Monthly Archives: February 2014

US Investors Have Been Net Buyers Of European Equities For Over A Year Now

Confidence in the European economy is slowly coming back. The eurozone’s economy (countries that have adopted the euro as their currency) grew by 0.3% in the last quarter of 2013 compared to only 0.1% in the quarter before. The Dutch economy grew by as much as 0.7% in the fourth quarter relative to the third quarter. Growth for the whole 28-member EU was 0.4% in the last quarter of 2013. For the whole of 2013 the economy of the eurozone contracted with 0.4% while growth for the whole EU grew with 0.1%.

This growth in the European economy has gradually attracted investors from outside the EU to buy European Equities since last year. US investors have been net buyers of European equities for over a year now as the chart below, courtesy of Gavyn Davies, depicts. The Eurostoxx 50 ETF (FEZ) has showed a very nice return lately and is up 20% from a year ago.

NET US Buying of European Equities (12mma)

NET US Buying of European Equities (12mma)

But as Shaun Port of Nutmeg pointed out, most of this money has actually been going in UK stocks. Historically US investors seem to favor UK stocks above stocks from other countries in the eurozone. Which is pretty interesting because the FTSE 100 has been in the same tight range for over a year now (chart).

US Net Purcheses Of European Equities, Rolling 12-month total

US Net Purchases Of European Equities, Rolling 12-month total

As a bonus: here is the same chart from Shaun Port as a percentage of total market capitalization.

US Net Purcheses Of European Equities, Rolling 12-month total As A Percentage Of Market Capitalization

US Net Purchases Of European Equities, Rolling 12-month total As A Percentage Of Market Capitalization

 

No World’s Reserve Currency Status Lasts Forever

The U.S. dollar is the current world’s reserve currency. Being the world’s reserve currency is very beneficial because persons living in the country which issues the currency can import goods and borrow more cheaply because they do not need to exchange their currencies to do so. An example of this is the oil market where barrels of oil are trading in U.S. dollars.

Every now and then another currency will come along to become the new world’s reserve currency as the bar chart below shows. In my last post I described a few books that have been forecasting the end of the world’s reserve currency status for the U.S. dollar. According to the authors of those books the end of the world’s reserve currency status would be disastrous for the U.S. dollar. While nobody knows when it will happen it is inevitable that the U.S. dollar will someday be replaced by another currency as the world’s reserve currency. My personal opinion is that the next reserve currency will be some form of an international currency like the IMF’s Special Drawing Rights (SDR). But this leaves me with the question: is it really that bad for a currency to lose it’s world’s reserve currency status?

Global Reserve Currencies Since 1450

Global Reserve Currencies Since 1450

I found this chart of the British Pound from 1900 till now which shows that losing the reserve currency status did not change the exchange rate for the British Pound that much. The First and Second World War did arguably more damage. Most of its “demise” happend in the second half of the 20th century when U.S. economic dominance grew bigger and bigger and the U.K. endured a few periods of economic weaknesses. The British pound was still the third most held reserve currency in the world in 2006.

Pound Sterling Exchange Rate U.S. Dollar Since 1900

Pound Sterling Exchange Rate U.S. Dollar Since 1900

Where Is That Stock And Dollar Crash I’ve Been Waiting For All These Years?

Fear sells. For years a big fear-mongering industry has been putting out books and articles about how the economy is going down the drain soon and the U.S. dollar will be worth less than the paper it is printed on. The bears have been saying this for years. Here are a few (hilarious) examples of “Doom & Gloom” books over the years that I found.

Below is picture of an impressive 300-page book by Doug Casey called “Crisis Investing: Opportunities and Profits in the Coming Depression“. In this book Doug Casey makes the case that the market is about to crash any minute now! The dollar will be destroyed soon and the stock market is going to zero. The next great depression is just around the corner. You have to act fast before all your wealth, that you have been carefully building up for years, will vanish in front of your eyes! But wait.. Let’s check something.. When did this book hit the shelves? July 1980?! There certainly hasn’t been a “new great depression” since then.

Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey

Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey (1980)

Ok maybe Doug was just a little bit early on his call that ‘the world as we know it’ is going to end. What about this book from Jerome F. Smith: “The Coming Currency Collapse“. In this book Jerome describes how the dollar is going to be toast in the near future. Oh wait that one was penned down in September 1981. He’s only 33 years (and counting) off on his call of an imminent dollar crisis. The only thing that collapsed in all those years is the price of this book since you can now get it for $ 0.01.

Coming Currency Collapse by Jerome F. Smith (1981)

Coming Currency Collapse by Jerome F. Smith (1981)

What about Howard J. Ruff’s book “How To Prosper During The Coming Bad Years“? This book came out in 1984. Everyone who followed the advice in this book missed the greatest bull market in stocks ever. The S&P 500 was trading at 160 at the time. Some reviews for the book on the Amazon page even talk about all the “missed opportunities” investors lost because they followed the recommendations in this book.

