March 14, 2014
By Steve Blumenthal
It sure feels like we are moving towards a point of crisis. The number two economy in the world is in serious decline; their customers’ economies (mostly the U.S. and Europe) have slowed. The great boom in China appears to be over. Prime the printing presses – more help needed.
Up next are the European Banks. They remain essentially in default. A bailout of some form is required. It looks like some more magic will need to be pulled out of the central banker’s bag of tricks.
As global economic tensions mount, the deeper risk is that of war. Currency battles lead to deeper tensions. Japan devalues the Yen and China devalues the Yuan. Economic stress can lead to crisis, crisis can lead to war. We are seeing tensions mount in the Eurasia (Ukraine, Russia and Turkey), South America and the Middle East.
Too much debt and simply too many unmanageable entitlement promises. The world’s largest economies find themselves in this mess – all at the same time. Here is what I believe you can do.
Remain aware of the rising tensions and make sure to have a plan in place that actively risk protects your investment capital. Share your thoughts with your clients. Rising equity markets tend to pull the investors in and make them complacent. Now is not the time to be complacent.
Actively hedge your long-term equity portfolio positions and/or find strategies that do. Also, increase allocations to flexible tactical investment strategies. I favor 30% Equities (hedged from time to time), 30% Fixed Income (flexible bond funds) and 40% Tactical.
I do believe that your client can be allocated to equities over many years. However, thirty years has taught me that few can “hold on” and “stay the path”. The behavioral data shows that for most individual investors emotion rules reason at points of extreme fear. Today, market valuations are expensive and the reality is that -40% to -50% bear market corrections happen. The current cyclical bull market is now over five years old.
Today, I share the following in this week’s On My Radar:
- China’s Shadow Banking Grinds to a Halt
- Copper Plunges to a Three-Year Low – John Murphy of Stock Charts
- China Export Illusion – It is the Huge Carry Trade – Martin Armstrong
- Trade Signals – Far Too Much Optimism
- Conclusion – Warren Buffet’s One Billion Dollars!
China’s Shadow Banking Grinds to a Halt
“A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.”
“Japan’s economy is losing steam as the monetary stimulus from “Abenomics” wears off and the country braces itself for a rise in the consumption tax from 5pc to 8pc. Economic growth slumped from 4pc in early 2013 to 0.7pc in the fourth quarter, while the country racked up a record trade deficit.”
“The Economy Watchers Survey saw the steepest drop last month since the March 2011 tsunami and is now lower than when Abenomics began. Marcel Thieliant, from Capital Economics, said Japan faces a “sharp slowdown”.”
Source: Ambrose Evans-Pritchard Click here for the full article.
Copper Plunges to Three-Year Low
The weekly bars in the chart that follows show the price of copper plunging to the lowest level in three years. The chart also shows that copper has been in a downtrend since 2011 and has formed a pattern of “lower highs” since then. A lot of that recent selling is being tied to potential problems in the Chinese economy.
China is the world’s biggest user of that commodity (accounting for 40% of world consumption). Many analysts fear that the collapse in copper hints at bigger problems in the Chinese economy.
There are several reasons for that concern:
- One is simply that the price of copper is positively correlated to the Shanghai Stock Index (red line). Another is that the recent drop in the Chinese Yuan (green line) makes it more expensive to import commodities. Chinese imports have dropped 29% since the Yuan started tumbling in February.
- Chinese companies also import copper and use it as collateral to obtain loans. As a result, copper weakness threatens wider financial problems in China.
- Last week saw the first corporate Chinese bond default in the country’s history (amid fears that it may not be the last). That’s worrisome because China is the world’s second largest economy.
Source: John Murphy StockCharts.com
China Export Illusion – It is the Huge Carry Trade – Martin Armstrong
Quoting Armstrong,
“I have warned that China’s exports were an illusion and that there was a huge carry trade borrowing dollars in Hong Kong at 1% and depositing the money in China getting 6%. But trade tracks money, not goods, so the illusion that China was still expanding was a good one – but still just an illusion.
China’s exports have plummeted “unexpectedly” in February among the tradition forecasters that use the numbers and believe in them. Compared to last year, according to official figures, exports fell by 18.1% from last year. Economists polled by Reuters had expected a gain of 6.8% for the second largest economy in the world. This demonstrates just how out of touch the mainstream economic community really is these days.
In China, many factories were closed. Imports in February rose by 10.1%, also more than expected. Then there has been the first important corporate bankruptcy in China. It is feared that more companies could follow as managing skills in how to survive an economic decline in China is seriously lacking.
Our projection for the low in China’s economy REMAINS the target year 2020. This is why the last bastion for capital remains the US dollar and the greatest recipient of capital is still the US share market. The widening scope of the rally has led the S&P 500 to take the lead away from the Dow Jones Industrials showing the trend is filtering outside of the big institutional money.”
Source: Martin Armstrong
Trade Signals: Extreme Optimism Once Again
Click here for a link to Wednesday’s Trade Signals.
Trade Signals identifies the equity and fixed income markets’ cyclical trend and suggests ways to hedge your long-term focused equity exposure tied to periods of excessive investor optimism. Charts are posted weekly on Wednesdays.
Conclusion – One Billion Dollars
Quicken Loans has teamed up with Warren Buffet to offer $1 billion dollars to anyone who can pick every game correctly in the upcoming March Madness NCAA Basketball Tournament. I couldn’t help but wonder how many people believe they can win. Impossible? Nearly? Picking the Perfect Bracket? The odds? 1 IN 9,223,372,036,854,775,808. Here is a fun clip from CNBC today:
I think many investors view the market in the same way. Easy to win.
The following chart shows returns of major asset classes year-by-year for the past 20 years. Note the difference in return from the top performing asset classes (Growth in 1995, 1996, 1997 and 1998) and the bottom performing asset classes (Emerging Markets in 1995, 1997 and 1998. EM was next to last in 1996).
If you knew all this return information in advance and positioned all your assets into the next year’s best performer, your returns would be phenomenal. Picking the top performing indices each year would have turned $100,000 into $12,930,762 or 27.52% annualized over the same period of time.
Warren Buffet is perhaps the greatest investor of our time. $100,000 invested in Berkshire Hathaway stock in 1993 grew to $1,140,936 by the end of 2012 or 12.96% annualized. Buying and holding the S&P 500 Index grew to $485,189.
Here is the hypothetical, compounded growth of $100,000 perfectly positioned into the top performing category each year:
The point is that even Warren Buffet can’t do it. I’m not sure if the odds of picking the top performing of nine investment categories each year for 20 years are better than the Billion Dollar Bracket (I haven’t calculated them) but I can tell you I’ve had many a client over the years who thought I should be able to do so. I bet you have received similar calls. I know of no single investor who has been able to do so. Wish I could.
I’ve found over the years that tactical price based momentum strategies do a good job at locking into leadership trends but picking the very best performing asset class each year – like the Billion Dollar Challenge, the odds defy logic.
I’m going for it and I’m sure my boys are already all over this. If I win, I promise to sponsor one of your investment conferences for each of the next ten years and if I don’t win, I hope you do and grab that One Billion Dollars!
Have a great weekend!
With warm regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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