What Is Really Bugging the Market

John Mauldin

My good friend David Rosenberg, Chief Economist at Gluskin Sheff, has long been one of the biggest draws at my annual Strategic Investment Conference. I had always taken him for a “permabear.” Then three years ago, Dave shocked us by announcing in no uncertain terms – in his usual fire-hose delivery of hard data and brilliant analysis – that he had turned decidedly bullish. His call was of course spot on.  

Dave will once again kick things off at this year’s SIC, and you’ll want to be there to catch his every valuable, investable word. David is only one of our all-superstar cast. At SIC we have only headliners, people who would keynote any other investment conference. You get to see them all in one place.

I can say with some justification (and a measure of pride) that SIC is the best economic gathering on the planet, and SIC 2016 is going to be our best yet. The dates are May 24-27, 2016, and this year we’ve moved the conference to Dallas, my home turf, with easy access from anywhere in the world. Just as you’ve come to expect, we’re tackling a big theme: “Decade of Disruption: Investing in a Transformed World.”

In the decade ahead, you and I will not be able to successfully invest in the same way we did in past decades. Our world is transforming at an ever-accelerating rate, and we’re going to need a more comprehensive understanding and better tools if we’re going to invest in that world profitably.

To see how SIC16 will help you with those aims and to get all the particulars on registration, click here. And don’t tarry: if you register by January 31 you’ll save $500 off the walkup rate.

And now let’s get back to Dave. To give you a taste of where he’s going these days, I’ve asked him to let me excerpt a key section from this morning’s edition of Breakfast with Dave. He asks, “What is really bugging the market?” And then he tells us, with the clarity and conviction that only a very few people in our business can muster.

OK, time to sign off and hit the sack! I just landed in Hong Kong and I already feel the jet lag oozing through my pores. I’ll be back this weekend, though, with my annual forecast issue, and I promise it will make for lively reading. I had hoped to finish it on the flight over, but I just had to finish catching up on 2015 and clear the decks for the big year ahead of us.

Your thinking that disruption means opportunity analyst,

John Mauldin, Editor
Outside the Box

What Is Really Bugging the Market

By David Rosenberg, Gluskin Sheff + Associates Inc.
Excerpted from Breakfast with Dave, January 6, 2016

The overriding problem for the equity market remains one of valuation – not that we are in bubble territory, but more that the stock market is still quite expensive.

The price action of 2015 failed to resolve one thing, which was to correct the excess valuations that held back the market last year as it likely will this year too.

The trailing price-to-diluted earnings multiple is 21.4x versus the historical norm of 17.5x, while the forward multiple on the S&P 500 is 16.8x, and again, the mean has been closer to 14.4x. The Shiller cyclically-adjusted price-to-earnings (CAPE) ratio is 26 and the long-run average is 23. Capish?

So here we have the stock market, according to many measures, trading close to three multiple points above historical norms.

Like the personal savings rate in the macro world, the price-earnings multiple in the financial world is a behavioral aggregate – a signpost of confidence, if you will. A lower savings rate is symbolic of higher confidence over income or wealth prospects, and similarly a higher multiple is a characteristic of rising investor confidence over the outlook for market returns.

The problem is that we do not have the clarity, certainty or visibility across the globe, whether it comes to policy, oil prices, regional conflicts or China, to warrant multiples being this far above the norm, if at all.

So, 2016 is likely going to be a year of transition and one where uncertainty is going to dominate the macro and investing landscape.

Oil prices

The fact that oil prices could not catch much of a bid given the conflict between Iran and Saudi Arabia should have the bulls shaking their heads.

The reality is that supply is an impediment at a time when there has still not been a dent in U.S. production and OPEC has been pumping out 32 million barrels per day (far above its quota) for seven months in a row.


The severing of diplomatic ties between Iraq and Saudi Arabia could be problematic for investors risk tolerance if the situation turns worse, as in some form of military response. At a minimum, it complicates efforts to resolve the internal crisis in Syria.

It also further exposes the failure of U.S. foreign policy under the current administration (underscored by the surge in Aerospace & Defense sector stocks last year).

The Fed

Several monetary policy makers, including San Francisco Fed President John Williams (who is reportedly close to Janet Yellen), struck a hawkish tone at the regional bank’s symposium.

Also, Cleveland’s Fed President Loretta Mester sounds very hawkish and has openly argued that the Fed should turn a blind eye to the stock market (the rotated voting membership this year has a slightly more hawkish tilt than it did in 2015).

Finally, there was nothing out of Fed vice chair Stanley Fischer to suggest that the Fed is going to stop at one or two hikes.

The Fed has never hiked rates with the ISM manufacturing moving below 50, let alone for two straight months now. This a transition, first away from quantitative easing, and now away from zero interest rate policy, but with a twist since the central bank has never tightened policy with manufacturing under so much duress.


The consensus is looking for around 8% S&P 500 earnings growth this year and yet the analysts have dragged the earnings revision ratio down to the lowest levels in eight months (to 0.55x for the three-month ratio in December from 0.58x in November and 0.74x in October; declining now for four months running).

Another transition will be what rising wage growth will do to profit margins – a case of what is good for Main Street may not be so good for Wall Street (call it mean reversion from the past six years of 18% equity returns and a mere 2% growth trend in the broad economy).

Local politics

Another transition this year is the U.S. election this November and if Byron Wien is prescient on his “surprise” pick for the Republican nominee being Ted Cruz, and the Democrats take over control of the Senate – well, it will likely be tough to build a positive market view from such heightened uncertainty.

As well, Donald Trump is not going out with a whimper either – there may be blue-collar voters who would be happy if he became President but I’m not sure the stock market would take it well (ditto for Ted Cruz with a Democratic-controlled Senate ushering in more years of gridlock).


While I am personally not bearish on the economy, it remains a “show me” situation and many pundits are becoming concerned over possible capital flight from any additional yuan devaluation.

Also, signs that the rebalancing from fixed investment and industrialization towards the consumer and services may not be going as smoothly as earlier believed are unnerving investors too.


There is uncertainty over how the influx of migrants will affect Germany; how the U.K. will vote on the European Union referendum; signs of foot dragging from Greece on pension reforms; and secessionist pressures surfacing in Spain.

