Chorus growing suggesting 2019 is crunch time

I am observing that a range of "wise investors" are starting to see ~2019 as crunch time. Charlie Aitken, fund manager, former "guru" at Bell Potter. Louis-Vincent Gave CEO of highly regarded Gavekal Research using very similar logic to Charlie Aitken. Elmer Funke Fupper, ex CEO of the ASX. Coming at it from a relatively different angle (though still with heavy

Charlie Aitken joins chorus warning of expensive defensives : 'the simple fact is the direction of the “risk-free rate”, and the rate of change of the risk-free rate is crucial to overall equity market pricing and stock and sector selection.' ' I have been warning on long bonds and bond-like equities for 12 months. We believe long bonds and bond-like equities are real return free capital risk. ' 'I believe we are going from Central Bank quantitative easing (QE) to Central Bank quantitative tightening (QT). At the same time, the US has lost all fiscal discipline under Trump and will now run huge budget deficits that require record issuance of US Treasuries. The world, led by so-

China is changing the rules against the West

On many levels, China is changing the global rules to its own benefit: Extending its soft power influence throughout particularly the developing world. Eg paying for infrastructure in African countries in return for mineral rights - but also in doing this, it gains influence over/with African countries. This is also happening in the Pacific and elsewhere. Even in Europe, where a Chinese company purchased a controlling stake in the Athen's port Pireaus when Greece was on its knees ... and now Europe find this is one port where it cannot control or monitor what goes in our out of Europe.

Rate rise will crush asset prices - Chris Joye

Chris Joye, AFR 17/2/2018 writes: February's dramatic 10 per cent sell-off in shares was the first big correction since the global financial crisis that has been fuelled by economic strength, not weakness. It offered a timely reminder that fixed-rate bonds (or "interest rate duration") can be a horrific hedge against losses in shares when the economy is firming. This was a lesson old heads learnt back in 1994 when equities and government bonds simultaneously slumped as a result of a re-setting of interest rate expectations upwards after the 1991 recession. It is not something seared into the brains of any adviser or investor aged under 41 because they were still at school. This column has

RBA warns of Trump inflation threat.

AFR 17/2/18 Reserve Bank of Australia governor Philip Lowe has slammed as "very problematic" the inflationary forces being unleashed by Donald Trump's unprecedented borrowing surge to fund company tax cuts, saying they are landing on a US economy already running at full tilt. Dr Lowe warned that financial markets "can turn against you" fast if governments overreach in borrowing to fund tax cuts, warning the Coalition government against blowing its planned return to surplus by 2020-21. Dr Lowe's remarks come after weeks of sudden global financial turmoil erupted over fears the US economy could be on the brink of a surge in inflationary pressures that would force up interest rates, making many

"Artificial market cycle... trouble ahead" says past CEO of ASX

Elmer Funke Kupper, past CEO of the ASX says: This view says that we can expect much more material volatility and falls in equity markets towards the end of 2018 or in 2019. Here is why. First, even after recent falls, US equity markets are expensive by historical standards. The S&P 500 price-to-earnings ratio, price-to-sales ratio and dividend yield are all still outside historical levels. Some excellent work done by John Hussman of Hussman Funds suggests that at the current valuation levels the S&P 500 will deliver close to zero returns over the next 12 years. Part of the problem is interest rates. It seems that markets have assumed that ultra-low interest rates justify ultra-high equity v

"The strangest of creatures- the fully invested bear." James Montier, GMO

Investing at times can be a strange "game". Or to be more precise, investors at times can behave strangely. Take Exhibit 2 below. More US fund managers think US shares are overvalued than at any other time over the last 20 years - including the peak of the 2000 dot com bubble and the peak in August 2007. And yet, reports James Montier, the same people who did this survey (see Exhibit 2), "showed fund managers to still be overweight in equities" - as you can see in Exhibit 3. This tells us a lot about a range of things: It tells us about how most fund managers are driven by quarter to quarter performance, "forcing them" to to index huggers and "relative performance managers". (Do you really

Volatility shorts and this week's market correction. Like 1987?

A very insightful article in today's AFR provides some very useful insight into the market correction over the last week. Here are some sections: Analysts say the biggest US equity reversal since 2011 was deepened by a bevy of exchange-traded products that allowed investors to wager on the Vix index, a measure of stock market volatility sometimes dubbed Wall Street's "Fear Index". However, these ETPs are just one corner of a complex and expanding "volatility ecosystem" that has evolved over the past decade and one that has raised comparisons with portfolio insurance, a hedging strategy blamed for exacerbating the market crash of 1987. Indeed, volatility is now both a major input into multibi

Australian banks pose global systemic threat:ASR

International investors are being urged to steer clear of banks in Australia, Canada and Sweden by a leading investment consultancy, which has sounded the warning about the risk they may pose to the entire financial system if interest rates rise and the Chinese economy slows. "High house prices, a build-up of household debt post-GFC, and – for Canada, Sweden and Australia – banking sectors that are more than 20 per cent of local market cap and 13 per cent of 'global banks', make these markets likely sources of financial market instability in the year ahead," ASR said. "The banking sectors in three of these economies have increased in size relative to their own economies and, potentially,

John Hussman expects US shares to fall 66% - and so do others

In this article, highly regarded US hedge fund manager says "I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this market cycle." Mind you: from these sort of levels using Shiller's straight cyclically adjusted P/Es, US shares fell 89% from they 1929 peak, 67% in real terms from their 1968 peak, 60% after the 2000 dot com bubble before the US Fed pumped the bubble up again to the 2007 peak from which it fell 53% (making the fall in real terms from March 2000 to March 2009 62% in total). So I think Professor Robert Shiller would also be comfortable with John Hussman's forecast decline for US shares. Famous fund manager and bubble researcher Jeremy Gra

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