How to Prosper During the Coming Bad Years by Howard J. Ruff (1984)

How to Prosper During the Coming Bad Years by Howard J. Ruff (1984)

But Howard J. Ruff was maybe just a few years off of his imminent call for a new period of “Doom & Gloom”. In this book I got here by Martin D. Weiss called: “How To Survive The Money Panic” the author talks about the coming destruction of the U.S. economy and the U.S. dollar (of course). This one came out in 1989.

The Money Panic by Martin D. Weiss (1989)

The Money Panic by Martin D. Weiss (1989)

And then there is this one by Ravi Bata called The Great Depression of 1990. 1990? You got to be kidding me.

The Great Depression Of 1990 by Ravi Bata (1988)

The Great Depression Of 1990 by Ravi Bata (1988)

Here are some more recent ones:

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan. This book came out in 2005.

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan (2005)

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan (2005)

This one is more bizarre because shortly after this book was published in 2008 the dollar index set a long term bottom (chart) and is trading higher ever since. The Collapse of the Dollar and How to Profit from It by James Turk.

The Collapse of the Dollar and How to Profit from It by James Turk (2008)

The Collapse of the Dollar and How to Profit from It by James Turk (2008)

And here is one from November 2013 where the author is forecasting a stock market crash in 2016. The Crash of 2016: The Plot to Destroy America – and What We Can Do to Stop It by Thom Hartmann.

The Crash of 2016: The Plot to Destroy America - and What We Can Do to Stop It by Thom Hartmann (2013)

The Crash of 2016: The Plot to Destroy America – and What We Can Do to Stop It by Thom Hartmann (2013)

The last time I checked (5 minutes ago) the S&P 500 was still trading near all time highs. The U.S. Dollar is still the world reserve currency and certainly not reduced to toilet paper. The Euro is still around as are a lot of other economies and currencies the bears have been warning us for, for years.

All the authors of the books above are still touting their doom & gloom stories to this day.

The bottom line is this: Although the bears are sometimes right about their calls for stock market crashes (2000-2002 and 2008-2009) and housing market crashes (2006-2011) the crashes never seem to bring us to a new normal of forever lower stock/housing prices and a destroyed currency (at least for the U.S. market and the U.S. dollar).

This doesn’t mean that it’s never smart to be a bear. It can be very profitable, but you need to have your timing almost exactly right. It is no secret that the market goes up on average every year (7%).

Being a long term bear is thus bad for your financial health.

The Problem With Apple’s Offshore Cash Hoard

Apple has a lot of cash as can be seen on the bar graph below. But the problem is that most of it is outside of the U.S. They can’t use this cash to pay out as a dividend or buy back stock because then they first have a to pay a U.S. profit tax on the amount of cash. Only cash and investments held domestically in the U.S. can be used for this. It is one of the reasons why Apple decided to issue new debt to buy back stock instead of paying a tax in the U.S. to move their money from the offshore accounts to the U.S.

Apple's Cash Q4

Apple’s Cash and Investments 2013 Q4

As you can easily see on this bar graph most of the cash and investment are held in offshore accounts.

Apple cash and investment held offshore Q1 2013

Apple cash and investment held offshore Q1 2013

Corporate Debt To GDP And Corporate Profits To GDP Are At An All Time High

As I noted in another post back in November American companies have been loading up on debt the last few years. Right now the amount of Corporate debt outstanding is so big it is at an all time high if you compare it to GDP.

Corporate Debt to GDP

Corporate Debt to GDP

This is possible because the yield on corporate bonds has been steadily declining to all time lows the last few years.

Corporate Bond Yields

Corporate Bond Yields

What is staggering is that this has happend at the same time while corporate profits as a percentage of GDP have never been higher.

EDIT (April 3, 2014): Please read this article regarding the relevance of the CP/GDP chart.

Corporate Profits As A Percentage Of GDP

Corporate Profits As A Percentage Of GDP

Meanwhile all this extra money has not been used to massively invest in new products or services. Companies have been laying of a lot of workers the last few years also. This can be seen in this chart below which depicts what percentage of corporate profits has been used to invest.

Net Domestic Investment (Private Business) To Corporate Profits

Net Domestic Investment (Private Business) To Corporate Profits

Instead companies have been using all this new money to buy back their own stock or to pay a dividend to shareholders. Activist shareholders like Carl Icahn have been pushing companies like Apple to give money back to shareholders instead of investing it in new products.

When Margin Debt to GDP Is High, Average 30 Month Returns On The S&P 500 Will Be Low

I came across this chart a few days ago on Twitter. It shows that when the use of margin debt is high relative to GDP, average 30 month returns on the S&P 500 will be poor. This chart suggests that returns  on the S&P 500 will be negative the next few months.

Margin Debt to GDP vs 30 month S&P 500 returns

Margin Debt to GDP vs 30 month S&P 500 returns