The ratio of nonfinancial equity market capitalization to nominal GDP is presently about 120%, compared with a historical average prior to the late-1990’s bubble of just 55%. The comparison – about double the historical norm – is about the same if one uses the Wilshire 5000, which includes financials, and for Tobin’s Q (price to replacement cost of assets). The price/revenue multiple of the S&P 500 is presently 1.6, versus a pre-bubble norm of just 0.8. All of these measures have a correlation of about 90% with subsequent 10-year S&P 500 returns, even including recent bubbles and subsequent busts.

Increasing our concern is a 10-week average of advisory bulls at 57.7% versus just 14.8% bears – the most lopsided bullish sentiment in decades. Add the record pace of speculation on borrowed money, with NYSE margin debt now at 2.5% of GDP – an amount equivalent to 26% of all commercial and industrial loans in the U.S. banking system. Add the currency collapses in Argentina and Venezuela, as well as fresh credit strains and industrial shortfall in China, and one has any number of factors that could be viewed in hindsight as a “catalyst” (as the German trade gap was viewed after the 1987 crash, in the absence of other observable triggers).

….entire article HERE

With continued chaos around the world and uncertainty in global markets, today KWN is publishing an incredibly powerful piece that was written by a 60-year market veteran.  The Godfather of newsletter writers, Richard Russell, has issued a dire warning, saying that even though there will be rallies in the major markets, stocks are now headed into crash mode as the US government is using massive propaganda and lying to its people.

….read it all HERE

IRA Retirement Funds Confiscation: it’s happening

I have an old acquaintance named Sam who has a hell of a deal for you.

Sam is actually a pretty famous guy with a big reputation. Unfortunately he has been a bit down and out on his luck lately… but he’s trying to make a comeback. And Sam is prepared to float you a really great investment opportunity.

Here’s the deal he’s offering: you give Sam your hard-earned retirement savings. Sam will invest your funds, and pay you a rate of return.

Granted, the rate of return he’s promising doesn’t quite keep up with inflation. So you will be losing some money. But don’t dwell on that too much.

And, rather than invest your funds in productive assets, Sam is going to blow it all on new cars and flat screen TVs. So when it comes time to make interest payments, Sam won’t have any money left.

But don’t worry, he still has that good ole’ credibility. So even though his financial situation gets worse by the year, Sam will just go back out there and borrow more money from other people to pay you back.

Of course, he will be able to keep doing this forever without any consequences whatsoever.

I know what you’re thinking– “where do I sign??” I know, right? It’s the deal of the lifetime.

This is basically the offer that the President of the United States floated last night.

And like an unctuously overgeled used car salesman, he actually pitched Americans on loaning their retirement savings to the US government with a straight face, guaranteeing “a decent return with no risk of losing what you put in. . .”

This is his new “MyRA” program. And the aim is simple– dupe unwitting Americans to plow their retirement savings into the US government’s shrinking coffers.

We’ve been talking about this for years. I have personally written since 2009 that the US government would one day push US citizens into the ‘safety and security’ of US Treasuries.

Back in 2009, almost everyone else thought I was nuts for even suggesting something so sacrilegious about the US government and financial system.

But the day has arrived. And POTUS stated almost VERBATIM what I have been writing for years.

The government is flat broke. Even by their own assessment, the US government’s “net worth” is NEGATIVE 16 trillion. That’s as of the end of 2012 (the 2013 numbers aren’t out yet). But the trend is actually worsening.

In 2009, the government’s net worth was negative $11.45 trillion. By 2010, it had dropped to minus $13.47 trillion. By 2011, minus $14.78 trillion. And by 2012, minus $16.1 trillion.

Here’s the thing: according to the IRS, there is well over $5 trillion in US individual retirement accounts. For a government as bankrupt as Uncle Sam is, $5 trillion is irresistible.

They need that money. They need YOUR money. And this MyRA program is the critical first step to corralling your hard earned retirement funds.

At our event here in Chile last year, Jim Rogers nailed this right on the head when he and Ron Paul told our audience that the government would try to take your retirement funds:

I don’t know how much more clear I can be: this is happening. This is exactly what bankrupt governments do. And it’s time to give serious, serious consideration to shipping your retirement funds overseas before they take yours.

