Today’s ‘magic number’ is…

  • Wilfully ignorant
  • Housing ‘melt-up’?
  • In the mailbag

Today, the ‘magic number’ is 2.27.

As I’ve mentioned before. It changes each day.

If you’re curious, it’s got nothing to do with the VIX (volatility index).

It’s got nothing to do with the Aussie dollar.

And we’re definitely not talking about Malcolm Turnbull’s popularity rating, or Kim Jong-Un’s IQ! (Or Donald Trump’s!)

But, the ‘magic number’ is important. To my mind, it could be the most important number I’ve found yet to indicate potential trouble in the stock market.

What is it? I’ll explain all in next week’s important stock market emergency briefing, ‘The Day the Bull Market Ends’. You really shouldn’t miss this event.

It will be live. And it will be free. To register for the online event, go here.

Markets

Overnight, the Dow Jones Industrial Average closed up 123.07 points, or 0.57%.

The S&P 500 closed up 17.72 points, or 0.73%.

In Europe, the Euro Stoxx 50 index ended the day up 50.75 points, for a 1.46% gain. Meanwhile, the FTSE 100 added 1.19%, and Germany’s DAX index closed up 1.52%.

In Asian markets, Japan’s Nikkei 225 index is up 10.66 points, or 0.05%. China’s CSI 300 is up 0.44%.

In Australia, the S&P/ASX 200 is up 66.50 points, or 1.17%.

On the commodities markets, West Texas Intermediate crude oil is US$45.38 per barrel. Brent crude is US$47.62 per barrel.

Gold is trading for US$1,222.60 (AU$1,586.93) per troy ounce. Silver is US$15.93 (AU$20.68) per troy ounce.

The Aussie dollar is worth 77.04 US cents.

WIfully ignorant

Just when will that bull market end?

Is it near, or far?

We hope to answer that question in next week’s special LIVE event. Until then, this from Bloomberg:

Federal Reserve Chair Janet Yellen said the U.S. economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing a gradual approach to tightening as the Fed monitors too-low inflation.

“Considerable uncertainty always attends the economic outlook,” Yellen said Wednesday in remarks delivered to the U.S. House Financial Services Committee. “There is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilization.”

Ah, the innocence of youth.

That’s what we would say if Dr Janet Yellen was either innocent or youthful.

She is, of course, neither.

If we were so inclined, and we are, we would say that yes, there is considerable uncertainty around the economic outlook.

Furthermore, were we so inclined (again, we are), we would say that the uncertainty exists. Not just primarily, but solely due to the actions of the US Federal Reserve.

It is the Fed, which creates the uncertainty, and then which exacerbates it with its ongoing meddling.

Either the Fed is aware of this and chooses to ignore it — entirely possible — or the Fed is unaware of the effects of its actions. In which case…God help us all, for they know not what they do!

Our bet is on the former. It’s wilful ignorance or avoidance of the facts. To analogise, we compare it to a swimming instructor holding a swimmer’s head underwater and wondering why they’re no longer breathing.

Cause and effect. Cause and effect.

But, what does it matter? It doesn’t matter that we can see the central bankers for what they are. What matters is that Wall Street, the City of London, Frankfurt, Hong Kong, Tokyo, and Sydney all remain faithful to and entranced by the word of the central bankers.

As an example, again from Bloomberg:

“We thought that it was pretty balanced and a pretty steady continuation of the themes” that Yellen had laid out after the Fed’s meeting last month, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It was pretty straight down the middle.”

All hail the lady Messiah. More from Bloomberg:

If progress on inflation stalls, “they are more likely to initiate a longer pause in the rate hike cycle,” said Michael Gapen, chief U.S. economist at Barclays Capital Inc. in New York. “I don’t think they will adjust balance sheet policy unless the economy goes into a recession.”

Pulling levers and pushing buttons.

How they try to get the entire world’s economy to move precisely as the economists and bankers would like it to move.

Nice try.

But it’s not possible. That’s not just us saying that. Central bankers and economists have tried for decades, centuries even, to finely tune and direct the economy to suit their purposes.

Each time, without fail, their plan…well…it fails.

