It’s a record…

  • Good times, good times
  • A familiar sound, but who’s listening?
  • The final word on gold
  • The final (final) word on gold

Investors are happy. Stocks are up.

The key US stock benchmark hits a new all-time record high.

No messing around. Let’s get straight into the details of this raging bull market…


Overnight, the Dow Jones Industrial Average closed up 80.19 points, or 0.44%.

The S&P 500 index closed higher by 7.26 points, or 0.34%.

In Europe, the Euro Stoxx 50 index ended the day up 47.31 points, or 1.67%. Meanwhile, the FTSE 100 gained 1.4%, and Germany’s DAX added 2.12%.

In Asian markets, the Nikkei 225 index is up 415.54 points, or 2.65%. China’s CSI 300 index is up 0.28%.

In Australia, the S&P/ASX 200 index is higher by 48.59 points, or 0.91%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$44.62 per barrel. Brent crude is US$46.25 per barrel.

Gold is trading for US$1,355 (AU$1,799) per ounce. Silver is trading for US$20.29 (AU$26.94) per ounce.

The Aussie dollar is worth 75.34 US cents.

Good times, good times

The US S&P 500 index took out two records overnight.

The index traded at the highest ever level…and closed at the highest level ever too.

Good times.

chart image

Source: Bloomberg
Click to enlarge

But are these really ‘good times’?

As you know, we haven’t liked this market since the middle of last year.

We didn’t like it when it fell last August. We didn’t like it when it recovered in October. We didn’t like it when it fell in the new year.

And we haven’t liked it as the market has rebounded in recent weeks.

You know why already. But since when did the fear of repeating ourselves…erm…stop us from repeating ourselves?

The main reason we haven’t liked the market isn’t just because of everything that has happened over the past year.

We haven’t liked it because of everything that has happened since 2008.

US stocks aren’t trading at a record because the US economy is booming, or because it has recovered from the recession. The same goes for the Aussie market.

Stocks are going up for one reason — central bank money printing.

It’s important to remember that. It’s important to remember it, because it’s easy to forget it. It’s easy to forget what’s really powering this market rally…especially when most mainstream commentators believe it’s still a great time to buy stocks.

As Bloomberg reports:

Japanese shares drove gains in Asia, headed for their steepest two-day climb since February after Prime Minister Shinzo Abe said he’ll order a fresh fiscal stimulus package. Crude oil fell with sovereign bonds.

Fortunately, there is a sense of reality among some in the mainstream. The report continues:

“Strong U.S. momentum, the allure of continued low interest rates, some leadership certainty in the U.K. and a bold action plan in Japan is going head to head with caution following Brexit,” Cameron Bagrie, chief economist in Wellington at ANZ Bank New Zealand Ltd., said in a client note Tuesday. “The former held the upper hand overnight, and indeed a number of nights of late. Will it last? We suspect not. We don’t see why the latest package in Japan will work more miraculously than previous ones.”

We can’t help but agree.

Check out the chart below. In 2012, Japan promised to double the money supply. It sent stocks soaring:

chart image

Source: Bloomberg
Click to enlarge

But since that first rally ended in May 2013, the net return on Japanese stocks is close to zero.

And since the market peaked mid last year, the Nikkei 225 is actually down 22.8%.

The quick 1000-point rally in the Japanese index sure does look impressive on a super short term chart. It doesn’t look as impressive on the five-year chart we’ve shown above.

Of course, Japan has long since fallen into the trap of thinking that if a certain level of money printing isn’t working, the solution is to print some more.

And if a certain level of low interest rates isn’t working, take them lower.

It’s the economics of madmen.

Unfortunately, it’s a strategy the West’s central bankers are keen to try. The US Federal Reserve, with rates only barely above their record low, are now reluctant to increase them further.

Can it be much longer before the Fed creates another stimulus package? Sure, not while stocks are high. But when the market realises (as it has in Japan) that this strategy doesn’t work, it won’t be long before the Fed pulls out another of its tricks.

The Bank of England looks set to imitate the economics of madmen. As the Financial Times reports:

The Bank of England is set to cut interest rates to new historic lows on Thursday in an attempt to ease the pain of a predicted Brexit-induced economic slowdown.

