Finance Trends Letter

Greetings, friends and readers from across the globe! The New Year is well underway and with it, a pronounced sell-off in global share markets.  So what can we do to protect our mental capital and our financial capital in fast declining markets like these? Let's take a quick look around the world's markets and then I'll share some thoughts on the importance of playing defense in this environment. We began 2016 with one of the worst starts on record for the US stock market. The S&P 500's market valuation plunged by over $1 trillion , erasing the combined equivalent value of tech giants Google ( GOOGL ), Facebook ( FB ), Intel ( INTC ), Netflix ( NFLX ), and Yahoo ( YHOO ). Meanwhile, the Financial Times reported that $2.3 trillion in value had been "sliced from companies across the globe" in the first trading week of the year. The damage was widespread: "...An analysis of more than 6,000 global stocks by the Financial Times showed more ...

Michael Lewis talks his (then new) book, The Big Short on C-Span back in 2010: "If I explain this to people, they're going to be outraged.". Watch it here. Having recently seen the film version of The Big Short in the theater, I've been going back to some of the interviews and source materials from Lewis' book. For those who don't remember (or are too young to recall), Lewis' book examines the real estate bubble and subprime mortgage debacle, which kick-started the 2007-2008 financial crisis and pushed our economy to the brink of collapse.  The book zeroes in on some of the investors and hedge funds that profited greatly from buying credit default swaps (CDS) on subprime bonds, and the banks who took the other side of that bet and crashed. A few years and a few trillion dollars in bailout money later, we're into a major motion picture starring Christian Bale and Steve Carell as said hedge fund managers, but that's a story for next time. T...

Shared this relative performance chart of bonds vs. equities on StockTwits this morning, and wanted to post it here for our readers. Here is TLT (US Treasury bonds) vs. the returns of QQQ (Nasdaq 100 ETF) and SPY (S&P 500 ETF), from March 13, 2009 to April 30, 2013.  As you can see from the chart above, TLT has gained about 20 percent (not including dividends) in this 4 year period. QQQ is up 144 percent and SPY is up 110 percent from the start of this recent bull market in equities.  In terms of price (directional) correlation, you'll note that while the QQQ and SPY are very closely linked, the two stock index ETFs seem negatively correlated with TLT. When stocks are up, government bonds are lagging and vice versa, at least for the period in question.

While catching up with Chris Puplava's latest market update last night, I had to stop and share some of his words with our followers on Twitter .  Read the opening of Chris' article, "Stop Talking and Start Listening!" . You'll find some worthwhile comments on interpreting data and the importance of maintaining accountability in one's market calls.  " ...Far too often investment managers and economists spend more time espousing their views and then defending them until eventually proven right (“I was just early”), rather than spending more time analyzing their assumptions and being honest enough to say, “I WAS WRONG!” and then moving forward.  Part of the problem is that they create a view and then find evidence to support their views rather than starting from the bottom up by collecting an exhaustive amount of data and then summarizing the collective message rather than their views.  Basically, listen to the message of the markets and the...

Hayman Capital's Kyle Bass discusses the world economy, gold, global credit growth, and debt problems in US, Japan, and Europe at the AmeriCatalyst 2011 conference.  Here's the, "Black Swan of Cairo" piece (Nassim Taleb and M. Blyth) cited by Bass. Hat tip: Olivier at Tischendorf Letter for highlighting this clip and the article. And if you missed it, here's Kyle's interview on BBC Hardtalk , skillfully dodging TV sensationalism and speculator-scapegoating attacks to address the euro crisis, the developed world's sovereign debt troubles, and how he is managing risk in his portfolio and hedging against problems in Japan.  Quoth Bass: "Capitalism without bankruptcy is like Christianity without hell" .  In other words, the Western world must atone for its past financial profligacy. Check it out.

The charts tell the tale of the October rally.  Since our last update on the global correction in stocks , shares have bottomed (at least in the short-term) and embarked on a powerful new rally.  As noted in real-time on Twitter and StockTwits, the 1,250-1,260 levels were an important technical (and psychological?) level for the S&P 500 and US shares. The market busted through those levels this week amid a backdrop of hectic news concerning Europe's debt crisis.  Here you'll find newly updated charts, from the SPX to the AWCI (MSCI World ETF), the Dow Industrials and Transports, the Nasdaq, the EEM (Emerging Markets ETF), the VIX, and TLT (long-bond ETF).  This is still a very news-driven (some would say intervention-driven) market. Therefore, I want to either watch (or ignore) the action from the sidelines or keep a very tight reign on positions and risk. We'll see if the global share markets can continue higher on a stream of bad news, a sign ...

