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Extreme bear market coming, says Jim Rogers

Jim RogersWhen Jim Rogers talks, investors listen. One of the world’s most famous investors, Rogers is known for his no-nonsense style and investment wisdom. He is the author of several best-selling books, such as “Hot Commodities” and “Street Smarts: Adventures on the Road and in the Markets.” ETF.com recently spoke with Rogers about the latest financial market developments, including why he sees a big downturn taking shape in the next year or two.

 

ETF.com: You recently said you see the worst stock market correction of your lifetime coming next year. What’s going to cause that?

Jim Rogers: I can give you lots of possibilities. These things always start small and with nobody noticing.  For instance, in 2007, Iceland went bankrupt when most people didn’t know there was an Iceland, much less that it could go bankrupt. And then the next thing you knew, Bear Stearns collapsed; and then Lehman Brothers collapsed. Finally, everybody said, “Oh, there’s a problem.”

That happened slowly over a year. That’s probably what’s going to happen this time. It may have already started. There are companies going bankrupt in China. The whole banking system in Latvia collapsed recently.  Who knows what will cause it? I don’t. Rising interest rates, trade wars, real wars— many things could cause it. But it will be gradual. The worst collapse in my lifetime doesn’t happen in a day. It will evolve over a year or two.

ETF.com: Why do you think the next downturn will be so extreme?

Rogers: Historically, we’ve always had economic setbacks and bear markets. In 2008, we had a problem because of too much debt worldwide. Since then, the amount of debt has skyrocketed everywhere in the world. Why would people think the next collapse—whenever it comes—won’t be worse than the last one?  (NORM ‘n’ AL Note: Our emphasis here.)

ETF.com: How much confidence do you have in your forecast?

Rogers: I have enormous confidence. When the bear market comes, it has to be the worst in my lifetime, because the debt is much, much higher than it’s ever been in history.  Plus, there are dramatic changes taking place. Retail shops are liquidating all over the U.S.  Somebody is going to be left holding a very big bag eventually as those stores go out of business. Many pension plans are under water. The state of Illinois, Connecticut and several others are essentially bankrupt now. There are many things that are going to be very, very serious going forward.

ETF.com: How do you think investors should position themselves ahead of the downturn?

Rogers: You should only invest in things that you, yourself, know about. The worst mistake is being invested in something you don’t really know about, because when things start going wrong, you really get whipsawed and get hurt.
If you know a lot about investing, you might sell short, you might buy agriculture, or you might buy some countries that will not suffer so badly. There are ways to get through this.

ETF.com: What agricultural commodities and countries will best weather the storm?

Rogers: I would look at the ones that are the most depressed; something like sugar is probably going to come through OK just because it’s so beaten up. It’s down dramatically, more than 70% from its highs, so something like is probably going to do OK.  Russia will probably be fine, compared to most of the world, in the next bear market. Venezuela will probably do OK, only because it’s been a total disaster. Same thing with Colombia.

ETF.com: It sounds like you’re suggesting the cheapest and most depressed countries are the place to be.

Rogers: Didn’t your mother teach you to buy low and sell high? Yes, that’s what I’m saying.

ETF.com: How do you think traditional safe havens like Treasuries and gold will fare?

Rogers: The Treasury market bottomed in 1981 and has been going up ever since, until the last year or two. In other words, we had a 36-year bull market in Treasuries that’s coming to an end or may have already ended.  I wouldn’t want to put money in U.S. Treasuries, because in the past America has had multidecade bull markets and multidecade bear markets. I suspect we’re now in a multidecade bear market for Treasuries.

ETF.com: Won’t Treasuries rally if the economy and markets enter a big downturn?
Jim Rogers:
Maybe in the short term. I own a lot of U.S. dollars, but not because the U.S. dollar is sound—it’s one of the most flawed currencies in the world. But when times of turmoil come, people look for a safe haven, and many people think the U.S. dollar is a safe haven for historic and comparative reasons.  Nobody’s going to buy the euro or the pound sterling, so the U.S. dollar is probably a place to be for a while.

ETF.com: What about gold? A lot of people run into gold when the market sells off.

Rogers: I own gold, but I haven’t bought any in quite a while. If you look back at previous bear markets, usually gold gets swept up in the bear market. It has a big drop, and then it’s a great buy.  My plan—if I get it right—is when the U.S. dollar goes up and gets overpriced, gold will go down, so I’ll just switch my U.S. dollars into gold.

