Read a few interesting things over the weekend which are helpful to recognize as the media seems to be tiring over its own coverage of current world ending monsters.

The “China is falling off a cliff” and “cheap oil is the worst thing you could possibly hope for” fear warnings are getting a bit long in the tooth and even, might a say, a bit boring.

As such, I simply suggest we be on the lookout for a new monster. One we have not thought of, spoken of or heard from in ages. Don’t know what it could be next – which is why we always say look out to left field.

Could it be some dire event soon to unfold over El Nino and the growing season? Could it be some Greece Part 3? Zika 2? Could it be increasing oil prices? Now that would be funny right?

Never Been This High

While producers in every press room around the world sit on a hair trigger to be ready to tell you about the next “end of the world as we know it” story, we might want to instead ponder this:

We have never had more wealth….

A quick glance above shows us that across all fronts, records are being set – even when allowing for the struggles we consistently fret over.

Further, the second chart shows us that while we got ahead of ourselves in the real estate bubble and then fell back off trend in the mortgage debt collapse, the Per Capita Net Worth chart is right back on the same annual increase trend which has been in place since the 50’s.

Debt is in Pretty Good Shape Too!

As much as we hear about all the troubles facing consumers, debt is not nearly as bad as we have seen before. In the mortgage peak years ago, debt was out of whack as too many got loans they should have never had.

Today, as a % of assets in total, household leverage is back to levels seen in the mid to late 90’s! Further as a percent of monthly income, the cost of servicing that debt is back to levels not seen since the 70’s. So, the next time someone utters those fateful words to you, “It’s never been this bad”, just pause and chuckle. Then look for something to buy,

There is more to ponder…

Even as we suspect we are on the fringe of a needed rest after the stabilization bounce, please keep in mind that one can get a sense of where risk is higher – and lower as it relates to underlying yield of asset classes.

The chart below is included again from last week in case you missed it.

The red arrows tell us that the equity risk premium for buying those ugly old stocks in the stock market with the outright dire future that we have has not been this high since the 70’s!!


Extremely low Treasury yields are also a good sign that the market is consumed by pessimism, given that the earnings yield on equities is 5.7%.

Choosing 10-yr Treasuries with a yield of only 1.7% in lieu of equities yielding 400 bps more (and considering further that equities have far more upside potential than bonds at this point) only makes sense if one is convinced that earnings will suffer significantly in the years to come.

So far, earnings are down only a little more than 2% in the past 12 months, and almost all of that is coming from the oil patch.

Put another way, the current P/E ratio of the S&P 500 is about 14.5 without the crappy impact of oil’s “collapse”, whereas the P/E ratio of the 10-yr Treasury is 58!

To pay so much for the presumed safety of Treasuries is to have truly dismal expectations for economic growth and corporate profits.

Closing Highlights

(data provided by Dr. Ed and his team this morning)

The market has been acting as though rate hikes are on hold. While we would not be surprised to see them on hold in the upcoming meeting, one cannot presume that forever.

Yellen is likely to postpone – as even with jobs getting better, February data showed there is still plenty of slack left in the labor market.

That’s confirmed by the slow 2.2% increase in wages. As such, we agree with Dr. Ed, “none-and-done or one-and-done seem like the most likely scenarios for Fed policy this year.”

Inflation Watch.

As last week’s notes pondered, while everyone has now become an expert on the dangers of deflation, we ought to simply be on the lookout for whiffs of inflation. That’s not a bad thing at all mind you as commodity prices seem to have bottomed.

Indeed, the CRB raw industrial’s spot price index actually did so on November 23, while its metals component bottomed on January 13. The price of a barrel of Brent bottomed on January 20 at $27.88, and is up 45% since then.

Just as encouraging is the credit contagion front. Just weeks ago, experts warned of a collapse equal to 2008 with energy bonds being the culprit.

Not at all actually – it’s only a couple hundred billion in bonds if every single energy company in the fracking world went bust. A drop in the bucket really ini the world of trillions.

That being said, despite the bursting of the commodity super-cycle bubble, there hasn’t been a financial crisis. Dr. Ed reminds us, “The yield spread between corporate junk bonds and US Treasuries did widen dramatically from the most recent low of 253bps on June 23, 2014 to the recent high of 844bps on February 11. However, it is back down to 640bps. In other words, the other shoe hasn’t dropped as many investors had feared.”

Will cover a few more positive surprises in your notes tomorrow.

In the meantime, the game targets remain the same:

  • Look for windows of red ink to take advantage of as the summer months roll toward us and the ever so frightful “sell in May” crowd is already itching to pull their triggers early.
  • Long-term investors can take advantage of these events with our good friends patience and discipline.