Asset protection
Mohamed A. El-Erian is the chief economic advisor for Allianz SE. Before joining Allianz, Dr. El-Erian held positions as chief executive and co-chief investment officer of PIMCO and president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment and related accounts. Dr. El-Erian was also a managing director at Salomon Smith Barney/Citigroup in London and spent 15 years with the International Monetary Fund in Washington, DC.
Dr. El-Erian has published widely on international economic and finance topics. His 2008 best-seller, When Markets Collide, was named a book of the year by The Economist, and one of the best business books of all time by The Independent (UK). He was one of Foreign Policy’s “Top 100 Global Thinkers” for four years in a row, and is a contributing editor for the Financial Times. His newest book – The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse – is another New York Timesbest-seller.
He replied to my questions in an email exchange on November 15.
What is your assessment of the overall health of the U.S. economy? In particular, do you agree with the narrative that the low unemployment rate (4.1%) indicates that we don’t suffer from a lack of aggregate demand?
The US economy is gaining momentum, on a standalone basis and as part of a synchronized pickup in global growth. This process would be turbocharged were Congress able to work with the administration to pass pro-growth measures, including tax reform and infrastructure. And, on the demand side, it would be further aided by an increase in the labor participation rate and higher wage growth in response to the sharp decline in the unemployment rate.
Last month, you wrote that investors must consider whether they are placing implicit bets on three scenarios: endogenous economic and financial healing, long-awaited policy breakthroughs and bigger liquidity waves. I’d like to ask about each of these. You’ve expressed optimism that the U.S. and Europe are on a path to sustained growth. Are you as optimistic about China and Japan?
Yes. All three factors have been important drivers of the impressive rally … and not just in stocks, but also other risk assets. They speak to actual liquidity support and endogenous economic improvements being reinforced by the prospects for policies that unleash the economy’s stronger growth potential. It is a critical policy handoff in order for fundamentals to eventually validate asset prices.
As regards the other two countries you ask about, China continues to navigate one of the most difficult phases in development economics – what the technocrats call the “middle income transition.” It’s a phase that requires changes to how the economy operates, and it is one that calls on the Chinese government to implement midcourse adjustments as needed.
Japan is in a tougher structural position, having acquired cyclical movement forward but lacking the secular momentum that China has. As such, it is even more critical that Prime Minister Abe’s recent poll victory translate into the implementation of what the government has called the “third arrow” – that is, measures aimed at improving growth responsiveness.
With regard to policy breakthroughs, what specific measures would be most positive for economic growth?
Tax reform, infrastructure and de-regulation, followed by further improvements in the actual and future functioning of the labor market – that in the context of educational reforms and greater skill acquisition. And all accompanied by better international policy coordination, including in order to reduce currency and trade tensions.
With regard to liquidity, you wrote that investors have been “enticed to become increasingly exposed to historically illiquid asset class segments.” Are there any of those historically illiquid asset classes that investors should be wary of, because their liquidity will not withstand a market downturn?
Yes, those whose dedicated investor base is relatively narrow in comparison to the potentially more volatile “cross-over” money that has flowed in. As an illustration, this would include parts of the high yield corporate bond markets and certain segments of emerging markets.
On November 1, you said that the Fed is on a “beautiful normalization” as it ends its easy-money policies. Could you elaborate?
The reference to a “beautiful normalization,” a phrase that I adapted from Ray Dalio’s concept of “beautiful deleveraging” which he popularized a few years ago, speaks to the Fed’s ability to stop asset purchases (QE), hike interest rates, and set out a plan for gradually reducing its $4.5 trillion balance sheet – all this without disrupting markets or derailing economic growth. I suspect that the Fed is able to continue on this orderly path of gradual and careful normalization of monetary policy.
The big question in central banking has morphed and migrated. It refers to whether more than one systemically important central bank – and, perhaps, as many as four more (the ECB, the Bank of Japan, the People’s Bank of China, and the Bank of England) can eventually also normalize at the same time.
We were recently asked to comment on Harry Dent’s predictions for the gold market and we thought that our reply might benefit other gold investors as well. To be precise, we were asked about Harry Dent’s 30-year cycle that supposedly peaked in 2011, and we supposedly could expect gold to peak again somewhere between 2038 and 2040 (you can watch the interview here). The indirect implication is that gold is not likely to soar sooner and that it’s likely to decline for a relatively long time.
