…Historically, looking at the two commodities, the average multiple of gas to oil was about 10x. That is, a barrel of oil was, on average, 10 times more expensive than one thousand cubic feet of gas. By last April, that premium had reached an all-time high of 55 times.
There was no way that kind of price relationship could have lasted. A reversion to the mean was 100% certain. And that’s what happened. Today, with West Texas Intermediate crude oil at $95 per barrel and natural gas at around $4, the ratio is still wide, at almost 24 times. But it’s half as wide as last year. You should expect oil prices to continue to decline and gas prices to continue to rise. I believe the future 10x equilibrium will be reached when gas is around $6 and oil is around $60.
Now… let me give you another “outlandish” prediction. The U.S. bond market – particularly junk bonds – is going to crash. When this crash occurs, it will be the largest destruction of wealth in history. There has never been a bigger bubble in U.S. bonds.
How do I know? It’s simple. Junk bonds (aka high-yield bonds issued by less creditworthy companies) have never yielded less than 5% annually. But they do today. Likewise, the difference between the yields on junk bonds and the yields on investment-grade bonds has almost never been smaller. That means credit is more available today than almost ever before for small, less-than-investment-grade firms. The last time credit was this widely available – and at such low costs – was in 2007. And you know how that turned out…
The coming collapse in the bond market will be far worse than it was last time, too. This time, the Federal Reserve’s actions have driven forward the huge bull market in bonds. The Fed is printing up almost $100 billion per month and buying bonds. That has forced the other buyers of bonds to buy riskier debt that, historically, offered much higher yields.
Today, those yields have been incredibly “compressed.” You can imagine the high-yield segment of the bond market to be like a spring whose coils have been driven together by the force of the Federal Reserve’s market manipulation. As soon as the Fed’s buying stops (and it must stop one day, or else it will trigger hyperinflation), the yields on those riskier bonds will soar again. As bond yields rise, the price of bonds will fall sharply.
To give you a specific example, car manufacturer General Motors recently issued bonds to investors. The yield on these securities was only 3.25%. I’m fairly certain that inflation in our economy will exceed that rate.
by Mark j. Grant, author of Out of the Box
A reversal will come. The odds on this are 100%. You cannot have every asset class on the planet in a bubble forever. The world does not operate this way. The disconnect between economic fundamentals and the markets continues but the odds on it continuing forever is Zero. Let us begin the postulate from here.
Corporations, banks, the housing market, borrowers and the securities markets have significantly benefited from the actions of the central banks. Money has been poured, dumped and shoved into the financial markets. The total exceeds $16 trillion to date and perhaps twice that amount if we were given accurate data to be able to count it. It was been a Tsunami of money.
Liquidity has buoyed the world as the central banks acted in concert and in a coordinated effort to provide fresh cash. The balance sheets enlarge but the money has not significantly helped anyone’s economy. Europe is in a recession, America is in a muddle and the world’s economies, without all of this money, would be in a sinkhole and so it continues. There is nothing else supporting the economies and the markets except the capital provided by the central banks.
The disparity is so large and so universal that something will break the bough as the weight eventually cannot be supported. When this happens it will be Katie bar the door. If you fall from ten feet you get hurt but if you fall from one thousand feet the consequences are quite different.
All of this is knowable but what is not knowable is what will cause the break. It could be the rise of nationalistic political parties in the U.K. or Germany. It could be social unrest, a major bank failure, a major hedge fund blowing up, some sovereign deciding to quit the Euro or a host of other possibilities. The odds on one item are minimal. The odds that a break will happen somewhere are 100%.
The creation of all of this money also has another effect. It causes stupidity. People and institutions rush around to invest their money but when there is too much easy money, such as right before our 2008/2009 debacle, really dumb things are done with money as people search for yield and appreciation. This is another 100% prediction made by me after being in the markets nearly forty years. When too much easy money floats around; stupidity takes its course.
Then there is the made-up fantasy data numbers….
You don’t think we’re in a bubble? – Thomas H. Kee Jr.
…everyone knows they will come to an end, everyone knows what has happened when other bubbles have burst, but very few want to get off in the middle of the parade.
And if you do not believe it is in a bubble, consider this:
The following four sectors have very odd price action when compared to earnings/revenue, and that makes them very important to this discussion. These are important sectors, they have all been under considerable pressure from an earnings/revenue standpoint, but the prices have been skyrocketing.
- · Materials has had -15.3% earnings-per-share (EPS) growth this year, but the Materials ETF is up 10% year-to-date (YTD).
- · Consumer staples has had -4% EPS growth this year, but the Consumer staples ETF is up 20%YTD.