The following chart of the Dow Jones Industrial Average proves that. Going back to the late 19th century, the red bars show recessions. It shows whenever central bankers and governments have tried to manipulate the economy and failed:



chart image

Source: Bloomberg
Click to enlarge

They’ve failed many times before. They’ll fail again.

We’ll discuss this and more in ‘The Day the Bull Market Ends’. Go here to register now.

Housing ‘melt-up’?

In next week’s LIVE and FREE special online event, ‘The Day the Bull Market Ends’, we’ll discuss the idea of a ‘melt-up’ in stock prices.

That’s the idea that, prior to a significant market crash, stocks don’t gradually fall. Instead, they soar higher…before collapsing.

With that in mind, we wonder if it’s possible a ‘melt-up’ could occur in the property market.

The reason? We refer to today’s Age:

As so often is the case, it appears the market has run ahead of government housing policy. According to the NAB June quarter residential property survey, first home buyers were the biggest players in new property sales and second in established housing.

Someone forgot to tell FHBs to wait until July 1 for various government incentives. In particular, the NSW stamp duty deal was widely tipped to sideline FHBs in June and cause a rush this month. If there is a further surge from the NAB’s June quarter figures, FHBs will rule.

Hurray for FHBs!

Of course, we could make the argument that incentives aren’t really the thing that drives first home buyer…sorry, FHB, demand. It’s part of it, but not all of it.

The main driver is…the fear of missing out.

Miss out on that house on that street today, there will never ever be another opportunity to buy another house again! So the young FHBs are led to believe.

Or, the poor FHBs have missed out on so many houses at auction, that if they get the chance to buy today, they’ll take it. Hang the incentive that’s set for a few weeks’ time.

After all, what’s the worth of an incentive if they may never ever have an opportunity to buy a house ever again? Or so the young FHBs are led to believe.

So, could all this demand from FHBs and others create a ‘melt-up’ in house prices?

Possible. Your editor has recently returned from a business trip to Dublin, Ireland. That country saw a monumental increase in house prices leading up to the peak in 2006:



chart image

Source: Macrobusiness.com.au
Click to enlarge

The monumental gain…was followed by a monumental fall.

According to one of our taxi drivers in Dublin, house prices have recovered since then. We’ve checked out the property websites. He’s right. House prices aren’t cheap.

So, again, could Aussie house prices go through a ‘melt-up’ phase? Prices have skyrocketed over the past 20 years, with barely a break in the upward trajectory.

One day (and boy, have we been waiting for that ‘one day’), the upward trajectory will end. But, like the ‘melt-up’ with stocks, the ‘melt-up’ with house prices could mean prices soar even higher yet.

What a thought!

In the mailbag

Subscriber, Andrew writes:

I was one of those people you talk about, getting the timing correct to jump to cash in late 2007.

But, I didn’t do it with any market data.

I had 3 things that made me think it was time to get out.

  1. US Credit card default increasing.
  2. US Home loan default increasing.
  3. US Car loan defaults increasing.

These were my alarm bells.

When the car loan issues got to the media, this was the straw as it were.

Americans love their cars, so if they were giving them up, something was very wrong.

I consider myself very lucky and not likely to time it again in the same way.

My problem was, I was not confident to re-enter the market to take advantage of the recovery. So while I lost little, I haven’t gained when I should have.

I suppose that is a lesson learnt.

I think the Fed reserve has raised rates inappropriately, the U6 unemployment figures are still at 8.6%. Looking at different charts, about 18-24 months after the rates start rising the US has a correction. So it fits nicely in with your thoughts of a down turn in the next 2 years.

But unlike the last 30 years where US interest rates have been between 5% and 20% and had room to go down, now they are already so low that reducing them in my opinion will not have any impact on the collapse of the market.

My thoughts are no one will be able to put in a floor to stop the down turn.  If you don’t have your own money outside of an financial institution you will be in a lot of trouble.

This time the panic will not be controlled.

I think a plot of land and a good veggie patch is in order!

Do you believe I’m in the ball park with my analysis?

Andrew makes good points. In the ball park? Yes.

We’ll explain why next Thursday. Find out how to tune in here.

Cheers,
Kris