The European Central Bank is at or near the bottom of the barrel when it comes to monetary easing at this point – the laws of diminishing returns may be setting in.

That said, some of the recent data flow has been encouraging.


Uncertainty in Japan regarding the efficacy of Abenomics and whether the Bank of Japan has done enough, notwithstanding how aggressive it has been, to fully thwart the ongoing deflation threat. But at least the latest recession last year managed to get revised away.

U.S. growth

While autos, housing and consumer spending are doing fine, exports, commercial construction, transports and manufacturing clearly are not.

That the Atlanta Fed’s GDP “nowcast” is tracking growth for Q4 at a 0.7% annual rate, down from 1.3% just a week ago and 2.0% back in mid-December – that is a sharp downdraft in a short time frame.

Manufacturing may only be 10% of GDP, but it does touch a lot of other ancillary sectors and only six of 18 industries polled by the Institute for Supply Management posted any growth at all in December.


This comes back to the Fed and maybe the bond market, but if there is complacency out there, whether in the bull or bear camp, it is that inflation is dead. It is not. It may be comatose, but not dead.

I sense that 2016 will bring with it more price gains in rents, big accelerations in health services, health care premiums, and wages. Core service sector inflation is already approaching 3% – imagine if the dollar stopped going up and commodities stop going down, as such preventing goods sector deflation from acting as an antidote?

Bottom line

As I said on CNBC yesterday (yes, Joe, I am also a strategist), I am not looking for a down year for the S&P 500 but am cautious over the near-term (flat is the new up).

Since I do not see a recession, and you only get successive down years in a recession, I doubt therefore that we will suffer the ignominy of another retreat in the S&P 500.

That said, after seeing returns more than triple this cycle and price-to-earnings multiples above historical norms, it goes without saying that we have borrowed returns from the future in a very major way.

As was the case in 2015, if you are buying the market, be happy with the reinvested dividend comprising much if not all of your total return.

Again, like 2015, the key to doing better than that will involve agility, opportunism, more discipline than normal (as in raising and deploying cash at the appropriate times), and having concentrated positions in the right sectors (such as being long the U.S. consumer last year which would have garnered an 8%+ return).

In general, anticipate an environment where active will beat passive investment management. We had a taste of this in 2015; expect much more of the same this year.

As for the economy, I think we will be just fine, and there will be more of the “neither boom nor bust” cycle.

Consumer spending in real terms is up 3.2% on a YoY basis. New home sales are up 9%. Housing starts by 16%. And both auto sales and production are up 6%. So while still soft overall, keeping in mind how tight monetary policy is given the dollar strength, the restraint in financial conditions from the surge in high-yield credit spreads, and a still restrictive fiscal stance, the economy is doing all right.

The key will be when net exports finally stabilize and at what point the business sector will feel more comfortable over the outlook to start expanding. Not until these two areas start to gain momentum can we talk about the U.S. economy, in aggregate, reaching or exceeding a 3% annual pace.

Now that would probably justify multiples closer to where we are today, but is a trend that has remained elusive for a long, long time – we have not seen a “three-handle” on real GDP growth since 2005. Is that you, Godot?

I mentioned the High-Yield corporate bond market so I will finish off there. This is where the best risk-reward opportunities may well reside for the coming year.


US dollar will dictate broad market performance in 2016

Interplay of US rates and currency critical in setting global tone
The pivotal determinant of 2016 for asset allocators will be the trajectory of the US dollar.
There are two possible scenarios that could play out.
Firstly, if excessive dollar gains were to choke the world’s largest economy, the growth differential between the US and the rest of the world would close. That is clearly an unwelcome scenario.
In the second scenario, dollar strength does not become excessive and the US expansion is reinforced, giving space for global growth to stabilise or accelerate. In this way, the gap between growth rates closes not through US economic weakness but rather through a global pick-up.
The outlook is starkly different depending on which scenario prevails. Risk assets struggle in the first scenario. In the second scenario risk assets accelerate, potentially leading to an eventual change in leadership from developed to emerging market assets.

We think the second scenario will prevail — the more virtuous end to the US dollar cycle — but the interplay of interest rate differentials and dollar valuation early in 2016 will be critical in setting the market tone across all major asset classes over the course of the year.
The path of the dollar in 2015 roughly tracked the “will they or won’t they” evolution of expectations of Federal Reserve policy.
As we move through the early rounds of the Fed’s rate normalisation in 2016, we would expect some further support for the dollar.

How this plays out depends on the balance among valuation, terminal rate expectations, and the path of Fed tightening.

Only once the path and level of rates are accepted by the market can we expect growth differentials between the US and the rest of the world, and the dollar’s overvaluation versus long run purchasing power parity (PPP) estimates, to drive the currency’s trajectory.

Recently, the sensitivity of the US dollar to yield differentials has increased markedly. This is perhaps unsurprising as the world finally starts to emerge from a prolonged era of zero interest rates, and policy divergence across major economic blocs reaches new highs.

In the early stages of the Fed’s policy normalisation we expect a repricing of the path of Fed hikes to provide support for the dollar. The market currently prices just two hikes each in 2016 and 2017; we believe that the strength of the US domestic economy warrants four per year.

Ultimately a terminal rate near 3.5 per cent rather than about 2 per cent, as is currently priced, will lend support to the dollar. But even allowing for this quicker pace of hikes, and higher terminal rate, the coming rate rise cycle will probably be shallower and longer than any in recent history.

Our expectation is for modest further upside to the US dollar in early 2016 as the start of the cycle creates a new high-water mark in global policy divergence.
The dollar is now overvalued on most of our metrics, however, and over the course of the year we anticipate that valuation headwinds, as well as a modestly better growth outlook in other regions, will limit further dollar appreciation.

We anticipate that risk appetite will recover further as the currency drag on US earnings eases, and as the upside risks to the dollar subside through the year, the outlook for emerging market assets has scope to brighten.

While stretched valuation can arrest the appreciation of the dollar, a reversal in the trend likely requires a closing of the growth differential to the rest of the world.

