” What’s the next likely phase”

Larry and Martin: What Can Save America?

This past week will go down in history as a pivotal turning point never to be forgotten.

Russia annexed Crimea, the first major land grab in Europe since World War II. A new Cold War has suddenly burst onto the scene. And Janet Yellen testified before Congress that short-term interest rates could be raised sooner than most analysts expected.

Now, to better flush out the real meaning between these unusual events, Martin called me with three timely questions:

1. What’s the next likely phase in the new Cold War?
2. Is the United States still doomed to a major failure?
3. What could save us from that fate?

Here’s an edited transcript of our call.

Martin: What’s the next likely phase in this new Cold War?

Larry: Putin is already giving us an advance warning. Not only did he annex Crimea, but he directly threatened nearly all of Eastern Europe — by having an envoy tell the United Nations Human Rights Council in Geneva that …

Russia is committed to “protecting” any country with sizable Russian-speaking populations.

That means the futures of Estonia, Latvia and Lithuania — three countries with large ethnic Russian minorities — are also in play.

Martin: Even though all three are members of the European Union? Even though all three are NATO countries?

Larry: Yes! Sounds crazy, doesn’t it? But remember: Not only are the sanctions announced by Europe and the United States paper thin, both have effectively kowtowed to Putin.

Martin: In what way?

Larry: They have accepted Russia’s Crimea takeover — a strategic peninsula the size of Maryland — as fait accompli. And they even vowed not to respond with military force.

Martin: So you’re saying that vow empowers and enables Putin to go beyond the Crimea.

Larry: He already has, in a subtle but powerful way. I’m talking about Iran. As you know, the United States absolutely needs Russia’s help to bring the shaky nuclear talks with Iran to a successful conclusion. But this week, Russia’s delegate to the talks [Sergei A Ryabkov] made comments to the effect that Russia might scuttle the Iran deal in retaliation for U.S. and European sanctions.

Plus, Putin can also play the same big card he’s played before — shutting off the massive natural gas pipelines to Ukraine and Western Europe.

With this kind of leverage as cover, and with President Obama declaring that he absolutely won’t send U.S. troops, what’s to stop Russia from taking over the Russian-speaking Eastern Ukraine? Nothing!

Martin: Not hard to believe, is it?

Larry: Not in the slightest! That’s what he did in Crimea this week. And it’s also what he did in Georgia just a few years ago. Look. Putin has concluded that both the United States and Europe are weakened opponents.

So he’s acting accordingly.

Martin: In that context, why did President Obama just declare the U.S. would not get involved in any military action? Everyone agrees we don’t want to go to war. But strategically, what does the U.S. gain by openly admitting that to a likely opponent?

Larry: That was entirely for domestic consumption, regardless of the tactical consequences. Obama knows that the last thing the majority of Americans want is another war. Meanwhile, he already has some of the lowest job approval ratings of any president ever — currently 40 percent, according to Gallup, just two points from his low of 38 percent.

He has a Congress that can barely agree to anything. He has mid-term elections coming up. He has the media, even the democratic media, firing shots at him like a machine gun.

Putin’s circumstances are precisely the opposite. Since the Crimea takeover, his approval rating has skyrocketed by 10 percentage points to 71.6 percent, his highest ever. He has virtually zero opposition in the Duma, the Russian legislature. He has already silenced nearly all criticism in the Russian media and blogosphere.

All this gives him almost a checkmate-type of tactical advantage. So you can expect Putin to continue, or even step up, his bold, aggressive actions.

Martin: Let me shift the focus to the Asian side of the Cold War, China vs. Japan. I read articles that, relatively speaking, tensions there have died down recently.

Larry: Not for long! China and Japan are still duking it out over an official apology over the Rape of Nanjing, and China has successfully usurped hundreds of square miles of airspace over sovereign Japanese soil at the very south of the Japan, including the resource-rich Senkaku Islands and surrounding waters.

Martin: But China abstained from the U.N. vote the other day against Russia.

Larry: That’s only because it’s also afraid of secessionist movements in its own western regions.

Martin: Are you suggesting that Russia and China are rebuilding the Iron Curtain?

Larry: Yes, with some obvious differences, of course:

Eastern European countries are now on this side of the curtain.

