What The Bears Still Left Standing Think

It has been a busy week for Chris and me. We wrapped up our annual seminar back in western Massachusetts on Sunday, and then met back up together on Wednesday out in Sonoma, California for this year's Wine Country Conference.

This morning, we woke at 4:30am in order to get Chris to the airport on time for his trip home. And now it's time to start digging into the stack of work that's piled up while we were on the road...

But before I disappear, I thought I'd briefly share some of my takeaways from the past few days. The Wine Country Conference (WCC) is an annual gathering of speakers organized by Mike "Mish" Shedlock and his advisery firm, Sitka Pacific. This year's speakers included: John Hussman, Steen Jakobsen, Axel Merk, Mebane Faber, Chris, and of course, Mish himself. Our good friend Charles Hugh Smith attended, as well.

The event is intimate; perhaps about 40 paying participants, many of them money managers themselves. The price of attendance is one big reason why the group is so small - registration cost over $1,000. Why so expensive? Because the primary mission of the event is to raise funds for charity research; this year's focus was the Autism Society (the Hussmans are huge activists for this cause).

A benefit of the small size is the personal access it offers. Chris and I were able to spend a lot of time talking in depth with Peak Prosperity members that attended, as well as socialize at length with the other speakers, which was a real treat. Turns out, big brains are just one of the many gifts these guys have an unfair share of. Many of them have fascinating life stories, are really funny, and have hidden talents that came out during the event. For example, John Hussman -- one of the most sophisticated data analysts I've met -- is a heck of a guitar player. Chris and he jammed for several hours around the fire on Thursday night while John's wife, Mish and I provided our best background vocals.

Since we were in constant 'mingle' mode, I didn't have time to take lengthy notes during the presentations, but I did my best to capture the main thrust of each. There was a videographer in the room, and my hope is like last year, full videos of the presentations will eventually be made available. If so, we'll post them on the site:

Axel Merk
  • The global economy is over-indebted. Biggest problem: "too much debt"
  • What kills markets? Over-confidence. Market hubris is sky-high; volatility is very low.
  • Volatility is the enemy of leverage
  • Sees structural instability creating more volatility going forward. That will lead to higher interest rates, which will threaten to bring the over-leveraged economy to its knees
  • He doesn't expect more rounds of QE. Thinks Fed doesn't feel it can do that as most observers consider it a failure (i.e. helped .1% at expense of everyone else). But believes the Fed still has other tools, regulation, etc it can use (how effective they will be is up for debate)
John Hussman
  • Lots of amazing charts showing that future asset returns are highly correlated with 1) profit margins, and 2) price multiples (when these indicators are higher, 10-year future returns are lower)
  • Profit margins are at all time-highs + price multiples (to earnings, sales, etc) are sky-high
  • Models show that stock returns will be depressed for the coming decade: ~4.5% percent *assuming* ~6.5% in GDP growth. If GDP growth is lower, then stocks returns should be even lower....
  • In a nutshell: QE/etc has brought all future return value into the present. Either buy now and expect no/low returns for a decade; or better to wait for price correction, buy low and get appreciation
  • Charts show that a major market top is happening now
  • Time for "alternative investments" -- i.e., those with little correlation to the stock market
Meb Faber
  • CAPE ratios help you determine whether a stock or market is under/over-valued
  • Can place additional filters over CAPE to narrow the focus & improve returns
  • In general, markets are at good CAPE levels
  • US overpriced on CAPE basis, but represents a majority share of most portfolios. Need to look outside US.

Steen Jakobsen

  • Very bullish for future of investing, BUT believes a clearing event is needed first. Sees it as a big deflationary event in the short term.
  • 2014 is about "as bad as it can get" for economic indicators
  • Expects them to get better in future (2015 on), starting a new bull market. Starts with an exponential recovery in stocks in the near term
  • BUT, sees world growth slowing down (Asia deflationary rebalancing, Europe anemic 'recovery', US dysfunction, etc)
  • Big fan of investing in SME's (small businesses), but short on details as to how
Mike Shedlock
  • Stocks at second highest valuation ever
  • Fed-induced asset price inflation (housing, education, health care, etc) is crushing productive classes/younger generation (data showing family formation is becoming compromised)
  • Gold undervalued (miners, too)
  • See yield curve now giving recessionary signals - looks like bond market is skeptical of future growth "story" and Fed's ability to 
  • Likes Treasuries, gold & Japanese equities
  • Doesn't like US stocks: recently went short the Russell 2000

Note that the speakers were not universal in their level of optimism/pessimism. Those with a more fundamentals-based view (versus using technical models) were more bearish.

