5 Reasons to Fear the Fall

By Michael Pento – Re-Blogged From http://www.PentoPort.com

This powerful and protracted bull market has made Cassandras look foolish for a long time. Those who went on record predicting that massive central bank manipulation of markets would not engender viable economic growth have been proven correct. However, these same individuals failed to fully anticipate the willingness of momentum-trading algorithms to take asset prices very far above the underlying level of economic growth.

Nevertheless, there are five reasons to believe that this fall will finally bring stock market valuations down to earth, and vindicate those who have displayed caution amidst all the frenzy.

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Are US Equities In A Bubble?

By Rudi Fronk and Jim Anthony –  Re-Blogged From http://www.Silver-Phoenix500.com

As we have noted, there is a very important difference between a bull market and a bubble. Valuations are certainly one means of distinguishing them. In retrospect, we can recognize previous historic bubbles such as 1929 and 2000. When basic ratios such as Price-to-Sales and Tobins’ Q have reached the levels that marked these bubbles, as they have, we can make a reasonable inference that another bubble has formed.

But there are other measures besides valuation. The most characteristic indicator of a bubble vs. a bull market is that bubbles ignore risk. Bubbles don’t discount risk, they don’t sniff out the next recession, they ignore or even fight the Fed, they don’t fall when earnings do and they do not herd into the long end of the Treasury curve for safety.

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The Fed May Show Trump No Love

By Peter Schiff – Re-Blogged From http://www.Gold-Eagle.com

Typically, US Presidents are wary of claiming stock market performance as a referendum on their success. Most have seemed to understand that taking credit also means accepting blame, and no one would want to make the tortured argument that the positive moves reflect well on their presidency but that the negative moves do not. But Donald Trump has shown no reluctance to make any argument that suits his political purpose of the day, no matter its absurdity, and no matter if he has to contradict the arguments he made last year, or last week. Perhaps he assumes, as most investors seem to, that the risks are minimal because the Federal Reserve will jump in to save the markets if things turn bad. But in binding his performance so closely to the markets he overlooks the possibility that the Fed will be far less charitable to him than it was to Obama.

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Jobs and Inflation: Gradually and Then Suddenly

By Ben Hunt – Re-Blogged From Wolf Street

If you’ve been reading my notes immediately before and after the June Fed meeting (“Tell My Horse” and “Post-Fed Follow-up”), you know that I think we now have a sea change in what the Fed is focused on and what their default course of action is going to be. Rather than looking for reasons to ease up on monetary policy and be more accommodative, the Fed and the ECB (and even the BOJ in their own weird way) are now looking for reasons to tighten up on monetary policy and be more restrictive. As Jamie Dimon said the other day, the tide that’s been coming in for eight years is now starting to go out. Caveat emptor.

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How Can The Fed Possibly Unwind QE?

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

There are currently two important items on the Fed’s wish list. The first is to restore interest rates to more normal levels, and the second is to unwind the Fed’s balance sheet, which has expanded since the great financial crisis, principally through quantitative easing (QE). Is this not just common sense?

Maybe. It is one thing to wish, another to achieve. The Fed has demonstrated only one skill, and that is to ensure the quantity of money continually expands, yet they are now saying they will attempt to achieve the opposite, at least with base money, while increasing interest rates.

Both these aims appear reasonable if they can be accomplished, but the game is given away by the objective. It is the desire to return the Fed’s interest rate policies and balance sheet towards where they were before the last financial crisis, because the Fed wants to be prepared for the next one. Essentially, the Fed is admitting that its monetary policies are not guaranteed to work, and despite all the PhDs employed in the federal system, central bank policy remains stuck in a blind alley. Fed does not want to institute a normalised balance sheet just for the sake of it.