But here’s another difference to consider: During most of the Cold War, China and Russia were arch rivals. They even fought a series of border skirmishes. Today, there’s real potential for a closer Sino-Russian alliance.

Martin: Larry, among all the analysts I read and hear, you have been in the forefront in terms of educating and warning the public about the rising cycles of war. Now it’s happening, and it’s happening faster than any of us anticipated.

My next question is …

Is the United States still doomed to a major failure?

Larry: Not now. Not soon. And not on the visible horizon. But the United States will slip to the number two economy in the world. Definitely.

Martin: Are we going to slip to number two militarily as well?

Larry: In terms of personnel, China is already more than three times stronger, with nearly 7.1 million in the military, compared to 2.3 million in the U.S.  What’s worse, we’re cutting our military budget, while China and Russia are growing theirs. For now, though, in terms of military technology and hardware, no one comes close to the U.S.

The other areas that concern me are twofold: Patently unpayable government debt and IOUs. Plus heavy-handed Washington efforts to track where everyone’s money is.

They’re tracking every bank overseas to hunt down where Americans may have money. They’re closely monitoring every transfer of more than $3,000 out of the U.S. to any foreign country. And they’re spying on Americans left and right. Throw in the 16,000 IRA agents that are being hired to enforce Obamacare and it’s just going to get worse. Washington is desperate for revenues so it’s turning against its own citizens. That’s what bothers me most.

Martin: What are the chances of another major bubble and bust in the U.S., of the kind we saw in 2008-2009, or worse — either a hyperinflationary crisis or a deflationary crisis?

Larry: If it’s going to happen, it’s going to take time to emerge. The reason is simple. What we are witnessing today is not the failure of the private sector in America. What we are witnessing is the decline in the public sector, big government.

Martin, you were the first to say it back in 2008 and 2009. Remember? When Washington bailed out the banking system and the real estate markets, you asked “Who the heck is going to bail out Washington?”

You were spot on. There is no entity or group of entities or governments who can bail out our government, or Europe’s for that matter.

Both the governments of the U.S. and Europe did this to themselves. Both spent too much money. Both made promises they could never keep.

This is the endgame for Western-style socialism. Not the end of capitalism, but the end of big government and big government hand-outs.

Investors all over the world are yanking their money out of sovereign bonds at a frightening pace. That’s why interest rates are going up and bonds are falling in value.

That’s why the United States is on a declining slope.

What could save the U.S. from that fate?

Larry: The private sector. America’s innovative genius. America’s entrepreneurs.

Remember: Nearly every major invention has emerged from American entrepreneurial spirit. Railroads. Mass production of the automobile. The light bulb. Radio. Television.

And more recently … the computer. Internet. Email. CDs and DVDs.

Mobile phones. Tablet computers. Alternative energy. Biotechnology.

Just consider all the major drugs and medical technologies that have come from U.S.-based research. There isn’t a country on the planet that comes close to the sheer volume and impact of the discoveries, innovations and patents that North America has contributed to the world.

If anything can save the United States of America, that’s it.

Economist Joseph Schumpeter called it “creative destruction.”  When something in an economy is destroyed, something else is created.

For instance, when the dust bowl decimated American farms, millions of farmers and farm laborers were unemployed. But with the introduction of assembly lines and the expansion of factories, entire new job sectors opened up and America became the manufacturer for the world.

More recently, if the U.S. had not lost ground in the manufacturing sector, it’s very possible we would not have had as much success in leading the computer industry, the Internet and digital technology.

Martin: Where’s the creative destruction now?

Larry: The destruction side is in big government. Big government is destroying itself. The creative side is that the American entrepreneurial spirit is going to come roaring back — in 3D printing, robotics, drones, driverless cars, life extension, mechanical eyes, hearing implants and much, much more.

These are the things that can save America.

Martin:  Thanks, Larry. Let’s be sure to talk again soon.

About Larry Edelson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.

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Over the past several years, we have been hearing a somewhat common theme from the financial media and pundits alike – BUY & HOLD is dead. After two significant market crashes in less than a decade, many investors were all too eager to buy into to this new mantra. It became a common theme from those in the business of selling news, complex trading programs, or even just straight hysteria, that the decade from 2000 to 2010, which they dubbed ‘The Lost Decade,’ had not yielded regular investors a return and that if everyday people wanted to actually earn a return on their capital then they had to adopt new and complex trading strategies (in our experience these types of strategies have only served to lose investor money).

