Massive Economic Uncertainty Continues

So many consumer surveys, but none of them ask the key questions for the next year:
- How much did you accumulate in savings during the pandemic?
- How much do you have left?
- How much of that do you intend to spend?
Without the answers, forecast margins of error are *massive.*

Twitter: Ian Shepherdson

Great questions. Too bad the Fed Chairman can't see the answers.

Risk Off Is Not a Recent Development

The following chart shows how utilities are performing relative to the Nasdaq over the past 6 months. Note that utilities have been outperforming the Nasdaq since Halloween, which oddly enough is the same time I decided to go on a diet. Pure coincidence? Or is it all part of the same risk off mindset? I cannot say.

Chart courtesy of StockCharts.com

First they came for the Nasdaq
And I spoke out
Because the Internet really needs more bloggers stating the obvious

Here's something less obvious. Next they came for utilities? Interest rates have risen. The spread between utility dividends and the yield on the 10-year Treasury bond is dangerously narrow. Those who bought utilities as a bond replacement (such as myself) should be finding less value there now. For what it is worth, it is that narrowing spread in "safe stocks" that triggered my flight to safety just 10 days ago. The situation has definitely not improved.

Plenty of risk out there and not much value. Doesn't feel at all like it did through most of 2021. The headwind to tailwind ratio has increased dramatically.

Oil and Natural Gas Extraction Employment per Capita

As a group, KMI and OKE have risen 9% since I recently purchased them. The high volatility, even when it works in my favor, makes me more than a bit nervous. A primary goal of mine is to not lose sleep over my investments. A secondary goal is to be especially fearful when investors are especially greedy. Are oil and natural gas investors being especially greedy right now? The following chart suggests that we are not.

I thouht about locking in some oil and natural gas gains and reducing my exposure today. After creating this chart, the feeling passed. There seems to be plenty of room left to run.

September 27, 2021
Nasdaq: US Oil & Natural Gas Rig Tally Rises for 3 Straight Weeks

Natural Gas Rig Count Declines in US: Natural gas rig count of 99 was lower than the prior-week count of 100. The count of rigs exploring the commodity was, however, higher than the prior-year week’s 75. Per the latest report, the number of natural gas-directed rigs is roughly 94% below the all-time high of 1,606 recorded in 2008.

This is definitely not investment/speculation advice. There's a reason why these stocks have high dividends and are so volatile. With great rewards come great risks. Only hindsight can show if the risk was actually worth it, and even then it might not be. If one bets their life savings on a triple or nothing coin flip, the math says it is a great bet. It would be little consolation if one loses though.

VPU Performance v.008

Months Elapsed: 8
Total Growth: 12.80%
Annualized Growth Rate: 19.81%
Distribution Yield (TTM): 2.80%

This isn't a sustainable growth rate. There is risk here, especially if inflation isn't transitory and yields don't continue to decay over the long-term. That said, I'm still comfortable holding it.

I did sell about half of my VPU position this month to buy BTI, MO, PM, and VZ. As a group, I'm up 0.66% on those. Would be doing better if I had not overweighted BTI and VZ. No plans to change course though. Feel good about the allocation.

And lastly, also bought platinum Eagles this month. On the one hand, it would cost 3.27% extra to buy them now. On the other hand, I would lose 3.67% if I sold them now. Still fighting the ~7% round trip spread. That was a tough long-term call. Could have bought a platinum fund that charges 0.5% per year instead. I therefore need to hold at least 14 years to make holding the coins the better choice. As an added bonus, holding platinum coins in one's hand beats holding a paper IOU, especially if there comes a time when many paper IOUs become worthless.

The Case for Permanent ZIRP

The following chart shows the natural log of retail trade. When using natural logs, constant exponential growth is seen as a straight line.

As the pandemic hit, the exponential growth of retail sales failed to the downside. Using massive and mostly temporary stimulus, retail sales then overshot the historical channel and failed to the upside. Look where it's headed next. Welcome to the world of barely damped harmonic motion.

Can You Drive a Car With Damaged Suspension?

A broken shock absorber will result in your car bouncing around, as well as excessive rolling, squatting and diving. In other words, it won't be comfortable. Plus, your car will be harder to control, especially at high speeds. For that reason, you should never drive a car with a broken shock absorber at high speeds and avoid sudden turns and abrupt stops.

If you aren't even a bit worried about the current state of the Fed's economic shock absorbers, then maybe you should be?

