Watch For Falling Skies

by: Michael Blair


Chicken little had it right.

At $100 trillion global debt is dangerously high.

At all time highs the stock market is dangerously high.

GDP falls by a percentage point. Bonds yields touch new lows. And the stock market keeps running higher. Is there anything wrong with this picture?

Talking heads wonder what is going on but the general state of the comments is euphoric. That is a recipe for tears later on.

With the Fed tapering you can conclude the drop in the ten-year Treasury yield to about 2.5% is smart money getting out of the way of what might be a hard landing. Or perhaps those bond buyers led by Bill Gross at PIMCO just don't get it. After all, Goldman is on the other side of the bond trade.

Nobel Prize winner Robert Shiller says stocks are trading at 25 times the previous 10 years average earnings, and it may be time to worry about "bubbles" as reported by the New York Times recently.

The euphoria is contagious and dangerous. When stocks rally on news that GDP declined, investors should worry. When stocks rally on news that bond yields are at record lows and falling, investors should worry.

Smart money has been moving out of stocks for a while now while retail money piles in. Retail investors have always found the stock market difficult, largely because they buy at the tops and sell at the bottoms.

Source: Financial Post

In many ways, it is the retail investor whose actions create the tops they buy into and cause the bottoms they sell into. With little first-hand knowledge of the companies they invest in they rely on brokers and advisors who, regrettably, are pretty well always selling (which is where they earn their fees and commissions) and rarely arguing for moving to the sidelines, at least in my experience.

I was at a luncheon with a well - respected Toronto investment firm and their clients yesterday. Some top money managers made short presentations on stocks they think their clients should buy right now. The ideas were solid, well researched and the "story" believable. But their recommendations presumed a resurgence of economic growth in China; strong growth in India; and, a soft landing to the massive quantitative easing that has been "de rigueur" for central banks for a couple of years now. In other words, more of the same.

The same is getting old. Sovereign debt has risen, not fallen worldwide. Household debt has risen, not fallen worldwide. A "world debt clock" shows an alarming debt level comprising several key economies that readers can watch growing in real time. Bloomberg reports world debt now exceeds $100 trillion, up from $70 trillion in mid-2007, only a few years ago. Interest rates have nowhere to go but up. Every percentage point rise is equivalent to about $700 billion that someone needs to pay. One way or another, that someone is you.

Unemployment really cannot go much lower despite the tide of people pointing to the "hidden unemployed," at least in my opinion. A lot of "boomers" like me have just left the workforce for good, we hope. Companies with terrific innovative capabilities are spending their money on stock buybacks and dividends, not on plant and equipment.

Source: Wall Street Journal

The rubber will hit the road within a few years, or a few months, or a few weeks. It will just take something to trigger it. A default of a major Chinese bank; a sovereign default like Argentina; Turkey; or, Ukraine could do it. Governments and central bankers plod merrily on their way almost oblivious to the issue of debt. It must come down.

The theory is that the world economy can grow out of its debt. Real growth of 3 or 4% is about what the world's capacity for sustained growth is as I see it, with demographics taking a toll as baby boomers retire. Longer lives mean higher health costs. Fewer people of working age in relation to retired people means higher taxes must be levied on those who work.

In a world with a $70 trillion economy, 3% growth can add $2.1 trillion of GDP. A two-percentage point rise in interest rates globally can wipe that out overnight.

This is a time for caution. Smart money has it right. Take something off the table and let someone else be the last man standing. It is OK to believe stocks will rise forever, just as long as you don't bet your livelihood on it. Save faith for your Church. The stock market will not care what you believe but your mortgagor will care if you can't meet the payments.

I have recently moved to a greater cash position by selling my long-term holdings in a number of stocks including Intel (NASDAQ:INTC). I am bullish on Intel but see the risks in the market far outweighing the prospects for a run up in Intel shares. I will buy back in when we have a deep enough correction that I can come out from my shell.

I have added a bit of IAMGOLD (NYSE:IAG) and a few junior mines and oils trading at deep discounts to any sensible valuation. Cash makes up my largest holding and while it does not earn anything, the fact that it is not going down in price makes me comfortable.

Good luck on your investments.

Disclosure: I am long IAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.