KeyStone has always advised investors to ignore the daily noise perpetually emanating from the markets. Market noise can take the form of price volatility, media headlines and buzz terms, or so-called experts shouting strong but unsubstantiated opinions. But whatever form it takes, it typically only serves to distract people from the long-term objective of investing in solid businesses that can be purchased at good prices. If buy and hold means buying a stock and forgetting about it for a few decades then not only is it dead to us, but it was never alive. In this context however, the strategy of buy and hold was sold by many members of the media and financial community as anything that didn’t involve continuous trading (whether daily or monthly) and a need to sit in front of your computer terminal for any minute the market was open. 

We first started hearing about ‘The Lost Decade’ at the outset of 2010. The recovery from the 2008 crash was still at a relatively early stage and feeling in the investment community was still one of uncertainty and pessimism. Figure 1 illustrates S&P TSX price performance from January 2000 to December 2009. Over this 10 year period, the TSX had produced a meager 3.5% return per year which was well below the 6% to 8% return investors generally anticipated as a long-term average. It was at this point that people started to ask, “Is buy and hold dead.” What many people did not think to ask at the time was whether or not measuring average return from the near peak of the ‘tech bubble’ in 2000 to the early recovery of the 2008 crash was an appropriate period from which to ascertain a trend. 

Figure 1: S&P TSX Price Index (2000 – 2010)

But when the ‘The Lost Decade’ commentary really started to take off was about half way through 2010. At that point we were into the lackluster summer period and the market had declined moderately from the start of the year. The 10 year price return on the TSX was only 0.4% per year which opened doors to those who thrive (financially or otherwise) from agitation to contend that buy and hold strategies absolutely were dead and that our concept of investing had to change. Those who had struggled in the markets over recent years were all too willing to eat that commentary up with many of them believing that they had to become quick and nimble traders and leave long-term, intelligent investment strategies in the rear view.

Figure 2: S&P TSX Price Index (June, 2000 – June, 2010)

Statistically, the argument in favor of ‘The Lost Decade’ was accurate. There was nearly a zero percent return generated on average over the previous ten years (at that one point in time). However, the data used to support this premise was misleading at best. First of all, dividends were never included by lost decade advocates and looking at the charts in Figures 1 and 2 it is easy understand how dividends have accounted for 40% to 60% of total market returns over time. But where we really take issue is with the time period used to back the lost decade claims. As we said, when this mantra really started to gain was about midway through 2010 which means that the measure was taken from the peak of the tech bubble to what was still a market recovery from the 2008 crash.

In the Figure 3 below, we can see that by simply shifting our measurement period forward 6 months we dramatically alter the picture of long-term investment returns. From 2001 to 2011, the average price performance on the TSX improves to 4.4% per year and when we add dividends we get back up to the 6.5% to 7.0% range.

Figure 3: S&P TSX Price Index (2001 – 2011)

When we look at the 10 year return measured from today, the TSX has produced average annual gains of about 5.3% per year and about 8.0% when including dividends.

Figure 4: S&P TSX Price Index (March 2004 – March 2014)

Although we don’t hear much about ‘The Lost Decade’ today (as it was now four years ago), we still see many people (including media and so-called financial experts) cling to the notion that buy and hold is dead and that investors need to be able to trade nimbly. This is in spite of the fact that the lost decade concept was only true for a very brief period of time and based on numbers and facts that were ignorantly and purposefully presently in a misleading fashion. It is unfortunate that many investors were, and continue to be, sold into this fallacy at what is likely a huge cost to their portfolios and financial positions. Investment success is and will always be based on buying solid, profitable companies at reasonable prices and being willing to hold those positions while being inundated with market noise. 

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 INSTITUTIONAL ADVISORS

FRIDAY, MARCH 21, 2014

BOB HOYE

 PUBLISHED BY INSTITUTIONAL ADVISORS

The following is part of Pivotal Events that was

published for our subscribers March 13, 2014.

“High Times For High Yield Bonds”

“Default rates are below historic averages.”

                                                                   – Investopedia, March 3

“A surge in interest rates and the worst currency rout since 2008 in developing nations from Russia to Brazil.”