Noted bond fund manager and DoubleLine founder, Jeffrey Gundlach speaks with FT.com about the economy, deflation risks, and his views on Treasury bonds.  Some highlights from this interview : DoubleLine notes that the market has been affected by shifts in sentiment relating to potential inflationary outcomes vs. deflationary outcomes. Gundlach seeks to take advantage of pendulum shifts in sentiment by positioning his portfolio more into government bonds when everyone is focused on inflation, bucking the prevailing sentiment trends.  As unattractive as Treasury yields appear to be from a historical standpoint, investment managers should own bonds "even today" as a hedge. "I used to be an inflationist several years ago". Gundlach understands the printing-money-to-cover-entitlements view, but feels that this pro-inflation scenario is unlikely to happen without a crisis. Gundlach feels you will first see economic weakness and a societal trend towards reigning i...

Earlier this afternoon on Twitter, I noted that the long bond ETF, TLT was up over 10% (then quoted near $114.60) since S&P downgraded the USA's debt rating to AA+ on August 5, 2011. Well, it looks like we'll have to update those stats already, thanks to the pop in 30 year bonds (ZB_F) and in TLT on news of Operation Twist , the Fed's telegraphed scheme to sell $400bn of short maturity bonds and reinvest in longer (6 to 30 year) bonds by June 2012.  Here's how the market reacted to that news. Note the flagpole move up in TLT and the 30 year Treasury futures, ZB_F on the intraday charts.   Above: 5 minute chart of the 30 year Treasury futures, via Finviz.com . Here's an intraday chart of TLT, courtesy of freestockcharts.com . The updated daily chart of the TLT, marking the August 5th closing price to today's action on the Twist announcement. Chart via freestockchats.com . So in the space of 20 minutes, we had to recalculate that 6 week retur...

"The worst thing you can do when you're having a hard time is flail. In trading, when there is nothing to do, the best thing to do is nothing." - Scott Bessent (Bessent Capital).  Well, the damage is already done for those who were heavily long heading into this week's market decline.  I look at the S&P 500 component data on freestockcharts.com and see that only 3 stocks in that index were up today. We saw a -4.78% decline in the S&P to go along with that. Here's an updated chart that shows the recent breakdown below the 1312 line we've fluctuated around in recent months. There's been a lot of whipsaw in this news driven market of late, and it doesn't seem like the recent deficit/debt ceiling deal reached by Congress has quieted things much. Even gold and silver got whacked today. But just look at all that money piling into Treasury bonds. At a time like this, perhaps it's best to step aside and watch the action from the sidelin...

The US debt crisis is a contrived political showdown , James Grant tells Bloomberg TV. If you want a real crisis, look to Europe, says Grant.  Also up for discussion: the 30 year bull market in US Treasuries and the risks associated with government paper. Plus, the future of monetary arrangements and the gold standard vs. the "Phd standard". Enjoy the clip.

Grant's Interest Rate Observer founder, Jim Grant sits down with Consuelo Mack for an interview on WealthTrack . Topics include: the rising cost of living and commodities, the US dollar's decline, and the Federal Reserve's targets for "desired inflation". See what Grant has to say about all this, and more, in this discussion. By the way, I don't think anyone who caught Grant's interview or Michael Burry's recent talk on America's financial condition was surprised by S&P's recent warning on America's AAA debt rating. Only the timing of the outlook revision might have come as a surprise, and even that may have been telegraphed to market participants earlier. Related articles and posts : 1. Jim Grant and John Hathaway chat with Charlie Rose . 2. Jim Grant's latest interview with King World News . 3. Lew Rockwell and Jim Grant discuss Austrian economics, gold standard .

Newsy: Marc Faber talks to Bloomberg TV about Davos, the disastrous 1st term of our dishonest President Obama, the illusion of deficit spending prosperity, and more. If you're a regular here, you already know how much we love the straight-shooting Dr. Faber. This latest chat is one more example of Faber's natural ability to cut through the propaganda and nonsense and get straight to the heart of matters. Have a listen and catch Marc's latest thoughts on the US and emerging markets, the "global agenda setters" of Davos, bonds, inflation, and gold. Enjoy. Related articles and posts: 1. Marc Faber: final crisis yet to come - Finance Trends. 2. Jim Rogers at Reuters 2011 Outlook Summit - Finance Trends.

Inflation or deflation ahead? Why, after the bursting of a massive credit bubble, do losses from defaulted debt go unrecognized? How is that we simply continue to hum right along? Chris Martenson explains in, "Don't worry, they'll just change the rules" : " Suppose, for the sake of argument, that there is a world in which banks are allowed by their regulators to pretend their default losses simply do not exist. And, even more outlandishly, some of these banks are allowed to sell heavily damaged loans to their central bank at nearly their full original price. What does "deflation" mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults. This is the world in which we currently live. Trillions in probable and provable losses quietly exist, out of sight, on the balance sheets of the ...

CNBC took their porta-studio down to Texas to chat with Kyle Bass (Hayman Capital) and Alan Fournier (Pennant Capital) at the Barefoot Economic Summit earlier today. Since I got a heads up on this interview from some folks in my Twitter stream, I thought I'd track down the interview clips from CNBC and post them here for all to see. Kyle Bass is well known for his big picture macro views, and he's made some pointed remarks recently about the path the US is heading down given the Fed's quantitative easing efforts. You'll hear Bass compare the monetary situation in the US with the hyperinflationary episode of Weimar Germany, and the more recent case of Zimbabwe, in this discussion. This interview also offers him a chance to elaborate a bit on his recent call to avoid stocks (in general) and instead look to real assets, such as commodities and gold, in an inflationary environment. Enjoy the discussion and the insights from Bass and Fournier in this 3 part interview. CNBC ...

