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Tom Armistead
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I'm a well-informed retail investor and formerly posted on SA in order to expose my thought process to critical examination and comment from readers. It made me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that... More
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  • A Note To John Hussman

    John, it's not going to happen.

    The reason is, it already happened, and you missed the boat. You stood there pontificating and procrastinating as the gravy train pulled out of the station and never looked back.

    When I was a kid, I went to this very special school. All the other kids were fairly bright, but kind of crazy. Barney was about my age, took an interest in aerospace and aviation, and had this escape fantasy. He was going to build an airplane, or maybe it was a glider, out of materials at hand, and fly away.

    He labored for days, constructing this contraption. We looked at it, and all we saw was the rough outline of a glider, formed from dead branches lashed together with bits of twine. We kept telling him, it's never going to fly. He kept insisting it would. He saw a sleek jet, shining in the sky as it carried him off to freedom.

    Finally somebody (not me) did the inevitable: they destroyed Barney's airplane, in the middle of the night. He found it lying in a heap, and never attempted to rebuild it.

    John, I hate to say this, but the S&P 500 is not going to go down to 400 so you can get a guaranteed 20% return for eternity. It doesn't work that way. You can pound on the pulpit, and cite Shiller statistics going back to 1871, chapter and verse, but you are not going to be rescued from irrelevance by this improbable occurrence.

    You can fiddle with dead statistics and data-mining until the cows come home, and prophesy until you are blue in the face, but the markets aren't going to listen. And you will never be wafted into that sweet future you envision, riding the sleek jet you imagine, looking down from 30 thousand feet, and saying "I told you so."

    The best thing for you to do John would be to go out and play with the other kids, as crazy as they are, and learn the rules of the game, as crazy as it is.

    Disclosure: I am long SPY.

    Feb 07 7:31 AM | Link | 20 Comments
  • Ten Year Treasuries As A Fear Guage

    I've been watching the interplay of the earnings yield on the S&P 500 (SPY) and the interest rate on Ten Year Treasuries with interest, not to mention wonder and awe. The question comes up, what drives it?

    The conventional wisdom is: QE drives it. Just as soon as the Fed gives up on their program of financial repression the Ten Year will head upward, to its long-term average and beyond, as bond vigilantes beat the drums and announce the bankruptcy of the US of A.

    Maybe Fear drives it. The world is an unstable place, and everything is inter-related. China is a black box, but the odors emanating from it aren't really that pleasant: no floral overtones, that's for sure. Russia is fairly transparent, in contrast, but what we see is ugly, wretched excess of crony capitalism. Emerging market currencies are in turmoil. Whether that arises from their inherent weakness or from the cumulative effect of meddling by Financialists from the Axis of Evil that runs from The Street to The City is open to question.

    The thing is, the US government is in charge of a country that has tremendous (although diminishing) resources in terms of the rule of law, prudential regulation, and enforcement of and compliance with taxation. Bonds are promises, dependent on the ability and willingness of the promiser to deliver over the long-term future. The US government will print you some dollars when the note comes due, and raise some of the money by taxation.

    My point would be, that blue chip US corporations are better capitalized than their country's government, better managed, and responsive to shareholders, as opposed to an army of lobbyists and PACs all focused on their own special interests. To my way of thinking there is less to fear owning PG, JNJ, KO et al than in owning obligations of the USG.

    Disclosure: I am long SPY, PG, KO.

    Tags: SPY, JNJ, PG, KO
    Feb 05 8:15 AM | Link | 2 Comments
  • STLFSI, Risk Premium And Halcyon Days

    Intuitively, it seems that financial stress should be related to risk premium: the higher financial stress, the higher risk premium. After plotting the two items together, I checked and found no meaningful mathematical relationship. However, looking at them together, there are a number of observations that may be useful.

    (click to enlarge)

    Note the two items are not expressed in the same units: risk premium is in % while the St. Louis Financial Stress Index is in standard deviations.

    Defining a Bubble

    From 1999 to 2002 the risk premium was negative, which I interpret to mean stocks were in a bubble for quite a while, even after the techs started to return to earth.

    Halcyon Days

    From the middle of 2003 until the middle of 2007 financial stress stayed in negative territory, meaning it was lower than average. The risk premium bobbed around in a range that averages out to 1.6%. Those were the days of the Greenspan Put, when the maestro had your back and conditions were calm and generally favorable.

    The Crisis

    When the Financial Crisis struck, financial stress went through the roof, taking the risk premium with it. As the situation improved, they went down in tandem.

    Irrational Fears

    When the European Crisis hit, it ignited fear of contagion that proved to be irrational. At that point the US financial system had been stabilized and financial stress here was in a manageable area throughout, thanks in good measure to the Fed's consistent easy money stance.

    As financial stress has gone below zero and stayed there, the risk premium has been coming down steeply, manifesting in higher stock prices. That raises the question, how much further can it go?

    More Halcyon Days?

    It doesn't take a very active imagination to extend the lines into 2014, with financial stress getting down below minus 1 and risk premium settling in a range around its average of 2%, or perhaps as low as the 1.6% mentioned above.

    There is beginning to be some speculation that the 10 year yield may not rise as rapidly as some expect. The argument would be, how much risk free debt is there, compared to what we thought we had in 2007? Meanwhile, demand is higher. So the laws of supply and demand may keep the 10 year below its historical average in the area of 4.4%.

    China could be the wild card here. The country has an extraordinary amount of bad debt that is not being dealt with. There have been the usual tremors that precede a major earthquake. Their wealthy have been leaving in record numbers, taking their money with them, as much as possible. That's very similar to how the wealthy behaved in Greece, they all bought properties in expensive areas of the UK, and moved their money offshore.

    I don't have a strong opinion. The Chinese situation will most likely unwind in a way that leaves the Central Government holding the bag in the form of a heavy debt load. That's what happened here. After re-enacting the Perils of Pauline over the European situation, the US equity markets may not over-react to a Chinese financial crisis. Debt of the US Government will remain in demand, especially as the budget deficit evaporates in the hot sun of a recovering economy.

    Jan 20 10:00 AM | Link | 2 Comments
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