same level as late 2007. I don`t think I have to explain to you how this story will end, and I guess I don`t have to tell you that all these “responsible homeowners” will not be part of the 1% anytime soon.

90% of my charts are always about the U.S. markets. This is mostly because it`s the largest market in the world, and a good indicator of how the rest of the world is doing. The second largest economy in the world also has its own problems though, and both consumers as well as businesses and the government itself is to blame.

Below you can see the outstanding credit card balances as a percentage of GDP for various countries at various times in history. As you can see, the mainland Chinese are quite good at raking up debt on their credit cards, even at a larger scale than the U.S.!

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April/May 2019 - Bubbles and bottoms for companies -

Corporate debt. It is the type of debt that has gone up the most over the past decade, compared to household, government and financial sector debt. As i`ve said before, the next financial crisis won`t be starting at banks. Banks have been bullied by every single government since the great financial crisis, and this is practically the only industry that has managed to deleverage over the past years. If one wants to find the catalyst of the next great crisis, look no further than private and listed companies all over the world.

Zooming in on this picture, one can see that Chinese nonfinancial corporate debt has been the biggest cause of the worldwide corporate debt growth. It has gone from roughly 3 Trillion in 2007, to more than 20 Trillion in late 2018!

In the U.S. it`s not much different though, with Russell 2000 companies increasing their debt fivefold in a decade.

When it comes to companies who are about to be listed on the stock market, the story might even be worse, as the majority of them are not even profitable yet. The Lyft IPO that went terribly wrong last month, was infamous for having the largest annual loss before going public. Ever.

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April/May 2019 - Bubbles and bottoms for stock markets -

Record debt means record valuations on stock markets, as long as the debt can be paid back. What can stop this debt payback? An increase in interest rates or a decline in demand.

Since the decline in the markets from October until December, markets have rebounded and found new all time highs. Just to put in perspective how fast this rally was, and how much the price increased: it took 80 trading days to let the Nasdaq 100 or NDX decline 23%, while it took only 73 trading days to go up 29%. Over the past 3 weeks it increased another 4%.

The Nasdaq has been up 15 weeks out of the past 17, which last happened at the peak of the 2000 bubble. Complacency galore.

There`s massive overconfidence in the Nasdaq 100, being close to extreme levels. Overconfidence in other markets, currencies and commodities don`t even come close.

The largest chunk of the rally comes from the tech sector, which is quite unsurprising. While not even being close to levels last seen in 2000, the tech sector is still outperforming the S&P 500 and is now the strongest since 2001.

The tech sector is fuelled by new IPO`s, since most of the newly listed companies are in the tech sector. This year will become the 4^th time that cumulative IPO value will hit the 100 Billion mark. The last 3 times this happened were in 2000, 2008 and 2015.

The flipside of this is that cumulative flows to tech funds have crashed since the peak in late 2018, and are now almost negative. This is bad news for all tech companies who are about to get listed. One can think of Pinterest, Slack, Robinhood and WeWork.

Investors are becoming more confident after the December dip, with the bull-bear spread now reaching October 2018 levels. What does it take for investors to run towards the exit again, just like they did in December?

Dumb money is also more confident than they have been in a long time. Since 2010 to be precise. The dumb Money indicator include the equity-only put/call ratio, the flow into and out of the Rydex series of index mutual funds, and small speculators in equity index futures contracts.

The reason why many investors are becoming so optimistic again, is because there haven`t been any large declines for a while. On average, it takes 48 days to have a 3% sell-off in a day. Currently we`re at 69 days, which is practically 50% higher than average.

“It is far more common for people to allow ego to stand in the way of learning.”

- Ray Dalio -

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April/May 2019 - Bubbles and bottoms for governments -

Worldwide, economies are slowing down at a pace last seen since 2009. The global purchasing managers index, which is a good indicator of economic health for the manufacturing and services industries, has shown the longest losing streak in at least 20 years, surpassing the declines seen in 2008 and 2009.

This comes together with a massive and steep decline in global trade, mimicking the declines in 2008.

Zooming in on Asia, one can see that export volumes have plunged to levels, you guessed it by now, last seen in 2008.

China`s industrial profits have declined last month by 14%, which was the largest decline since 2009.

This is despite a multi decade high in Chinese consumer confidence, which should boost domestic consumption. Unfortunately for China, domestic consumption is still a much smaller part of the economy than for example in the U.S.

Meanwhile in Europe it`s all looking bleak as well, with Germany`s manufacturing orders going down 8.4%. This has now surpassed the declines from 2012, when we were in the middle of the European banking crisis.

In the U.K. it`s a whole different story, and on the surface you would think that their economy is booming. You can see the massive outlier in U.K. factory output compared to its European peers. But once you start to realize that this is all due to stockpiling because of the Brexit uncertainty, one can imagine that this fast rise will collapse just as fast, whether or not an actual Brexit will take place.

London house prices are going down at the fastest rate in more than a decade, likely due to the fact that much of the London property is being used for speculation by the Arabs and Chinese, who don`t use the property as their primary dwelling.

Debt to GDP levels in Europe have increased in all countries since 2008, but you can see that there are actually only two countries who managed to come very close to their pre-recession levels. Germany is practically back at the same level, while the Netherlands is declining rapidly since 2014.

What do these two countries have in common? They are the two largest exporters in the EU zone.

Germany`s exports account for 24.2% of total EU exports, while the tiny Netherlands account for 11.2%. Why have the two largest export nations shown the most positive developments in debt to GDP levels? Reason number 1 is the low Euro. If Germany and the Netherlands would still have their own currencies, it would be at much higher levels in comparison to, for example, the US Dollar. But because the Euro is basically a collection of 19 differently performing economies, the bottom performing economies pull down the value of the Euro and create a massive advantage for the EU`s export nations. The opposite is true as well; if the bottom performing economies in the EU would have their own currency, it would be at lower levels to the US Dollar than the Euro currently is.

This is the main reason why countries like Greece and Portugal are continuously underperforming and need continuous bailouts. In my opinion, countries like Germany and the Netherlands are more than happy to bail these countries out, because on the bottom line there`s still an economic gain.

Now, here`s the real issue with the EU, which is hardly spoken about: despite having a united currency, the EU does not have united EU bonds. Each EU member pays different interest rates on their bonds, and you guessed it; the bottom performing economies pay the highest interest rates.

If there would be European bonds, or Eurobonds, with an interest rate that is based on the average performance of all EU members, just as the Euro is valued, there would be a much better balance in the EU`s economic system, where the best performing economies benefit from a low currency, but have to pay higher interest rates, and the least performing economies benefit from lower interest rates, but have to endure a higher currency. But guess who the biggest opponents are to Eurobonds? You guessed it…

In my opinion, this is the biggest kept secret about the EU, with the Netherlands and Germany being the biggest beneficiary. They literally have their cake and eat it too; an artificially low currency with low interest rates!

Meanwhile, the U.S. is reaching the record of 120 months of economic expansion, that was set in the mid 90`s. Back then, the economic expansion happened with much higher GDP growth, but nonetheless it`s very impressive, and a great example of what Quantitative Easing can do for a country. The biggest problem right now is that consumers, businesses and even the government itself is becoming addicted and dependent on this constant inflow of “cheap money”, and there doesn`t seem to be a way out of this spiral.

“If you’re not failing, you’re not pushing your limits, and if you’re not pushing your limits, you’re not maximizing your potential”

- Ray Dalio -

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