The Bank of England’s benchmark interest rate is at 0.5%. The bond markets expect it to fall to 0.25% this week.

But heck, who cares? Stocks are high, so buy stocks. Let’s do a bit of self-fulfilling prophesying. But wait. Whenever you may feel the temptation to follow along with the unrealistic bull market, we like to pull a couple of charts out of the old kitbag.

For no other reason than to give you pause for thought…and to prevent you from doing something you may later regret.

First, for long-time readers, one of our favourites: This chart shows actual and forecast earnings for US stocks in the S&P 500 index:

chart image

Source: Bloomberg
Click to enlarge

The white line to the left of the green line shows actual company earnings. The white line to the right of the green line shows estimated company earnings.

In order for S&P 500 companies to achieve current earnings estimates, earnings will have to increase almost 16%.

Is that likely? Not in our view. If the US Federal Reserve was confident companies could achieve such earnings growth again, we’re pretty darn sure it wouldn’t keep interest rates at 0.5%.

And if folks want to argue that it’s the low interest rates that will deliver the 16% gain, we’ll ask why such a gain hasn’t been possible since 2010?

After all, interest rates were even lower during the previous six years.

This other chart is another favourite. It shows the Dow Jones Industrial Average (white line) and the Dow Jones Transportation Average (green line):

chart image

Source: Bloomberg
Click to enlarge

For the uninitiated, the premise of this chart relates to an analytical concept called the ‘Dow Theory’.

The theory (in basic terms) states that if industrial stocks are near a record high, transport stocks should be near record highs too.

That would provide a ‘confirmation’ that the market rally is genuine.

However, as you can see, while the Dow Industrial is only around 100 points from the record high, the Dow Transportation is more than 12% below the record high.

The divergence between industrial and transport stocks was one of the reasons why we issued a crash warning last year.

In our view, nothing has changed.

The Fed can hold off on a rate rise. The Bank of England can cut rates. The UK and Australia can confirm their respective Prime Ministers. But none of it matters a jot.

The current rally is a fools rally, and we wouldn’t have a bar of it.

A familiar sound, but who’s listening?

From the Financial Times:

A top US regulator has sounded a new alert over banks’ commercial real estate lending, adding to concerns that bubbles may be forming in parts of the country’s property market.

Thomas Curry, comptroller of the currency, used the watchdog’s twice-yearly report on financial risks published on Monday to warn about looser underwriting standards and concentrations in banks’ CRE portfolios.

When a regulator issues a warning, it’s hard to know whether to take it seriously or not. Without being mean, their record of predicting and forecasting bubbles isn’t perfect.

We won’t ignore it, but our hunch is that it’s a ‘butt-covering’ exercise. Issue a timid warning, but don’t actually do anything to prevent it from becoming a problem.

That way, when the proverbial hits the fan, they can say, ‘We told you so.’

It’s just another warning sign that convinces us the world’s markets are heading for big trouble. Exactly when, for now, we can’t say.

All we can say is: Make sure you’ve got hold of some gold. It will be the best ‘money’ you can own when the worst does happen.

The final word on gold

From Bloomberg:

Tetsushi Kudo, a 50-year-old office worker, bought a one-ounce gold coin this month for the first time. With stocks slumping and zero percent interest on savings, he says it won’t be the last.

“I want to buy gold every year as a birthday present for my daughter,” Kudo said at a store in Tokyo’s posh Ginza district where he made the 162,000 yen purchase. “She will thank me for the gift when she grows up because gold will have value wherever she goes.”

It’s an excellent idea. In the short term, gold priced in yen has underperformed the Nikkei 225 by a big margin. But we can be certain in 20 or 30 years that one ounce of gold will still be one ounce of gold.

Can we be as certain that Japanese stocks, in 20 years’ time, will be what they are today?

The final (final) word on gold

Gold has underperformed the Nikkei 225 in the short term but, in the long term, the old shiny metal is showing the Japanese market who is boss.

Since 1971, the Nikkei 225 is up 570%.

Over the same timeframe, gold is up 906%.