This page has been archived and commenting is disabled.
3 Things Worth Thinking About
Submitted by Lance Roberts of STA Wealth Management,
Deflation
The recent market contraction should not be as much of a surprise as it has been. First, the markets were long overdue for a correction after an extremely long and unbroken run. Secondly, as I have addressed several times previously, the collapse in global inflationary pressures, along with economic growth, was an issue that would rapidly “wash up” on domestic shores. To wit:
“I would most likely bet on the latter as the deflationary pressures that are rising in Japan and the Eurozone flow back into the domestic economy over the next couple of quarters.”
The chart below, which shows oil prices, interest rates and the 10-year breakeven inflation rate, are all stating that those deflationary pressures have come home to roost.
The collapse in oil prices is the effect of the drag in global demand combined with the recent surge in the U.S dollar.
Here is the “GOOD NEWS.”
The collapse in oil prices, combined with a strong dollar, will provide consumers with roughly a $40 billion tax credit going into the winter. This should help provide some support to the domestic economy in the short-term provided there are no other offsetting factors such as a resurgence of the “polar vortex’s” that sapped economic growth last year.
Retail sales makeup about 40% of the personal consumption expenditures which comprises almost 70% of the quarterly GDP calculation. Retail sales have slowed recently as the bulk of American’s is living paycheck-to-paycheck. This is shown in the chart below of “control purchases” that reflects what households are buying. (Note: Historically, control purchases below 4% annualized have been associated with very weak economic growth.)
Therefore, there may be some pickup in retail sales in the months ahead which may provide a temporary buoy during the global economic storm.
Houston, We Have A Problem
I live in Houston, which as many already know, has enjoyed on of the biggest economic “booms” in history as oil production has had a major impact on the wealth and prosperity of the city.
However, as I have warned in the past, it is important to remember that all things are going in cycles and that the current expansion was unlikely to last forever. The reason, I said this then, and still believe it now, is two-fold.
First, the development of the “shale oil” production over the last five years has caused oil inventories to surge at a time when demand for petroleum products in on the decline as shown below.
The obvious ramification of this is a “supply glut” which leads to a collapse in oil prices. The collapse in prices leads to production “shut ins,” loss of revenue, employee reductions, and many other negative economic consequences for a city dependent on the production of oil.
Secondly, I have also discussed that the “fracking miracle” may not be all that it is believed to be due to fast production decline rates and massive amounts of leverage. Just recently Yves Smith posted an article discussing this very issue stating:
“The oil and gas sector is capital intensive. Drillers have borrowed phenomenal amounts of money, which was nearly free and grew on trees, to acquire leases and drill wells and install processing equipment and infrastructure. Even as debt was piling up, the terrific decline rates of fracked wells forced drillers to drill new wells just keep up with dropping production from old wells, and drill even more wells to show some kind of growth. One heck of a treadmill. Funded in part by junk debt.
Junk bond issuance has been soaring as the Fed repressed interest rates and caused yield-hungry investors to close their eyes and take on risks, any risks, just to get a teeny-weeny bit of extra yield. Demand for junk debt soared and pushed down yields further. And even within this rip-roaring market for junk bonds, according to Bloomberg, the proportion issued by oil and gas companies jumped from 9.7% at the end of 2007 to 15% now, an all-time record.”
While I am not suggesting that the Houston economy is set to collapse, I know many individuals that are heavily leveraged into the “energy” sector believing that things will “only continue to go up.” This is tremendously risky and anyone who lived in Houston during the 80’s will assure you they don’t.
Freaking Out
The long awaited correction has finally begun. It should come as no surprise considering the markets have been in the longest near vertical run in the history of the market. However, the question for investors is “what do I do now?”
The answer from the mainstream “bulls” is simply to do nothing. After being caught heavily flatfooted with daily cheerleading of the markets, their only answer currently is to do nothing. After all “it’s not about timing the market but time ‘IN’ the market that matters.” Right?
Such a statement is a cop-out for the lack of an actual portfolio/risk management discipline of any sort. However, as discussed earlier this week, the current correction was not only anticipated, but should also not be taken lightly.
A big concern at the moment is the conclusion of the Federal Reserve’s ongoing liquidity intervention program which has been the driver behind the markets unbridled advance since its inception in 2012. The same thing occurred in 2011, which led to a topping process as QE2 was coming to an end.
While no two periods are ever the same what is important is the current defense of 1850 level on the S&P 500 so far. A rally from this level, which fails to attain a new high, suggests that the market will complete an important topping process in the months ahead.
