Month: April 2015

HSI update

Hamilton

hsi apr 4 2015

It was only a week or two ago that we last commented on this index. In the meantime it has gained roughly 900 points and is fast approaching our target which is around 500 points higher yet, about 25800 give or take and not including a possible throw-over. We are paying particular attention to this index as this wedge is a highly accurate predictor of what follows. Furthermore this would complete the entire B-wave so a drop to 16000 is only the beginning! Notice that the RSI is already touching on overbought territory. As it stands the timeframe to reach the peak is about a week. This could be delayed if we are still in the 4th wave which could become more complex and consume a little more time, but that is becoming less likely by the minute.

What would cause such a sizeable move? Who knows but that is the whole point of expecting the unexpected. If you knew, it would become expected and would defeat the reason for your present preparedness as you would no longer be expecting the unexpected. See how EW solves this problem! You do not have a clue and yet you are ready.

Interest Rates, update

Hamilton

The usual then – Aug. 22 , 2012 – and now charts (see also previous blogs).

US 10year bondus 10y bond apr 4 2015

The US 10 year bond hit a  year low back in August of 2012. We anticipated that event basically on the symmetry from 1945 to 1979 to 2012. 33 years up followed by 33 years down, the exact dates are hard to find so this is a rough measurement but nevertheless quite accurate (see previous blogs). At the time a new low was still anticipated but that never materialized. The wedge, however , is clear as daylight and consequently the 4% was reasonable as that represents the base of that wedge. No new lows were made in the 10 year (the 30 year did make a new low). Most of 2013 was the year of the Fed’s “conundrum”, they had promised more QEs etc. and still rates went up, not down.

    We are always taught to expect the unexpected but when it arrives we are surprised and annoyed that it was not the expected outcome. This is along the lines of Donald Rumsfeld’s known and unknown knowns and unknowns.  My guess is that interest rates will rise more rapidly than is now expected so Greenspan’s 2013 conundrum might well become Yellen’s 2015/16 enigma. From an EW perspective, there was never a conundrum , nor will there be an enigma. Both the conundrum and the enigma only exist if one assumes that the Fed. (or other CBs) actually can control interest rates. This may not, in fact, be the case at all. After all it is possible that we have spent the past 6 or so years in one of those famous “liquidity traps” from which it is almost impossible to extract the economy. Pushing on a string as we all know does not work but at the Fed. this is apparently still an unknown unknown.

There are undoubtedly many households, banks etc.etc. that have been egged on to do more business or borrow more than they otherwise would. The relative low cost has been a great stimulus for doing so. Should rates change unexpectedly and by more than is now expected, you can rest assured that the vast majority did not expect the unexpected.

Retirement Plan, doing the math.

Hamilton

Interest income and expense

This chart, which I first noticed in one of Mauldin’s Outside-the–box articles, captures the essence of QE and Central Bank policy very well and points to where some of the most unintended and underappreciated problems are going to surface in the future. The chart is from the FDIC and shows what banks receive and pay in interest. Corporates and Governments as well as households are also large issuers of debt and are not featured in this chart but we will simple assume that this is a reasonable proxy for all debt (about 70 T, 2+X the total stock capitalization, about 40 T).

    When planning for retirement, either on a DIY or Institutional basis, your first task is to find the right mix. Traditionally this has roughly been 60%-$40% in favour of debt instruments as opposed to stocks. There are logical reasons for this having to do with the relative dependability of returns over long time periods. But, no doubt, the availability played into this ratio simple given the relative sizes of the stock and bond markets. Borrowers and investors must always be equal or the returns will simple adjust to make it so. Also not all investing is retirement related but it does all fall under “wealth” management.

   The intelligent reader (you can test yourself) will notice that I have left out the stock of housing which stands at about 27 T, still down a bit from 29 T at the peak. At first blush this seems to be a serious omission , particularly as this is an asset class that has often behaved better than the others (except in the US). However if you do include the house value you would have to put it together with the stock asset class which, in most cases, would mean that the retirement investor should only own bonds!

   So in our rough approach you can only chose between stocks or bonds. On BNN and everywhere else you will hear that on any given day money flowed out of bonds and into stocks (a risk-on day) or visa versa ( a risk-off day). This is complete rubbish as , collectively, this cannot possible happen. For the same reason it is impossible for investors as a whole to cash in on their stock gains over the past six years.

    Getting back to the chart you can see that income from bank deposits, earned by investors, has dropped from about 100 T per year to about 20 T. This has been true , on average, for about the last 5 years, representing a loss of, give or take 375% which would require a corresponding gain of 562% on stocks to balance out (using 60-40). In reality the broad US stock market is only marginally above its 2008 peak level. Interestingly banks have not been affected at all judging by the net interest income line.

    All this is based on the past 5/6 years. It takes time for bonds to mature but now that most have, and have rolled over at much lower rates, going forward things will be a lot worse. In fact it is not unreasonable to conclude that it will simple be impossible to get a decent return. Keep your government job as the defined pension plan may prove to be worth more than all your other income, over a lifetime, combined.