We have got the bounce in equities with all those different indexes bang at their supports as indicated. CRB etc.. I have leverage in my main investment account and ‘loaded the boat’ as said in the forum pages. (For clarity i do still have pockets of cash which i will allocate on market opportunities and the timing of expiring bonds).
I see some issues like GTAT, as an example, have increased by nearly 30% from entry in just a few of days – volatility is immense. (For a company with cash at hand of half their cap value, growing by double digits p.a., significant IPR assets and earning 25% p.a. was/is frankly ridiculous). But we could see these valuations repeated again and again across the entire market. Participants were pricing in a complete collapse of the world economy and monetary system it seems. In my opinion, for as long as cash and near cash remains high (see below), the money printers will continue their efforts and expropriate at will. Trading issues come and go. Its a constant moving feast as markets twist and turn. Understanding and catching the big trends is how to make significant returns from our capital and hence this is what i really wanted to comment on at this point..
We had a couple of interesting data points in the last few weeks on investment trends for US consumers.
Firstly, the home ownership data:
http://www.businessweek.com/news/2011-10-07/housing-desert-leads-biggest-u-s-homeownership-drop-since-1930s.html
Secondly the financial asset data published 27th Sept:
http://www.census.gov/compendia/statab/2012/tables/12s1201.pdf
You will see here that US household capital invested has increased considerably over the last ten years in spite of historically low savings rates. But we also see investment in equity/stocks has remained nominally unchanged (inflation adjusted declined considerably – NOTE!). The $8trn of equity holdings has remained very steady over the last ten year period recording approximately a 5% increase in capital invested ie inflation adjusted a circa 40% decline. Whereas corporate and foreign bond holdings have essentially quadrupled and treasury holdings have tripled. (Rates have fallen to produce some of these gains but this only explains a fraction of the increase in the capital).
A maths issue to unpick these nos..
The Dow Industrial Index in the year 2000 was at the very same nominal level she was when the survey was taken last year ie around 10500 points. We can therefore conclude that not only has no new capital flowed into stock ownership in the last ten years or so but also that dividends were not reinvested into US companies. Where did the money go then? Excess capital has flowed, meaningfully, into debt issuance by local, central as well as foreign governments. Corporates have also been net beneficiaries of this inflow pushing down yields to these current historic low levels. Governments have seen huge capital inflows whereas SMEs (small medium enterprises) have been starved of investment. (I draw a distinction here between ‘investment’ in a company as an equity share and the purchase of debt or roll over of debt at lower yields to large corporates).
If we are looking for bubbles in the world the data suggests we need look no further than the debt bubble we have all around us. Capital has flowed to governments who have mis-allocated the capital. Capital needs to flow to companies which will invent and improve our standard of living not to governments who squander this capital needlessly.
And here Gallup on the subject of US household’s declining equity exposure.
And here the ICI (Association of Investment Companies) fund recent fund flows. Compare equity to Bonds.
http://ici.org/research/stats/flows/flows_10_05_11
And here an excel table of the last few years of data:
Fund-flows_data_2011
In addition to the above we have seen in the recent reports from the hedge fund industry how extensive the outflows to cash have been.
http://www.reuters.com/article/2011/09/28/us-mangroup-idUSTRE78R22P20110928
My point in putting up this data is to illustrate not whether equities are cheap or bonds expensive but to illustrate actually why money printing will continue to be employed by developed market central banks.
To explain, putting it all together, we can see household’s response to ‘progressive’ monetary strategies has been to reduce exposure to assets which correlate to money supply and instead increase exposure to inversely correlated assets. I.e, in plain English, households are more exposed to monetary meddling than ever in the post war environment. Households have allocated their capital increasingly to cash and bonds which are the very worst asset to hold in a money printing environment. They have reduced their exposure to the supply of money indexing assets like property and equity assets.
We understand from prior research that the golden ratio of new cash to existing cash and near cash is the key ratio to put a complete stop to monetary supply increases via printing presses and the banking system. (As the central banks of Zimbabwe and Argentina know all too well. (And is why capital controls will eventually be imposed when the penny drops). What I’m clearly suggesting is that monetary expansionary strategies will continue and even increase until this ratio of existing and near cash falls relative to the new cash being created.
Only then will we see the ‘progressive’ policies of money creation via expropriation self destruct. Given the above reports i would suggest this is a long way down the road and therefore that we can expect much much more money printing before this cycle is over.
All the best
Rich