ETF.com: Do you own any ETFs?

Rogers: I own ETFs, including on China, Vietnam, Korea and Indonesia. ETFs are good for lazy people like me.

By the way, they’re going to make the next bear market worse because since we all own ETFs, we all own the same things—the same shares, bonds, commodities, etc. When we liquidate, the liquidation in those is going to be dramatic and painful.

 

[From an article published by ETF.com]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

 

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World economy getting sicker…

World economy sick and getting sicker...

If you are looking for a “canary in a coal mine” type of warning for the entire global economy, you have a whole bunch to pick from right now.  “Dr. Copper” just hit a six year low, Morgan Stanley is warning that this could be the worst oil price crash in 45 years, the Chinese economy is suddenly stalling out, and world trade is falling at the fastest pace that we have seen since the last financial crisis.  In order not to see all of the signs that are pointing toward a global economic slowdown, you would have to be willingly blind.  In recent months, I have been writing article after article detailing how the exact same patterns that happened just before the stock market crash of 2008 are playing out once again.  We are watching a slow-motion train wreck unfold right before our eyes, and things are only going to get worse from here.

Copper is referred to as “Dr. Copper” because it does such an excellent job of indicating where economic conditions are heading next.  We saw this in 2008, when the price of copper started crashing big time in the months leading up to the stock market implosion.

Well, now copper is crashing again.  Just check out this chart.  The price of copper plunged again on Wednesday, and it is now the lowest that it has been since the last financial crisis.  Unfortunately, the forecast for the months ahead is not good.  The following is what Goldman Sachs is saying about copper…

“Though we have been bearish on copper on a 12-mo forward basis for the past two and a half years, we have maintained a more bullish medium to long-term stance on the assumption of Chinese copper demand growth of 4% per annum and a major slowing in supply growth around 2017/2018 … we substantially lower our short, medium, and long-term copper price forecasts, on the back of lower Chinese copper demand growth forecasts (we have been highlighting that the risk has been skewed to the downside for some time), increased conviction in copper supply growth over the next three years, and increased conviction in the outlook for mining cost deflation in dollar terms.”

It is funny that Goldman mentioned China so prominently.  Even though China’s fake GDP figures say that everything is fine over there, other numbers are painting a very dismal picture.

For instance, Chinese electrical consumption in June grew at the slowest pace that we have seen in 30 years, and capital outflows from China have reached a level that is “frightening”

Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”.

The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.

Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money.

Just last month, the Chinese stock market started to crash, but the crash was interrupted when the Chinese government essentially declared a form of financial martial law.

And I don’t think that “financial martial law” is too strong of a term to use in this case.  Just consider the following excerpt from a recent article in the Telegraph

Half the shares traded in Shanghai and Shenzhen were suspended. New floats were halted. Some 300 corporate bosses were strong-armed into buying back their own shares. Police state tactics were used hunt down short sellers.

We know from a vivid account in Caixin magazine that China’s top brokers were shut in a room and ordered to hand over money for an orchestrated buying blitz. A target of 4,500 was set for the Shanghai Composite by Communist Party officials.

So a stock market crash was halted, but in doing so Chinese officials have essentially destroyed the second largest stock market in the world.  China’s financial markets have lost all legitimacy, and foreigners are going to be extremely hesitant to put any money into Chinese stocks from now on.

Meanwhile, there is no hiding the fact that trade activity in China and in most of the rest of the planet is slowing down.  In fact, world trade volume has now dropped by the most that we have seen since the last global recession.  The following comes from Zero Hedge

As goes the world, so goes America (according to 30 years of historical data), and so when world trade volumes drop over 2% (the biggest drop since 2009) in the last six months to the weakest since June 2014, the “US recession imminent” canary in the coalmine is drawing her last breath

World Trade Volume - Zero Hedge

As Wolf Street’s Wolf Richter adds, this isn’t stagnation or sluggish growth. This is the steepest and longest decline in world trade since the Financial Crisis. Unless a miracle happened in June, and miracles are becoming exceedingly scarce in this sector, world trade will have experienced its first back-to-back quarterly contraction since 2009.

As you probably noted in the chart above, a decline in world trade is almost always associated with a recession.

That was certainly the case back in 2008 and 2009.

Another similarity between the last crisis and what is happening now is a crash in the price of oil.