Since the global financial crisis, the world economy has been underpinned by the steady, if unexciting, expansion in the US.

As a result we weathered the eurozone crisis, the slump in commodity exporters, and, later, the slowdown in trade and manufacturing that centres on China’s economic rebalancing.

In some ways the US currency is now doing what it should — acting as a natural governor on growth and policy until growth differentials relax.

Simply put — the longer dollar strength persists, the more 2016 will look like 2015, but the sooner the dollar stabilises, the quicker we will see sentiment recover and emerging economies repair.

John Bilton is global head of multi asset strategy at JPMorgan Asset Management

Don’t Blame Oil for Global Chaos

Cheap energy is a symptom, not a cause, of the world’s geopolitical mess.

By Holman W. Jenkins, Jr.


Photo: Getty Images

Since 1918 and the full flowering of the automobile age, the average U.S. domestic price of gasoline has rarely fallen below $2 or risen above $4 as measured in 2015 dollars. At today’s price of $1.99, gasoline is approaching its all-time low in inflation-adjusted terms.

In 1965, gasoline sold for 30 cents. In 1965 dollars, today’s price is 26 cents. So, yes, the current oil price depression is not ordinary.

Those who see a price recovery coming soon note that expensive projects to wring oil from Arctic waters or Canadian oil sands or the deepest Gulf of Mexico are being halted. Once halted, they won’t easily be restarted, so oil in the future will be undersupplied once today’s excess inventories are burned off and producers are done eking out revenue based on capital they’ve already spent.

Those who argue “lower for longer” point to U.S. shale players, whose projects have shorter-time horizons and can ramp up quickly and set a natural cap on rising prices. Oil bears also note that most of the world’s reserves are controlled by revenue-hungry governments that aren’t eager to put potentially restive oil workers out of jobs just because the price is low.

Take your pick of forecasts. Just don’t make the mistake of thinking today’s rampant geopolitical instabilities are caused by depressed oil.

Vladimir Putin’s economy was hitting a wall, and Russia was turning to foreign adventures to boost its leader’s domestic popularity and justify opposition crackdowns, well before the price collapse. Oil was selling for $104 a barrel when Mr. Putin annexed Crimea in March 2014. The Arab Spring, progenitor of so many soured dreams from Egypt to Libya and Syria, came during a period of high and rising oil prices. Oil didn’t drop below $100 until July 31, 2014, when the region was already in flames.

If anything, geopolitical causation now runs the other way. Markets once assumed that instability, particularly in the Middle East, meant rising oil prices. Now instability means falling oil prices. Saudi Arabia, which peak oil theorists insisted was on the verge of exhausting its major fields, recently tweaked production to a record-beating 10.5 million barrels a day, low prices be damned. The motive: Riyadh’s undeclared war against Iran and Iran’s ally-of-the-moment, Russia.

Russia, whose energy development was expected to decline once sanctions cut it off from Western capital, surprised many by setting a post-Soviet record of 10.8 million barrels a day in December. Helping was the Kremlin’s willingness to slash the exchange value of the ruble, cutting its oil companies’ domestic costs even though it also hammered the standard of living of the average Russian (40% of whose food is imported). This Russian-Saudi game of chicken, occasioned by Mr. Putin’s meddling in Syria, is now the key driver of a global oil glut.

At the same time, cheap oil failed to provide the hoped-for elixir for Western stagnation.

Causation again seems to run the other way. The West’s stubborn growth disappointment, now joined by China’s, is a factor keeping oil depressed.

Some favor the clinically neutered term “secular stagnation.” A more accurate diagnosis suggests the West has hit a crisis in its post-World War I expansion of government, to the point where growth and dynamism seem permanently to have fled.

In Western Europe and Japan, though it seldom gets mentioned, the only political debate today is between the supply-side reformers and the footdraggers. Even the politics of energy and climate is not the exception it might seem, as Germany, Spain and Britain trim handouts for renewables.

The U.S. has been an outlier under President Obama. Apparently the difference between 0% growth and 2% growth is enough to keep alive a significant political force that believes the time is ripe for ambitious upsizings of government. Oil again has played an unexpected geopolitical role: The U.S. likely would not have experienced 2% growth if not for oil and gas fracking.

President Obama’s leadership itself may be a historically exogenous factor. Not many, in the conditions in which he took power in 2009, would have judged the historical moment as beckoning a bigger welfare and regulatory state, modeled on Europe circa 1945-75, at the expense of jobs and growth.

Mr. Obama looked out on the world and also saw differently than most of us when he decided that removing the U.S. as an obstacle to Iran’s nuclear ambitions would, in 20 or 30 or 50 years, pay off in a more peaceful, cooperative Iran.

We should live so long. To those not gifted with such visions, the real message today is to forget the shockingly steep oil depression, which is a symptom not a cause. The great historical challenge is still the industrial world’s debt and stagnation, which won’t yield without a basic rethinking of its tax codes, regulatory systems and welfare missions.

