waiting2

STAFF NEWS & ANALYSIS
Waiting to Buy
By Daily Bell Staff - January 27, 2016

The sharp sell-off in the stock market has some of Wall Street’s top strategists recommending to clients that they buy. “With the S&P 500 down 11.7% from its all-time high (2,130 in May 2015), investors are questioning whether a bear market is in the offing,” RBC chief equity strategist Jonathan Golub said on Tuesday. “History shows that sell-offs of 20% or more rarely occur in the absence of a recession (1987 is the only occurrence in the past 50 years).” In other words, the sell-off could get worse should the US go into recession. But — and this is a big but — assuming there’s no recession, this pullback should prove temporary in an otherwise ongoing bull market. – Business Insider

Dominant Social Theme: Choose your spots … and buy!

Free-Market Analysis: So if the US is not headed back into a recession, this is a buying opportunity.

It’s a pretty grim one, which supposedly makes it a good one. That’s the perspective of Jonathan Golub who works for RBC. And recently the views of the RBC strategist hit the headlines for suggesting that clients sell their equity holdings across the board.

Golub may not be of that camp.

To be clear, Golub acknowledges that risks have increased out there. In fact, he was the first of his peers to cut his 2016 outlook for the market. But investing is all about price, and Golub thinks the stock market’s correction has presented investors with an attractive price.

Golub believes that economic indicators support a continued “economic expansion,” and he is not alone. Deutsche Bank’s David Bianco describes the current bloodletting as, “a profit recession centered at certain industries.”

Bianco explains there are profit recessions and broad recessions. During a profit recession not everything is going down. Golub has a similar perspective, bolstered, apparently, by history.

Golub provides numbers to support his thesis. After pullbacks in October 2014 and August 2015, “equities gained 11% over the next 2-3 months after the VIX rose to 26 and 41.”

Computational projections indicate that some equities now have an upside of close to 10 percent once the current collapse subsides, Golub believes.

Over at David Stockman’s Contra Corner, we find a distinctly different perspective. Stockman doesn’t believe Wall Street ever seriously contemplates a recession and this situation is no different. Stockman believes a recession is a foregone conclusion and he recalls 2008 to bolster his case.

Here:

As of June 2008 no Wall Street banking house was predicting a recession, yet by then the Great Recession—the worst economic downturn since the 1930s—was already six months old, as per the NBER’s subsequent official reckoning …

Wall Street never predicts a recession. And that’s basically why the stock market goes up for 5-7 years on a slow escalator, and then plunges down an elevator shaft during several quarters of violent after-the-fact retraction when an economic and profits downturn has already arrived.

Needless to say, there are plenty of economic booby traps hiding in plain sight this time, too. Yet the sell side was out over the weekend with noisy chatter about stocks now being on sale at a discount, and that selective buying of the dip is once again in order.

Mortgage Equity Withdrawals (MEWs) are a big culprit here, according to Stockman. He calls them “booby traps” and provides an example of their destructive potential as regards auto sales.

While auto sales have moved up some 6.1% or $65 billion in the past 12 months, auto loan paper is up by nearly $90 billion! This surge resembles the surge in subprime housing lending back in 2006-2007.

Stockman says that “anyone who can fog a rear view mirror” can get an auto loan today. But 100 percent debt financing of cars is no more stable than a similar approach to houses.

In short, this is just one more case of the truism that under conditions of “peak debt” new borrowings do not increase GDP on a permanent basis; they just steal sales and output from future years, thereby booby-trapping the main street economy with recession risk that the Keynesian Cool-Aid drinkers refuse to recognize.

Stockman writes about housing in the latter portion of the article, and here the statistics are not nearly so heated as in the auto sector. Housing for the most part has still not recovered in the US anyway from the 2008 declines.

On the other hand, Stockman cannot find support for the idea that housing is going to support the economy going forward and continue to provide the push out of recession. He calls such suggestions a “thin reed.”

Our own position is that the recession of 2001 some 15 years ago was never fully rationalized because central banks poured low-rate money into Western economies. This resulted in the mid-2000s boom that gave way to the Great Recession.

Janet Yellen and other central bank officials want to make the case that the expansive liquidity of the past half-decade, over US$250 trillion according to some estimates, is responsible for re-liquifying the world’s economy.

From their perspective, this is a triumph. But economic history may tell us otherwise. One awaits new statements from Ms. Yellen regarding the Fed’s recent rate hike. Current events seem to make that hike look precipitous.

In fact, the trouble with arguments regarding modern recoveries and recessions generally is that they are taking place within a paradigm of monopoly central banking.

If one grants that monopoly central banks are price fixing machines, then a good argument can be made that economies have not operated “normally” since 1913. In other words, we are constantly dealing with economies distorted by artificial expansions supported by the rocket fuel of low rates.

Accept that modern economies are bloated and distorted by money printing and further disfigured by regulatory enterprises, and the viciousness of the modern boom bust cycle becomes a good deal more comprehensible.

It strains credulity, in our view, to believe that the latest seven-year cycle of strenuous liquidity injections of incomprehensible amounts of “money” is actually sustainable for any significant amount of time.