According to Business Insider, we have just officially entered a brand new bear market for oil…

Oil is officially in a bear market.

On Thursday, West Texas Intermediate crude oil futures fell more than 1% to settle near $48.55 per barrel in New York.

A bear market is roughly defined as a 20% drop from highs. Crude has now fallen by about 20% in the last six weeks.

So what does all of this mean?

All of these signs are indicating that another great economic crisis is here, and that a global financial implosion is just around the corner.

At this point, even many of the “bulls” are sounding the alarm.  For example, just consider what Henry Blodget of Business Insider is saying…

As regular readers know, for the past ~21 months I have been worrying out loud about US stock prices. Specifically, I have suggested that a decline of 30% to 50% would not be a surprise.

I haven’t predicted a crash. But I have said clearly that I think stocks will deliver returns that are way below average for the next seven to 10 years. And I certainly won’t be surprised to see stocks crash. So don’t say no one warned you!

For those that don’t know, Henry Blodget is definitely not a bear.  In fact, he is one of Wall Street’s biggest cheerleaders.

So for Blodget to suggest that we could see the stock market drop by half is a really big deal.

The closer that we get to this next crisis, the clearer that everything is becoming.

[by Michael Snyder, writing for The Economic Collapse Blog]

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

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Bubbles. They grow. They grow bigger. They grow even bigger yet. Then they burst. That’s all bubbles can do.They’re fascinating. They’re beautiful. But they never last, and they burst. And we can never know precisely when the destruction will come.

Bubbles burst. That's what bubbles do.

Are we at or near the end of a stock market bubble to end all stock market bubbles?

Almost everyone in the financial world seems convinced that things are somehow “different” this time around.  Even though by almost every objective measure stocks are wildly overpriced right now, and even though there are a whole host of signs that economic trouble is on the horizon, the overwhelming consensus is that this bull market is just going to keep charging ahead.  But of course that is what they thought just before the last two stock market crashes in 2001 and 2008 as well.  No matter how many times history repeats, we never seem to learn from it.

The chart below shows how the Nasdaq has performed over the past decade.  As you can see, we are coming dangerously close to doubling the peak that was hit just before the last stock market collapse…

NASDAQ since 2005

By looking at that chart, you would be tempted to think that the overall U.S. economy must be doing great.

But of course that is not the case at all.

For example, just take a look at what has happened to the employment-population ratio over the past decade.  The percentage of the working age U.S. population that is currently employed is actually far lower than it used to be…

Employment Population Ratio Since 2005

So why is the stock market doing so well if the overall economy is not?

Well, the truth is that stocks have become completely divorced from economic reality at this point.  Wall Street has been transformed into a giant casino, and trading stocks has been transformed into a high stakes poker game.

One of the ways we can tell that a stock market bubble has formed is when people start borrowing massive amounts of money to invest in stocks.  As you can see from the commentary and chart from Doug Short below, margin debt is peaking again just like it did just prior to the last two stock market crashes…

Unfortunately, the NYSE margin debt data is a month old when it is published. Real (inflation-adjusted) debt hit its all-time high in February 2014, after which it margin declined sharply for two months, but by June it had risen to a level about two percent below its high and then oscillated in a relatively narrow range. The latest data point for January is four percent off its real high eleven month ago.

Margin Debt - Doug Short

So why can’t more people see this?

We are in the midst of a monumental stock market bubble and most on Wall Street seem willingly blind to it.

Everyone knows that the stock market cannot stay detached from economic reality forever.

At some point the bubble is going to burst.

If you want to know what the real economy is like, just ask Alison Norris of Detroit, Michigan

When Alison Norris couldn’t find work in Detroit, she searched past city limits, ending up with a part-time restaurant job 20 miles away, which takes at least two hours to get to using public transportation.

Norris has to take two buses to her job at a suburban mall in Troy, Michigan, using separate city and suburban bus systems.

For many city residents with limited skills and education, Detroit is an employment desert, having lost tens of thousands of blue-collar jobs in manufacturing cutbacks and service jobs as the population dwindled.

Sadly, her story is not an anomaly. Millions of people in the US today can’t seem to find a decent job no matter how hard they try.

It would be one thing if the stock market was soaring because the U.S. economy was thriving.

But we all know that is not true.