(Note to members of our PREMIUM service: look for an upcoming actionable alert on this topic).

by Simon Black

Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Visit his website

This article is taken from the Winter 2014 EPC Global Investor Newsletter.

With the Standard & Poor’s 500 Index having posted a 30% gain, it’s easy to assume that U.S. stocks easily led the world in 2013. (There is more on what is behind this rally in the latest version of the Euro Pacific Capital Newsletter). But as it turns out, the stimulus-loving U.S. markets had plenty of company. Surprisingly, this includes countries supposedly saddled by the scourge of austerity.

The Irish Stock Exchange Quotient (ISEQ), gained 33.6% in 2013. Close behind were the 28% jump in the Athens General Share Index, and the 21% rally in Spain’s IBEX 35 Index (IBEX). Factoring in the 4% rise of the euro over the calendar year and these returns look even better from American eyes. Europe was supposed to be the economic dregs in 2013 and these three charter members of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) were supposed to be the worst of the worst. Yet, they saw big rallies on their stock markets. Despite all we have heard about how callously imposed austerity had threatened to knock these fragile economies back into the Stone Age, the policy has not been as toxic as advertised. In fact, we would argue that it has helped these deathbed economies get partially back on track.

The Luck of the Irish

You may have missed it but back in December Ireland became the first troubled euro zone state to exit its rescue program completely. Three years ago, amid the collapse of the country’s property market and large losses in the banking sector, Ireland received a 67.5 billion euro loan from a lending troika consisting of the International Monetary Fund, the European Commission and the European Central Bank. In exchange, Ireland was required to impose a series of spending cuts, tax increases, asset sales, and banking reforms. Although these measures made the Paul Krugmans of the world shudder, they appear to have worked for Ireland.

A turning point came in March of last year, for the first time since November 2010, Ireland successfully floated sovereign debt on the international market. Demand for its 10-year bond was so strong that Ireland increased the size of the offer to 5 billion euros from the original 3 billion euros. Then in the new year 2014, things got even better when Ireland was able to raise another 3.75 billion euros at an even lower rate (3.54%). In December 2013, ratings firm Standard & Poor’s affirmed its long-term credit rating of BBB+ and said the outlook remained positive. Ireland appears to be out of the financial doghouse.

In another positive sign, Ireland’s housing market appeared to have turned around after having fallen about 50% during the crisis. In June of last year, “national residential prices recorded their first year-on-year increase (of 1.2%) since January 2008,” said the Central Statistics Office. Additionally, October saw prices rise 6.1% year-over-year. Finally, the unemployment rate had fallen again in December for the 18th consecutive month, registering the lowest rate since May 2009. In the third quarter of 2013, the seasonally-adjusted rate fell to 12.8% from 13.6%, and more than two percentage points below its early 2012 peak.

The falling unemployment rate has been helped by American technology companies expanding their Irish operations. In 2012, Apple Inc. (NASDAQ:AAPL) announced it would build new offices at its Cork headquarters and would hire 500 people. Then in December, Microsoft Corporation (NASDAQ:MSFT) invested170 million euros to expand its Dublin center. All of this happened during a period of austerity!

The Drain in Spain

Spain agreed to its rescue package in July 2012, about 19 months after Ireland, but it expects to exit its bailout program in less time (the country expects to transition in early 2014). While the euro zone partners authorized a rescue package of 100 billion euros, Spain only took 41 billion.

Like Ireland, Spain was forced by the lenders to make budget cuts and structural reforms in the financial system, and while the measures have bitten, they have led to improvements. In the third quarter, the Spanish economy emerged from a two-year recession and posted growth of 0.1%. While this is below the euro zone average, it is not the catastrophe that some had predicted. In November, Standard & Poor’s raised its outlook on Spanish debt to stable from negative, and kept its debt rating at BBB-, one notch above junk-bond status. By year end 2013, Spain’s government bond market stabilized with yields on 10-year bonds falling to 3.9% from 6.4% in July 2012.

In its November report on the European economy, the European Commission said Spain’s domestic consumption and equipment investment began to stabilize in the second quarter of 2013 and that it expected these trends to continue, with the composition of growth becoming more balanced as domestic demand strengthens.