- · Telecom has had -14.17% EPS growth this year, but the Telecom ETF is up 13% YTD.
- · Energy has had a -5.4% revenue contraction, but the Energy ETF is up 15% YTD.
Consider the old adage “a rising tide lifts all boats.” This is true, as we can see here, and even sectors that do not deserve to be bought increase along with the broader market.
Revenue Disappointments Have Been Widespread But Goldman Cranks Up Its S&P 500 Targets, Sees A Whopping 33% Return Through 2015… FLASHBACK: In 2008 Goldman called oil to $200/barrel. Within months it was at $35!!
BOOM: Goldman Cranks Up Its S&P 500 Targets, Sees A Whopping 33% Return Through 2015
Goldman Sachs is cranking up its official targets for the U.S. stock market.
“We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015,” says Goldman’s Chief U.S. Equity Strategist
David Kostin in a note to clients.
Including dividends, this would represent a 33% total return through 2015.
The Stock Market Needs Revenue Growth More Than Ever, But Things Aren’t Looking Good
Revenue disappointments have been widespread
Now that there probably isn’t much more upside for profit margins, revenues will drive earnings. Revenues will be driven by the growth in global nominal GDP, which I expect will be 5% this year, next year, and maybe for each of the next four years. That’s probably the minimum that would be required to drive a secular bull market.
How are we doing? Not so good recently. S&P 500 revenues fell during Q1, and are up only 1.4% y/y. This series is highly correlated with the 12-month sum of the value of world exports, which has been flat for the past year.
Bernanke Is Drunk On Optimism And His Faith In The Future Is Frightening
How can he reject depressing views of reality?
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The Fed is pumping billions into the economy every month, hoping to inflate it! From a stock market perspective, many key index’s are at all-time high levels. Is the Fed succeeding to inflate stocks? Many would say yes.
From a broad based Commodity perspective (CRX Index), higher prices are not taking place!
In fact the opposite is taking place, as the CRX index above has been created a series of lower highs since May of 2011, as the CRX index is down 18% from two years ago this month. These lower highs could well be forming a “Descending Triangle” which the majority of the time suggests lower prices are ahead.
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Velocity is a ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP
Velocity peaked back in 2000 and is now is at its lowest levels in 50-YEARS! The CRX peaked back in 2008 and may be forming a “Descending Triangle” over the past 5-years. This pattern the majority of the time suggests lower prices are ahead.
If this resistance lines holds at (3) in the top chart and the CRX starts falling in price, it would be suggesting deflation is about to pick up speed, despite the massive money printing by the Fed!
The best news for the global economy would be…..CRX breaking resistance, reflecting global commodity strength. Watch the CRX in the next couple of months, it will tell us a ton about the status of the worlds economy and the Fed’s attempt to inflate!
Regulators and investors are struggling to meet the challenges posed by high-frequency trading. This ultra-fast, computerized segment of finance now accounts for most trades. HFT also contributed to the “flash crash,” the sudden, vertiginous fall in the Dow Jones Industrial Average in May 2010, according to U.S. regulators. However, the HFT of today is very different to that of three years ago. This is because of “big data.”
The term describes data sets that are so large or complex (or both) that they cannot be efficiently managed with standard software. Financial markets are significant producers of big data: trades, quotes, earnings statements, consumer research reports, official statistical releases, polls, news articles, etc.
What Warren Buffett once called “financial weapons of mass destruction” are firing again, with securitization and shadow banking at post-financial crisis highs.
The twin powers of bank funding that helped propel the nation into turmoil have regained ground swiftly, and analysts say it’s both a challenge for regulators and a sign that the economy is recovering.
Securitization, or the channels through which banks repackage loans and farm them off to investors, has hit volume of $225.6 billion by way of 365 deals this year, according to Dealogic.
That’s a 14 percent increase over 2012 but still miles away from the heady days of 2007, which saw a staggering $777 billion in volume at the same point—right before securitization, and the rest of the mortgage market, came crashing down.
Governments, which have yet to resolve the problem that some banks are too big to fail, face another potentially larger problem — the shadow banking system has also become too big to fail warns Shanghai-based economist Andy Xie in an article for Caixin Online.
NYT: CFTC’s Derivatives Regulations Are ‘Setback for Financial Reform’
New regulations from the Commodity Futures Trading Commission (CFTC) on derivatives are “a victory for Wall Street and a setback for financial reform,” asserts The New York Times in an editorial, asserting the rules “may also signal worse things to come.”
Record stock levels challenge chart readers
Analysts can no longer look at prior highs for resistance. There are no former peaks to reclaim. It’s like sailing off the map of the known world.