The markets are currently on very important “sell signals,” but also “grossly oversold” on a short-term basis. This setup suggests that investors should be patient and await a rally back to resistance to reduce equity risk in portfolios for the time being.
(Subscribe for free email delivery of this weekend’s newsletter for portfolio model adjustments and suggested allocations)
“The point is that there are many risks investors should not ignore. Making up losses is much harder than reinvesting stored capital once a clearer picture emerges. While the current belief that a correction of magnitude in the markets is "inconceivable," I am not sure that word means what they think it means.”
Caution is advised.
- 20716 reads
- Printer-friendly version
- Send to friend
- advertisements -



Think about it...
https://www.youtube.com/watch?v=AHa-AvLk4no
"Investing" is not the right game to be playing at this moment in history.
Fundamentals of life and community are the right areas of endeavor.
Newsboy, wise words very wise words!
The real investment is to invest in real toilet paper, instead of those faux ones formerly known as FRN's.
You'll get a better return on your investment and you'll really 'clean up' nicely... just say'in.
Inequality ==> epidemics
QE means more inequality
Think of all the money the FED has stolen from workers and savers, around the world, just to hand it to junk bond issuers in Houston.
my neighbor's ex-wife makes $77 /hour on the computer . She has been unemployed for seven months but last month her payment was $15804 just working on the computer for a few hours. go to the website... www.job-reports.com
Ben deserves a trophy. 4 trillion printed and oil below $82.
Everyone that participates deserves a trophy... So yeah, at least give Benny a participation ribbon.
Houston can't survive $65 oil.
Houston can't survive $65 oil.
Houston, we have a problem. -- Dallas.
Dallas, stay right there and we'll bring help to you (after we run like hell). -- Houston
Yeah, the market is "grossly oversold" according to this shill. Notice on his own chart how the market remained "grossly overbought" for almost 2 years straight. What a shyster industry.
Indeed
The FED took away QE. Forget all the other reasons being trotted out here for everything turning down. This was the most telegraphed correction in history. It's not time in the market, it's bankers who should be doing time.
I wonder....all planned? a couple years ago I warned people that there would be a false flag to blame the economy collapse on..
Maybe ebola and isis are coordinated to blame instead of blaming the banksters and politicians? Just a thought, in this world
who knows anything anymore?
Oil, ISIS, Ukraine, Ebola, Ferguson, Illegal Immigrants...
Keep lots of balls in the air. Drop one and it's a crisis to not let go to waste. Drop several, kill everyone, and declare ultimate victory.
And now there is a 'false fever'* to take everybody's mind off the collapsing economy.
* One that did not materialize as coincidentally as everybody thinks it did.
"BUY you fuckers! I have shit to sell!"
Another problem you have, as a resident of Houston, is your wackjob lesbian mayor who has secured court orders to force pastors to hand over copies of their sermons to see if they contain any mention of homosexuality. But she is harassing mosques in the same manner, right? NOPE, only the Christians. Hey sister, the muslims have definite plans for you but if the pastors want to call you a castrated bull-dyke THAT IS THEIR FUCKING RIGHT. It's called the First Amendment!!!! You commies are about to suffer a humiliating defeat in November. Are Republicans the answer? No, but communism was NEVER the answer.
Bob Beckel says different and he's probably right
The national security October surprise he's alluding to appears to be the rollout of Ebola. Possibly with a financial twist thrown in for bad measure. Notice how quickly they cut him off when he says this
You've got a country filled with every imaginable form of treasonous filth you can think of and then some. They're glad to help do anything and everything they can get away with helping to destroy your country
http://www.youtube.com/watch?v=UOgRMSbJ_MM
This earlier comment covers the first part of what you mentioned
http://www.zerohedge.com/news/2014-10-16/obama-mobilizes-national-guard-...
I saw that and caught it. The BS meter exploded and shot off into low earth orbit when not one of his supposedly conservative/libertarian collegues press for clarification.
Oh, and that fraud Eric Boling or whatever his name is, professes to be libertarian but fully endorses torture or whatever it takes. I almost have the ball and chain turned around by pointing out such obvious inconsistencies.
Are you telling us that you are counting the votes this time around? If the machines are counting, forget it.
"Another problem you have, as a resident of Houston, is your wackjob lesbian mayor who has secured court orders to force pastors to hand over copies of their sermons to see if they contain any mention of homosexuality".
OK, so with all child molestation, rape and sodomy committed by members of the biggest christian congregation on earth (that has gone unpunished to a greater extent), let's call it even.