VPU Performance v.007

Months Elapsed: 7
Total Growth: 8.78%
Annualized Growth Rate: 15.51%
Distribution Yield (TTM): 2.90%

It's just climbing that wall of worry. Thankfully, not much drama nor reasons for regrets. At least not yet.

VPU Performance v.006

Months Elapsed: 6
Total Growth: 4.67%
Annualized Growth Rate: 9.56%
Distribution Yield (TTM): 3.02%

Received a distribution of $1.0140 per share this month which was reinvested at $139.29.

On the one hand, it was a bit disappointing. The distribution was down from $1.2578 in June of 2020.

On the other hand, VPU distributions were extremely volatile in 2020. Last year's abnormally high distribution (as seen here) made for a very difficult comparison this year. In theory, this September's upcoming distribution should have a much easier year over year comparison.

In any event, overall performance is more than safisfactory so far. As a long-term Treasury bond substitute, I have no complaints. At least not yet.

Firmly HODLING with cast-iron hands. They are strong hands, but they're also brittle and prone to rusting. ;)

VPU Performance v.005

Months Elapsed: 5
Total Growth: 6.65%
Annualized Growth Rate: 16.70%
Distribution Yield (TTM): 3.13%

5 months down, 195 to go. I'm thankful that it's much like watching paint dry, at least so far. Definitely not looking for any drama here.

VPU Performance v.004

Months Elapsed: 4
Total Growth: 9.20%
Annualized Growth Rate: 30.22%
Distribution Yield (TTM): 3.06%

The 30-year Treasury yield has risen from 1.67% in December to 2.30%. In hindsight, investing in utilities was a much better plan than locking in a 1.67% yield (the red target in the chart). Since I am not even remotely convinced that the long-term bull market in government bonds is over, those locking in 2.30% today might not be similarly disappointed though. That said, it would take a lot to be similarly disappointed. 30 years at 1.67% nets so much less than 30 years at 2.30%.

I suspect one short-term tailwind for utility investors to diminish as Treasury yields stabilize. Picture a recent safety-seeking retiree invested in low-yielding bonds who is looking at massive losses on those bonds, while also watching higher-yielding utilities actually going up in price. Painful. Is it any wonder that some therefore sold government bonds to buy utilities? As utility prices rise and Treasury prices fall, there is a growing temptation for me to sell utilities to buy government bonds though. The 30-year TIPS yield is currently only 0.02%, so the temptation is still very minimal.

4 months down, 196 to go.

VPU Performance v.003

Months Elapsed: 3
Total Growth: 5.23%
Annualized Growth Rate: 22.60%
Distribution Yield (TTM): 3.17%

VPU paid a $0.9851 dividend today (a 9.5% increase from 2020 Q1). It was automatically reinvested through a DRIP @ $139.874. VPU closed @ $140.51.

From down 4.59% last month to up 5.23% now, it's been quite a volatile start. Live by the sword, die by the sword, live, die, and so on.

3 months down, 197 to go.

M2 and Interest Rates

The following chart shows how much interest would be generated if the M2 money supply earned the same interest as the 10-year Treasury bond.

The M2 money supply is growing exponentially. The 10-year Treasury yield has been decaying exponentially. Ignoring volatility, the end result has pretty much been a constant for 40 years. Behold the power of falling off the gold standard.

Although correlation doesn't imply causation, I don't believe this is a coincidence. Deep down, I think we all know what would happen to our economy if interest rates rose to 10%. Saying that it would not be pretty would be an understatement.

Those expecting interest rates to increase because the money supply has suddenly increased may be very disappointed. To support my belief, why would banks raise interest rates to attract more deposits when they are already flooded with deposits?

As a side note, should we be worried that the chart has become more volatile over the past 20 years?



Nothing lasts forever.

The Sarcasm Report v.283

March 4, 2021
CNBC: Cramer says investors are in denial about stocks: ‘The sell-off is real’

“Right now, even after a 6% decline, we’ve still got a ton of denial,” Cramer said. “People don’t want to believe the sell-off is real. The market’s been so good for so long, and many newer investors have never seen this kind of pummeling, so the downdraft does seem pretty surreal.”

I know that many newer investors probably don't want to read up on ancient history, but the 2020 stock market crash also seemed pretty surreal.