Interestingly, all the above speakers pretty much just focused on the Economy "E". Chris, of course, brought resources into the discussion, which the other speakers were unanimous in agreeing added a critical set of additional risks to the macro story. (As Chris succinctly described it, he saw his role at the conference to "play the Lorax")

Great discussion was held on the developments in the Ukraine. Steen gave an excellent synopsis on why Europeans regard America's recent actions towards Russia as extremely misguided. Chris had a lot to add, as he's finishing up an important report on the topic. It should be ready for publishing this weekend.

And now, back to re-introduce myself to my family...

Have a great weekend!


This is a companion discussion topic for the original entry at https://peakprosperity.com/what-the-bears-still-left-standing-think/

Thank you for the summary and your tireless work here.  If we get Steen Jakobsen's exponential stock market, "recovery" in 2015… can we call it the crack-up boom?  

 What are we using for money again? Sea-shells? Debt? No-problem. Just ask the lady on the beach.
She sells sea shells by the sea shore.

I'm gonna be rich, rich beyond me wildest dreams.

Where are my meds?

Second that! 
Interesting to have such a range of opinion – and range of focuses.  I think that's what I would enjoy most about a gathering such as this – listening to/taking in the viewpoints/info of so many smart, tuned-in folks.
This current historical moment strikes me as a prolonged pause before the next big bump down.  As much as I scry I cannot for the life of me figure if we have a week or two or another five years as this holding pattern continues.  (I have my basic preps in place and am gathering resources to throw myself into a deeply-revised Plan C vis-a-vis a sustainable place to be and live.)  And I don't suppose any of the folks at the WCC knows either.  (not to impugn their good work and sharp minds!)  I guess the trick is to prepare and be mentally cool with whatever presents itself each day.  Each day is a gift.  I try not to waste any… 
Plan C requires another "smooth" year or two.  Plan D is still in place if the next bump occurs soon.  I like both plans.  Then again, I'm very comfortable/cool with change, and emergent and/or crisis situations.  <smile>  
Viva – Sager

David Harvey, Distinguished Professor of Anthropology at the City University of New York Graduate School, unravels the paradoxes at the heart of capitalism and offers a manifesto for a new way forward.
Actually he doesn't offer a new way forward.

I think that Marx, for all his personal flaws was on the money. The eventual endpoint of the economy will be a homogenized Distributism where the worker owns the means of production. That is not an Ideal- it is a prognostication. Marx's timing was off. First Capitalism had to run out of room to expand into. I give my forecast a 5% chance of being correct.

Interestingly he also sees that the worker is becoming less relevant to the economy. I get a lot of conformational bias from Professor Harvey. 

"If Capitalism cannot grow, it dies. The manner of it's death is seen all around us."


I find it interesting that PP's focus on the market, while cogent and insightful, sometimes forgets to mention those using resilience philosophy in a major way. Warren Buffett's recent acquisition of SNC's share of Alta Link (the rapidly expanding electrical grid in Alberta) is a case in point. He recently purchased Grid assets in Nevada, which fit nicely with a western electrical grid that could feed power into an area potentially short of water. Consider that most of the veggies this nation and Canada rely on are grown not to far from the Imperial valley, Oregon, the Cascades and BC.Couple this with his purchase of Nalco (a water treatment company) and Burlington railroad and it appears he is focused on a large scale resilience model that features HARD assets. Warren won't be around forever, but he sure is setting up a model that should keep North America warm, dry and fed over the long haul.With all due respect to Dr, Harvey, capitalism, communism, environmentalism are interesting sideline discussions, but then to quote a realist,"WE're all environmentalists, until we run out of toilet paper". Those cheap Chinese solar panels are looking better all the time. I think I'll but a couple more for my sunny place in Alberta and feed into to Warren's grid when I have too much power. Only wish Washington had half the sense of Mr. Buffett. Cheers, Tom

quote=Uncletommy Couple this with his purchase of Nalco (a water treatment company) and Burlington railroad and it appears he is focused on a large scale resilience model that features HARD assets. Warren won't be around forever, but he sure is setting up a model that should keep North America warm, dry and fed over the long haul.(…)
If I had a billion dollars that I had to invest, I'd be doing exactly what Warren is doing.  Namely, buying hard asset plays that address the bottom of Maslow's hierarchy of needs.  Those will always be in demand.
What Mr Buffet is going makes sense to me, as does the massive imports of durable commodities by China. 
It really does seem like some participants in this mega drama get it, but the current rotation of 'talent' between Wall Street and DC are not among them.

