Despite the some modest similarity in views...
...please do not confuse me with him. An opinion on the recent credit crunch...
Insight: History teaches this is just a bull market correction
By Ken Fisher, chairman of Fisher Wealth Management
Published: August 22 2007 19:33 Last updated: August 22 2007 19:33
On July 18, just past the market’s peak, I wrote here claiming the sub-prime mortgage mess would not trigger a bear market and recession – that there was more bull market ahead. Since then stocks tanked. But I still think I’m right. This is just an archetypal bull market correction. Here is why!
First, back then, and central to my argument was that credit spreads, spreads between high and low quality debt of the same maturity, had widened but just barely – an iota of what happened in the last century’s many credit crunches, including recent ones of 1997, 1998 and 2000-2001.
Then, in late July they widened much more – but still to only about a third of history’s normal credit crunch – before stocks plunged.
More importantly, since then, spreads that had widened the most, like between the Merrill Lynch seven-10 year US government bond index and their comparable junk bond index, have fallen back – while the media seems not to notice. It keeps clucking that the sky is falling, which is by itself bullish. Also, much of July’s credit spread widening, maybe a third, came from US Treasury note rates falling.
In most past credit crunches, Treasury note rates rose.
Conclusion: this is a much ballyhooed, much ado phony credit crunch, not yet recognised as such.
Second, cash is being hoarded big-time, a sign of the late stages of a panic or correction, not early-on in a bear market.
How to know that? For most of history, US Treasury bill rates have been inelastic relative to Fed Fund rates.
The T-bills have been just a hair below the Fed Funds rate. (Note: T-bills can’t exceed the Fed Funds rate for long or banks would borrow Fed Funds endlessly to buy T-Bills).
When that gap, T-bills below the Fed Funds, has widened very far, say more than 1.25 per cent, it has almost always been from the Federal Reserve jerking its benchmark up in the short-to-intermediate term.
If very temporary, such as on the single day of January, 23 1991, early in that new bull market, it means nothing. If longer term, it means Fed tightening which may be bearish. But when the gap widens solely from the T-bills falling – while the Fed Funds rate remains steady – it means non-profitable cash hoarding and that is what is going on now.
That gap widened from late July’s 35 basis points to more than 2.25 percentage points on August 21, with the Fed Funds at 5.25 per cent and the T-bills at 2.9 per cent – all the widening from T-bills falling.
This is classic cash hoarding – and because, as per above, longer term credit spreads aren’t all that wide and widening, it is cash hoarding in anticipation of a phony credit crunch. This is bullish.
It’s what happened late in the 1998 correction or after the 1987 crash. I can’t find it ever having happened early in a bear market. That hoarded cash won’t stay in T-bills for long.
A few months from now this will all blow over and we will wonder what the noise was all about, as is the case with all corrections. As with all corrections the media were on it fast, unlike early in bear markets when they never are. Doomsayers claim we don’t need as big a credit spread now as in past crunches because, “it’s different this time”, as crippled lenders simply tighten standards and do not lend rather than raise rates.
Recall John Templeton’s famous warning that the four most dangerous words in the English language are: “It’s different this time.”
Finally, and as I’ve pointed out for years now, even at today’s slightly higher corporate borrowing rates it’s hugely profitable for the average firm globally to borrow money and buy back shares, increasing earnings per share. After-tax, long-term corporate borrowing rates are historically very low compared with the earnings yield (inverse of the price-earnings multiples).
Picking up that spread will still be mega-profitable after the noise settles.
Firms will resume buying back shares and taking over their peers – and we will keep shrinking the supply of equity and the bull market will resume.
Insight: History teaches this is just a bull market correction
By Ken Fisher, chairman of Fisher Wealth Management
Published: August 22 2007 19:33 Last updated: August 22 2007 19:33
On July 18, just past the market’s peak, I wrote here claiming the sub-prime mortgage mess would not trigger a bear market and recession – that there was more bull market ahead. Since then stocks tanked. But I still think I’m right. This is just an archetypal bull market correction. Here is why!
First, back then, and central to my argument was that credit spreads, spreads between high and low quality debt of the same maturity, had widened but just barely – an iota of what happened in the last century’s many credit crunches, including recent ones of 1997, 1998 and 2000-2001.
Then, in late July they widened much more – but still to only about a third of history’s normal credit crunch – before stocks plunged.
More importantly, since then, spreads that had widened the most, like between the Merrill Lynch seven-10 year US government bond index and their comparable junk bond index, have fallen back – while the media seems not to notice. It keeps clucking that the sky is falling, which is by itself bullish. Also, much of July’s credit spread widening, maybe a third, came from US Treasury note rates falling.
In most past credit crunches, Treasury note rates rose.
Conclusion: this is a much ballyhooed, much ado phony credit crunch, not yet recognised as such.
Second, cash is being hoarded big-time, a sign of the late stages of a panic or correction, not early-on in a bear market.
How to know that? For most of history, US Treasury bill rates have been inelastic relative to Fed Fund rates.
