'He who lives upon hope will die fasting,' said Benjamin Franklin.
Often while searching for a piece of data through Google, I stumble across something else which is far more interesting. That is how I found the table below of international savings rates.
Why should you care? Because countries with high savings rates tend to have strong economies and great stock markets, since there is plenty of excess cash available to pour into investments. Those with low savings rates suffer from weak economies and poor stock markets, because of a shortage of available capital. When the American savings rate dropped below zero in the latter part of the last decade, it set off emergency alarms for me that a collapse of the financial markets was on the horizon.
During the last four decades, I have watched Japan's savings rates plunge from 16% to 2.8%, and you know the result for markets there. When it approaches zero, that will be the time to short the JGB's, the yen, and the Nikkei stock index. The only country that doesn't fit this analysis is Australia, with a mere 2.5% savings rate, but boasts a positively virile stock market and currency. The resource boom there is skewing things towards under saving and over consumption.
By the way, the outlook for the US, with its still miserable 3.9% savings rate, does not look great when considering this benchmark. Don't expect a runaway bull market anywhere savings rates are low and falling. What are savings rates telling us are the best countries in which to invest? China, 38%, India, 34.7%, and Turkey, 19.5%.
Australia? 2.5%
Japan? 2.8%
USA? 3.9%
Brazil? 6.8%
Britain? 7.0%
Germany? 11.7%
Ireland? 12.3%
Switzerland? 14.3%
Turkey? 19.5%
India? 34.7%
China? 38%
In their century long coverage of exotic places, cultures, and practices, National Geographic Magazine inadvertently sheds light on broad global trends that deeply affect the rest of us. Plus, the pictures are great. A recent issue celebrated the approach of the world's population to 7 billion, and the implications therein.
Long time readers of this letter know that demographic issues will be one of the most important drivers of all asset prices for the rest of our lives. The magazine expects that population will reach 9 billion by 2045, the earliest date that I have seen so far. Can the planet take the strain? Early religious leaders often cast Armageddon and Revelations in terms of an exploding population exhausting all resources, leaving the living to envy the dead. They may not be far wrong.
A number of developments have postponed the final day of reckoning, including the development of antibiotics, the green revolution, DDT, and birth control pills. Since 1952, life expectancy in India has expanded from 38 years to 64. In China, it has ratcheted up from 41 years to 73. These miracles of modern science explain how our population has soared from 3 billion in a mere 40 years.
The education of the masses may be our only salvation. Leave a married woman at home, and she has eight kids, as our great grandparents did, half of which died. Educate her, and she goes out and gets a job to raise her family's standard of living, limiting her child bearing to one or two. This is known as the ?demographic transition.?
While it occurred over four generations in the developed world, it is happening today in a single generation in much of Asia and Latin America. As a result, fertility around the world is crashing. The US is hovering at just below the replacement rate of 2.1 children per family, thanks to immigration. But China has plummeted to 1.5, Europe is at 1.4, and South Korea has plunged as low as 1.15.
Population pressures are expected to lead to increasing civil strife and resource wars. Some attribute the genocide in Rwanda in 1999, which killed 800,000, as the bloody result of overpopulation.
The conspiracy theorists will love this one. Buried deep in the bowels of the 2,000 page health care bill was a new requirement for gold dealers to file Form 1099's for all retail sales by individuals over $600. Specifically, the measure can be found in section 9006 of the Patient Protection and Affordability Act of 2010.
For foreign readers unencumbered by such concerns, Internal Revenue Service Form 1099's are required to report miscellaneous income associated with services rendered by independent contractors and self-employed individuals. The IRS has long despised the barbaric relic (GLD) as an ideal medium to make invisible large transactions. Did you ever wonder what happened to $500, $1,000, $5,000, and $10,000 bills?
Although the Federal Reserve claims on their website that they were withdrawn because of lack of use, the word at the time was that they disappeared to clamp down on money laundering operations by the mafia. In fact, the goal was to flush out income from the rest of us. Dan Lundgren, a republican from California's 3rd congressional district, a rural gerrymander east of Sacramento that includes the gold bearing Sierras, has introduced legislation to repeal the requirement, claiming that it places an unaffordable burden on small business.
Even the IRS is doubtful that it can initially deal with the tidal wave of paper that the measure would create. Currency trivia question of the day: whose picture was engraved on the $10,000 bill? You guessed it, Salmon P. Chase, Abraham Lincoln's Secretary of the Treasury.
Ever Wonder Where The $10,000 Bill Went?
Traders were taken aback this morning when the Department of Labor announced a 50,000 drop in weekly jobless claims to 352,000. The street had been expecting a decline of only 19,000. It was the lowest report in almost three years, and the sharpest weekly decline in seven years.
I tell people that, if stranded on a desert island, this is the one weekly report I would want to call the direction of the economy. So I am up every Thursday morning at 5:30 am PST like an eager beaver awaiting the announcement with baited breath.
The impact will not be as great as the headline number suggests. Nearly half of the figure represents a take back of the 24,000 increase in claims for the previous week. But there is no doubt that it represents an upside surprise for the economy. And you have to put this in the context of a long steady stream of modestly positive economic data that has been printing since the summer.
The release was only able to elicit a small double digit response from the stock market. That?s because we are now up nine out of eleven days, taking the S&P 500 up 4.5% on the year, a far more blistering performance than many expected. That takes us right up to the level of 1,312, which many analysts predicted would be the high for the year.