The Danger of a Weak Europe

Joseph S. Nye

European Union flag

CAMBRIDGE – In 1973, US Secretary of State Henry Kissinger, following a period of American preoccupation with Vietnam and China, declared a “year of Europe.” More recently, after President Barack Obama announced a US strategic “pivot,” or rebalancing, toward Asia, many Europeans worried about American neglect. Now, with an ongoing refugee crisis, Russia’s occupation of eastern Ukraine and illegal annexation of Crimea, and the threat of British withdrawal from the European Union, 2016 may become, by necessity, another “year of Europe” for American diplomacy.
Regardless of slogans, Europe retains impressive power resources and is a vital interest for the United States. Although the US economy is four times larger than that of Germany, the economy of the 28-member EU is equal to that of the US, and its population of 510 million is considerably larger than America’s 320 million.
Yes, American per capita income is higher, but in terms of human capital, technology, and exports, the EU is very much an economic peer. Until the crisis of 2010, when fiscal problems in Greece and elsewhere created anxiety in financial markets, some economists had speculated that the euro might soon replace the dollar as the world’s primary reserve currency.
In terms of military resources, Europe spends less than half of what the US allocates to defense, but has more men and women under arms. Britain and France possess nuclear arsenals and a limited capacity for overseas intervention in Africa and the Middle East. Both are active partners in the airstrikes against the Islamic State.
As for soft power, Europe has long had wide appeal, and Europeans have played a central role in international institutions. According to a recent study by the Portland Group, Europe accounted for 14 of the top 20 countries. The sense that Europe was uniting around common institutions made it strongly attractive for the EU’s neighbors, though this eroded somewhat after the financial crisis.
The key question in assessing Europe’s power resources is whether the EU will retain enough cohesion to speak with a single voice on a wide range of international issues, or remain a limited grouping defined by its members’ different national identities, political cultures, and foreign policies.
The answer varies by issue. On questions of trade, for example, Europe is the equal of the US and able to balance American power. Europe’s role in the International Monetary Fund is second only to that of the US (although the financial crisis dented confidence in the euro).
On anti-trust issues, the size and attractiveness of the European market has meant that American firms seeking to merge have had to gain approval from the European Commission as well as the US Justice Department. In the cyber world, the EU is setting the global standards for privacy protection, which US and other multinational companies cannot ignore.
But European unity faces significant limits. National identities remain stronger than a common European identity. Right-wing populist parties have included EU institutions among the targets of their xenophobia.
Legal integration is increasing within the EU, but the integration of foreign and defense policy remains limited. And British Prime Minister David Cameron has promised to reduce the powers of EU institutions and to subject the results of his negotiations with the Union’s leaders to a popular referendum by the end of 2017. If Britain votes no and exits the EU, the impact on European morale will be severe – an outcome that the US has made clear should be avoided, though there is little it could do to prevent it.
In the longer term, Europe faces serious demographic problems, owing to low birth rates and unwillingness to accept mass immigration. In 1900, Europe accounted for a quarter of the world’s population. By the middle of this century, it may account for just 6% – and almost a third will be older than 65.
Although the current immigration wave could be the solution to Europe’s long-term demographic problem, it is threatening European unity, despite the exceptional leadership of German Chancellor Angela Merkel. In most European countries, the political backlash has been sharp, owing to the rapid rate of the inflows (more than a million people in the past year) and the Muslim background of many of the newcomers. Again, an important American diplomatic interest is at stake, but there is not much the US can do about it.
There is little long-term danger that Europe could become a threat to the US, and not only because of its low military expenditure. Europe has the world’s largest market, but it lacks unity. And its cultural industries are impressive, though, in terms of higher education, whereas 27 of its universities are ranked in the global top 100, the US accounts for 52. If Europe overcame its internal differences and tried to become a global challenger to the US, these assets might partly balance American power, but would not equal it.
For US diplomats, however, the danger is not a Europe that becomes too strong, but one that is too weak. When Europe and America remain allied, their resources are mutually reinforcing.
Despite inevitable friction, which is slowing the negotiation of the proposed Trans-Atlantic Trade and Investment Partnership, economic separation is unlikely, and Obama will travel to Europe in April to promote the TTIP. Direct investment in both directions is higher than with Asia and helps knit the economies together. And while Americans and Europeans have sniped at each other for centuries, they share values of democracy and human rights more with each other than with any other regions of the world.
Neither a strong US nor a strong Europe threaten the vital or important interests of the other.

But a Europe that weakens in 2016 could damage both sides.

New Evidence on the Phony ‘Retirement Crisis’

A CBO study shows that Social Security benefits are far from meager, despite progressive claims.

By Andrew G. Biggs


Photo: Getty Images/Tetra images RF    
Every Democrat running for president has pledged to increase Social Security benefits, on grounds that Americans’ retirement savings are inadequate and the costs are affordable. Republicans in the race instead focus on restoring Social Security to solvency—by reducing benefits for high earners or raising the retirement age—and expanding opportunities for Americans to save. New data released Dec. 15 by the Congressional Budget Office suggest that the Republican approach is better grounded.
It’s almost dogma among today’s progressives that Americans face a “retirement crisis” due in part to stingy Social Security benefits. But how do we know if this crisis is real? One common measure compares a household’s Social Security benefits or total retirement income with its pre-retirement earnings. Most financial advisers believe that a “replacement rate” of 70%-80% is sufficient, since the cost of living falls once a person stops working.

The question then turns on how best to measure replacement rates. Financial advisers compare retirement income to a household’s earnings in a single year—the year before retirement. The problem is that a single year’s earnings may not reflect a household’s true standard of living.

The Social Security Administration instead calculates replacement rates using career-average earnings, but indexed for the growth of wages economy-wide. The problem here is that the SSA’s wage-indexing overstates the true purchasing power of lifetime earnings by about 20%, and makes Social Security replacement rates—which the SSA says average only around 40%—seem low.

The bipartisan Social Security Advisory Board appointed an expert panel, headed by Boston College economist Alicia Munnell, to look into the issue. After almost a year of deliberations, the panel recommended in September that replacement rates be calculated relative to an average of several years of late-in-life earnings. Years of very low earnings should not be counted, it said, since many people shift to part-time work before retirement. The panel also said the focus should be on individuals with reasonably full working careers, since replacement rates aren’t very meaningful for individuals with short careers.

Following the panel’s recommendations, economists at the Congressional Budget Office compared retirees’ Social Security benefits to the inflation-indexed average of their last five years of substantial earnings, defined as annual earnings equal to at least half the individual’s career-long average. The calculations were restricted to retirees who had earned at least 10% of the national average wage over at least 20 years of work.

The results are striking: The CBO projects that a typical middle-income individual born in the 1960s and retiring in the 2020s will be eligible for a Social Security benefit equal to 56% of his late-in-life earnings. For individuals in the bottom fifth of lifetime earnings, Social Security replaces about 95% of their substantial late-in-life earnings.

Even so, the CBO excluded the spousal or widow’s benefits that more than one-third of female retirees receive on top of the benefit based on their own earnings. Among retired women who receive these auxiliary benefits, the average total monthly benefit was $1,128, versus $634 based only on their own earnings. In short, the true replacement rates for many retired women are significantly higher than CBO figures show.

