Timing & trends
Puru Saxena Says: ” Markets Are So Distorted And So Twisted That Reliable Indicators Are No Longer Working. Everything is Backwards”
As part of the ongoing series of Austrian School of Economics, FRA Co-Founder Gordon T. Long sits with Puru Saxena, of Puru Saxena Wealth Management. Mr. Saxena is the portfolio manager of his firm and he oversees discretionary investment mandates. He is also responsible for heading the firm’s research process and formulating investment strategy.
Mr. Saxena is also the editor of a monthly economic report – Money Matters. A highly acclaimed publication is read by professional and retail investors in numerous countries. He first began publishing his monthly economic report in June 2000 and it has now attracted a wide following. Prior to establishing Puru Saxena Wealth Management in 2005, he was a Founding Director and President of financial services firm – Bridgewater (now Tyche Group), where he oversaw the firm’s investment strategy.
LIMITING CENTRAL BANKS BALANCE SHEET GROWTH
“Financial markets are so distorted and so twisted that reliable indicators are no longer working. Everything is backwards”.
People are so conditioned now of believing the stimulus jargon that every time a central bank utters the word stimulus, everybody starts buying stocks again. If you look at japan, they have tried this for nearly 25 years now, and we have had recession after recession. There are zero percent short term interest rates, and not much economic growth in Japan. I don’t think this monetary experiment is going to end very well.
CENTRAL BANKS FUTURE ACTIONS
“I would be very weary by promises from the government and central banks at this point because they have a vested interest.”
I think they will try and inflate this in a typical Keynesian manner. We have negative interest rates already throughout Europe, so it won’t surprise me if you have it in the US.
“The problem isn’t a liquidity problem, it is a debt problem.”
The world has never been so indebted; the debt to GDP ratio is now over 280% globally. When you have this much accumulated debt, history has shown that economic growth slows down. Economic growth, by definition, comes from the private sector taking on more debt. When people borrow, they bring forth tomorrows consumption, today, and they consume without ever buying any assets.
“Whatever they’re doing, it’s not working.”
Central planners do not realize that if somebody is already in debt, they are not going to borrow anymore with interest rates at zero. We are currently in a deflationary environment. Central planners are trying to fight this by implementing quantitative easing, and all sorts of bizarre experiments. But at the end of the day the monetary velocity is at a decade low.
At some point, maybe even next year, we are going to get a recession. We are going to get a global recession which will occur at a time where interest rates at the short end of the curve are already at zero.
“Asset prices are going to deflate quite sharply and when this happens, there will be chaos.”
CURRENT MARKET MISCONCEPTIONS
“Major mistake people have is that QE works, or stimulus works.”
First one is that QE causes hyperinflation and therefore everybody drove up the prices of commodities to multi year highs. Investors still believe QE causes economic growth, I do not believe this. People think stimulus will cause economic recoveries and economic growth. When people realize stimulus actually leads to anti-growth you will see a big sell off in equities.
The one thing I’ve learned from being in this field from 16 years is that markets go up and markets go down. There is no one way street.
TO DIVERSIFY INTERNATIONALLY
“I think investors should keep a large chunk of their money in cash right now and long term treasuries are also a good idea.”
But if you’re look at a long term horizon, (i.e. 5 years+) I think investors should start looking at the beaten down commodity areas. Commodities have been decimated over the last 4 tears. If it was me I would not buy any equities right now. We personally don’t own any stocks on the long side for our clients at the present. The downside risks for many stocks is greater than their upside potential.
Abstract written by Karan Singh karan1.singh@ryerson.ca
Robot Theory
The battle of robot theory is on. Bank of America paints one picture and McKinsey another.
Let’s investigate both theories……continue reading HERE
A lot is being made of remarks from Federal Reserve Chair Janet Yellen earlier this week and the likelihood of the Federal Reserve raising rates as early as December. This is because, all else being equal, the US economy no longer warrants emergency level interest rates. Fridays US jobs report added further evidence to this, and that in fact the lame payroll numbers of August and September look more to be anomalies than a slowdown of the US economy, which was immediately impacted by economic instability in Asia. With the anticipation of action from the US Fed in December, it seems likely to expect a second phase of US dollar strength.
For starters, the global economy is shifting back to a precedent where US financial markets remain the most attractive home for capital on a relative basis. Over the previous couple of months anticipation was that like the Federal Reserve in the US, the Bank of England was ready to adjust rates higher, but policy uncertainty there in the last week has led forecasters to look to the latter half of 2016 for a rate rise. Furthermore, during this current period the global economy finds itself in a similar situation where the US sits alone as the only western central bank with a tightening bias, and is almost akin to September 2014 when the first wave of dollar strength began.
Another cautious sign was revealed in a research note by Bank of America Meryl Lynch earlier last week that money is fleeing
out of Canada at the fastest rate of the 10 major developed economies. The author examines two main factors, and the first is that Canadian investors and money managers are looking to US financial markets for better opportunity. The second is perhaps a more troubling sign that Canadian businesses are merging with or acquiring firms abroad as apart of 73 billion dollar outflow in acquisitions so far this year. Very simply this is money leaving the country because there are better prospects elsewhere. And it is without a doubt that there was anticipated to be a flight of capital from a decrepit energy sector, and it’s resoundingly clear that opportunities domestically are few and far between.
Bank of Nova Scotia estimates the Canadian dollar could go as low as 72 cents by the first quarter of 2016, and that forecast sounds bullish compared to some of the independent forecasters for the loonie. The reality though is that it fits into a scenario where we are about to embark on another phase of weak commodity prices and US dollar strength. That is why in turn Bank of Nova Scotia doesn’t see oil prices recovering until at least the end of 2016. Further to this, CIBC Economics Department wrote a very important note a few months back directed at firms that hedge their foreign exchange risk, and their message was clear. The downside is limited with a loonie that is ‘fair value’ around 78 cents, and it’s not likely we’ll overshoot back into the 80-cent range. Albeit, there’s always reason to be wary of a consensus call, but the evidence for another wave of US dollar strength seems overwhelming.
A final thought is how this theme encompasses precious metals. Gold is currently retesting the August low of 1,085 US per ounce. Further downside would almost be anticipated with a hike in interest rates, but the shallow liquidity of the gold market and its quick readjustments encourage that this news has already been priced in. In less than two weeks the price of gold has given back 90 dollars. Whether support at the 1080 level holds will be the ultimate question, but with the next phase of conversation around the US Fed will not be when they raise rates, but when can they do it again and to what level. My call is for eventually lower gold prices, but the downside will be short-lived.
Over the last couple of weeks, I have discussed the entrance of the markets into the seasonally strong period of the year and the potential to increase equity exposure in portfolios on a “short-term” basis. To wit:
“With the markets EXTREMELY overbought short-term, the setup for putting money into the market currently is not ideal.
However, as shown in the chart below, the markets have registered a short-term BUY signal that suggests that we remain alert for a pullback that generates a short-term oversold condition without violating any important supports.”
The chart below updates that analysis from last week.
…for larger charts and more analysis (make sure to scroll down to Lance’s Sector Analysis) all can be found HERE
1. Sickly stock market internals, plus gold update …
by Larry Edelson
“If you’re heavily invested, just get out now. It’s that simple.”
2. Is This 80/20 Portfolio the Best Plan for Your Money?
“If you want to do well with your investments, you will buy stocks… and buy them now“
“…a long-term investor who wants an easy life should keep 80% of their money in stocks and 20% in short-term bonds or cash”
3. Silver Stocks Look Spectacular
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