Thursday, May 7, 2015

It's Not 1929....But....

Strange, strange, strange stuff going on in the financial markets.

Today on the front page of the WSJ, Janet Yellen has said she believes that stocks may have gotten too bloated and bond holders may be taking more risk than they realize.

Really?  What do you expect is going to happen, Mrs. Federal Reserve, when your institution drives interest rates down to 0% and hold them there for 6 years?  Do you think it MIGHT force people to look for higher returns and thereby drive them into the stock and bond markets which in turn drives stock prices higher?  Is it a coincidence that the stock market indexes have broken new highs this year?

Of course the bear market dudes continue to growl....warning us all that this MONETARY EASING experiment that has NEVER BEEN DONE before may end with a thunderous BUMP!

"Oh Dennis, I NEVER listen to those gloom and doomers!  They always say bad stuff is coming and yeah, some minor shaking may happen for a little while but things always go right back up!  This is America!  That's how it's always going to be!  I just wish they would quit warning us of something that is NEVER going to happen!"

Our old mega-bear friend, Robert Shiller, is warning us again that we may have already entered the Twilight Zone....where things aren't necessarily as they appear.

Achieving escape velocity from 2% or 2.5% GDP growth seems increasingly unlikely to both Nobel laureate Robert Shiller and DoubleLine CEO Jeffrey Gundlach. Both financial market experts were interviewed yesterday in New York by DoubleLine portfolio manager Jeffrey Sherman, who co-manages the DoubleLine Shiller Enhanced CAPE smart beta fund with Gundlach.

The United States has looked like one of the strongest countries in the developed world, “but I’m distrustful,” Shiller said. While Shiller acknowledged pockets of “animal spirits” can be found in areas like fracking and technology, the current economic expansion has seen fewer hot new innovations than past economic cycles.

Like many of the previous five years, 2015 was supposed to be the year U.S. GDP growth would reach 3.0%, but Gundlach said he had arrived at the viewpoint of Missouri, the so-called “Show Me” state. The Fed is “starting to believe in Missouri” as well, he noted.

Blame the harsh winter weather if you want, but since the economic recovery began in the second quarter of 2009, first quarter growth has averaged 0.6% while all other quarters have averaged 2.8%. Other culprits besides the weather have included Greece, the euro and Japanese earthquakes, but there is always an excuse. It “makes you start to wonder about seasonal adjustments,” Gundlach said.

Neither man disagreed with Fed Chair Janet Yellen’s remarks that equity valuations are high. Using his CAPE ratio, Shiller says it indicates equities should return 2% annually for the next decade, and that is better than he expects bonds to do. “My gut feeling is this doesn’t look right,” Shiller said, but “I haven’t met anyone who sold everything. People are worried, but no one knows what to make of [the markets] because interest rates are so low.”

Still, Shiller noted that it wasn’t 1929, when his CAPE ratio was 37, not the current 27, which is still very high compared to historical levels. Furthermore, interest rates were much higher than they are today.

Record low interest create distortions that both these perceptive observers find very odd. though in the last ten days bond prices have suddenly tumbled around the world, triggering some odd results. "We've lost 100 years of income on 10-year German bunds in the last week," Gundlach said.

In addition to such anomalies, Gundlach said some warning signs aren’t hard to spot. In the corporate bond market, new issuance of covenant-lite bonds reached a record of 70% of all new issues last year. Worse yet is some people’s interpretation of this phenomenon.

“Some people say it’s a good thing because it shows how confident people are,” Gundlach said. “That’s a horrible way” to extrapolate the willingness of bond market investors rolling over for issuers. The upshot is that the investment-grade corporate bond market entered 2015 at its “most overvalued level” in history.

Another interpretation that left Gundlach startled was when he heard recently that the stock market had set a record because consumer confidence reached levels not seen since June 2007. That hardly makes him eager to buy stocks and uncork champagne bottles.

Here;  http://www.fa-mag.com/news/shiller--gundlach-on-2--gdp-growth--why-2--equity-returns-may-still-beat-bonds-21688.html?section=43

Wait...what??  Investment grade corporate bonds entered 2015 at it's most overvalued level in history??  Isn't that just another way of saying bonds are the most overpriced they have EVER been?

And how about those crazy Swiss and German bond yields they are selling today?  Who can explain them?  If you give the Swiss or German government $10,000 today they will promise to pay you back $9800 in 5 years!!  And people are buying them up like hotcakes!!  Why?  What is happening?  Why would you pay a government to hold your money?  Because the bank is going to charge you more to hold your money?

As the authors above tell us, these strange negative interest rates are causing never-before-seen anomalies in the financial markets.

One day the Bible tells us that all the wealth of the world is simply going to evaporate.  What man THOUGHT he had set aside in savings will be revealed as worthless paper.  It's happened before, it WILL happen again...BUT...when you lay all of this on top of earthquakes, volcanoes, tornadoes, droughts, floods, Arabs fighting Arabs and Israel sitting in the middle of it all......it makes one ponder even more what Jesus said, "When these things begin to take place, stand up and lift up your heads, because your redemption is drawing near.”

Why does he tell us to look up?  What are we believers in Jesus Christ supposed to be looking for in the sky?

Acts 1
9 After he said this, he [Jesus] was taken up before their very eyes, and a cloud hid him from their sight.

10 They were looking intently up into the sky as he was going, when suddenly two men dressed in white stood beside them. 11 “Men of Galilee,” they said, “why do you stand here looking into the sky? This same Jesus, who has been taken from you into heaven, will come back in the same way you have seen him go into heaven.”

So wait!!  Jesus is going to come back to earth in the same way the disciples saw him disappear into the clouds...meaning he will reappear in the clouds?

1 Thessalonians 4
16 For the Lord himself will come down from heaven, with a loud command, with the voice of the archangel and with the trumpet call of God, and the dead in Christ will rise first. 17 After that, we who are still alive and are left will be caught up together with them in the clouds to meet the Lord in the air

"Yeah, but Dennis, I don't believe in any of those fantastical verses in the Bible!  Stories of Arks, whales spitting, cities destroyed, dead rising, demons cast, thousands fed with 5 fish....those are all just old wive's tales that helped people make sense of things before we got science...and now have explanations for everything like evolution, epilepsy, rising sea levels, etc...  You must be crazy if you think a man named Jesus who has been dead for over 2000 years is going to appear in the sky, blow a trumpet and transform millions of people into new, glorified bodies and whisk you all away into the sky to a wedding banquet!!  That has to be about the craziest thing I have heard yet!!  Are you actually allowed to have a job and educate our kids?"


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