Add in 401(k) and other plans, and it should not be difficult for a typical worker to achieve a total replacement rate of 70% or even 80% through individual savings and Social Security benefits. Total retirement savings measured by the Federal Reserve are at record levels relative to personal incomes, additional evidence that this goal can be reached.

Overall, the CBO’s Social Security figures, taken together with rising individual retirement savings, undercut the often-voiced claim that Americans face a “retirement crisis” that only an expanded Social Security program can fix.

Nevertheless, the CBO report also brings sobering news. The agency projects that the Social Security program is underfunded by 24% over the next 75 years. Raising the payroll tax rate to restore its solvency would require an immediate and permanent 4.37 percentage-point increase to the existing 12.4% tax.

To restore the program’s solvency, some want to remove the ceiling on earnings subject to the Social Security payroll tax—currently $118,500. That was the progressives’ favorite proposal, until they decided to instead to use much of the additional revenues to increase benefits.

However, taxing all earnings would fill only 41% of Social Security’s long-term deficit. Fixing the rest would require either cutting benefits or raising taxes on lower-earning households, which Democratic front-runner Hillary Clinton has pledged not to do.

The CBO’s new replacement-rate figures show that Social Security’s promised benefit levels are far more adequate than is often portrayed. But the program is far short of being able to pay what it has promised. Both sets of figures show the folly of expanding benefits before Social Security’s underlying finances are fixed.

Mr. Biggs is a resident scholar at the American Enterprise Institute. From 2007-08 he served as principal deputy commissioner of the Social Security Administration.

Gold And Silver - Why More Important Than When. Going Lower Before Moving Higher

By: Michael Noonan

When the globalist's central bankers are in control, primarily the US/UK, they are proving their ability to supersede the natural forces of supply and demand with impunity. When they have the ability to "print" unlimited amounts of fake fiat, no other country can stand in the way, not even China.

On the other hand, neither China nor Russia wants to oppose the globalist forces of evil, for both of those nations see what is unfolding on the world's stage is the kabuki theater death dance of the US and the inexorable fading away of the fiat Federal Reserve Note.

All that is going on in the world, especially in the Middle East, is about money and control, and the US is strong-arming every nation it can to use the "dollar" has a reserve currency, but more and more countries are turning away. War and destruction is all the US knows n order to get its way. The world is worse off because of it.

The insatiable demand and lessening supply of silver, the sovereign buying of Western gold, emptying as many vaults as have gold, by China, and very legitimate fundamental considerations mean nothing, absolutely nothing. It is an exercise in folly to assess the reality of diminishing supply and increasing demand as a basis for expecting PMs to move higher. A look at the charts says the exact opposite.

Probably the ones who can better understand or appreciate this perverse anomaly are stock fundamentalist pre-2008. Their world was focused on value investing, standards that existed for decades upon decades. The charts told a totally different story, but not one believed by those intrepid fundamentalist who scoffed at charts, tolerated only when they backed a fundamental view.

What has been going on in gold and silver is the reverse of what transpired in stocks, just not as dramatic. However, as an aside, the crash of 2008 in stocks was just a test drive as that market prepares for an eventual collapse, in our opinion, but that is not our focus, at least for now. [We have already given ample warning to not be in the stock market.]

There have been some incredibly laudable analysis from several experts on how and why the fundamental factors for gold and silver cry out for higher prices, while at the same time, price continues lower creating a bit of understandable anguish in the PMs arena.

While what is being said may seem negative, one has to keep one's head while the monetary forces of destruction play out their end game. At some point, reality will set in, and here is where it really gets negative. Will the globalists force WWIII, or something very close to it?

The globalists are interested in one thing and one thing only: "money," which is hard to define because fiat is debt, and debt cannot be money. Gold and silver used to be the best measure of money, but they get in the way of the globalist control of the world's money supply, actually non-money supply, to which the world dances, and not very well.

The biggest answer, for which no one knows is, When? When will the insanity that rules this sad world lose its grip, and at what cost to the remaining 99.99% that are subject to the whims and rules of the ultimate money game and money rulers?

As individuals, we cannot control what goes on. All any individual can do is be in control of him/herself and act in one's best interests. The globalist's financial world is spiraling out of control. People have as many warning signs as they choose to see, while most choose not to see because it goes against the lies they have come to believe as truths.

There is a 5,000 year history, or however many years of proof, that all fiat money fails, and that includes the so-called "dollar," the phony Euro, the worthless Pound, the Yen that refuses to bow to reality, as globalist fiat "unreality" maintains control. In each and every instance of a failed fiat, it always took longer than most expected, and the fiat "dollar" is the final king of fiats that is next to fail.

When? We certainly do not know, and based on all other so-called experts, none of them have any idea, either. So the focus has to be on protecting our financial self-interests as best as can be done in a growing tsunami of uncertainty. The most reliable and proven certainty, in a financial sense, remains gold and silver. Paper gold and silver are worth what the paper is, and no more. 

Count on that, even if it is a piece of paper from a Swiss bank that says you own allocated and numbered gold and silver. Take it as a lie, and that you can take to the bank, for those who still choose to use one.

All that matters is physical gold and silver. As with paper, the price of physical PMs also has been going down. Those who choose to measure the utility of owning gold and silver in terms of price alone have lost a sense of their true utility, a storage of wealth. There are times when the "store of value" is negative. The cost of insurance is negative, so why carry any for self, home, car, etc?

Insurance has no value if it is never used, yet people have it all the time. Why? Because they do not know when it will pay off to have it.

In the final analysis, one either believes gold and silver are a valuable form of insurance, or not, and any form of sophist reasoning does not matter. We choose to appreciate the value of gold and silver throughout history, and we recognize there are and have been times when holding them was a losing proposition, albeit temporarily.

In Chicago, 2 weeks ago, 100 oz silver bars cost $1,530, readily available. One week ago, a bar cost $1,490. What are the odds of silver dropping another $1 or $2 "dollars? That would result in a $100 - $200 loss, but only on paper. At some point, the odds of silver going to $20, $30, $40 the ounce are very probable, maybe even higher, which means it just gets better. Why should one be concerned over a potential decline in "value" [only on paper, so unrealized] while the world is fast going out of control, and owning silver, or gold, can result in substantial gains?