Break this on substantial volume, and we could reach my own upside limit of 1,370. If you believe that we are trading to the top of a 300 point range from 1,070 to 1,370, as I do, then there is not a lot you want to do here when you are 81% into that move, unless you want to day trade.
At this point, I would like to refer you to my October 30, 2011 piece, ?The Stock Market?s Dream Scenario? by clicking here. Since then, two of my three predicted ?black swans? have occurred, progress on the European sovereign debt problem and the first interest rate cut by the People?s Bank of China in three years. The third, a multi trillion dollars budget and tax compromise in Washington, was dead on arrival. But hey, calling two out of three black swans is not bad!
Arriving on Schedule
Many of you have asked for this year?s strategy luncheon calendar so you can make advance travel arrangements, so here it is. This is understandable, since the Orlando luncheon saw visitors from Brazil and Australia, the Los Angeles one had subscribers from Alaska thawing out, and at the London event the distinctive accent of Johannesburg was heard.
This year I am going into the cruise business, holding a seminar in the penthouse suite of the Cunard transatlantic liner, Queen Mary II, en route from New York to Southampton, England. The gathering will be held as we sail over the wreck of the Titanic just to keep us all humble. I promise the captain will be British, not Italian! The events in bold are already listed in the store at www.madhedgefundtrader.com under ?LUNCHEONS?. The rest will be posted in coming months. There are still a couple of Beverly Hills tickets left, so if you want to come, get a move on.
January 23 Beverly Hills
January 27 Las Vegas
February 9 Houston
February 10 Orlando
April 20 San Francisco
May 3 Phoenix
June 11 Beverly Hills
June 29 Chicago
July 5 New York
July 6-13 Queen Mary II Cruise
New York to Southampton
July 16 London
July 17 Frankfurt
October 26 San Francisco
November 8 Orlando
January 3, 2013 Chicago
Let me tell you about the real January effect. Many pension and retirement funds only reshuffle weightings between different asset classes once a year, mostly in January. That has created a temporary surge of stock buying and bond selling that exhausts itself by the middle of the month. After that, the market sells off. During the second half of January in 2009, the S&P 500 dropped by 3.5%, in 2010 it plunged 5.9%, and in 2011 it pared back 0.54%.
Will history repeat itself a fourth time? The global economy is facing certain slowdowns in Europe, China, and India. The bull run in equities is rapidly approaching the advanced age of four months, long in the tooth by recent standards. I am betting that it will, but will keep my short positions small until I?m sure. The next bad headline from Europe will be the trigger.
Is the Bull Market Now a Senior Citizen?
I have been warning readers away from the agriculture space for the past few months, and on Thursday you found out why.
More than 90% of the street was positioned for a bullish report, expecting that the last summer?s blistering drought and ongoing dryness in South American would lead to inevitable shortages.
Instead, the US Department of Agriculture dropped a bombshell, predicting in its closely watched crop report that there would be copious oversupplies of every major grain for 2012. Prices utterly collapsed, with corn (CORN) closing limit down on the day.
This is not the first time this has happened. Over the past year, the USDA has lost, and then later found, 100,000 million bushels of corn, twice, sending prices gyrating each time, and putting traders through a meat grinder. Conspiracy theorists suspect political manipulation, insider trading, or just shear incompetence. Budget cuts are a more likely cause. The less money the government agency has to spend, the more volatile and less reliable its numbers are becoming. This is a major reason why I avoid the sector like a plague going into these reports.
I?ll tell you what happens from here. After a few weeks or months, these new developments will get digested by the marketplace. A few bodies will float to the surface, as overleverage by small traders reaps its grim harvest. Liquidation of their positions will give us our final low.
Then the long term bull market in food will resume its inexorable climb, and the grains will begin a slow grind up. The bottom line is that the world is making people faster than the food to feed them. Of the 2 billion souls who will join the global population over the next 40 years, half will come from countries unable to grow enough of their own food, primarily in the Middle East. It is just a matter of time before the weather turns hostile once again. There is the ever present tailwind of global warming. And who knows? The next USDA crop report could surprise to the downside, sending prices soaring.
I think this year you?re going to have six years? worth of movement in the commodities markets,? said Mark Fisher of hedge fund MBF Clearing Corp.
The only surprise in the downgrade of nine European sovereign borrowers was that it took so long. It is a classic case of locking the barn door after the horses have bolted.
The only unknown is how many more downgrades remain. The marketplace is already valuing this paper at CCC levels, with ten year yields violently fluctuating around the 7% handle. So the BBB+ awarded to Italy, down from A, seems generous in the extreme.
The downgrades have created far bigger headaches for European authorities beyond wounded pride. By downgrading big contributors to the bailout package for Greece, like Italy and France, the funds available have been effectively cut by nearly half. This comes on the day when direct negotiations for restructuring Greece foundered on the rocks.
Friday?s action has emboldened hedge funds to double up shorts in the beleaguered European currency (EUO), (FXE), (UUP) from already record levels. The head and shoulders topping formation is now so clear on the charts that I am sure it will be used for some future, yet to be written, book about basic technical analysis. Whereas $1.19 looked like a safe bet, $1.14 is now coming into play.
Is This the Euro?s Future?