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John Overstreet

 
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  • Emerging Markets Are In Trouble
    Yesterday, 3:59 AM DIA, EEM, EEMA 19 Comments

    Summary

    • Commodity prices and the dollar suggest emerging markets will suffer, especially relative to developed markets.
    • The downturns in oil, nickel, silver, and gold are all particularly ominous.
    • China may be the next domino in the emerging market crisis to fall.
  • Does Gold Disprove Marginal Utility?
    Thu, Sep. 18 GLD, IAU, SGOL 61 Comments

    Summary

    • Looking on from Mars or from Omaha, it would seem that a vital commodity like water would be infinitely more valuable than a non-essential commodity like diamonds.
    • The classical labor theory of value and the now-standard neoclassical theory of marginal utility attempt to explain why non-essential commodities are typically more expensive than essential ones pound for pound.
    • The value of world gold supplies as determined by market prices tends to match or exceed the value of most other primary commodities, which suggests that utility plays no role.
    • If marginal utility were a sufficient account of prices, it could explain both the difference in unit prices and the parity of aggregate prices for gold and other commodities.
    • If prices are determined by simple supply and demand, then the size of the gold market suggests that humans collectively have a higher demand for gold than for essential goods.
  • Big Macs, Catch Up, And The Dollar Index: Thoughts On The Future Of Global Growth (Part II)
    Wed, Aug. 13 SPY, UDN, UUP 10 Comments

    Summary

    • The richer a country is, the more likely its nominal exchange rate is correlated with its real exchange rate.
    • According to the "Penn Effect," the absolute level of a country's real exchange rate is virtually an inverse function of real per capita GDP.
    • Exceptionally high real exchange rates among rich economies seem to be linked historically with exceptional GDP growth in poor countries over both the long and short terms.
    • Miraculous growth in emerging markets and the rise of the Penn Effect appear to be contingent on American dominance of the global economy.
    • Were another country to displace America in its hegemonic role, long-term growth rates among the catch-up countries might collapse.
  • Big Macs, Catch Up, And The Dollar Index: Thoughts On The Future Of Global Growth (Part I)
    Fri, Aug. 8 UUP, UDN, SPY Comment!

    Summary

    • The global economy is well into its third emerging markets crisis since the end of Bretton Woods, but there has been no panic yet.
    • Historically, investing in the global growth story has been very risky over both the short and long term.
    • The best time to risk exposure to emerging markets may be after significant appreciation in the dollar against rich-world currencies.
    • Previous emerging market panics seem to have been triggered by Fed tightening.
    • In light of weak global growth and commodity prices in this cycle, tightening by the Fed in the coming months may trigger the panic that has been missing so far.
  • Water And Diamonds, Iron And Gold: The Problem With Commodity Prices
    Editors' Pick • Tue, Jul. 22 CRUD, DIA, DJP 14 Comments

    Summary

    • Why do basic commodities (water and iron) and precious commodities (diamonds and gold) cost the same?
    • Changes in yields, especially the earnings yield, have historically been linked to changes in aggregated commodity prices but less so in individual commodity prices.
    • Individual commodity prices and levels of production seem to adjust to aggregate changes in a systematic way.
    • In recent decades, gold and silver prices appear to be inversely correlated with stocks but positively correlated with basic commodity production levels.
    • Emerging markets, commodity prices (especially for expensive commodities), and basic commodity production levels appear to be due for another major collapse.
  • Blood And The Street: Do Foreign Policy Crises Matter?
    Wed, Jun. 18 SPY, DIA, QQQ 2 Comments

    Summary

    • Investors often worry during geopolitical crises, and market commentators attempt to predict their outcomes.
    • The history of American markets suggests that crises are typical during bull markets.
    • Considering the inverse correlation between stocks and commodities over much of the last century, it is possible that crises are characteristic of stock market booms.
    • If there is a time to worry, it is only after oil prices have spiked and when geopolitical crises take on a primarily anti-American tone.
    • The current crop of crises do not appear to pose immediate threats to the market.
  • Playing Chicken With Bulls And Bears
    Wed, Jun. 11 DIA, QQQ, SPY 18 Comments

    Summary

    • CAPE does a poor job of predicting bullish returns in the years before market tops.
    • CAPE's failures to predict returns in these instances can be used to time the market instead.
    • We may be nearing the end of this bull market, but it probably has a couple of years left in it.
  • Earnings Growth Suggests Things Will Get A Lot Better Before They Get Worse
    Mon, Jun. 2 DIA, QQQ, SPY 24 Comments

    Summary

    • By looking at the shape of earnings growth over the course of a business cycle, we can make predictions about future stock performance.
    • The history of earnings growth and the stock market indicates that medium-term returns are propelled by brief, reflexive, contrapuntal bursts in earnings.
    • Earnings grew nearly 800% in the twelve months ending in June 2010 after collapsing over 80% from their June 2008 levels.
    • If we can extrapolate from the history of earnings growth, we can estimate that the S&P 500 will roughly double by the end of the decade.
    • History also suggests that the gains could be disproportionately skewed to the 2014-2017 period.
  • Stocks And Bonds Risk Going Parabolic
    Tue, May. 27 SPY 26 Comments

    Summary

    • There is an increasing likelihood that interest rates will decline significantly over the next two to three years.
    • If rates decline, stocks are likely to move up with bonds.
    • If falling long-term yields flatten the yield curve sufficiently, that could increase the risk of a market crash.
    • In a low-yield, low inflation environment, however, those crashes tend to be preceded by periods of exceptional returns.
    • This bull market will likely remain intact until inflation picks up.
  • CAPE Has A Deflation Problem And Earnings May Be The Solution
    Sun, May. 18 SPY 16 Comments