Stackers keep on stacking!

The gold:silver ratio has reached 78:1, last week, vacillating between 75:1 and a little higher.

For this reason, we favor silver over gold, even exchanging gold for silver. The charts may not show a turnaround, at this point, so the when question remains in play, but so does the why question, as in why own PMs? History favors the why, and so does the future. We continue to recommend the purchase only of the physical PMs.

The charts show the ongoing and uncertainty of being able to answer the when. All we can say is, it just is not yet.

Time to show the annual and quarterly charts, not for timing, but because they show as true a picture of developing market activity as smaller time frames in terms of persistent direction.

The annual shows wide range bars down with lower end closes, all typifying weakness. The Quarterly shows the same with potential support at 1,000, and should that price level fail to hold, down to 900. The monthly shows the same potential support at 1,000 based on prior developing activity from 2008 and 2009.

Monthly Gold Chart

Simply as a general measure, but not considered absolute, a half-way retracement indicates the character of a trend. In a down trend, price usually fails to reach a 50% swing retracement indicating a continuing weak market, to stopping at/near 50% before resuming the trend lower.

It is when one sees price rally above, and hold, a half-way retracement that it could portend a change in market behavior. Right now, a potential for change is absent, so there is no definitive answer for when.

Weekly Gold Chart

You get a clearer example of what a 50% retracement looks like, and how this one has failed to reach that level, an indication of a still weak market and why the probability for lower prices is greater than not.

Daily Gold Chart

Overlapping bars and a clustering of closes indicates either a stopping or resting point before the existing trend continues, or it can lead to a change, as in reversal, of a trend.

On the Qrtly chart, the closes are all mid-range to lower on each bar, and that tells us sellers are stronger than buyers, so continuation lower is the most likely outcome.

It does not matter how much wants to embrace the strong fundamentals favoring silver, the charts reflect current market assessment, and all participants know all that is to be known about the fundamentals, and price is still making lower lows and shows no ability to rally. Here is how the message from the market is clear and simple without being misleading.

Facts are facts, and the logic is irrefutable. The same cannot be said of opinions, so ignore them and deal with what is.

Monthly Silver Chart

Here is the proverbial picture worth 1,000 words. Scan this chart from left to right. One does not have to be much of an analyst to conclude the market direction and determine there is no visible sign of change. While the when remains unanswered, you have a definitive answer that it is not right now or even in the immediate future.

For the past three years, the charts have not mislead anyone who takes even a cursory look to see where price is and has been headed. Fundamentals, for however real and accurate they may be, have been misleading all throughout this down trend.

Anyone who says charts cannot be relied upon does not know how to read them and is not a source that has validity, just an idle opinion that is consistently wrong.

Weekly Silver Chart

We mentioned how overlapping bars can lead to change as well as continuation of the existing trend.

Why would a read of the rectangular activity not suggest a change may be in the making?

For one thing, all of the activity is under 14.50, so 14.50 is resistance. Look to the left, and you will see 14.50 acted as primary support, July through September of last year. Whenever you see sideways activity that is under a previous sideways move, odds favor the current activity is weak and will lead to lower prices.

Next, note how price fails to even approach a 50% retracement, clearly a sign of ongoing weakness. These are two indisputable facts about which no reasonable person can disagree.

Finally, note the highest volume bar from last Thursday. Volume equals effort. Exceptionally high volume is usually smart money actively involved. Rarely, if not never, is high volume the result of small traders acting in unison to create that level of activity. Small traders react rather than proactively act.

What were the results from all of the volume effort that led to a strong close on the bar?

Nothing further to the upside. Apply logic to the observed fact. If all that buying effort could not rally price more, who is in control? Not buyers, they expended all that effort to no avail.

Plus, next day, Friday, all of the upside effort was erased with a close under that effort, trapping all those who bought.

This is an example of strong-handed short sellers selling however much buyers want to buy and leaving them under water right away. Also, this is another example of why one never wants to position against the trend.

Reading charts is not rocket science. It all comes down to facts and applied logic which are highly reliable. The bear trap rally, identified on the chart, was a legitimate place to buy, based on developing market activity. However, once it failed, one had to bail out and take immediate loss. It happens.

For all the information these charts convey, it is not unfair to suggest price is likely to go lower, nor it is unfair to expect anyone armed with this knowledge to be disappointed that gold and silver are not going higher, for now. For all the reasons given, expecting price to rally would be an unreasonable position to take, and one that takes no sense.

This has nothing to do with the why of buying and holding physical gold and silver. In the end, the why is considerably more important than the when, and when does not mean if.

Daily Silver Chart


Saudi Arabia and Iran Are at Each Other’s Throats. Why Are Oil Prices Falling?

So much crude is sloshing around the globe that even the prospect of growing Mideast unrest isn’t enough to spook oil traders.

By Keith Johnson

Saudi Arabia and Iran Are at Each Other’s Throats. Why Are Oil Prices Falling?

Saudi Arabia and Iran, OPEC’s two biggest powers, are at each other’s throats in an escalating war of words that is already spreading to other countries in the Middle East and Africa and spooking diplomats from Moscow to Beijing. Yet crude oil prices fell on Monday, a reminder of how dramatically awash the world still is in cheap oil.

Oil traders had initially panicked after Saudi Arabia broke off diplomatic relations with Iran on Sunday amid fears that the growing tensions sparked by Riyadh’s execution of a prominent Shiite cleric could further escalate and potentially threaten oil supplies. That sent crude prices sharply higher in early trading in Asia, Europe, and the United States on Monday.

The political crisis has intensified further, with other Persian Gulf countries joining Saudi Arabia in downgrading or cutting diplomatic ties with Tehran. Oil traders, though, don’t seem to care: Oil prices began falling within hours of markets opening as traders digested gloomy economic news from Asia, including the 10th straight month of falling Chinese factory orders.

The dismal data is being seen as a sure sign that the engines of the global economy are sputtering and unlikely to gobble up much of the excess crude sloshing about.

The global oil glut, in other words, weighs more heavily on prices than even the prospect of open conflict between two rival, regional powerhouses.