The Sarcasm Report v.281

Some are arguing that there may be excess speculation in the markets, but I take comfort in the bitcoin to GameStop stock price ratio. It’s really starting to stabilize.

The Super Bowl's Black Swan

February 3, 2017
Wells Fargo Quants Tell You How to Bet on the Super Bowl

Wells Fargo Asset Management’s Analytic Investors LLC, the Wall Street quant shop that has accurately predicted 10 of the last 13 Super Bowls against the point spread, says take the Atlanta Falcons and the three points over Tom Brady, Bill Belichick and the New England Patriots.

So what went wrong? 25-sigma event just after Lady Gaga's halftime performance? Nobody could have ever seen it coming! Again.

And here's the best part. I have no assets with Wells Fargo Asset Management. Woohoo! ;)

Wrong Way Gartman Strikes Again?

September 28, 2016
CNBC: October will be 'spooky' month for investors, Dennis Gartman predicts

You have political circumstances, I think, that are going to make October an unbelievably volatile period of time.

The S&P 500 close has been stuck between 2126 and 2164 this month, currently lurking near the midpoint at 2139. Futures are down 0.2% as I type this. Eerily quiet. Too quiet. Spooky.

Meanwhile...

October 25, 2016
The Salt Lake Tribune: Treasury volatility drops to lowest since 2014

"People are looking for a December rate hike. Even with the presidential election, people are comfortable with rates."

Treasury volatility lowest since 2014? Eerily quiet. Too quiet. Spooky.

Don't you see what this means? It's not too late to make big money in October! If Gartman's right, then bet the farm that something "unbelievably volatile" is about to happen in the next few trading days! Woohoo!!

This is NOT investment advice. ;)

Permanently High Plateau?

The following chart shows the 4-quarter moving average of household net worth divided by GDP.


Click to enlarge.

Is it just me, or do risk assets seem especially risky these days?

Source Data:
St. Louis Fed: Custom Chart

The Wisdom of Ian

October 5, 2015
Cramer: Why I'm rethinking my view on the market

From the comments:

I don't hate Cramer like so many do, if any of us tried to do what he does we'd be ridiculed all the time too, but I agree with all of you that his daily flip flopping is a little ridiculous. I'm also pretty sure a long time ago he told people/us to "have conviction", but sadly this is something he seems to lack. - Ian

Traders beware. Looks to get ugly out there today for those long the stock market now that Cramer is bullish yet again, lol. Sigh.

An Oxymoron's Guide to Chinese Central Planning

September 1, 2015
CNBC: What's with China's mixed policy messages?

Beijing's micromanagement of the turmoil in equity markets is only worsening confidence in the world's second largest economy as a series of contradictory policy measures creates further confusion.

Emphasis added. That's a whole lotta cons.

"It seems like they're turning to more sustainable intervention, compared to their earlier intervention methods of direct share purchases."

Still, all this has only exacerbated volatility, drawn international criticism and scared investors away...

Does the contradiction that more sustainable intervention has only exacerbated volatility confuse you and reduce your confidence? There is no need for that to be the case. Let me explain using oxymoron technology.

I  am hopelessly optimistic that, given the exact estimates of their shrinking growth in GDP, the Chinese economy will continue to be awfully good. There will be no crash landing and they can avoid a minor disaster. Good grief, a preemptive intervention isn't the only choice they have left.

I look forward to their next tentative decision. It will no doubt be a wicked good one. China's leaders know where the truth lies. Years from now we will all look back and laugh at this comedic tragedy, that is, if we're not engaged in currency war games.

So, cheer up! Think of it as a slumber party! If you don't invest now, you may end up being a retired worker for the rest of your life. You snooze, you lose! Be all the greater clever fool that you can be! That misplaced trust? It was found missing!!

Good News for Global Stock Market Investors (Musical Tribute)

It may look scary, but it doesn't have to sound scary. Sit back, relax, and enjoy the soothing sounds of volatility.

Backup Quote of the Day

Dammit! I wasted my quote of the day on Cramer and have to resort to using a backup. That means I have nothing left in reserve and there's still nearly 7 hours of day left (in my timezone)! Dangerous!

August 26, 2015
Stocks are ready for more rock and roll

I think we'll have this screeching volatility going on until we don't. - Ward McCarthy, Chief Financial Economist at Jefferies

Mind blowing! This explains why chief economists are paid more than the typical American. It takes years of financial training to accurately predict the future like this! ;)