The T-bills have been just a hair below the Fed Funds rate. (Note: T-bills can’t exceed the Fed Funds rate for long or banks would borrow Fed Funds endlessly to buy T-Bills).
When that gap, T-bills below the Fed Funds, has widened very far, say more than 1.25 per cent, it has almost always been from the Federal Reserve jerking its benchmark up in the short-to-intermediate term.
If very temporary, such as on the single day of January, 23 1991, early in that new bull market, it means nothing. If longer term, it means Fed tightening which may be bearish. But when the gap widens solely from the T-bills falling – while the Fed Funds rate remains steady – it means non-profitable cash hoarding and that is what is going on now.
That gap widened from late July’s 35 basis points to more than 2.25 percentage points on August 21, with the Fed Funds at 5.25 per cent and the T-bills at 2.9 per cent – all the widening from T-bills falling.
This is classic cash hoarding – and because, as per above, longer term credit spreads aren’t all that wide and widening, it is cash hoarding in anticipation of a phony credit crunch. This is bullish.
It’s what happened late in the 1998 correction or after the 1987 crash. I can’t find it ever having happened early in a bear market. That hoarded cash won’t stay in T-bills for long.
A few months from now this will all blow over and we will wonder what the noise was all about, as is the case with all corrections. As with all corrections the media were on it fast, unlike early in bear markets when they never are. Doomsayers claim we don’t need as big a credit spread now as in past crunches because, “it’s different this time”, as crippled lenders simply tighten standards and do not lend rather than raise rates.
Recall John Templeton’s famous warning that the four most dangerous words in the English language are: “It’s different this time.”
Finally, and as I’ve pointed out for years now, even at today’s slightly higher corporate borrowing rates it’s hugely profitable for the average firm globally to borrow money and buy back shares, increasing earnings per share. After-tax, long-term corporate borrowing rates are historically very low compared with the earnings yield (inverse of the price-earnings multiples).
Picking up that spread will still be mega-profitable after the noise settles.
Firms will resume buying back shares and taking over their peers – and we will keep shrinking the supply of equity and the bull market will resume.
posted by Odoacer at
10:16 AM
7 Comments:
Fisher has been the most right on cxoadvisory.com. For what that's worth.
Just please get him off my internet browser and bloomberg and I will give him props.
The worst was, when I was working there, the firm was doing a spam campaign. I had to show up to work everyday knowing that the firm I worked for was showing up in inboxes next to messages for viagra and penis pumps.
I am blaming my losses in Silver directly on being friends with le Silverado. It is down huge since this debacle started meanwhile gold unching.
Three Words: Plunge Protection Team
Not a group that cares about silver nearly as much as gold. In addition, the de-leverage globally obviously would hit silver harder as it is a smaller market.
Regardless, I don't trade futures in silver anymore, too volatile for me even.
My silver bars are not going to be sold anytime soon, and I own them outright. I know the intrinsic value of silver per oz is over $100 if we target a 20x gold to silver ratio - not even the 15x ratio found in most bull markets in precious metals historically - based on $2000 gold, which I think is really not much of a stretch.
Adjusted for CPI-U, SGS Alternative CPI-U (Pre-Clinton CPI-U), M2, & M3 then I calculate that the real all-time high in gold was anywhere from $2400, $4171, $3008,to $$4049 respectively based on each adjustment factor.
If I simply take the most conservative number - $2400 based on re-calculated gov't issued CPI-U and divide by 20 then I get $120 per oz of silver which is a 900%+ return vs. a 250%+ return in gold.
Which one do you want to own when the pending UNPRECEDENTED BULL MARKET IN PRECIOUS METALS is under way?
I have made my choice. My portfolio is 45% silver bars, options, & equities and 15% gold coins & equities.
I have 20% in a cash account thats principle is linked to 3 currencies - the YEN, the Swiss Franc, and the Canadian Dollar.
Finally I have the remaining 20% in a variety of derivative securities on Wheat, Soybeans, Orange Juice, Cocoa, & Cotton.
The crop report is going to be a massive disappointment, combined with unprecedented demand for these crops, & a couple idiosyncratic issues in the cases of Cocoa & Orange Juice.
I believe we are at the beginning of the 2nd leg of the commodity mega bull market, but this time the leaders will be the laggards of the first leg of the bull...i.e. precious metals & soft commodities will strongly outperform energy & base metals.
Sorry you lost money, buy bars instead of futures.
I love you bro. I could care less, was just giving you a hard time. I am planning on redistributing selling gold, buying more silver.
Silver - Just got back from the Farm Progress Show in Decatur IL (over 300K visitors in a week) and the farmers I spoke with and leading observers all agree that the bean and wheat reports will disappoint with corn going on the upside which looking at your investments that would play out just fine for you. Although the mkts look to be anticipating this already. Corn fields look horrible with bad droughts in corn belt but this crop more than any other has had years of biotech seeds which even under this drought conditions should results in very strong yields..for those that care
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