Bank fees and ultra low interest rates continue to hit US savers hard. Bloomberg has the story in, "Savers Pay Banks to Keep Cash as Rates Dip, Fees Rise" : " It’s getting tougher for U.S. savers to find a bank where they won’t end up paying to keep their money safe. The average interest paid on savings, checking, money-market and certificate of deposit accounts fell to 0.99 percent in July, the first dip below 1 percent in a decade, according to researcher Market Rates Insight. Banks also have been raising fees and adding new ones, most recently in response to the financial-services overhaul bill that became law July 21. The result is that an increasing number of savers are seeing their deposit earnings eaten up by charges. That’s frustrating people like Ken Ward, who recently passed on a savings account with a 0.01 percent interest rate at the Chase bank branch near his home in Wantagh, New York..." As if years of hyper-spending and livin...

Kevin Depew at Minyanville has authored, "The Real Person's Guide to the Federal Reserve" , which should help set the record straight on what exactly was said in the most recent Fed release. Here's an excerpt from Kevin's guide: " Yesterday at 2:15 PM EST the Federal Reserve released what to most of us normal people was a bunch of gibberish, including this: "To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities." In the aftermath of the financial crisis, most of us are now at least vaguely aware that the Federal Reserve has intervened in financial markets to "help support the economic recovery." But what, exactly does that mean, intervention? It's actually not that hard to underst...

Hedge fund manager and author, Seth Klarman (Baupost Group) was recently profiled in Bloomberg for his investing acumen, as well as for the enduring popularity of his 1991 book, Margin of Safety . An excerpt from, "Klarman Tops Griffin as Investors Hunt for 'Margin of Safety'" :   " Seth Klarman almost doubled his hedge fund’s assets to $22 billion in the past two years as the industry shrank by sticking with the off-the-beaten-path investments he’s pursued since starting out in 1983. Unlike John Paulson , who made $15 billion by betting against home mortgages, Klarman didn’t see one big trade that would profit as markets began to collapse. The founder of Baupost Group LLC focused on corporate bonds he calculated would yield solid returns even if the economy got worse. “We didn’t have the degree of conviction Paulson had,” said Klarman, whose views are so closely watched by investors that his out-of-print book, “The Margin of Safety,” is ...

Niall Ferguson recently spoke on "Fiscal Crises and Imperial Collapses" at the Peterson Institute for International Economics. The event summary, presentation transcript and slides, as well as audio and video of the talk and Q&A session, are all available at the PIIE link above. I happened to watch Niall's historical overview of government debt crises last night, and it certainly put the current problems we are facing with sovereign debt into perspective. On a day when we are greeted with news of Spain losing its AAA rating through a Fitch downgrade, Niall's speech certainly comes at a pressing moment and the lessons he imparts are profound. Listen closely to Ferguson's conclusion on the historical impact of the bond vigilantes in each public debt crisis. Each time, he points out, interest rates on government debt skyrocketed when bond holders saw an unsustainable fiscal program threaten the viability of a nation's debt repayment and market participants ...

Spiegel Online interviews economist Nouriel Roubini, who notes, "We will have even more crises in the future" . An excerpt from Nouriel on problems in Europe and government debt: " SPIEGEL: What do you think about the dangers presented by Greece?* Roubini: Today the markets are very worried about Greece, but that's only the tip of the iceberg. Increasingly, bond market vigilantes have woken up in places like the UK and Ireland. Even the US and Japan will have problems because of their huge budget deficits. Maybe not this year, but they will eventually. In the US, states like California, Nevada, Arizona, New York and Florida have immense fiscal problems. The growing budget deficits and the huge government debts are really what worry me most. SPIEGEL: Is it really the right thing to do for the IMF and the EU to help out Greece with €110 billion? Roubini: That is only kicking the can down the road for a year. I am afraid that Greece, more likely than not ,isn...

Michael Burry explains credit default swaps and his subprime short to Scion Capital investors in this November 2006 document shared by Marketfolly: " A big hat tip to Greenbackd for originally bringing this to our attention. Below you will find a very interesting primer on credit default swaps and the subprime mortgage short from Scion Capital's hedge fund manager Michael Burry. Burry of course was recently featured in Michael Lewis' latest book, The Big Short (which we highly recommend reading) for his notable early short position in subprime mortgages. Michael Burry penned his primer back on November 7th, 2006 and it's almost comical now to think about how he was running a value fund focused on equities and then all of a sudden has to explain his short subprime trade and complex derivatives to his certainly surprised and confused investors... " Head on over there to read the full embedded document . Should make for very interesting reading, as by now I'...