Mr. Dent is referring to gold as a premier commodity and he claims that it moves up and down with the commodity cycle, which, in his opinion, is 30 years.
If the above is really the case, then the previous prediction may be well founded. But is it really so?
We respectfully disagree for two reasons.
The first reason is fundamental. Gold’s price reacts more to flows of gold than to mining supply and demand and thus it behaves more like a currency than a commodity. So, from the fundamental point of view, it may not be justified to view gold simply as a commodity (even a premier one).
The second reason is… Simply checking the facts and the facts confirm our thesis from the above paragraph, invalidating Mr. Dent’s claim that gold moves in a 30-year cycle.
The price of gold was fixed for most of history, so it’s impossible to analyze this cycle directly. No, that’s not our case against the theory. Our case is that we can use the best proxy that we have for the price of gold. The price of gold was fixed, but the prices of gold stocks were not and since the major tops and bottoms in both asset classes correspond to each other, gold miners could be used to check what gold could have done. The gold stocks ratio to the general stock market is even better because by using it we are taking out the part of the mining stocks’ price movement that depends on the stock market volatility.
Let’s check if this is indeed the case with the HUI to S&P 500 ratio (chart courtesy of http://stockcharts.com).
The above charts show the same ratio over the same time-span and they differ only in terms of scale. Since the link between the HUI to S&P ratio and gold is clearly visible in both linear and logarithmic terms, we can safely assume that our earlier assumption of using gold miners and their ratio as a proxy for gold was correct.
Unfortunately, we can’t use the HUI Index and its ratio in the case of the very long-term analysis as it wasn’t trading just a few decades ago. The gold stock that was trading and that we will use as a proxy for the entire sector (in light of lack of other alternatives) is Homestake Mining.
Can we observe a 30-year cycle in Homestake Mining prices and/or its ratio to the general stock market?
Sources: first chart, second chart
The bottoms in the ratio (second chart) are the moments when we can speak of “artificial tops” in gold. The 2011 top and the 1980 top were seen in gold directly and the only (!) addition that the above chart provides us with is the mid-1930s extreme.
We can see exactly the same thing on the chart featuring Homestake Mining directly. There was a major, long-term top in mid-1930s and then nothing extreme happened until 1980 with the exception of interim tops in the late 1960s and mid-1970s.
About 30 years passed from the 1980 top to 2011, but that’s it as far as the confirmations of the 30-year old cycle go and a cycle with only one occurrence is no cycle. The timespan between the 1980 top and the previous one is about 45 years, which is exactly between 2 supposed topping dates (that should be 30 and 60 years away). In other words, the mid-1930s observation couldn’t invalidate the 30-year cycle theory more than it already does.
On a side note, since gold topped in early 1980, taking the 30-year cycle and applying it to the letter would make one sell gold in early 2010 – more or less when gold was trading around $1,100, right before the biggest rally of the bull market.
Summing up, it doesn’t seem that gold is just a premier commodity as it’s price doesn’t seem to follow the 30-year cycle. Consequently, it doesn’t seem to be justified to expect gold to form the next big top between 2038 and 2040 – it could and is likely to rally much sooner. The above doesn’t mean that gold will not decline in the following months, but it does imply that one shouldn’t bet on a multi-year long decline in the prices of yellow metal. Therefore, when gold slides sharply, it is likely to serve as an epic buying opportunity – not the start of a boring, multi-year consolidation.
Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits – Tools for Effective Gold & Silver Investments
Have you ever played the game Monopoly? If so, you’re probably familiar with the image of “Rich Uncle Pennybags,” the game’s unofficial mascot. Sporting a bushy white mustache, a black top hat, and a cane, Mr. Monopoly (as he is sometimes known) has become a cliché. Created as a caricature of J.P. Morgan, the legendary financier, Pennybags serves as a kind of stock image for the ultra-wealthy investor.
Thanks to this and other stereotypes, some people seem to think that investing is a game for only the super-rich to play. But you don’t have to own a huge pile of cash to invest. That’s because investing isn’t about “playing the stock market.” It’s not necessarily even about getting rich. No, investing is about building for the future. It’s about compounding the money you already have so that you can afford to reach your goals in life.
No matter who you are or where you come from, everyone has financial goals. Your goal could be to save for retirement so that you don’t have to work forever. It could be to help your children attend college. It could be to build a new house, open a business, or travel the world. It could be all those things and more. But achieving those goals costs money, and that’s where investing comes in.