                                                                   – Bloomberg, March 7

“A Whole New Inflationary Threat Is On The Horizon”

                                                                   – Business Insider, March 7

“Copper futures fell the daily limit”

“Commodities and equities slide amid broad risk aversion”

                                                                   – Financial Times, March 11

* * * * *

Perspective

Tuesday clocked some outstanding reversals. Many to the downside, with long treasuries to the upside.

As we have noted, outside reversals may not end a trend but they show impetuous action and a sudden loss of liquidity.

The senior indexes accomplished a higher-high than the day before, a lower-low and a lower close. This included the S&P, DJIA, and the NDX. Banks (BKX), broker-dealers (XBD) and base metal miners (SPTMN) did the big reversal as well.

Last week’s Pivot led off with “Big forces are at play.”

It is too early to determine how significant the stock reversals are, but it included spectacular stuff in some parabolic flyers. Tuesday’s “Silly Season” Chartworks covered FCEL, BLDP and PLUG. These key reversals closed at down 16%, 20% and 33%, respectively. The big TSLA reversed as well.

Some credit spreads also recorded dramatic reversals. JNK/TLT, HYG/TLT, MUB/TLT, EMB/TLT and even the high-grade with LQD/TLT.

The price for junk (JNK) clocked the reversal, as the price for the bond future (TLT) reversed to the upside.

Base metals (GYX) suffered the surprise, as copper dropped in three days from 3.22 to 2.94, which takes out last summer’s low of 2.98.

Precious metals joined the reversal action, which will be reviewed below.

In recording the most ebullient conditions since 2007 financial markets had become precarious. Step one in the denouement is usually the discovery of volatility.

Volatility arrived today.

The hit to lower-grade bond prices is an alert to the end of the greatest bond bubble in history.

Junk soared to 41.36 last week and set a Weekly RSI at 77. This compares to 79 reached on last year’s seasonal thrust into early May.

It is uncertain if the RSI at 77 is the best on what could be a seasonal rally, or if the move has further to go. Strong rallies at this time of year in lower-grade bonds can become precarious at any moment.

The Euro bond market has become a one-way street. Confidence and the need for yield has overwhelmed caution. And then there is the old saying: “Credit is suspicion asleep”.

Using the Spanish Ten-Year Note, technical excesses have been accomplished and reviewed on the following chart.

Yields have jumped in Asia and it is unlikely that the sudden loss of liquidity will be isolated.

Emerging debt spreads (EMB/TLT) has been a good way of following the drama.

Representing narrowing spreads the ratio rose to 1.05 at the end of December and was the first to take out key technical support. The rebound out of the oversold made it to above the 200-Day ma last week. It has drifted below this marker and is vulnerable to an extended move. Today, it fell through the 200-day line. Now it’s at 1.00.

Other spreads followed on what was likely a cyclical reversal in credit spreads.

Ambrose Evans-Pritchard at The Telegraph has a clear view.

“It is extremely hard to calibrate a soft landing, and the sheer scale of China’s credit boom now makes it a global headache. China accounts for half of the $30 trillion raised in world debt over the past five years.”

Last week’s rush to risk dropped the bond future down to 130.7, it has recovered to the 133 level. We have had a target of around 136.

The main conditioner on commodities has been the exceptional lows set in November-December. And as noted, the sector was so dismal that a “Rotation” was possible.

The action has been outstanding and technical measures were reviewed last week.

Sentiment measures on the CRB soared to 56%, which is the highest since the 2011 peak. That high was 474, the recent is 308. Coffee, with sentiment at 78%, became the most popular on record.

Momentum seems to have peaked and within this coffee won the championship with a Daily RSI of 88. Agriculturals (GKX) accomplished 83 and the CRB recorded 86. These high momentum readings are only found at important highs.

Last week, the action seemed “straight up” and we concluded that on such a speculative spike it was difficult to call the top day.

Quite likely, the best is in for momentum, sentiment and for the “Rotation”. That’s on the hot commodities.

Crude oil was not as dynamic. Our overview included “Peak Oil” of February 19th. This concluded that the rally into March would set a cyclical peak and the subsequent decline would resume the secular bear. The high was 105 at the first of the month.

The Daily RSI reached 73 in February which was the level that ended the rally last July.