I see where you're coming from but I don't see how Buffett owning those assets is going to keep N America any warmer dryer or more fed than if they were instead owned by average people in a more equitable society. And the thing is, if the average person had the sense to buy these things then the financial ponzi scheme would collapse and we'd all be faced with the cold hard reality that there aren't enough resources for everyone, that it's all been a 40 year con job based on interest rate suppression, and that we are in fact running out of those assets.
I see few environmentalists out there, and I envision even fewer after the financial system collapses, as our leaders have successfully convinced us that the economy is different from the environment. When the economy collapses, people won't see it as simply the manifestation of a collapsing environment. Instead, they will put aside all environmental concerns for the sake of "the economy". When the reality of resource scarcity is truly reflected in the markets after money dies, then we will all revert to our animal origins and our survival genes will take over: gimme gimme gimme. Someone said something to the effect of: "Social niceties and generosity are nice, but they only happen when people have everything they need". I don't fully agree with this, since I think certain cultures are generous even though they have little, but I think this is what N American society will reflect as we start sliding down the Malthusian Collapse and our leaders steer us even deeper and faster into the hole of death.
Just look at this email I got from the BC Liberal Party today (they are the amalgamated right-leaning free enterprise party that wants to / is privatizing everything they can and running up a massive deficit as a result). I think that they actually believe that the solution to running out of resources and the economy slowing down is to try to extract resources even faster! They are fully supportive of the Northern Gateway pipeline to China, as if exporting our scarce resources overseas is going to somehow benefit the average Canadian:

While the cast of characters at the WCC was decidedly in the camp of "there are no compelling assets out there right now" it looks like we weren't the only ones.

Bubble talk catches fire among big-money pros

Mar 5, 2014

There was a surprising amount of bubble talk at the Milken Institute's Global Conference in Los Angeles last week.

Top investors and economists spoke publicly about their fear of inflated values for various securities and the broader economy—a decidedly less optimistic view compared to recent years at "Davos with palm trees."

"I do see many signs of the bubble of the future—the default specter that you're talking about. I agree that short term we're not likely to see that, but all the danger signs are there of a future crisis," Marc Rowan, co-founder of $161 billion private equity firm Apollo Global Management, said during a panel discussion.

"Covenants have been stripped away, cov-lite is the norm, senior debt levels are actually higher than they were in 2007, although total debt is not quite where it was," Rowan added, noting looser lending terms given to borrowers.

"We're back to doing exactly the same things that were done in the credit markets in the crisis."

"It's just indiscriminate buying. There are no covenants whatsoever. It's covenant light and there's just no creditor protections. PIK-toggle is back in a big way," James Litinsky, founder of investment manager JHL Capital Group, said of leveraged loans and high yield bonds while speaking on a separate panel.

"PIK-toggle" refers to a "payment in kind" bond that allows the issuers to defer paying interest on the note for a higher rate later on, essentially trading a cash payment for a new bond.

"We've seen this movie before. We know how it ends," Litinsky added. "We don't know where we are—maybe there's another year to go but as we know, when psychology changes, it changes fast."

Justin Slatky, a senior portfolio manager at credit-focused investment firm Shenkman Capital Management, agreed while speaking on the same panel.

"We're definitely in the part of the cycle…where it is true that everybody is rushing into new deals. It is true that many people are not doing the amount of work that they were, even six months ago," Slatky said.

Higher and higher we go in this centrally planned, monstrosity of a bubble economy.

Perhaps in the future we won't let central planner anywhere near the important levers again.


Having retired 4 months ago from one job, I now am down to only two part-time jobs, both working with my son and son-in-law. One job is delivering lost luggage for Air Canada and the other is delivering concrete forms for new basements. I delivered forms for a basement in Edmonton at the end of Feb. On May 2, I delivered luggage to a house built on that same basement. I had to negotiate planking, mud, construction trucks to get the  luggage to the weary traveler. I asked the new owner when she moved. "Two days" ago", she replied. They signed papers in January and the Royal bank financed it on 10% down. They were from NewFoundland and had come to Alberta to take advantage of the oil sand jobs.Edmonton is in the process of annexing 38,000 acres for new development directly south to the Edmonton International airport for the anticipated population boom. MacDonald's got their fingers slapped for taking advantage temporary foreign workers program when every fast food joint has Phillipinos working for lower wages.
Why does this scenario smell so much like "bubble"? Average house price around here is approaching 5 to 6 times the average wage. Yet the pundits don't seem to feel there's a big problem. Maybe I have been listening to Peak Prosperity too long or maybe I'm just silly to think such thoughts. When the bubble breaks, you will know what kind of gas formed it!!!   

"One job is delivering lost luggage for Air Canada"
You sir, can count on no shortage of lost luggage from AC til' the day you die… at some point the craziness emanating from the oil sands will go away, and all the over priced Albertan real estate will bust, but lost luggage from AC will continue until the day they fly into oblivion. No worries for your pay cheque while with them.