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“Bigger Systemic Risk” Now Than 2008 – Bank of England

By Mark O’Byrne – Re-Blogged From http://www.Gold-Eagle.com

– Bank of England warn that “bigger systemic risk” now than in 2008
– BOE, Prudential Regulation Authority (PRA) concerns re financial system
– Banks accused of “balance sheet trickery” -undermining spirit of post-08 rules
– EU & UK corporate bond markets may be bigger source of instability than ’08
– Credit card debt and car loan surge could cause another financial crisis

– PRA warn banks returning to similar practices to those that sparked 08 crisis
– ‘Conscious that corporate memories can be shed surprisingly fast’ warns PRA Chair

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This Stock Market is Priced to Sell

By Vitaliy Katsenelson – Re-Blogged From IMA

If you feel that you have to own stocks no matter the cost; if you tell yourself, “Stocks are expensive, but I am a long-term investor,” — there’s help for you yet.

First, let’s scan the global economic landscape. The health of the European Union has not improved, and Brexit only increased the possibility of other nation’s “exits” as the structural issues that render this union dysfunctional go unfixed.

Meanwhile, Japan’s population isn’t getting any younger — in fact, it’s the oldest in the world. Japan is also the world’s most-indebted developed nation (though, in all fairness, other countries are desperately trying to take that title away from it). Despite the growing debt, Japanese five-year government bonds are “paying” an interest rate of negative 0.10%. Imagine what will happen to the government’s budget when Japan has to start actually paying to borrow money commensurate with its debtor profile.

Regarding China, the bulk of Chinese growth is coming from debt, which in fact is growing at a much faster pace than the economy. This camel has consumed a tremendous quantity of steroids over the years that have weakened its back — we just don’t know yet which straw will break it.

n the U.S., meanwhile, S&P 500 SPX, -0.12% earnings have stagnated since 2013, but this has not stopped analysts from launching into a new year with forecasts of 10%-20% earnings growth — only to gradually take expectations down to near-zero as the year progresses. The explanation for the stagnation is surprisingly simple: Corporate profitability overall has been stretched to an extreme and is unlikely to improve much, as profit margins are close to all-time highs (corporations have squeezed about as much juice out of their operations as they can). And interest rates are still low, while corporate and government indebtedness is very high — a recipe for higher interest rates and significant inflation down the road, which will pressure corporate margins even further.

I am acutely aware that all of the above sounds like a broken record. It absolutely does, but that doesn’t make it any less true. We are in the final innings of this eight-year-old bull market, which in the past few years has been fueled not by great fundamentals but by a lack of good investment alternatives.

Starved for yield, investors are forced to pick investments by matching current yields with income needs, while ignoring riskiness and overvaluation. Why wouldn’t they? After all, over the past eight years we have observed only steady if unimpressive returns and very little realized risk. However, just as in dating, decisions that are made due to a “lack of alternatives” are rarely good decisions, as new alternatives will eventually emerge — it’s just a matter of time.

The average stock (that is, the market) is extremely expensive. At this point it almost doesn’t matter which valuation metric you use: price to 10-year trailing earnings; stock market capitalization (market value of all stocks) as a percentage of GDP (sales of the whole economy); enterprise value (market value of stocks less cash plus debt) to EBITDA (earnings before interest, taxes, depreciation, and amortization) — they all point to this: stocks were more expensive than they are today only once in the past century — during the late 1990s dot-com bubble.

Investors who are stampeding into expensive stocks through passive index funds are buying what has worked — and will likely stop working. Mutual funds are not much better. When I meet new clients, I get to look at their mutual-fund holdings. Even value-oriented funds, which in theory are supposed to be scraping equities from the bottom of the stock-market barrel, are full of pricey companies. Cash (which is another way of saying, “I’m not buying overvalued stocks”) is not a viable option for most equity-fund managers.

Thus this market has turned professional investors into buyers not of what they like but of what they hate the least. In 2016 less than 10% of actively managed funds outperformed their benchmarks (their respective index funds) on a five-year trailing basis. Unfortunately, the last time this happened was in 1999, during the dot-com bubble, and we know how that story ended.

To summarize the requirements for investing in an environment where decisions are made not based on fundamentals but due to a lack of alternatives, look to Mark Twain: “All you need in this life [read: lack-of-alternatives stock market] is ignorance and confidence, and then success is sure.”

To succeed in the market that lies ahead of us, one will need to have a lot of confidence in his ignorance and exercise caution and prudence, which will often mean taking the much less-traveled path.

So, how does one invest in this overvalued market? Our strategy is spelled out in this fairly lengthy article.

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