Base metals (GYX) jumped from 331 in early December to 362 in January and that was that. Although Chinese buying was called “investment” it was speculation, which we covered. The decline has been brutal. GYX is down to 324, which was the low last summer.

Copper rallied from 3.12 to 3.45 and plunged to 2.91 today. This takes out the low of last July at 2.98 – extending the bear that started at 4.65 in 2011.

However, under forced selling copper has become oversold enough to prompt a brief rebound. If it can’t get through 3.15 the bear will likely continue.

In US dollars gold has broken out. This is based upon the January 21st ChartWorks that noted that 1306 was key resistance. Another resistance level was at 1361 and it has been taken out as well. Today’s price has been up to 1375.

The equivalent levels for silver have been the 25 and 29 levels, and at a best of 22 silver is not working.

Why?

Will it catch up?

Earlier in the year we noted that for a bull market in precious metals silver had to outperform gold. From February 1st to the 18th it did as the silver/gold ratio increased from .153 to .167. Precious metals rallied with the strong commodities.

It is right back down to .153, which suggests changing credit markets. Which in turn suggests that gold could start to outperform silver. And that suggests a return of postbubble financial pressures. This seems round about reasoning but at the beginning of a financial storm gold starts to outperform silver.

So let’s look at the gold/silver ratio and it typically declines with a boom and rises with the bust.

In the great inflation in tangible assets to 1980 the ratio declined to 16. The Hunt Brothers “bet the ranch” that it would go lower. They must have been doing supply/demand research.

The consequent banking crisis did not fully clear until Citi and Chase had to be bailed out at the end of 1990. As with previous periods of credit distress the gold/silver ratio went up. It reached 104.

In the boom that peaked in 2000 the ratio declined to 46. In the bust it reached 83 in 2003.

On the party to 2007 the ratio declined to 45 and in the bust it soared to 93 in 2009.

The decline to 30 in 2011 showed the greatest speculation in precious metals since 1980. This excess seems independent of the credit cycle because the financial boom kept going.

Since then the gold/silver ratio has been correcting the unique excess and not connecting to the credit markets. It could be returning to its traditional role of signaling trouble. We will soon see.

Credit spreads took a turn to widening today and that slammed the general stock markets. With this the gold/silver ratio has turned up.

Considering the excesses in stocks and lower-grade bonds, we are assuming that the ratio is returning to its traditional role as a leading indicator.

At 64.5 now, rising through resistance at 66 would be an alert. Rising through 69 would suggest a rapidly spreading liquidity crisis.

Last week we advised that nimble traders could begin to take some money off the table. If the gold/silver ratio breaks above 65 take some more off.

Our bellwether stock is Silver Standard (SSRI) and it has rallied from 5.18 in October to 11.35 today. With this, the Daily RSI has enjoyed an impressive swing from 28 to 74.

The precious metals sector is getting overdone.

Link to March 14, 2014 Bob Hoye interview on TalkDigitalNetwork.com:

http://talkdigitalnetwork.com/2014/03/dont-blame-ukraine-for-market-bounces/

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL bhoye.institutionaladvisors@telus.net

WEBSITE: www.institutionaladvisors.com

• Financial stress reached its worst in early 2009.
• By this measure there is less stress than in the halcyon days of 2007.
• Note the reversal at the beginning of the year.

• The ChartWorks proprietary model has registered a rare Downside Capitulation.
• This is an indicator of excess.
• Another technical model is registering a Sequential Buy.
• This one tracks the pending reversal and all that is needed now is an up-tick in yield.
• Credit distress has been increasing in China, and troubles that begin in outer regions have always visited the financial center.
• With the 2012 crisis, the yield soared to 7.50%.
• This week, a new low for the move was set at 3.30%.

The rare move in Investor sentiment is explained HERE

Any long-time reader knows that we routinely draw on lessons from history (sometimes obscure ones) to show that ‘this time is NOT different’.

Whenever advanced civilizations reach unsustainable levels of debt, consumption, and oppression, they get into serious trouble. 

This premise is going mainstream. And a recent research paper published by a NASA funded group makes a startling, mathematical analysis about economic collapse. 

Given everything that’s happening in the world, they write that “collapse is very difficult to avoid.”

NASA-funded study: Over 32 advanced civilizations have collapsed before us, and we’re next in line.

I definitely recommend you read more about this by clicking HERE – Simon Black.