The European Commission expects the Spanish economy to finally expand in 2014 with growth of 0.5%, and 1.7% in 2015. And while unemployment fell from its first-quarter peak of 27.2%, it remains extremely high at 26%. While these jobless numbers seem unimaginable to Americans, it must be remembered that Spain’s highly restrictive labor laws have driven a large portion of the nation’s jobs into the opaque world of the under the table economy.

There can be no doubt, however, that Spain is still in the thick of it. Based on its historic housing boom of the last decade, the country’s real estate market has yet to show signs of a true bottom, and will probably continue to contract in 2014. Still, the European Commission said, “overall, the adjustment process is progressing, but challenges and vulnerabilities remain significant.” Apparently that was enough for investors.

Greek Trajectory

The situation in Greece remains much riskier for investors than either Ireland or Spain. The country is nowhere near exiting its bailout. Actually, it’s expected to receive another 1 billion euros as part of its bailout program before the end of December 2013. The country is currently in the sixth year of a recession, and since 2010 has received 240 billion euros from the lending troika. (That’s more than 21,000 euros per resident). But its fiscal picture is improving.

In December, the Greek parliament approved the 2014 budget in which it expects its first surplus in a decade, 812 million euros, double the previous estimate. Although the surplus excludes debt payments, it may be likely the country will meet next year’s fiscal targets. Meanwhile, Greek bond yields have plunged to 8.28% from 25% in August.

While the European Commission expects Greece’s GDP to contract by 4.0% in 2013, this is still an improvement over the 7.1% decline in 2011 and its 6.4% contraction in 2012. Going forward, the Commission expects Greece’s GDP to grow 0.6% in 2014 and increase to 2.9% the following year. Last summer, the tourism industry staged a strong revival as it proves to be a much cheaper destination compared to other vacation spots.

However, the austerity measures have required the government to eliminate many public-sector jobs from Greece’s famously bloated bureaucracy. This transition to a sustainable model is causing much current dislocation. The unemployment rate jumped to 27% in 2013 and with the lending troika demanding more austerity from the government, it doesn’t look like this problem will get better in the very near term. But investors may be looking past these numbers.

According to the commission, “In 2015, the recovery is forecast to gain strength, as investment becomes the main engine of the recovery. … With consumption no longer being a drag, real GDP growth is projected…” Given how woefully awful the Greek economy was widely understood to be, this forecast is actually a fairly acceptable prospect.

Austerity Bites?

Clearly all three economies are still in a shambles. But given how wildly unsustainable the debt growth had become for all three the recent stabilization should be celebrated. Given their problems, it would have been impossible to conjure a pain free solution that stood a chance for the long term.

While economists such as Paul Krugman have been at the forefront of the chorus that says austerity doesn’t work, these measures have not stopped these countries from improving their fiscal positions while setting a sustainable course. Although unemployment remains high in Greece and Spain, the falling unemployment rate in Ireland shows that restored faith in government responsibility leads to investment. Krugman and his brethren are similarly wrong when it comes to the devastating effects that are supposedly delivered by deflation (also explored in the Newsletter).

The improvements in these “basket case” economies remind us of the emerging market economies that came out of the Asian debt crisis with a new lease on life. For those who can tolerate the risks and volatility, it may be a good time to look deeper.

Andrew Schiff is Director of Communications and Marketing at Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff. 

Subscribe to Euro Pacific’s Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

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On Friday, the Dow suffered its worst one-day percentage decline since November 2011. The index plunged by nearly 2%. 

The S&P 500 didn’t fare much better. It plunged by 2.1% – its biggest one-day percentage drop since June 2012. 

So far in 2014, the S&P 500 has lost 3.1%. And the Dow is down 4.2%. 

Mainstream pundits say the big fall in US stocks had to do with China. Or with the Fed’s tapering of QE. Or with bad labor reports… a slowdown in capital spending… or the drop in foreign trade. 

Take your pick. 

Does this mean the bull market is over? Is it time to sell stocks? Or should you buy the dip?

We never know what markets will do next. And now, we are in a particularly troubling place. 

Never before in the history of the world have markets and economies been the subjects of so much experimentation and innovation. 

Thanks to the Fed, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank, the People’s Bank of China… and every other central bank bent on “fixing” what ails their economies… every price in the global capital market is now manipulated, twisted, tortured and distorted. 