[from an article by Michael Snyder for The Economic Collapse Blog]
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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

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In-the-know corporate insiders are dumping stocks…

Corporate insiders are more bearish than they have been in almost 25 years. That isn’t good news for the stock market, since these insiders — corporate officers and directors— know more about their companies’ prospects than the rest of us.

In fact, you may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders aren’t heavily selling, such as energy, financials and basic industrials.

Just be aware that this record bearishness isn’t evident from the insider indicator that gets widespread attention on Wall Street — the ratio of shares of company stock that insiders have recently sold versus the number they have bought.

According to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio, when applied to transactions over the previous eight weeks, is higher than average but no higher today than it was one year ago — when the S&P 500 was poised to produce an impressive double-digit gain.

And in late 2003, just as the 2002-07 bull market was gathering steam, the insiders’ sell-to-buy ratio rose to even higher levels than it is today.

Insider date quote

But this measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior. That is because it uses a government definition of insiders that includes a group of investors whose past transactions, on average, have shown no correlation with subsequent market moves: those who own more than 5% of a company’s shares.

Though on rare occasions a large shareholder also will be an officer or director, in almost all cases it will be an institutional investor — such as a mutual fund or a hedge fund.

Because the transactions of these big shareholders often involve a far greater number of shares than those of the insiders who do show more insight — officers and directors — the raw sell-to-buy ratio is heavily dominated by insiders with the least forecasting ability.

For example, Seyhun found that far from being a laggard, the average stock sold by these largest shareholders actually outperformed the market by 0.7% over the subsequent 12 months.

For his calculation, Seyhun strips out the largest shareholders from the sell-to-buy ratio. Currently that adjusted figure shows a record level of insider bearishness. According to this measure, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhun’s data begin.

One year ago, Seyhun’s adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still.

The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years,” he says.

What makes this development so ominous, he adds, is that, while no indicator is perfect, his research has shown that “the adjusted insider ratio does a better job predicting year-ahead returns than almost all of the better-known indicators that are popular on Wall Street.”

There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today — early 2007 and early 2011. The first came a half a year before the beginning of the worst bear market since the 1930s. While the market didn’t fall as much following the second of these two instances, the May-October decline in 2011 did satisfy — based on intraday levels of the S&P 500 index — the semiofficial definition of a bear market as a 20% drop.

Contrary to what many investors may think, insiders aren’t necessarily breaking the law when trading on material information unavailable to other investors. The courts generally have deemed an insider transaction to be illegal only if the insider was acting on information that his firm would itself have been required to disclose to the public — such as an imminent earnings report that is going to be much better or worse than expected or a takeover announcement.

“In the absence of such announcements, insiders are considered to be trading on legal information,” Seyhun says.

Given that there is a lot of gray area in the application of the insider-trading laws, insiders often sell well in advance of perceived trouble coming down the pike to avoid the appearance, and potential legal liability, of selling right before bad news hits the market. So even if the insiders are right this time, it doesn’t mean the market is set for an imminent decline.

This suggests there isn’t any need to immediately sell your stocks, even if you are inclined to follow the insiders’ lead. However, you might want to get ready to sell any of your current holdings if and when they reach the price targets you set when purchasing them and park the proceeds in cash rather than immediately reinvesting them in other stocks.

Among the stocks you should be looking to sell are those in industries whose officers and directors are selling particularly aggressively. These sectors, according to Seyhun, include capital goods, technology, consumer durables (such as automobiles, construction and appliances) and consumer nondurables (food and beverages, clothing and tobacco).

If you nevertheless insist on putting new money to work in the stock market, you might want to favor those sectors whose insiders aren’t especially pessimistic, including the aforementioned energy, industrials and financials. Exchange-traded funds that are benchmarked to these sectors include Vanguard Energy, with a 0.14% annual expense ratio, or $14 per $10,000 invested; the Industrial Select Sector SPDR, with a 0.16% fee; and iShares U.S. Financials, with a 0.45% fee.

There are a handful of stocks in these sectors that corporate officers and directors recently have been buying heavily, according to David Miller, a senior portfolio manager at the Catalyst Insider Buying Fund, which uses insider activity to buy and sell stocks and charges a 1.50% annual fee. Since its inception in mid-2011, the fund has returned an annualized 21.6%, versus 17.7% for the S&P 500, including dividends.

Two stocks that Miller points to are industrial conglomerate General Electric, and Continental Resources, an oil-and-gas company.

[by Mark Hulbert, writing for MARKETWATCH]

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

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