Nowadays, most people—even those with high-paying jobs—simply don’t earn enough regular income to achieve all their goals. It’s not enough to store your money under the mattress. Nor is it enough to put your money in a bank and rely on interest. In the 21st century, your money has to grow. It has to work for you. It has to outpace inflation. The good news? All of that can be accomplished through investing.
People often ask me, “So how can I invest if I don’t have a huge pile of cash?” Fortunately, there are many ways. While I certainly wouldn’t recommend any one specific approach without understanding your personal financial situation, here are a few ways to get started:
Set up a Tax-Free Savings Account (TFSA), which aside from allowing you to invest, also comes with specific tax benefits.
Participate in your employers Defined Contribution Pension Plan or Employee Stock Purchase Plan.
Invest in an index fund, which allows you to “match” the investments held in a market index, like the S&P/TSX 60 or S&P 500. Index funds are both simpler and less costly than most other types of funds, and can also help you diversify your portfolio. (See point #2 below.)
Doing any of these things allows you to:
1. Start small. You don’t have to invest a lot of money all at once. Even a little bit is better than nothing, because once you’ve invested, your money can start growing and compounding in value.
2. Invest in broad sections of the market. This is valuable because different industries or types of investments do better than others at different times. By participating in an index fund, you can effectively invest in several areas at once rather than relying on one specific investment to do all the work. This is known as “diversification.”
3. Save for the future. As you know, so many of the financial decisions we make are based on short-term needs. Meanwhile, our long-term plans are ignored. But by investing wisely, you are actively determining what tomorrow will be like…today!
Of course, it’s not enough to simply invest. To reach your goals, it’s even more important to invest wisely. That’s why it’s sometimes a good idea to seek out the advice of a qualified financial advisor. With an experienced advisor, you can get unemotional, educated insight into how to invest properly.
But the most important thing to remember, is that you don’t have to wear a top hat or own a hotel on Boardwalk to invest. And because you can invest, you don’t have to wait another day to begin working toward your goals in life. So go out and start determining what tomorrow will look like…today!
Brent Woyat, CIM, CMT
Portfolio Manager
“I believe a great speculative third phase lies ahead for this bull market. The coming third phase will see the stock market climb far higher than even the bulls think possible.
The question is: is it too late to enter the stock market? In the third phase of a bull market, usually more money is made than in the first two phases combined. Thus, I foresee the possibility of large gains if a third and final speculative phase is ahead. My advice is that you assume an initial position in DIA or SPY on any weakness.”
Richard Russell died November 21 2015 – the Dow closed that day at 17,799.
also from King World News:
What Is Happening In The Residential Real Estate Market Is Remarkable
As an investor, what do you prefer: certainty or uncertainty?
Certainty, of course. We all do.
When things seem certain, the future looks bright and we embrace risk-taking. When things seem uncertain, it’s hard to imagine things ever getting better, and we shun risk at all costs.
But is there really such a thing as a certain environment when it comes to investing? No. There is always risk in markets, even if you can’t see it, and by extension, there’s always uncertainty.
It is only our perception of risk that changes.
If the recent past is a calm market filled with good news, we perceive things to be quite certain. If the recent past is a volatile market filled with bad news, uncertainty is deemed to be high.
How are investors feeling today?
Quite certain.
Volatility over the last year has been lower than any period in history.
At the same time, performance has been well above average, leading to one of the highest risk-adjusted return environments we’ve ever seen.
Naturally, investors are feeling pretty good about all of this, with one measure of sentiment (Investors Intelligence) recently hitting its most extreme level since 1987.
A summary of the prevailing thinking today is as follows:
- Recent economic data has been strong -> it will continue to be strong, there’s no risk of recession.
- Earnings have been strong, are at new highs -> there’s no risk of a slowdown in earnings growth.
- Tax cuts are coming -> that will have a dramatic positive impact on growth and earnings.
- Global Central Bank policy remains extraordinarily easy -> that can only be good for markets.
Let’s address each of this from the standpoint of certainty about the future.
Economy
The economic data has been pretty good this year:
- Unemployment Rate at its lowest level since 2000.
- Jobless Claims at their lowest level since 1973.
- 85 consecutive months of payroll growth, longest streak in history.
- Manufacturing sentiment highest since 2004.
- Consumer Confidence highest since 2000.
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