Did not junk you. What you speak of is true. The perverts who hide behind the cross quite obviously do not represent the teachings of Jesus. He said in no uncertain terms that, paraphrasing, "he who would hurt a child will be punished". But no, we won't be calling it even and allow this mayor to trash the First Amendment and the law by conducting this witch hunt.
looks like she is already rueing the day she let/told her lawyer feldman to put together that overly broad subpoena in the battle over signatures to force a referendum on the recently passed human (specifically gay, etc.) rights ordinance.
i wonder why the supporters don't let the referendums happen and treat them as a consciousness raising opportunities (and, hey, they might win and how much more powerful would the law and its implications be then?). if anything is certain politically, it is that homosexuals are on their way to equal rights across the globe.
It is surprising just how unflinchingly callous christians are the moment something crops up that doesn't adhere to the 2000 year old story book. If an alien was looking down on earth trying to determine who were the good people and who were the bad people the treatment of some minorities by christians would put them well and truly in the "bad people" camp. When people are simply respected for who they are and what they do for the betterment of the world in which we live, for their compassion to the less well off, concern and consideration for the environment and tenderness for all living things then civilisation may lift itself from it's current state of backwards servitude to outdated myths, stories and fantasies.
It's a long road but if humans survive long enough the great invisible grey bearded skyman will be consigned as a dusty bookmark in history and we can get on with exploring the universe.
i guarantee whatever/whomever is to blame won't be the fuckers that caused it...
I didn't do it.
But I did point it out.
Sorry to word cloud Ebola again...but this pestilence thingy has been rocking and Rollin for some time now.
Oil prices are almost certainly tracking the outbreak Looking at that price action now. (And having thought about this and knowing I'm pretty slow about "getting it."). We can of course wait to find out by say...watching an Epic Demand Fail unfold instead of a mere Total Collapse of Wall Street aka 2008.
Markets will not wait however.
My view is that neither should you.
I think Madame Chairperson will need to weigh the costs of an unwind of QE (staying the course...which does build confidence even if it's wrong) versus a sudden change Back to the Future (QE 4) and the risk that such a change entails. (Fail...and then what?)
I would advise that market corrections happen...no one is going to argue the Fed should have saved the economy from Dieboldia or whatever this affliction is we've got going on here.
Stay on course...tell the Government to get their phi king ass in gear.
If you are Yellen, then please stop and give us some peace and quiet. Ba-dum-bum.
If you are Yellen you might be looking at this from a different moral perspective than you looking at this as you. One can imagine that Yellen will realize the only option is to pull a Bernanke and buy time. She would ramp the QE with the goal of getting to 2016 and retiring for the green pastures of speechifying. Let the next chump take the fall.
Assuming she isn't an evil person who finally realizes her predicament, who could blame her. Of course you might also assume that dog is really spelled c-a-t but that doesn't make the cows come home to roost. Mixed metaphors, it ain't rocket surgery.
It's Barrack Obala fault!
Obama = Ebola. Both inventions of CIA.
Let three problems solve each other.
See
https://www.academia.edu/8816411/Rogue_Swan_EU_disintegration
"The collapse in oil prices, combined with a strong dollar, will provide consumers with roughly a $40 billion tax credit going into the winter."
Oh fer fuck out loud. The next time I hear somebody describe a decrease in gas prices as a "tax break", I'm going to wish bloody ebola on their whole fucking family. I buy gas because I choose to. I pay taxes so I don't go to jail.
I was ranting and raving to myself just this morning. The fcking lying pol and media calling lower gas prices a "tax break".
That is sooooo demented. Why does the public put up with this? If the price of corn goes down do they call that a tax break? If the cost of a pair of jeans goes down is that a tax break? Hell no. Where do they get off thinking they can commandeer a reduction in prices of anything as a tax break?
When the price of gas goes down, the fcking .gov still collects every bit as much tax as they did before.
I want to see in boldface type by anyone in the media, the next time gas prices go up
"AMERICANS SUFFER NEW TAX INCREASES, GAS PRICES ROSE .05 CENTS THIS WEEK, THIS NEW TAX INCREASE WILL IMPACT THEIR SPENDING!!!"
With Ebola seemingly less and less contained by the day I suspect looking at charts with a view to anticipating future economic and market trends is quite futile. Imagine a couple of wall street jocks staring intently at a chart of the US/JPY while out the window a gigantic asteroid is starting to burn up in the atmosphere, headed straight for their building.
What bearing on reality did that chart have moments before impact.
NONE.