Stockman’s perspective is unlike, say, that of John Maynard Keynes: Liquidity DOES have a cap because even the most attractive loan terms eventually run out of customers. And that’s when precipitous declines begin.

For us, looking at the current sell-off as a buying opportunity is at least fraught. We are far more inclined to suggest that people’s investment profiles ought to be adjusted to what works well within the context of an explosive bubble inversion.

Certain commodities, precious metals, farmland, aquifer rights, second homes in underdeveloped but promising regions of the world … these are the sorts of “investments” that one might rationally consider in a world awash in hundreds of trillions in uneasy, excess cash.

Conclusion: The cycle does turn at regular intervals and the distortions that afflicted Western economies in 2007-2008 seem as evident now as they were then.

Posted in STAFF NEWS & ANALYSIS
  • Earn nest

    Perhaps we need to accept that we’re going to have a monetized jubilee. At least metals should hold.

  • 2bvictorius

    Buying anything not easily transported, either on ones person or conveyance is futile, as those properties failing to meet the definition of portability will eventually become the possession of others. Non portable objects become anchor chains that enslave the owners to the tyrants and make them easy prey to the soon coming tsunami of raiding hordes of invaders from the middle east and other Muslim breeding grounds.

    Soon, very soon the rule of ownership will simply be this, “you will lose anything you cannot defend by using whatever force is required.”

  • Bruce C.

    One thing to keep in mind is if “big money” wants to get out of stocks they need buyers who are willing to pay current or even higher prices for them. What would be telling is to see what happens to the holdings of the various broker-dealers, and maybe even the personal portfolios of the managers. The “excuse” or explanation that they don’t have any money to buy any more equities themselves is bogus because that’s one of the purposes of margin debt. If it’s so likely that stocks or their indices are likely to rebound 11% or so in the next few months, surely that justifies the very low cost of funds to speculate, courtesy of the Fed’s ZIRP.

    It’s also suspicious that Golub changed his mind so quickly. Maybe more and more insiders and “technicians” are starting to stare into the abyss as key data points are broken. Remember also, that even the “Great Recession” wasn’t recognized by the NBER (the “official” judge of such things) for having started until it was declared over with. I kid you not.

    Thirdly, whether or not the US is entering a recession is a red herring as far as stocks go. Corporate earnings are falling because of slowing global demand and the stronger dollar causing profits made in foreign, “weaker” currencies look lower (even Apple is running out of customers to sell iPhones to). And more important, is the slow down in corporate stock buy backs because of increasing corporate bond rates. Even more important, however, are the accelerating corporate “junk bond” defaults starting in the energy/oil sector but also by corporations who can’t handle their debt servicing costs and don’t want to sell their own stocks at a loss (which brings us back to the theme that they need “suckers” to sell them to.)

    Here’s an article that reviews the track records of expert predictions concerning the financial markets and economy:

    http://www.bloombergview.com/articles/2016-01-27/the-market-s-troubling-message

  • Injun Holbrook

    What do WE want? PIE! Where do WE want it? In the SKY!

  • alaska3636

    An Oxford scientist has invented a mathematical formula that disproves conspiracy theories:
    http://www.csmonitor.com/Science/2016/0127/Which-conspiracy-theories-are-mathematically-impossible
    https://www.theguardian.com/science/2016/jan/26/secret-success-equations-give-calculations-for-keeping-conspiracies-quiet
    “In other words, conspiracies will always exist, regardless of a math equation proving they are wrong.”

    Technocracy meets historicism. Conspiracy is now conflated with a new term: anti-science. What it implies is that a person rejects the scientific method of inquiry. What it means is that someone doesn’t accept hook, line and sinker, whatever they are told.

    Maybe they don’t have anti-trust laws in the UK.

    From the Sherman Act:
    “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”

    We have laws against conspiracy, thus, they do not exist. Because of math.

    • Bruce C.

      Good point. I like that.

  • Tom kauser

    A small amount invested over time can’t hurt? Who knows 5 years from now you might read this claptrap as entertainment and have been prudent to start buying at the top of the biggest bubble of all the dollar bubble?

  • http://www.ur2die4.com/ amanfromMars

    Certain commodities, precious metals, farmland, aquifer rights, second homes in underdeveloped but promising regions of the world … these are the sorts of “investments” that one might rationally consider in a world awash in hundreds of trillions in uneasy, excess cash.

    Certain commodities like future intellectual property provision, DB?

    amanfromMars 1 Thu 28 Jan 14:27 [1601281427] ….. asking a Russian Ruffian type question on http://forums.theregister.co.uk/forum/1/2016/01/28/google_130m_sweetheart_could_be_probed_by_europe/:-)

    Hidden Unrealised Benefits are Surely Monstrous and Easily Overwhelming.

    How much is Google’s help to governments worth/valued at? Care to add that to the tax on work in and with the UK and A.N.Other Lands and LANetworks, for a more real indication of Additional Wealth Supply.

    Does Google Supply Provision Novel NEUKlearer HyperRadioProActive IT Intellectual Property ….. Supposed Immaculate Source? Or is that AI Working Remarkably Well?

    cc … Google DeepMinders

    :-) [Crazy] Words Create, Command and Control [Crazy] Worlds ;-)>

  • Agent Revolver

    ~$50 by mid-Feb? want?

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