“Until oil production is actually compromised, risk can’t swing prices on its own for too long,” said Matthew Reed, vice president at Foreign Reports, an energy consultancy. “The glut is too great.”

Despite the growing unrest — which included the sacking of the Saudi Embassy in Tehran and moves by an array of Persian Gulf countries to downgrade their diplomatic ties with Iran — actual oil production is not at risk in either country. On the contrary, Saudi Arabia is still pumping flat out, and Iran is gearing up to boost oil production and exports in the coming months as Western sanctions are lifted.

“The Saudi-Iranian confrontation is very significant for regional politics but poses a limited direct risk to oil supplies from either country or their Middle East neighbors,” said Richard Mallinson, a geopolitical analyst at Energy Aspects, a London-based consultancy. “The market would react to developments that directly threatened supplies from a major producer, but that does not seem to be on the horizon at present.”

The spat between Saudi Arabia, the most powerful Sunni state, and Iran, the standard-bearer of Shiite Islam, has been brewing for decades and has only intensified in the wake of the landmark nuclear deal Tehran inked last year with Western powers. Riyadh and its Sunni neighbors worry that the deal, by freeing Iran to export more oil and earn more money, will allow a rejuvenated Iran to expand its regional influence at their expense.

Tehran, for its part, feels slighted by Saudi Arabia, which took advantage of Iran’s global isolation in recent years to increase its own role in the region and in global oil markets. Saudi Arabia has tried to push back against Iranian influence in countries like Iraq and Yemen. The two countries’ primary battleground is Syria, where Tehran has been one of President Bashar al-Assad’s staunchest supporters while Riyadh has pumped money and weapons to the rebel groups working to oust him.

Oil is just a part of the broader rivalry between the two countries, both of which rely heavily on income from exporting crude — and both of which have suffered as crude prices plunged over the last year and a half. Crude prices have fallen from about $110 a barrel in the summer of 2014 to the mid-$30s a barrel today. Annually, that costs Iran about $25 billion in foregone revenues and costs Saudi Arabia almost $200 billion.

But Saudi Arabia, emboldened by much deeper pockets than Iran, has been able to withstand the price decline better. As the biggest oil producer and dominant voice inside OPEC, Riyadh has ignored calls from other OPEC members, including Iran, to throttle back its oil production to prop up falling prices.

At the same time, Iran is angling to jump back into global oil markets with a vengeance and claw back market share as sanctions are lifted. Since 2012, Iranian exports have been limited to about 1 million barrels a day, compared with 2.5 million barrels a day before Western sanctions were imposed because of Iran’s controversial nuclear program. But under the terms of the deal reached last year, those oil sanctions will soon come off, potentially freeing Iran to dump up to 1 million barrels of additional oil into an already glutted market.

The simmering tensions between the two countries came to a head over the weekend after Saudi Arabia executed a prominent Shiite cleric, prompting an angry response from Iranian leaders and irate reactions in the Iranian street. On Monday, Sunni states including Bahrain and Sudan joined Riyadh in severing diplomatic ties with Iran; the United Arab Emirates “downgraded” its diplomatic relations with Tehran but didn’t cut them completely.

The escalation prompted concern far and wide, especially since it could torpedo floundering talks for a resolution to the five-year-old Syrian civil war and the broader fight against the Islamic State.

State Department spokesman John Kirby on Monday urged leaders in the Middle East to take steps to calm the escalation. Russia reportedly offered to act as an intermediary between Saudi Arabia and Iran. China, whose need to secure large amounts of oil from the Middle East has made the region an increasing source of worry, said on Monday it is “concerned that the relevant incident may sharpen regional disputes.”

With a more impetuous Saudi leadership than in years past, and Iran’s leaders torn between hard-liners and relative moderates, there are real prospects for significant escalation. That could extend to proxy fights in places like Yemen, where Saudi Arabia has battled to push back against Iranian-backed rebels, or Syria, where Riyadh has backed rebel groups fighting the regime of Assad, an ally of Iran.

But despite the relative calm on oil markets Monday, the conflict could also spread to the oil patch itself, Reed said. Saudi oil installations in the eastern, heavily Shiite part of the country are potentially vulnerable to sabotage. And in 2012 hackers, reportedly from Iran, planted malware on Saudi Aramco computers in a high-profile attack that wiped out thousands of computers and crippled the oil company’s corporate operations for weeks.

Although that hack did not affect Saudi oil output, “it was a wake-up call for Riyadh, and Tehran certainly learned from it too. A second wave can’t be ruled out,” he said.
Keith Johnson is a senior reporter covering energy for Foreign Policy.

Wall Street's Best Minds

Blackstone’s Byron Wien: 10 Surprises for 2016

Among the veteran strategist’s predictions: U.S. stocks and high-end New York real estate will falter.

By Byron Wien       

Editor’s Note: Wien, vice chairman of multi-asset investing at Blackstone, has released his annual list of surprises. He defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes has a better than 50% likelihood of happening.

The 10 Surprises for 2016 are as follows.

1. Riding on the coattails of Hillary Clinton, the winner of the presidential race against Ted Cruz, the Democrats gain control of the Senate in November. The extreme positions of the Republican presidential candidate on key issues are cited as factors contributing to this outcome. Turnout is below expectations for both political parties.