    Summary

    • CAPE appears to do a poor job of predicting returns (particularly to the upside) during periods of volatile earnings and deflationary pressure, such as in the late 1990s.
    • Stock market performance appears to be positively correlated with earnings growth only during periods of volatile earnings and deflationary pressure; otherwise, it is negatively correlated.
    • Earnings volatility appears to be heightened during periods of very low inflation and low yields.
    • Insofar as we are in a period of volatile earnings and deflationary tendencies, CAPE will probably be an unreliable guide for the remainder of the decade.
    • This is additional evidence that this market will likely post strong returns for the remainder of the decade, although there is always need for more research and analysis.
  • CAPE, Earnings Volatility And Stock Returns: 1871-2019
    Editors' Pick • Tue, May. 6 DIA, DJP, GSG 11 Comments

    Summary

    • Eliminating earnings volatility, as in Shiller's CAPE, reduces the P/E ratio to shadowing deviations from the long-term moving average of stock prices.
    • Stocks behave contra-cyclically during bull markets, becoming inversely correlated with commodities, inflation, interest rates, and earnings, but in this article, we will consider earnings volatility itself, from a few perspectives.
    • Medium-term (five- to ten- year) fluctuations in stock prices seem to be partially predicted by fluctuations in earnings volatility, although it is not especially clear how or why.
    • Based on an extrapolation from the historical relationship between P/E, earnings, and stocks, it appears that a stock market boom will continue until the conclusion of the decade.
  • The Roaring Twenties Are Back
    Thu, Apr. 24 CRUD, DIA, GLD 19 Comments

    Summary

    • This market has all the characteristics of a strong bull: weak commodities, a wide yield curve spread, disinflation, P/E expansion, and counter-cyclical stock behavior.
    • This market and the crisis that preceded it is often compared to the Depression, but a far better comparison is the Roaring Twenties and the 1921 crisis.
    • That leaves us with three difficult questions to answer: when will this bull market end, what will the aftermath look like (Depression? Stagflation?), and do we have any policy alternatives?
    • The market will probably grow for a few more years, and the aftermath will probably be pretty grim, as our understanding of market forces has barely progressed since 1929.
  • Currencies, Inflation And Global Stock Indexes: Are Devaluations More Good Than Bad?
    Wed, Mar. 26 Comment!

    Summary

    • Currency strength and inflation do not predict long-term global stock index performances.
    • Most countries' stock market indexes tend to negatively correlate with their exchange rates (i.e., positively correlate with currency strength) over the long run.
    • But, those countries whose stock market indexes most strongly correlate with their exchange rates (negatively correlate with currency strength) clearly tend to outperform markets with strong currencies.
    • This effect seems to be stronger among high-performing markets, but may hold among weaker performers, too.
    • The central questions that remain are whether or not this is a necessary condition of global markets and how total return data would figure into this kind of analysis.
  • Politics, Profits, And Price: 3 Reasons I Am Bearish On Thai Stocks
    Sun, Mar. 2 TF, THD, TTF 1 Comment
  • Shiller's CAPE: A Statistical Fluke
    Editors' Pick • Tue, Jan. 21 CAPE, SPHQ, HUSE 46 Comments
  • Southeast Asia's Crisis: Global Bust Exacerbating Structural Tensions
    Wed, Jan. 1 EWM, IDX, TTF 8 Comments
  • Putting 2014 In Perspective
    Dec. 19, 2013 BIK, DBC, DIA 4 Comments
  • How Do Stocks Impact Inflation?
    Dec. 5, 2013 SPY 13 Comments
  • Gold And Silver: No More Manipulation!
    Dec. 2, 2013 DBA, DBC, DIA 55 Comments
  • Summers And Krugman On Bubbles And The Great Stagnation
    Editors' Pick • Nov. 25, 2013 DIA, GLD, GSC 88 Comments
  • ZIRP And The Secular Effect: A New Way Of Interpreting The Yield Curve
    Nov. 18, 2013 DIA, GLD, GSC Comment!
  • There Is More Than A Mere Bubble In The Stock Market
    Nov. 12, 2013 DIA, GLD, GSC 116 Comments
  • Markets Are Neither Efficient Nor Irrational (Part 3)
    Nov. 7, 2013 SPY 7 Comments
  • Markets Are Neither Efficient Nor Irrational (Part 2)
    Nov. 1, 2013 SPY 6 Comments
  • Markets Are Neither Efficient Nor Irrational (Part 1)
    Oct. 25, 2013 DIA, EWZ, GSC 15 Comments
  • Be Bullish: How Interest Rates, Profits And The Stock Market Interact
    Oct. 15, 2013 SPY, IEF 13 Comments
  • Secular Signals Remain Very Bullish, Cyclical Signals Slightly Less So
    Jul. 24, 2013 OIL, DIA 5 Comments
  • Bernanke Is Wrong About Gold
    Jul. 19, 2013 GSG, GLD 28 Comments
  • Silver: A Mere Metal?
    Apr. 29, 2013 SLV, GLD, GSC 9 Comments
  • Gold: A Bright Shining Lie?
    Editors' Pick • Apr. 18, 2013 DIA, GSC, OIL 235 Comments
  • Cyclical Cross-Currents In Treasuries: Which Way To Swim?
    Apr. 8, 2013 IEF Comment!
  • Are Bonds Signaling A New Bear Market? Keep An Eye On Japan
    Editors' Pick • Apr. 8, 2013 BIK, GSC, IEF 19 Comments