We live in a bubble of faith in central banks, where nothing is quite what it seems. Trying to fashion a coherent economic view or an enlightened investment strategy has never been so difficult. 

And remember, no paper currency has ever survived a complete credit cycle. 

What will happen when interest rates revert back to their historic norms? We don’t know. But when it comes, we doubt you will be happy holding a portfolio concentrated around US stocks and bonds. 

What will happen next? 

We’ve tried to figure it out. Inflation? Deflation? Hyperinflation? Boom? Bust? Bubble? Our guess is that we will see all those things… in good time. 

In the meantime, not having much to guide us, we fall back on old formulae. 

“Buy low, and sell high,” for example. 

So forget buying the dip. US stock prices would have to be almost cut in half before they were really attractive on a valuation basis. 

And as for selling, that is what you should have done last week, last month, last year – or whenever was the last time we recommended it. Still, it’s not too late. This market could go a lot lower. 

Here is all we know: 

First, sooner or later the price of debt and equity in the US (and most major economies) will have to come down. 

To make a long story short, today’s prices depend on real growth rates that haven’t existed since the early 1980s. 

Second, when asset prices begin to fall seriously, the Fed will stop talking about tapering QE. 

The Fed has broken the stock and bond market. Now, it owns it. Its meddling in the Greenspan and Bernanke years caused a big run-up in prices. It stands to reason that if the Fed stops meddling, prices will go back down to where they ought to be. 

The resulting “poverty effect” will be even more unpleasant than the “wealth effect” was pleasant. Janet Yellen won’t permit that. She will add stimulus, not remove it. 

But we will have to wait to see how this little selloff develops. Stay tuned this week for more on that… 

Regards,

Bill

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

It’s not just in the US that stocks are tanking… 

Emerging markets are taking it on the chin, too. 

Over the last two trading sessions of last week, Turkey’s benchmark stock index dropped 4.4%. Brazil’s Bovespa dropped 3.1%. And the iShares MSCI Emerging Markets ETF (NYSE:EEM) – which tracks the performance of over 800 highly-traded stocks in the emerging world – plunged 5%. 

And Friday also saw a big rout in emerging market currencies, with sharp selloffs in the Turkish lira, the South African rand and the Mexican peso. 

This is part of a longer-term trend. 

As you can see from the chart below, the MSCI Emerging Markets Index (red line), priced in dollars, is roughly where it was in May 2010, despite plenty of volatility. The S&P 500 (blue line) is up more than 50% in that period (and has trended higher with much less volatility). 

One problem is slowing economic growth – particularly in China, where worries remain over the government’s ability to rebalance the economy away from cheap exports and toward greater domestic spending. 

Another problem for the emerging world right now is that the Fed’s EZ credit policies helped inflate a speculative bubble in emerging market bonds. 

Facing the Fed’s artificially low bond yields in the US, yield-hungry investors piled into emerging market bonds (often denominated in US dollars). These investment inflows helped mask trouble in emerging market currencies. 

But since the Fed announced its intention to cutback on QE in May 2013, this trend reversed course. 

Emerging market currencies have been tanking since. A Bloomberg index of the 20 most-traded emerging market exchange rates is down by 9.4% over the past year. This has helped pull down emerging market stocks, because underlying earnings are priced in currencies that have been weakening sharply versus the dollar. 

But crashing emerging market stocks could spell opportunity for patient investors with an eye for value… 

Stock market valuations are already on the floor in the many parts of the emerging world. 

The Chinese stock market, for instance, trades on a trailing P/E of 6.7 and yields 4.6%. And the Russian market trades on a trailing P/E of just 5.9 and yields 3.3%. 

That compares with a trailing P/E of 18.4 and a yield of 2.3% for the S&P 500. 

That means expensive US stocks are more vulnerable to a reverse in sentiment than relatively cheaper emerging market stocks. 

I’d steer clear of pricey US stocks. But I wouldn’t bet the farm on emerging market equities right now, either. There’s plenty of turbulence ahead for the emerging world. 

But judging by the single-digit price-earnings multiples in places such as China and Russia, much of that turbulence is already priced into equities. 

That gives you the opportunity to follow the golden rule of prudent investing, which is to buy low and to sell high. 

Gradually ease into positions in discounted markets. This is the safest way to play the current set-up.