Byron Wien                          

2. The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance.

3. After the December rate increase, the Federal Reserve raises short-term interest rates by 25 basis points only once during 2016 in spite of having indicated on December 16 that they would do more. A weak economy, poor corporate performance and struggling emerging markets are behind the cautious

Reversing course and actually reducing rates is actively considered later in the year. Real gross domestic product in the U.S. is below 2% for 2016.
4. The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks. An uncertain policy agenda as a result of a heated presidential campaign further confuses the outlook. The dollar declines to 1.20 against the euro.
5. China barely avoids a hard landing and its soft economy fails to produce enough new jobs to satisfy its young people. Chinese banks get in trouble because of non-performing loans. Debt to GDP is now 250%.
Growth drops below 5% even though retail and auto sales are good and industrial production is up. The yuan is adjusted to seven against the dollar to stimulate exports.
6. The refugee crisis proves divisive for the European Union and breaking it up is again on the table. The political shift toward the nationalist policies of the extreme right is behind the change in mood. No decision is made, but the long-term outlook for the euro and its supporters darkens.
7. Oil languishes in the $30s. Slow growth around the world is the major factor, but additional production from Iran and the unwillingness of Saudi Arabia to limit shipments also play a role. Diminished exploration and development may result in higher prices at some point, but supply/demand strains do not appear in 2016.
8. High-end residential real estate in New York and London has a sharp downturn. Russian and Chinese buyers disappear from the market in both places. Low oil prices cause caution among Middle East buyers. Many expensive condominiums remain unsold, putting developers under financial stress.
9. The soft U.S. economy and the weakness in the equity market keep the yield on the 10-year U.S. Treasury below 2.5%. Investors continue to show a preference for bonds as a safe haven.
10. Burdened by heavy debt and weak demand, global growth falls to 2%. Softer GNP in the United States as well as China and other emerging markets is behind the weaker than expected performance.
Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are ‘probable.
Also rans:
11. As a result of enhanced security efforts, terrorist groups associated with ISIS and al Qaeda do NOT mount a major strike involving 100 or more casualties against targets in the U.S. or Europe in 2016. Even so, the United States accepts only a very limited number of asylum seekers from the Middle East during the year.
12. Japan pulls out of its 2015 second half recession as Abenomics starts working. The economy grows 1%, but the yen weakens further to 130 to the dollar. The Nikkei rallies to 22,000.
13. Investors get tough on financial engineering. They realize that share buybacks, mergers and acquisitions, and inversions may give a boost to earnings per share in the short term, but they would rather see investment in capital equipment and research that would improve long-term growth. Multiples suffer.
14. 2016 turns out to be the year of breakthroughs in pharmaceuticals. Several new drugs are approved to treat cancer, heart disease, diabetes, Parkinson’s and memory loss. The cost of developing the breakthrough drugs and their efficacy encourage the political candidates to soften their criticism of pill pricing. Life expectancy will continue to increase, resulting in financial pressure on entitlement programs.
15. Commodity prices stabilize as agricultural and industrial material manufacturers cut production.
Emerging market economies come out of their recessions and their equity markets astonish everyone by becoming positive performers in 2016.

The ‘hollowing’ of the middle class?

By Robert J. Samuelson

(Andrew Harrer/Bloomberg)

We’ll be hearing a lot about the middle class in the coming months. That’s one sure bet for 2016, as both parties compete for votes. What’s less sure is whether we’ll get an accurate assessment of the middle class’s condition. By now, the conventional wisdom is familiar: The top 1 percent has skimmed most income gains for itself, producing decades of stagnant living standards for most Americans. Wall Street has slaughtered Main Street.

Now comes a report from the Pew Research Center that paints a more complex picture. It’s not that the Pew study contradicts all the conventional wisdom. It finds (as have others) that economic inequality is increasing. One of the study’s main conclusions is that the middle class is being hollowed out, as more Americans find themselves in either upper- or lower-income households. The extremes grow at the expense of the center.

Consider. In 1971, about 61 percent of adults lived in middle-income households (defined as three-person households with incomes from $41,869 to $125,608 in today’s dollars). By 2014, that share had dropped to 50 percent. Meanwhile, the share of low-income households (households with incomes of $41,868 or less) grew from 25 percent to 29 percent, and the share of upper-income households (incomes above $125,608) increased from 14 percent to 21 percent.

But the study convincingly rebuts the notion that the living standards of most Americans had stagnated for many decades. Pew calculated household incomes, adjusted for inflation, all along the economic spectrum and found that, until the early 2000s, most households reaped slow but steady increases. Growing inequality did not siphon off all gains for those who are not rich .

Here’s how Pew describes this period:

“Households typically experienced double-digit gains in each of the three decades from 1970 to 2000. Middle-income household income increased by 13% in the 1970s, 11% in the 1980s, and 12% in the 1990s. Lower-income households had gains of 13% in the 1970s, 8% in the 1980s and 15% in the 1990s. Upper-income households registered a 10% gain in the 1970s [and] . . . 18% in both the 1980s and 1990s.”

What’s happened since, of course, is that the Great Recession erased some of these gains.

Unemployment rose, overtime pay declined and many of the unemployed had to accept lower wages to get new jobs. Pew estimates that household incomes dropped to levels of the late 1990s.

That’s a steep decline. Still, the Great Recession left intact most gains achieved since 1970. In 2014, typical middle-income households had incomes 34 percent higher than in 1970; in 2000, the advance had been 40 percent.

Indeed, these figures probably understate the gains. Like many others, the Pew study relies on pre-tax cash incomes. It ignores taxes and non-cash government transfer programs to the poor (food stamps, Medicaid) and employer-provided fringe benefits for workers (mainly health insurance and vacations). These blunt inequality and raise recipients’ living standards, as Cornell University economist Richard Burkhauser and others have argued.

The good news is this: Despite the top 1 percent’s outsize incomes, this hasn’t yet shut down the upward march of living standards for most of the population. We’ve mistaken what is plausibly a one-time setback — the response to the Great Recession — for long-term stagnation. People have understandably but wrongly taken their recent experience and projected it onto the past.

Still, greater inequality threatens future living standards. That’s the bad news. The middle-class spirit is central to the American tradition. By Pew’s definitions, middle-income households still dominate.

This is a unifying force in an era of growing fragmentation. But if present trends continue, it will weaken. Class warfare, already rising, will intensify.

What can be done?

We need a prudent agenda — not a vendetta against the rich or the poor but a purging of policies that abet inequality with few offsetting benefits. Tax breaks that favor the rich, starting with the infamous “carried interest” subsidy, should be abolished. Limits on unskilled immigrants, who inflate the ranks of the poor, should be enacted as part of comprehensive immigration legislation. Half of Hispanic immigrants have low incomes, Pew says.

The hollowing of the middle class is simply not in America’s best interest. The biggest boost to middle-class fortunes could be a tight job market that raises wages without triggering an inflationary wage-price spiral. Whether this ideal outcome can be achieved in the real world may be one of 2016’s big stories. We’ll see.