2013 Wrap-Up and Invitation to Vote on Your Favorite Article

by the Curmudgeon and Victor Sperandeo

Introduction:

We hope readers have enjoyed the original themes and commentary in our CURMUDGEON articles this year.Victor and I meticulously research the topics we agree to write about and then augment our remarks with quotes from seasoned financial professionals to support our position(s).

 

There were quite a few important subjects we wrote about in 2013, including:

-Much more leverage in the market & more concentrated control among fewer players

-U.S. Equity and Gold markets might be manipulated by the Fed and/or its Primary Dealer/owner banks

-What is Gold and Where Gold is now in the investment cycle

-The great disconnect between ever rising U.S. stock prices and a stagnating economy is wider than ever (see bar chart below for a wake-up call)

-The U.S. is exhibiting many of the attributes of a socialist country

-Is the Fed a Ponzi scheme or a no-risk hedge fund

-Fannie Mae and Freddie Mac accounting appear to be another U.S. Ponzi scheme

-And many more..............................................

 

We invite readers to vote for their favorite Curmudgeon article and let us know what topics they'd like to see addressed in 2014.

Email the CURMUDGEON at: ajwdct@sbumail.com

What to Watch for in 2014:

As you might expect, our thinking for next year (we don't make market forecasts or price/time predictions) is quite different from the mainstream media.For example, it's quite likely that the economy- particularly housing- will slow due to less QE.As a result, new Fed Chief Janet Yellen might be forced to abort tapering and increase QE.††

 

Also, we think the U.S. $ will hold the key to many investment markets next year, e.g. gold, oil, bonds, and stocks.That's especially true if it breaks down or falls sharply.Victor thinks the global trend towards socialism is a major problem (see his comments below).

 

The Curmudgeon believes the greatest global financial threat is unchecked global bank lending and nation-states' failure to co-ordinate monetary policies.This is especially true in China, where state owned banks make loans to entities/well connected individuals who then loan that money out at much higher rates.A terrific article on that topic appeared in this Saturday's NY Times.

 

"Official bank lending has more than doubled since the global financial crisis, growing nearly twice as fast as the overall economy. The even bigger problem, however, appears to come from the rise of a shadow banking system that has allowed a number of companies and individuals, often with political connections, to borrow from state-controlled banks at low interest rates and relend the money at much higher rates to private businesses desperate for credit at almost any price."

In his December 19th NY Times op-ed Stumbling Toward the Next Crash, former UK Prime Minister Gordon Brown made several eye opening statements regarding China's credit expansion and global debt build-up to seemingly unsustainable levels:

"Chinaís total domestic credit has more than doubled to $23 trillion, from $9 trillion in 2008 ó as big an increase as if it had added the entire United States commercial banking sector. Borrowing has risen as a share of Chinaís national income to more than 200 percent, from 135 percent in 2008. Chinaís growth of credit is now faster than Japanís before 1990 and Americaís before 2008, with half that growth in the shadow-banking sector. According to Morgan Stanley, corporate debt in China is now equal to the countryís annual income."

"Emerging-market economies in Asia and Latin America have seen a 20 percent growth in their shadow-banking sectors. After 2009, Asian banks expanded their balance sheets three times faster than the largest global financial institutions, while adding only half as much capital."

Follow-Up on Market Manipulation:

After reading our piece on stock market manipulation following the Fed's recent announcement to begin tapering, Tim Quast of ModernIR wrote in an email to the CURMUDGEON:

"Thereís no question that machine-driven behavior is behind the big market gains. Whether the Fed is intentionally driving it is impossible to substantiate.

 

We track volumes through nearly all primary dealers Ė the firms required to make markets at Treasury auctions of notes, bills and bonds.Following the Japan Tsunami in 2011, we saw coordinated intervention in markets by the biggest banks, a willful effort to stabilize global financial markets.Thatís injecting liquidity.

 

Here lately?It is hard to say. We can see the behaviors setting price.Bottom-up investors were not and are not now the price-setters.Itís all speculative trading and index/ETF volumes that coincided with options-expirations 12/18-20 and index-rebalances 12/20.

If thereís an argument to be made that the Fed intervened and managed outcomes, itís in the US dollar.Leading into the Fed's tapering decision, the dollar was weakening, suggesting the Fed may have been injecting dollars into the system to purposely weaken the dollar ahead of tapering, so that any rise in the dollar resulting from lessening liquidity would be blunted.

Meanwhile, the S&P 500 has been soaring as the dollar remains steady Ė thatís inflation resulting from the injection of dollars.Iím sure the Fed is as surprised as anyone by how the equity market is soaring.For sure, itís not at all what they (the Fed) expected."

Victor's Closing Comments:

 

All investments (and life decisions) are about "risk versus reward."†† Without such a thought processing evaluation, you will lose more money than you gain.†† This maxim is especially relevant for today's U.S. stock market.

 

Although a market can still appreciate in a high risk environment, lowering your exposure is a critical consideration for maximum returns when the risk ultimately manifests itself in a sharp price decline.

 

The chart below clearly show that after a 4.75 year bull market (which started 3/9/09), bullish sentiment is clearly excessive.

ii

Greed has overcome fear. In my authored books and interviews, I stressed a minimum of 1:3 risk vs reward ratio in order to justify an investment.For example, if you think the market can have a 10% correction, you need a 30% potential upside. That's not very likely in today's U.S. equity market, especially after the unchecked advance since the last 10% correction ended on October 4, 2011.While shorting stocks is a "very deadly sport' these days, being long about 1/3 of your normal stock allocation is prudent.

 

The beginning of tapering cannot be bullish in the long run; as printing money to buy debt is the reason the Fed uses this "tool" to create what it believes to be the "wealth effect."But it has not worked, as evidenced by sluggish GDP growth, miniscule commercial loans, and still high unemployment.And that's after 4 1/2 years of the U.S. "economic recovery."

Overall, my main concerns are the U.S. dollar's fall or collapse and the worldís trend towards Socialism.Austerity - higher taxes and lower government spending - is what I refer to as "Socialism Lite."

With this backdrop, how will the world economy really grow?Not via austerity measures or huge government deficits.Huge amounts of debt lead to defaults and/or hyperinflation.So the U.S. and Japan have resorted to printing money, while Europe stands ready to do likewise.

 

With few exceptions, governments around the globe really don't care about negative consequences of their current fiscal/monetary policies (or lack of same), as long as itís a "future problem" - not today's problem.In my opinion, this is most immoral political philosophy in history.††

 

My only optimistic note is that ObamaCare is so bad, and (adversely) effects so many people, it will change the perception of big government being good for the people.

 

Till next year........................

 

The Curmudgeon
 ajwdct@sbumail.com

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1979) to profit in the ever changing and arcane world of markets, economies and government policies.  As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.